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

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                   FORM 10-K

(Mark one)

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                      For the Fiscal Year Ended July 31, 2002

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

                        Commission File Number 000-26763


                                NET2PHONE, INC.
             (Exact name of registrant as specified in its charter)

                     Delaware                                 22-3559037
           (State or other jurisdiction                    (I.R.S. Employer
        of incorporation or organization)                Identification No.)

                 520 Broad Street                               07102
                Newark, New Jersey                            (Zip Code)
     (Address of principal executive offices)


       Registrant's telephone number, including area code: (973) 438-3111
        Securities registered pursuant to Section 12(b) of the Act: None
          Securities registered pursuant to Section 12(g) of the Act:
                    Common Stock, par value $0.01 per share
                                (Title of Class)


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

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of 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 registrant's common stock held by non-
affiliates of the registrant on October 17, 2002, was approximately
$74.1 million. On such date, the last sale price of registrant's common stock
was $2.22 per share. The number of shares outstanding of each of the
registrant's classes of common stock, as of October 17, 2002, was 34,447,213
shares of common stock and 28,986,750 shares of Class A common stock.


                      DOCUMENTS INCORPORATED BY REFERENCE

   Certain sections of the registrant's Proxy Statement to be filed in
connection with the 2002 Annual Meeting of Stockholders are incorporated by
reference into Part III of this Form 10-K where indicated.

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                                NET2PHONE, INC.
                        2002 ANNUAL REPORT ON FORM 10-K

                               TABLE OF CONTENTS

<TABLE>
<S>                   <C>                                                                                                <C>
PART I.

ITEM 1.               BUSINESS ...................................................................................         1
ITEM 2.               PROPERTIES .................................................................................        23
ITEM 3.               LEGAL PROCEEDINGS ..........................................................................        23
ITEM 4.               SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........................................        24

PART II.
ITEM 5.               MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ......................        24
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 .................................        40
ITEM 8.               FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................................................        40
ITEM 9.               CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE .......        40

PART III.
ITEM 10.              DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .........................................        40
ITEM 11.              EXECUTIVE COMPENSATION .....................................................................        40
ITEM 12.              SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .............................        40
ITEM 13.              CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .............................................        40
ITEM 14.              CONTROLS AND PROCEDURES ....................................................................        40

PART IV.
ITEM 15.              EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ............................        41

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

SIGNATURES .......................................................................................................       S-1

CERTIFICATIONS ...................................................................................................       S-3
</TABLE>


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                                     PART I


   This Form 10-K includes "forward-looking statements." The words "may,"
"will," "should," "continue," "future," "potential," "believe," "expect,"
"anticipate," "project," "plan," "intend," "seek," "estimate" and similar
expressions identify forward-looking statements. We caution you that any
forward-looking statements made by us are not guarantees of future performance
and that a variety of factors, including those discussed below, could cause our
actual results and experience to differ materially from the anticipated results
or other expectations expressed in our forward-looking statements. Please see
"Certain Risk Factors" below for detailed information about the uncertainties
and other factors that may cause actual results to materially differ from the
views stated in such forward-looking statements. All forward-looking statements
and risk factors included in this Form 10-K are made as of the date hereof,
based on information available to us as of the date hereof, and we assume no
obligation to update any forward-looking statement or risk factors.

Item 1. Business

Company Overview

   We are a provider of Voice over Internet Protocol, or VoIP, telephony
products and services. We began operations in 1995 as a division of IDT
Corporation, and were incorporated in Delaware as a separate subsidiary of IDT
in October 1997. We utilize our VoIP technology to transmit digital voice
communications over the Internet and other data networks. We introduced our
flagship product, the personal computer to telephone, or PC-to-phone, service,
in 1996, which allows our end users to transmit voice communications over data
networks, such as the Internet, to standard phones on public switched
telephone networks. Since we introduced our PC-to-phone service, we have used
our VoIP technology and our ability to bridge VoIP networks with switched
networks to allow end users to send voice communications over the Internet via
telephone, computer or other calling device virtually anywhere in the world.
Since 1996, we have grown our VoIP services to the extent that, based on our
market share, we believe we are the largest retailer of VoIP services
worldwide.

   The majority of our revenue comes from the sale of voice minutes over our
data networks. Currently, we market our products and services through three
units, each focused on a different market for those minutes: (1) International
Communications Services; (2) Domestic Retail Services; and (3) Broadband
Telephony Solutions. The International Communications Services group, or ICS,
is responsible for the sale of international long distance solutions utilizing
VoIP technology. ICS, in turn, is comprised of three divisions: (a) Channel
Sales and Distribution; (b) Carrier Services; and (c) Direct to Consumer
Services. Our Domestic Retail Services group sells VoIP minutes via both
disposable and rechargeable calling cards primarily to U.S. consumers.
Finally, our Broadband Telephony Solutions group is able to provide cable
operators with a fully outsourced end-to-end telecommunications solution
utilizing existing high speed cable data networks and the "last mile" access
into consumers' homes provided by the cable operator via cable modems.

   During the past twelve months, we have aggressively consolidated our company
to focus on these three lines of business. In addition, we have de-emphasized
our activities in some markets to focus on what we believe are opportunities
with higher gross margins. The financial impact of these activities is described
in more detail below in our Management's Discussion and Analysis of Financial
Condition and Results of Operations under the heading "Restructing, Severance,
Impairment and Other Items."

VoIP Industry Overview

   The international telecommunications industry has continued to grow since our
inception in 1995. This growth has been driven by increased demand and enabled
by technological advances, increased network development, greater bandwidth
capacity and domestic and international deregulation. As the industry has grown,
there has been an increasing drive to reduce the expenses surrounding continuous
network development. VoIP technology is a cost effective and efficient
alternative to traditional circuit switching technology. According to a January
2002 Frost & Sullivan report, VoIP is expected to account for approximately 35%
of world voice services by 2007. This expected growth, if achieved, will result
in additional VoIP minutes and associated revenues for the companies positioned
to take advantage of this market. We believe Net2Phone, which one independent
research company listed as having approximately 50% of the global market share
of retail VoIP service at the end of 2001, is in position to capitalize on these
market changes.


                                       1

<PAGE>

   We believe that there is also an increasing market for voice services
provided over cable broadband technology. According to a 2001 J.P. Morgan
estimate, nearly six million homes in the United States will purchase primary-
line telephony from their cable providers, contributing $4.4 billion in
revenues to these providers by 2006. Additionally, the same J.P. Morgan
estimate indicates that cable operators will capture approximately 65% of the
secondary line market by 2006, accounting for about $900 million in revenue by
2006. Because VoIP services are generally more efficient and require less
capital than traditional voice services, cable operators are beginning to
consider VoIP solutions as they begin to enter this new market. We believe our
broadband solution will be attractive to cable operators because we provide a
complete, end-to-end, fully outsourced alternative, that complies with cable
industry standards. We believe we are the first to provide a fully outsourced,
standards-compliant service, and that we will be able to take advantage of our
first-to-market position to some degree.

Our Business

   We market our products and services through three units: (1) International
Communications Services; (2) Domestic Retail Services; and (3) Broadband
Telephony Solutions.

   1. International Communications Services

   We believe that there is a strong opportunity for growth in our
International Communications Services, or ICS, unit during fiscal year 2003.
To that end, in fiscal 2002, we restructured our organization in part to give
stronger focus to our ICS unit. The ICS group is comprised of three divisions:
(a) Channel Sales and Distribution; (b) Carrier Services; and (c) Direct to
Consumer Services.

   (a) Channel Sales and Distribution

   The Channel Sales and Distribution division contracts with third parties
around the world, who in turn distribute VoIP minutes and related enabling
devices to retailers, businesses, Internet cafes and others in the countries
where the distributor does business. We derive revenue from both the sale of
the hardware required to run our VoIP services and the sale of minutes of use
on our VoIP networks. By offering these third parties a combination of VoIP-
enabling hardware and minutes, we believe we offer a strong competitive
advantage over other VoIP providers, who primarily provide minutes over
personal computers. Our distributors purchase an integrated solution of both
hardware devices as well as VoIP minutes in bulk, predominantly on a pre-paid
basis, and then sell it through their respective distribution channels.

   We initiate and manage relationships with our international distributors
through a global sales force, located in the United States, South America,
Europe, the Middle East and Asia. These distributors are then responsible for
their own sales and marketing efforts ultimately down to the end user. Typical
channel partners include Internet service providers, or ISPs, value added
resellers, Internet cafe owners, systems integrators and telecommunications
providers. These distributors then sell Net2Phone's integrated solutions of
hardware and minutes to businesses, Internet cafes, public call centers,
retail computer stores, hotels or directly to end-users. Many of our
distributors are not limited to purchasing combined offerings of devices and
minutes, but may purchase minutes separately, and then sell Net2Phone account
numbers through their distribution channels. We provide both customer service
and technical support to our distributors, who then provide customer service
and technical support through their distribution channels directly to their
end users.

   The hardware and Internet devices, such as IP phones, we sell to these
distributors, allow end users to place a VoIP call without a computer. This is
an important piece to our marketing strategy, as many countries do not have
the widespread personal computer penetration that exists in the United States.
By using an IP phone or other device instead of a computer to place a call,
end users can improve the quality of the call as well as the overall user
experience. An end user may access our VoIP network through the use of other
Internet devices, such as our YAP Jack Plus, in conjunction with a regular
telephone. Thus, a user can plug a regular telephone into a Net2Phone powered
device for narrow-band or broadband services, which then connects the call to
a local data network. The call is then routed to Net2Phone's VoIP network,
which then connects to a gateway. The gateway then transfers the call off the
VoIP network and onto the public switched telephone network, or PSTN, and the
call is then completed locally to the caller's destination. We typically
contract with third parties to build these IP

                                       2

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phones and other Internet devices, embedding either Net2Phone's calling engine
and protocols or industry standard (e.g., SIP) protocols inside the device.

   (b) Carrier Services

   Through our VoIP network, we offer carriers a low-cost, high quality,
alternative for the transport and termination of voice and fax communications.
We generate revenue from carriers through the sale of access to our network,
via a VoIP interconnect, and through call termination charges. We sell access
to our network to traditional circuit-switch carriers, and also to other VoIP
carriers via what we call a VoIP interconnect. Through the medium of a VoIP
interconnect, we link our VoIP network with other VoIP carriers' networks, and
then buy and sell minutes to and from these carriers. With little capital
expense, this linking of networks allows us to reduce termination costs,
increases the number of termination destinations available for us to resell
and expands our customer base. It is also easier and less expensive for us to
support VoIP networks than traditional networks.

   We previously announced our intention to reduce our carrier services
activities and to seek only higher margin business. We recently reiterated
that decision and our intention to continue to de-emphasize our traditional
carrier services, and to that end, we plan on limiting our carrier activity to
selected carriers. IDT was our largest traditional circuit-switch carrier
customer in fiscal 2002, representing approximately 9% of our revenue for the
fiscal year.

   (c) Direct to Consumer Services

   We provide our PC-to-phone service to consumers globally through our web site
at www.net2phone.com via our CommCenter(SM) service. Our CommCenter service can
be downloaded from our web site in six different languages (English, Spanish,
French, Italian, German and Portuguese). CommCenter allows users with Internet
access to place telephone calls from their personal computer, or PC, to any
other PC or telephone in the world at rates which are almost universally lower
than the rates charged by traditional network carriers.

   In addition, we work with multiple Internet service providers, or ISPs, and
other Internet portals to distribute our PC-to-phone service. For example, our
services are fully embedded in the Instant Messaging programs of AOL, Yahoo!
and Microsoft, so that Instant Messaging users can easily place phone calls
from their PCs using Net2Phone technology.

   2. Domestic Retail Services

   We sell domestic VoIP minutes through the sale of disposable and rechargeable
prepaid calling cards. Using multiple distributors, we sell disposable calling
cards, marketed primarily to ethnic communities. Recent immigrants and members
of these ethnic communities are heavy users of international long distance,
given their desire to keep in touch with family members and friends back home.
These cards can be purchased throughout the country at local retailers such as
newsstands. Our largest pre-paid disposable calling card distributor,
representing approximately 22% of our revenue for fiscal year 2002, is Union
Telecard Alliance, which is an affiliate of IDT. We are currently de-emphasizing
our domestic disposable calling card business.

   Our rechargeable calling cards are linked to a customer's credit card. The
Net2Phone Direct(R) card, which is particularly convenient for use by
travellers, is currently available for originating calls from 25 different
countries and often offers lower rates than other long distance providers. Our
Pennytalk(SM) card caters more to callers who tend to talk for long periods of
time, offering a domestic rate of $0.01 per minute with an initial connection
charge of $0.49.

   We market our rechargeable pre-paid calling cards through advertising in
traditional direct-response print in domestic publications. In addition, many
customers enroll for calling card services on the company's web site. We also
market through loyalty programs as well as through e-mail based programs to
existing customers.


                                       3

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   3. Broadband Telephony Solutions

   We have leveraged our seven years of experience in VoIP services to develop
the first outsourced VoIP solution for cable operators that complies with cable
industry standards. We intend to target non-U.S. cable operators as well as
small to mid-size cable operators in the U.S. who may be more likely to prefer
to buy rather than build their own cable telephony solutions because of the
significant cost and other resources necessary to build an internal solution. By
offering a broadband telephony solution, we enable cable operators to offer
their subscribers the third leg of the "triple play" of voice, video and data
services and provide them with the opportunity to generate incremental revenue
and reduce churn. By hosting a complete solution, we also enable cable operators
to reduce the significant operating expenses associated with building an
internal solution.

   Using the Net2Phone solution, the cable operator maintains ownership of the
customer, service brand, and first level customer and technical support. In
turn, we support the back office platform, switching and transport, ongoing
operations and higher levels of technical support to deliver a fully managed
solution. We track and monitor voice quality and network performance metrics
from start to finish and provide cable operators with a full view of the
status of telephone calls routed over their network. Consumers benefit from
cost savings over their current phone service, in addition to receiving a
unified bill aggregating cable TV, high-speed Internet access and telephone
services.

   We initiated our first deployment of our cable broadband solution with
Liberty Cablevision of Puerto Rico in June 2002. This deployment began with a
trial to approximately 100 subscribers without charge. We are currently moving
to a second stage of deployment, during which we will commence billing, acquire
market research and validate the scalability of our technology. Although we are
currently evaluating our business model for supporting such a solution, we do
expect to collect some minimal revenues from monthly maintenance fees, platform
usage fees, and per-minute termination fees beginning in fiscal 2003.

Our Strategic Relationships

   We maintain strategic relationships with several investors and customers
that are an important part of our business plans. During fiscal 2002, we
terminated or substantially reduced our reliance on several strategic
relationships that were no longer essential to our business plans. We also
sold our ownership interests in some of these companies, and in other
instances, we have elected not to participate in additional financing requests
from these companies, thereby reducing our equity interest in these companies
to a point where our relationships are no longer material.

 Our Relationship with IDT Corporation

   We continue to maintain significant business relationships with IDT
Corporation and its affiliates. Our companies' headquarters are located in the
same building in Newark, New Jersey. Our Chairman of the Board, Howard Jonas,
is also Chairman of the Board of IDT, and four other members of our thirteen
member board of directors are employees and/or directors of IDT. We also have
the following material business relationships with IDT:

   o IDT is our largest carrier customer, and an affiliate of IDT, Union
     Telecard Alliance, is our largest pre-paid disposable calling card
     customer;

   o We are a customer of IDT, using its network for a portion of our long
     distance traffic;

   o Our Newark, New Jersey headquarters, as well as our facilities in
     Hackensack and Piscataway, New Jersey, are leased from IDT;

   o We lease equipment storage space for some of our networking hardware from
     IDT locations in New Jersey and London, and occasionally at other IDT
     locations around the world;

   o On occasion, we have aggregated long distance minutes and other services
     purchases with IDT;

   o We have entered into, and may continue to enter into, joint ventures and
     other investments with IDT that we believe to be mutually beneficial. For
     example, in April 2002, we formed Enterprise Communication Solutions,
     LLC, a Delaware limited liability company, with an affiliate of IDT to
     develop and offer voice

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     communications services, data services and software systems based on VoIP
     technology to large U.S. corporate customers. The business plan for this
     company is still being developed; and

   o On occasion, we provide outsourced services to IDT, and IDT provides
     outsourced services to us.

   For more information relating to our relationship with IDT, please see Note
13 to our financial statements included elsewhere in this Form 10-K.

 NTOP Holdings, L.L.C. and Our Relationship with Liberty Media

   In October 2001, IDT, Liberty Media Corporation and AT&T formed NTOP
Holdings, L.L.C., a limited liability company, which through a series of
transactions among AT&T, IDT and Liberty Media, now holds an aggregate of
28,896,750 million shares of our Class A common stock representing just over
50 percent of our outstanding capital stock, and controls approximately 64% of
our stockholder vote. IDT controls the right to vote the shares of our Class A
common stock held by the LLC in most matters, and is the managing member of
the LLC.

   In June 2001, we entered into a Binding Memorandum of Understanding with
Liberty Media Corporation, which provided Liberty Media with a license for our
VoIP and other proprietary technology. As a result of the new corporate
structure formed in October 2001, and the restructuring of our relationship
with Liberty and IDT with respect to our broadband initiative, the Memorandum
of Understanding no longer reflected our anticipated business relationship
with Liberty. Accordingly, we terminated the Memorandum of Understanding in
May 2002, including the license granted to Liberty and the right to receive
the future payments provided for therein, and instead began working closely
with Liberty Media Corporation to develop the business model for offering a
fully outsourced telephony solution to Liberty Media cable operators. To that
end, we entered into an agreement with Liberty Cablevision of Puerto Rico, an
affiliate of Liberty Media, in June 2002 to begin a pilot of such a service,
which is ongoing.

Other Relationships

   During fiscal 2002, we have reduced our reliance on several strategic
partners that were material to us in fiscal 2001. Below is a brief description
of the current status of certain of these relationships below.

 Yahoo!

   On July 24, 2000, we entered into a three-year exclusive services and
marketing agreement whereby Yahoo! granted us exclusivity on the Yahoo!
network of properties. We also committed to make advertising media buys. The
2000 Yahoo! agreement provided, among other things, that: (1) Yahoo! would
embed our Internet telephony software into its Yahoo! Messenger software
client; (2) Yahoo! would use our network to carry traffic to and from its
voice portal that was not yet available to the public; and (3) we would be
permitted to market our products and services to users of the Yahoo! voice
portal.

   At the time, our future obligations under the 2000 Yahoo! agreement were
advertising commitments and placement fees, which were to be paid over the
life of the contract, and an upfront signing fee. The 2000 Yahoo! agreement
also provided for revenue sharing after costs were recovered. It became
apparent during the second quarter of fiscal 2001 that the actual usage for
our telephony services would be significantly less than projected with the
result that we would neither cover the costs of continuing the service, nor be
able to cover the incremental cost of the placement or advertising
commitments.

   The 2000 Yahoo! agreement also required us to provide free domestic U.S. PC-
to-phone calling to consumers. The cost for the free minutes was initially
projected to be covered by international calling margins and advertising on
the PC-to-phone platform. This advertising model was not successful.

   As a result of these factors, in December 2000, we agreed to pay Yahoo! a
one-time fee of $19 million to terminate the 2000 Yahoo! agreement and wrote
off previously capitalized advance payments of $12 million that were being
amortized over the three-year contract period. The $19 million termination fee
was significantly less than the costs that we would have incurred had the 2000
Yahoo! agreement not been terminated.

   We entered into a new agreement with Yahoo! in March 2001, whereby we
provided paid VoIP services to Yahoo! The fees we charged Yahoo! for the
services were at competitive rates reflective of current market

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conditions and demand for these services. The 2000 Yahoo! agreement and the
March 2001 Yahoo! agreement are separate and distinct agreements. Accordingly,
we wrote off the $19 million one-time fee and $12 million of unamortized
advance payments, as we were not receiving any future benefit under the 2000
Yahoo! agreement.

   Under the March 2001 Yahoo! agreement, we paid to Yahoo! a percentage of PC-
to-phone gross revenues from Yahoo! subscribers as well as revenues we
received from users of the Yahoo! voice activated dialer after deducting
agreed upon per minute charges made by Net2Phone. Under the March 2001
agreement, Yahoo! paid Net2Phone on a per minute basis for the 1-800 My-Yahoo
services hosted by Net2Phone. The March 2001 agreement expired by its terms on
December 31, 2001.

   We entered into a new agreement with Yahoo! on January 29, 2002 replacing
the March 2001 agreement. Under the new 2002 agreement, Yahoo!'s users
continue to use Net2Phone's voice activated dialing and PC-to-Phone services
that were offered under the prior agreement. We receive per minute fees from
Yahoo! for calls using the voice activated dialing service and pay Yahoo! a
percentage of gross revenue derived from users of the PC-to-phone service. The
2002 agreement expires by its terms on November 15, 2002.

 Microsoft

   On June 2, 2000, we entered into a three-year agreement with Microsoft to
integrate our VoIP products and services into Microsoft's MSN Messenger. Under
this agreement, Net2Phone served as Microsoft's exclusive Internet telephony
service provider. This agreement was terminated in anticipation of Microsoft's
release of its new SIP-based Internet telephony service provider program to be
launched in conjunction with a new release of Microsoft's instant messaging
program.

   On October 10, 2001, we signed a one-year integration and marketing
agreement with Microsoft pursuant to which Microsoft includes Net2Phone, for a
fee, as one of its approved Internet telephony service providers in its new
version of Microsoft's Instant Messaging Service software. Users of the new
Internet Messaging Service are able to choose us as their Internet telephony
service provider for the purpose of making PC-to-phone calls and to access
other telephony related services from us. We are solely responsible for
establishing the pricing plans and promotions relating to its services. This
agreement by its terms expired on October 10, 2002, and we are currently
negotiating an extension with Microsoft.

 ADIR Technologies

   We formed ADIR Technologies, Inc., along with several minority stockholders,
including IDT, in 2000 to develop and market network management software for
VoIP and other packet-based multimedia networks. In June 2001, ADIR entered
into a sales coordination agreement with Cisco Systems, Inc., a minority
investor in ADIR, and we believed this agreement would lead to Cisco working
with ADIR to jointly market ADIR's network management platform. In August
2001, ADIR acquired all of the issued and outstanding capital stock of
NetSpeak Corporation, a Florida corporation.

   In March 2002, Net2Phone and ADIR filed suit against Cisco and a Cisco
executive in the United States District Court for the District of New Jersey.
The suit arose out of the relationships that had been created in connection with
Cisco's and Net2Phone's original investments in ADIR and out of ADIR's
subsequent acquisition of Netspeak. We consummated a settlement agreement in
August 2002. For a description of this litigation, see Legal Proceedings below
and Note 21 of our financial statements included elsewhere in this Form 10-K.

   As the result of the litigation between the parties and the ultimate
settlement of that litigation, the relationship between ADIR and Cisco has
ended. Therefore, we intend to stop pursuing ADIR's original business plan,
which was largely dependent on marketing arrangements with CISCO. We are
currently examining alternative approaches, including pursuing possible
business development opportunities or merger and acquisition transactions with
third parties. We expect to continue to use Cisco products and maintain our
business relationships with Cisco that are not related to ADIR.

Customer and Technical Support

   We provide customer service on various levels to different customers. Within
the ICS unit, customer service and technical support is provided directly to
channel sales distributors. The distributors provide their own support

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directly to their sub-distributors and end users. Our Network Operations
Center, or NOC, provides support to carriers and monitors our telephony
network 24 hours a day, seven days a week. Consumers who access our services
directly through CommCenter, Net2Phone Direct or Pennytalk receive customer
service and technical support through multilingual telephone communication,
web-based customer service as well as e-mail support. Over the past year, we
scaled back our internal customer support and migrated to an outsourced
solution, allowing us to utilize multiple call centers globally to provide
better support to our worldwide customer base. Additionally, we upgraded our
web-based customer management system, allowing customer service agents around
the world to access customer information and provide improved support.

Technology

   All of our services rely on similar technology to transmit calls over data
networks, such as the Internet. We compress and digitize voice into packets
and send the packets over data networks around the world. All calls are routed
to our managed softswitch, which is a software-based product that provides
call control functionality and rates; manages and enrolls customers; and bills
calls and routes them to the closest gateway to the recipient. Unless the
recipient is an on-line device, the packets are then reassembled and the calls
are transferred to the public switched telephone network (PSTN) and directed
to a regular telephone anywhere in the world.

   We believe that reliable and flexible billing, information management,
monitoring and control systems are critical to our success, and support all of
our products and services. Accordingly, we have invested substantial resources
to develop and implement our sophisticated real-time call management
information system. Key elements of this system include:

   o customer provisioning;

   o customer access;

   o fraud control;

   o network security;

   o call routing;

   o call monitoring;

   o call reliability; and

   o detailed call records.

   Our Network Operations Center, or NOC, located at our headquarters in
Newark, New Jersey, employs a staff of approximately 15 people, and
incorporates a Data NOC and a Voice NOC to provide 24/7 support to our
operations around the world. We use network management tools to manage call
quality and view all gateways and traffic in real-time from the NOC. We have
hubs in the United States, United Kingdom and Hong Kong to route voice traffic
within particular regions, thereby enhancing the quality of the calls. The
Voice and Data NOCs manage the entire Net2Phone network.

   Additionally, our NOC group provides technical support to troubleshoot
equipment and network issues at all times, to ensure that issues are remedied
through multiple engineering groups. Our out sourced customer service centers
also rely on our customer service group for the resolution of outstanding
technical issues.

   Our goal is to comply with standards set forth by telecommunications
operators, Internet telephony consortiums and broadband providers in order to
further expand the reach of our network. Currently, our technology complies
with the following standards:

   o Voice Codecs: Lucent SX9600, SX7300 ; G.729 ; G.711 ; G.723

   o Broadband : DOCSIS 1.1

   o Fax : FRF11.1 Annex D ; T.30 and T.4 via PCM pass through

   o Packetization: Real Time Protocol (RTP)

   o VoIP Signaling: SIP; H.323; MGCP


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   o DTMF: RFC2833; SIP INFO with MGCP body attachment

   o PSTN Signaling: SS7/ANSI SS7

   Our customers may access our VoIP telephony services via multiple points,
varying slightly by product and/or service. Our services are organized around
these various access points.

 International Communications Services

   (a) Channel Partners.  Many of our users who become customers through our
channel partners access our network through Internet devices that incorporate
our VoIP technology. A user can plug a regular telephone into one of these
devices that compresses voice into packets that are then routed appropriately
in the same manner as our other VoIP calls.

   In order to improve efficient management of product offerings, we have added
new reporting tools that now provide all groups with a direct view into the
network's performance. We have also created a multi-level technical support
interface, allowing channel partners to view both their account activity as
well as the activities of their sub-distributors and end users. We also
support the user interface for foreign currency, allowing channel partners to
charge their users in their currencies while partners pay us in U.S. currency.

   (b) Carrier Services.   Our carrier partners gain access to our network
through a carrier network interconnect. We maintain core interconnect
locations, or hubs, in Newark and Piscataway, NJ, London and Hong Kong for
both our traditional carrier interconnects and our VoIP interconnects. With
regard to our traditional carrier interconnects, we can use an ISDN
(integrated services digital network) interconnect for a PSTN (public switched
telephone network) customer, or we can utilize other telephony signaling
standards, such as SS7 in the U.S. or C7 in Europe. With regard to our VoIP
interconnects, we can interconnect either via SIP or H323, two of the primary
VoIP interconnect standards in use today. Once the networks are
interconnected, we work with each partner to buy or sell minutes to each other
through a unilateral or bilateral carrier agreement.

   (c) Direct to Consumer Services.  Our PC-to-phone application is simple to
install and to use and has won various industry awards. The software is
organized into two elements: an application interface engine and an internet
telephony calling engine. The software is flexible and customizable and the
newest version of the domestic software supports buddy lists for building
online calling communities. Through presence management, callers can identify
which of their friends, family or coworkers are online and then choose to
initiate either a voice or text conversation via the Internet. Consumers can
initiate calls from their Internet-connected PCs which then dispatch the call
to a telephone or a multimedia Internet-connected PC.

 Domestic Retail Services

   Our calling card customers access our services by dialing an access number
that reaches one of our gateways. These gateways convert calls into packets
and then the calls are sent over an IP network to another gateway. The calls
are then taken off the IP network and transmitted locally over the public
switched telephone network, or PSTN. We are currently in the process of
installing new standards-compliant higher-density gateways with lower
"latency," which means less of a delay between the moment a caller speaks and
the moment the listener hears what was said. Early tests have indicated
improved quality of calls as a result of this upgrade.

 Broadband Telephony Solutions

   End users can access our VoIP services by plugging a regular telephone into
a cable modem equipped with Net2Phone's protocols. Calls are then routed and
managed over the cable operator's network to our IP network, where the calls
are then routed to the closest terminating gateway. The calls are then taken
off the network and completed locally over the PSTN. From the moment a
subscriber picks up the handset and a call is initiated across the local cable
network to Net2Phone's global IP network and then terminates to the PSTN, our
sophisticated management system provides both Net2Phone and the cable operator
with a real-time view of each network segment enabling them to monitor,
diagnose and troubleshoot any issues.


                                       8

<PAGE>

Competition

 International Communications Services

   Internationally, the competitive marketplace varies from region to region.
In markets where the telecommunications marketplace has been fully
deregulated, the competition continues to increase. Even a newly deregulated
market, such as India, allows for new entrants to establish a foothold and
offer competitive services more easily. Competitors include both government-
owned phone companies as well as emerging competitive carriers. As consumers
and telecommunications providers have come to understand the benefits that may
be realized from transmitting voice over the Internet, a substantial number of
companies have emerged to provide VoIP services. The principal competitive
factors in the market include: price, quality of service, breadth of
geographic presence, customer service, reliability, network capacity, the
availability of enhanced communications services and brand recognition.

   Some providers, such as Go2Call, DeltaThree, Inc. MediaRing and Innomedia,
offer similar services to ours, including international communications
services and direct-to-consumer product offerings. Wholesale Internet
Telephony Service Providers (ITSPs), such as ITXC Corp. and iBasis, Inc.
compete with our carrier services, and could become meaningful competitors to
our international communications services group.

 Domestic Retail Services

   The long distance market in the United States is highly competitive. There
are several much larger and numerous similar-sized and smaller competitors,
and we expect to face continuing competition based on price and service
offerings from existing competitors. The principal competitive factors in the
market include: price, quality of service, breadth of geographic presence,
customer service, reliability, network capacity and the availability of
enhanced communications services. Competitors include AT&T, Sprint, IDT and
Regional Bell Operating Companies (RBOC), all of whom offer services and
products competitive with ours on the above factors, including offering their
own pre-paid calling cards.

 Broadband Solutions

   Net2Phone believes that it presently provides the only fully outsourced IP
telephony solution for cable operators that complies with cable industry
standards. Other providers, such as Vonage, DeltaThree, Inc. and Gemini Voice
Solutions, offer telephony services over cable networks, but, unlike Net2Phone,
we believe that they can neither offer cable standards-compliant solutions nor
can they deliver a fully managed solution that enables the cable operator to
transform all phone jacks in a residence from the local phone company to the
cable operator. Our ability to sell our broadband product may be further limited
by the fact that major cable operators may elect to build their own internal
cable telephony solutions.

Research and Development

   At our research and development centers, we employ approximately 30
engineers, whose technical expertise covers software, hardware, switching,
security, voice compression, protocols, web applications, PC development,
interactive voice response systems, VoiceXML, speech applications, next-
generation signaling, firewalls and NATs (network address translations),
engineering real-time online transactions, billing and network and call
management. This staff is devoted to the improvement and enhancement of our
existing product and service offerings, as well as to the development of new
products and services.

   Current research and development activities include the following:

   o enhancements to our PC-to-phone software to increase functionality;

   o porting of our PC-to-phone software to other operating system platforms;

   o enhancements to our call processing platform to increase scalability and
     performance;

   o enhancements to our billing platforms to increase scalability and
     performance;

   o enhancements to our enhanced services platform to host interactive voice
     response and VoiceXML applications;

   o development of speech enabled calling applications;


                                       9

<PAGE>

   o interactions between voice over IP protocols, NATs and firewalls;

   o multiprotocol VoIP support to embrace multiple VoIP calling devices and
     platforms;

   o protocol support for IP calling software and devices; and

   o enhancements to end-to-end cable telephony solutions and related
     applications.

   Our future success will depend, in part, on our ability to improve existing
technology, retaining services of talented employees and developing new
products and services that incorporate leading technology.

   Costs for the internal development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, at which time any additional
costs would be capitalized. Software development costs are our only research
and development expenditures. For the years ended July 31, 2002, 2001 and
2000, research and development costs totaled approximately $11,185,000,
$10,360,000, and $4,692,000, respectively. We anticipate that our research and
development costs will decrease in the short term as we consolidate our two
research development centers, resulting in a reduction in payroll and other
operating expenses.

Regulation

   The use of the Internet and private IP networks to provide voice
communications services, is a relatively recent market development. Although
the provision of such services is currently permitted by United States law and
largely unregulated within the United States, several foreign governments have
adopted laws and/or regulations that could restrict or prohibit the provision
of voice communications services over the Internet or private IP networks.
More aggressive regulation of the Internet in general, and Internet telephony
providers and services specifically, may adversely affect our business,
financial condition, operating results and future prospects, particularly if
increased numbers of governments impose regulations restricting the use and
sale of IP telephony services.

   United States. In an April 10, 1998 Report to Congress, the Federal
Communications Commission (FCC) declined to conclude that IP telephony
services constitute telecommunications services and instead indicated that it
would undertake a subsequent examination of the question whether certain forms
of phone-to-phone Internet telephony are information services or
telecommunications services. The FCC indicated that in the future it would
consider the extent to which phone-to-phone-Internet telephony providers could
be considered "telecommunications carriers" such that they could be subject to
the regulations governing traditional telephone companies such as the
imposition of access charges. The FCC stated that although it did not have a
sufficient record upon which to make a definitive ruling, the record suggested
that, to the extent that certain forms of phone-to-phone IP telephony appear
to possess the same functionality as traditional telecommunications services
and to the extent the providers of those services obtain the same circuit-
switched access as obtained by interexchange carriers, the FCC may find it
reasonable that they pay similar access charges. The FCC also recognized,
however, that it would consider whether it should forbear from imposing any of
the rules that would apply to phone-to-phone Internet telephony providers as
"telecommunications carriers." Thus, the FCC currently does not impose
regulatory surcharges or traditional common carrier regulation upon providers
of Internet communications services, although it could determine to do so in
the future.

   To date the FCC has determined that providers of Internet telephony services
should not be required to pay interstate access charges, this decision may be
reconsidered in the future. For instance, on April 19, 2001 in Docket No. CC
01-92, the FCC adopted a proposal to begin a fundamental examination of all
forms of intercarrier compensation -- the payments among telecommunications
carriers resulting from their interconnecting networks. The FCC could adopt an
intercarrier compensation mechanism and other regulations that could result in
an increase in the cost of the local transmission facilities necessary to
complete our calls or a decrease in the costs of such facilities to
traditional long distance telephone companies. If we were required to increase
our rates as a result of new FCC regulations, this could have a significant
impact on our ability to compete with long distance carriers.

   Additionally, on October 18, 2002, AT&T filed a petition with the FCC
seeking a declaratory ruling that would prevent incumbent local exchange
carriers, or ILECs, from imposing traditional circuit-switched access

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<PAGE>

charges on phone-to-phone IP services. This petition and subsequent ILEC
reactions may exert pressure on the FCC to render a decision regarding the
regulation of phone-to-phone IP services. The FCC could determine, for
instance, that certain types of Internet telephony should be regulated like
basic interstate telecommunications services. Thus, Internet telephony would
no longer be exempt from the access charge regime that permits local telephone
companies to charge long distance carriers for the use of the local telephone
network to originate and terminate long-distance calls, generally on a per
minute basis. Similarly, the FCC could conclude that Internet telephony
providers should contribute to the Universal Service Fund, which provides
support to ensure universal access to telephone service. The imposition of
interstate access charges or universal service contributions would
substantially increase our costs of serving our customers. The imposition of
regulation and contribution requirements might also negatively affect the
incentives for companies to continue to develop IP technologies. It is also
possible that the FCC might adopt a regulatory framework that is unique to IP
telephony providers or one where IP telephony providers are subject to reduced
regulatory requirements. We cannot predict what regulations, if any the FCC
will impose.

   In addition, other aspects of our operations may be subject to state or
federal regulation, such as regulations relating to the confidentiality of
data and communications, copyright issues, taxation of services, universal
service funding, and licensing. Similarly, changes in the legal and regulatory
environment relating to the Internet connectivity market, including regulatory
changes that affect telecommunications costs or that may increase the
likelihood of competition from the regional Bell operating companies, or
RBOCs, or other telecommunications companies, could increase our costs of
providing service.

   Moreover, state governments and their regulatory authorities may assert
jurisdiction over the provision of intrastate IP communications services where
they believe that their telecommunications regulations are broad enough to
cover regulation of IP services. Various state regulatory authorities have
initiated proceedings to examine the regulatory status of Internet telephony
services, and a state court in Colorado has ruled that the use of the Internet
to provide certain intrastate services does not exempt an entity from paying
intrastate access charges. Similarly, the State Public Service Commission
(PSC) of New York has ruled (with respect to another company providing IP
telecommunications,) that certain IP services may be considered
telecommunications services subject to access charges depending on how much of
the service is provided over IP networks.

   As state governments, courts, and regulatory authorities continue to examine
the regulatory status of Internet telephony services, they could render
decisions or adopt regulations affecting providers of Internet telephony
services or requiring such providers to pay intrastate access charges or to
make contributions to universal service funding. Should the FCC determine to
regulate IP services, states may decide to follow the FCC's lead and impose
additional obligations as well.

    International.  The regulatory treatment of IP communications outside the
United States varies significantly from country to country. Net2Phone operates
on a global scale. The regulations we are subject to in many jurisdictions
change from time to time, they may be difficult to obtain or it may be
difficult to obtain accurate legal translations where official legal
translations are unavailable. Additionally, in our experience, the enforcement
of these regulations does not always track the letter of the law. Accordingly,
although we devote what we believe to be sufficient resources to maintaining
compliance with these regulations, we cannot be certain that we are in
compliance with all of the relevant regulations at any given point in time.

   While some countries prohibit IP telecommunications, others have determined
that IP services offer a viable alternative to traditional telecommunications
services. As the Internet telephony market has expanded, regulators have begun
to reconsider whether to regulate Internet telephony services. Some countries
currently impose little or no regulation on Internet telephony services, as in
the United States. Other countries, including those in which the governments
prohibit or limit competition for traditional voice telephony services,
generally do not permit Internet telephony services or strictly limit the
terms under which those services may be provided. Still other countries
regulate Internet telephony services like traditional voice telephony
services, requiring Internet telephony companies to make universal service
contributions and pay other taxes. While some countries subject IP telephony
providers to reduced regulations, others have moved towards liberalization of
the IP communications sector and have lifted bans on provision of IP
telecommunications services. We cannot predict how a regulatory or policy
change of a particular country might affect the provision of our services. We

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<PAGE>

believe that while increased regulations and restrictions could pose a threat
to our ability to provide services, the lifting of regulations in a country
generally will enable us to expand our services and presence in that country.

   In some cases where access to some of our services has been blocked by
government-controlled telecommunications companies, we have tried to negotiate
agreements with those governments to provide our services. We intend to
continue to do the same where similar situations may arise. No assurances can
be given, however, that we will be successful in such negotiations or that we
will be able to provide alternative means of accessing our services that will
not be blocked by foreign governments or government-controlled
telecommunications companies. The varying and continually changing regulatory
landscape of Internet telephony in the countries in which we currently provide
or may provide services may adversely and materially affect our business,
financial condition and results of operations.

   In addition, as we expand into additional foreign countries, some countries
may conclude that we are required to qualify to do business in their country,
that we are otherwise subject to regulation, or that we are prohibited from
conducting our business in such countries. Our failure to qualify as a foreign
corporation in certain jurisdictions, or to comply with foreign laws and
regulations, may adversely affect our business.

   Moreover, our distributors in various foreign countries may be or may become
subject to various regulatory requirements. We cannot be certain that our
partners are currently in compliance with every regulatory or other legal
requirement in their respective countries, that they will be able to comply
with existing or future requirements, and/or that they will remain in
compliance with all requirements. Failure of our distributors to comply with
these requirements could adversely affect our business.

   Regulation of the Internet. In addition to regulations addressing Internet
telephony specifically, other regulatory issues relating to the Internet in
general could affect our ability to provide our services. Congress has adopted
legislation that regulates certain aspects of the Internet, including online
content, user privacy, taxation, liability for third-party activities, and
jurisdiction. In addition, a number of initiatives pending in Congress and
state legislatures would prohibit or restrict advertising or sale of certain
products and services on the Internet, which may have the effect of raising
the cost of doing business on the Internet generally. The European Union has
also enacted several directives relating to the Internet, one of which
addresses online commerce. Recently, the European Union adopted a privacy
directive that establishes certain requirements with respect to, among other
things, the confidentiality, processing and retention of personally
identifiable subscriber information and usage patterns. The potential effect,
if any, of these data protection rules on the development of our business
remains uncertain.

   Federal, state, local and foreign governmental organizations are considering
other legislative and regulatory proposals that would regulate the Internet.
For instance, the extension of the Internet Tax Freedom Act prohibits the
taxing of certain Internet uses through November 1, 2003. We cannot predict
whether new taxes will be imposed on our services or, depending on the type of
taxes imposed, whether and how our services would be affected thereafter.
Increased regulation of the Internet may decrease its growth and hinder
technological development, which may negatively impact the cost of doing
business via the Internet or otherwise materially adversely affect our
business, financial condition, and results of operations.

Intellectual Property

   We rely on a combination of patents, trademarks, domain name registrations
and trade secret laws and contractual restrictions to enforce our rights in
our intellectual property against others.

 Patents

   We currently own two VoIP related patents issued in the United States and
have over thirty other applications pending in both the U.S. and abroad. The
two U.S. patents are patent number 6,137,792, or Patent `792, and patent
number 6,389,038, or Patent `038. Patent `792 relates to a method and system
for enabling data transmission over a bypass circuit-switched network between
two computers connected to a public packet-switched network, such as the
Internet. Patent `038 relates to a method and system for combining plural
independently addressable packets into a larger packet, called a SuperPacket,
which improves the utilization of a telecommunications channel, and helps
reduce latency. Because these patents relate to our core business, we

                                       12

<PAGE>

believe these patents have value. Patent `792 was issued on October 24, 2000
and expires October 24, 2020. Patent `038 was issued May 14, 2002 and expires
May 14, 2022.

   In addition to the above referenced patents, we own a majority interest in
ADIR Technologies, Inc., which wholly owns NetSpeak, Inc., a Florida
corporation. NetSpeak owns a portfolio of ten patents. We are currently
conducting an investigation into the scope and value of these patents, some of
which relate to our core VoIP technology.

   The ability to make, use, sell or offer for sale our products and services
is important to our business. We are aware that patents have been granted to
others based on fundamental technologies in the Internet telephony area. It is
possible that certain patent infringement claims might be asserted
successfully against us in the future. A party making an infringement claim
could secure a substantial monetary award or obtain injunctive relief that
could effectively block our ability to provide services or products in the
United States or abroad. If any of these risks materialize, we could be forced
to suspend operations, to pay significant amounts to defend our rights, and/or
secure an expensive license. A substantial amount of the attention of our
management may be diverted from our ongoing business. Moreover, because patent
applications in the United States are not publicly disclosed when filed, third
parties may have filed applications that, if issued as patents, could result
in claims against us in the future. These claims could materially adversely
affect our ability to operate and our financial condition and results of
operations. We may be able to use our own patents against such claims, for
example, if cross-licenses are warranted.

   Although we have no knowledge that we infringe the patent rights of any
third party, on February 15, 2000, Multi-Tech Systems, Inc. filed suit against
us and several other companies in the United States Federal District Court in
Minneapolis, Minnesota, asserting patent infringement. For a discussion of the
Multi-Tech proceeding, see Legal Proceedings below.

 Trademarks

   We own twenty-seven registered trademarks in the United States and more than
fifty foreign registered trademarks. Our most important mark is NET2PHONE. We
have made a significant investment in protecting this mark, and we believe it
has achieved recognition in the U.S. and abroad. We are currently engaged in
an international filing program to file trademark applications for trademark
registrations of the mark NET2PHONE in a number of foreign countries. There
can be no assurance that we will be able to secure registration and maintain
protection for NET2PHONE in all the countries where we deem it important to do
so. Competitors of ours or other third parties may adopt marks similar to our
mark NET2PHONE, thereby interfering with our efforts to build brand identity
and possibly leading to customer confusion.

   We have encountered trademark oppositions challenging our registration and
use of the NET2PHONE mark in several countries. We have also encountered
refusals to registration from local trademark offices in several foreign
countries, typically based on the asserted grounds that the mark is
descriptive/non-distinctive or that it conflicts with a prior registered mark.
In addition, in a limited number of situations, third parties have challenged
our marks. Our practice is to oppose vigorously such challenges, and we have
generally been successful.

   Unlike patents, which have a limited duration, our trademarks will continue
to be registered so long as we pay the required fees and the company does
nothing to lose its rights, such as permit others to use the same mark.

 Domain Names

   We have registered many Internet domain names that contain the term
NET2PHONE. We cannot assure you that we will be successful in obtaining all of
the domain names that we would like to have, either because of unwarranted
expense, inability to register the domain due to registrar requirements that
we cannot meet, or because of third parties who previously registered the
relevant domain name. We have encountered several instances of third parties
who have registered the term NET2PHONE within a domain name. We have generally
had success in obtaining the transfer of those domains that we deemed
important to our business from such third parties by agreement, institution of
accepted domain name dispute resolution proceedings, or other means, but we
cannot assure you that we will be successful in the future in obtaining all
domains that we deem important. Finally, there are many variations of the word
NET2PHONE, and it is difficult, if not impossible, to register each variation,
or to pursue all pirates who register such variations. Because we are in large
part an Internet business,

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<PAGE>

we may be negatively impacted by the unauthorized use of the word NET2PHONE,
or of a substantially similar word, in a domain name owned by a third party.

 Confidentiality Agreements

   All key employees have signed confidentiality agreements, and it is our
standard practice to require newly hired employees to execute confidentiality
agreements. These agreements provide that the employee or consultant may not
use or disclose confidential company information except in the performance of
their duties for the company, or in other limited circumstances. These
agreements also state that, to the extent rights in any invention conceived of
by the employee or consultant while they were employed by us do not vest in
the company automatically by operation of law, the employee or consultant is
required to assign their rights to us. The steps taken by us may not, however,
be adequate to prevent the misappropriation of our proprietary rights or
technology.

Employees

   As of July 31, 2002, we employ 290 individuals full-time, 4 individuals
part-time, and 3 individuals on a temporary basis. These employees include
approximately 109 in technical support and customer service, 56 in marketing
and sales, 41 in management and finance, 61 in operations and 30 in research
and development. We anticipate that by December 2002, as a result of
consolidations primarily related to our research and development and network
operations areas, we will reduce the number of full-time employees by
approximately 63. Our employees are not represented by a union, and we
consider our employee relations to be good. We have never experienced a work
stoppage.

Revenues and Assets by Geographic Area

   For the year ended July 31, 2002, 45% of our revenue was derived from
international customers, and 55% from customers in the United States.
Substantially all our long-lived assets are located in the United States. For
more detailed information concerning our geographic segments, see Note 20 to
our financial statements included elsewhere in this Form 10-K.

Executive Officers

   The following are the executive officers of Net2Phone as of October 29,
2002:

<TABLE>
<CAPTION>

                                                                                     Executive
Name                                                                        Age    Officer Since            Present Office
----                                                                        ---    -------------            --------------
<S>                                                                         <C>    <C>             <C>
Stephen M. Greenberg....................................................     58        2000        Chief Executive Officer and
                                                                                                   Vice Chairman of the Board

Norman Klugman..........................................................     52        2002        Chief Financial Officer and
                                                                                                   Chief Operating Officer

Jonathan Reich..........................................................     36        1999        President, Worldwide Sales and
                                                                                                   Marketing

Bruce Shoulson..........................................................     62        2001        General Counsel and President of
                                                                                                   Broadband Division

Jeffrey Skelton.........................................................     36        2000        Chief Technology Officer

Glenn J. Williams.......................................................     39        1999        Corporate Secretary and
                                                                                                   Executive Vice President of
                                                                                                   Legal and Business Affairs
</TABLE>

   Stephen M. Greenberg is presently our Chief Executive Officer and Vice
Chairman of our Board of Directors. Mr. Greenberg practiced law for 32 years
prior to joining us. His legal career began in Newark, New Jersey in 1968. He
served as Executive Assistant to the United States Attorney for the District
of New Jersey from 1969 to 1971. Before joining Net2Phone, Mr. Greenberg was a
founder of and senior partner in the New Jersey law firm of Stern & Greenberg.
Mr. Greenberg has received many honors including one for Outstanding

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<PAGE>

Personal Achievement from the New Jersey Bar Association. He is also a
Commissioner of the New Jersey Public Broadcasting Authority and a member of
the New Jersey Israel Commission.

   Norman Klugman has been our Chief Financial Officer since March 2002 and
also our Chief Operating Officer since August 2002. From 1993 to 1994,
Mr. Klugman was Chief Operating Officer of Worldcom/LDDS. From January 1994 to
December 1995, Mr. Klugman was founder and Chief Executive Officer of Trescom
International, a facilities-based international long distance company. From
1995 to March 2002, Mr. Klugman was a consultant for various companies in the
telecommunications and other industries. From March 2001 to July 2001,
Mr. Klugman served as interim Chief Financial Officer for Teligent, a
telecommunications company that provided local, long distance, and high-speed
Internet access to businesses.

   Jonathan Reich has been our President, Worldwide Sales and Marketing since
July 2002 and our Executive Vice President--Marketing and Corporate
Development from January 1999 to July 2002. Prior to his employment with us,
Mr. Reich was IDT Corporation's Senior Vice President of Advertising,
Marketing and Business Development in charge of strategic relationships for
both us and IDT Corporation from June 1997 to December 1998 and IDT
Corporation's director of advertising from January 1995 to November 1997. From
1992 to 1993, Mr. Reich worked for Sanford Bernstein & Co. as an associate
analyst. Prior to this, Mr. Reich was an internal consultant for Morgan
Stanley & Co.

   Bruce Shoulson has been our General Counsel since February 2001 and the
President of our Broadband Division since July 2002. Mr. Shoulson practiced
law for 36 years with the law firm of Lowenstein Sandler P.C. prior to joining
Net2Phone. Mr. Shoulson was a partner at Lowenstein Sandler from 1970 until he
joined us in February 2001.

   Jeffrey Skelton has been our Chief Technology Officer since September 2000
and a senior engineer since December 1997. Prior to his employment with us,
Mr. Skelton was a principal technical staff member and a software engineer at
AT&T from 1988 to December 1997.

   Glenn J. Williams has been our Executive Vice President of Legal and
Business Affairs and Corporate Secretary since February 2001. From October
1999 to February, 2001, Mr. Williams served as our General Counsel and
Corporate Secretary. Prior to joining us, Mr. Williams served as Associate
General Counsel to IDT Corporation from December 1998 to September 1999. From
August 1997 to December 1998, Mr. Williams served as Associate General Counsel
to a privately held company and from 1994 to 1997 worked as an attorney in
private practice, including representing the New Jersey Sports and Exposition
Authority.


Risk Factors


   In addition to other information in this Form 10-K and any documents
incorporated by reference to this Form 10-K, the following risk factors should
be carefully considered when evaluating our company and our business.
Investing in our common stock involves a high degree of risk, and you should
be able to bear the complete loss of your investment. We also caution you that
this Form 10-K includes forward-looking statements that are based on
management's beliefs and assumptions and on information currently available to
management. Future events and circumstances and our actual results could
differ materially from those projected in any forward-looking statements. The
risk and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial also may impair our business operations. If any of
the following risk and uncertainties actually occur, our future operating
results and financial condition could be harmed, and the market price of our
common stock could decline.


                                       15

<PAGE>

           Risks Related to Our Financial Condition and Our Business

We have never been profitable. If we continue to incur losses, we may not be
able to finance the commercial deployment of our products and services.

   We have never been profitable on an annual basis. Our aggregate revenues
from inception to July 31, 2002 were approximately $408.4, and our accumulated
deficit was approximately $773.7 million as of that date. We will need to
generate significant revenue to achieve profitability. We may not be able to
do so. Even if we do achieve profitability, we cannot assure you that we will
be able to sustain or increase profitability on a quarterly or annual basis in
the future.

Our limited operating history makes evaluating our business difficult.

   IDT formed us as a subsidiary in October 1997. Prior to that, we conducted
business as a division of IDT. Therefore, we have only a limited operating
history with which you may evaluate our business. You must consider the
numerous risks and uncertainties an early stage company like ours faces in the
new and rapidly evolving market for Internet-related services. These risks
include our ability to:

   o increase awareness of our brand and continue to keep and build our
     customer base;

   o develop and implement effective marketing and business plans;

   o maintain our current, and develop new, strategic relationships;

   o respond effectively to competitive pressures; and

   o continue to develop and upgrade our network and technology.

   If we are unsuccessful in addressing these risks, sales of our products and
services, as well as our ability to maintain or increase our customer base,
will be substantially diminished.

We intend to pursue new streams of revenue, which we have not attempted to
generate before and which may not be profitable.

   In addition to our current minutes-based revenue, we are beginning to pursue
new revenue opportunities, such as from our broadband telephony business. We
intend to devote significant capital and resources to create these new revenue
streams and we cannot ensure that these investments will be profitable. For
example, in fiscal 2002, we pursued new Web-based revenue opportunities from
banner advertising, and then elected to exit those lines of business and focus
on our core business units. In fiscal 2003, we intend to devote significant
resources to implement our broadband telephony business initiative. Our
business model for our broadband telephony business has not been tested, and
may not be attractive to potential cable operator customers. Also, we have not
tested our broadband telephony solution on a large scale, and therefore, we
cannot be sure our solution will be scalable to the extent necessary to serve
a large customer base.

We may have difficulties managing our operations, which may reduce our chances
of achieving profitability.

   Our future performance will depend, in part, on our ability to manage our
business growth effectively. To that end, we will have to undertake the
following tasks, among others:

   o continue to develop our operating, administrative, financial and
     accounting systems and controls;

   o continue to improve coordination among our engineering, accounting,
     finance, marketing and operations personnel;


                                       16

<PAGE>

   o continue to enhance our management information systems capabilities; and

   If we cannot accomplish these tasks, our chances of achieving profitability
may be diminished.

If we fail to establish and maintain strategic relationships, our sales would
suffer.

   We currently have significant strategic relationships with IDT Corporation
and Liberty Media. For a complete description of these strategic
relationships, see Strategic Relationships above. We depend on these
relationships to help us:

   o expand our customer base;

   o distribute our products to potential customers; and

   o increase usage of our services.

   We believe that our success in the ICS and broadband areas depends, in part,
on our ability to develop and maintain relationships with leading hardware and
software companies, as well as our many distribution partners.

   In addition to these strategic relationships, we rely on one of our vendors,
LG Electronics, to manufacture approximately fifty percent of the hardware
devices sold by our channel sales and distribution group. We do not have a
contract with LG Electronics, and therefore, LG Electronics could stop
providing us with these products with little or no prior notice. While we
believe our relationship with LG Electronics is stable, we can provide no
assurance that this relationship will continue to be good, or continue at all.
While we believe we could replace LG Electronics if necessary, this could take
a period of time during which our channel sales and distribution group's
hardware sales could be materially impacted, and this could impact our ability
to service some of our customers for this period of time. We are currently
devising a plan that can be implemented quickly to avoid or significantly
reduce this period of time if LG Electronics were not continue to provide us
with these devices in a timely maner.

We have and plan to increasingly depend on our international operations, which
subject us to unpredictable regulatory, economic and political situations.

   Our customers based outside of the United States generated approximately 45%
percent of our revenue during fiscal 2002. A significant component of our
strategy is to continue to expand internationally. We cannot assure you that
we will be successful in expanding into additional international markets. In
addition to the uncertainty regarding our ability to generate revenue from
foreign operations and expand our international presence, there are certain
risks inherent in doing business on an international basis, including:

   o changing regulatory requirements, which vary widely from country to
     country;

   o action by foreign governments or foreign telecommunications companies to
     limit access to our services;

   o increased bad debt and subscription fraud;

   o legal uncertainty regarding liability, tariffs and other trade barriers;

   o economic and political instability; and

   o potentially adverse tax consequences.

   For example, several of our largest customers are based in the Middle East,
and other areas of the world, such as Argentina, where there is currently
significant political and economic instability. We have experienced power
supply problems, difficulty maintaining local customer support and
difficulties dealing with local companies and governments in some of these
regions. Moreover, developments in the Middle East, such as the commencement
of hostilities by the United States or others, could result in the disruption
of our business in the regions affected by the hostilities. These events could
also reduce travel to these regions, which could further adversely affect our
calling card business, which relies in large part on the use of calling cards
by travelers. We cannot assure you that these political and economic
difficulties will not continue or that they will not expand into other
geographic areas experiencing political and economic instability.


                                       17

<PAGE>

Competition could reduce our market share and decrease our revenue.

   The market for VoIP services is extremely competitive. Many companies offer
products and services like ours, and many of these companies have a
substantial presence in the markets we serve. In addition, many of these
companies are larger than we are and have substantially greater financial,
distribution and marketing resources than we do. We therefore may not be able
to compete successfully with these companies. If we do not succeed in
competing with these companies, we will lose customers and our revenue will be
substantially reduced. Our competitors include the following:

   International Communications Services. Competitors include both government-
owned phone companies as well as emerging competitive carriers such as
Go2Call, DeltaThree, MediaRing and Innomedia. Wholesale Internet Telephony
Service Providers, or ITSPs, such as ITXC and iBasis, compete with our carrier
services business.

   Domestic Retail Services. There are several large and numerous small
competitors, and we expect to face continuing competition based on price and
service offerings from existing competitors. Competitors include AT&T, Sprint,
IDT and Regional Bell Operating Companies (RBOC), all of whom offer their own
pre-paid calling cards.

   Broadband. Other companies, such as Vonage and Gemini Voice Solutions,
offer telephony services over cable networks, but, unlike Net2Phone, we
believe that they can neither offer cable standards-compliant solutions nor
can they transform all phone jacks in a residence from the local phone company
to the cable operator. Our ability to sell our broadband telephony solution
product may be further limited by the fact that major cable operators may
elect to build their own internal cable telephony solutions.

Our business may be affected by the proliferation and increased usage of
cellular telephones.

   A significant number of our calling card customers use calling cards while
traveling, both domestically and abroad. As more and more people obtain
cellular telephones, and as cellular telephone users increase their usage, and
begin to use their phones in broader geographic regions, including
internationally, the need for these customers to purchase our calling cards
may be reduced. We cannot predict how this development will impact our
business, as our calling card rates could be attractive enough for cellular
telephone users to continue to purchase our cards when traveling.

Pricing pressures may lessen our competitive pricing advantage.

   Our success is based partly on our ability to provide discounted domestic
and international long distance services by taking advantage of cost savings
achieved by carrying voice traffic over the Internet, as compared to carrying
calls over long distance networks, such as those owned by AT&T, Sprint and MCI
WorldCom. In recent years, the price of long distance calls has fallen. In
response, we may lower the price of our service offerings. AT&T, Sprint and
MCI WorldCom have adopted pricing plans in which the rates that they charge
for U.S. domestic long distance calls are not always substantially higher than
the rates that we charge for our U.S. domestic service. The price of long
distance calls may decline to a point where we no longer have a price
advantage over these traditional long distance services. Alternatively, other
providers of long distance services may begin to offer unlimited or nearly
unlimited use of some of their services for an attractive monthly rate. We
would then have to rely on factors other than price to differentiate our
product and service offerings, which we may not be able to do.

We may not be able to compete with providers that can bundle long distance
services with other offerings.

   Our competitors may be able to bundle services and products that we do not
offer together with long distance or Internet telephony services. These
services could include wireless communications, voice and data services,
Internet access and cable television. This form of bundling would put us at a
competitive disadvantage if these providers can combine a variety of service
offerings at a single attractive price. In addition, some of the
telecommunications and other companies that compete with us may be able to
provide customers with lower communications costs or other incentives with
their services, reducing the overall cost of their communications packages,
and significantly increasing pricing pressures on our services. This form of
competition could significantly reduce our revenues.


                                       18

<PAGE>

If our customers do not perceive our services to be effective or of high
quality, our brand and name recognition would suffer.

   We believe that establishing and maintaining brand and name recognition is
critical for attracting and expanding our targeted client base. We also
believe that the importance of reputation and name recognition will increase
as competition in our market increases. Promotion and enhancement of our name
will depend on the effectiveness of our marketing and advertising efforts and
on our success in continuing to provide high-quality products and services,
neither of which can be assured. Our International Communications Services
business requires us to rely on third party distributors to promote and market
our products and services. We cannot be assured that these third parties
provide the same level of effort as we do to protect the high-quality
reputation we believe our services and products maintain. If they do not, our
reputation may be diminished in these markets.

All of the IP telephony calls made by our customers are connected through
local telephone companies and, at least in part, through leased networks that
may become unavailable.

   We are not a local telephone company or a local exchange carrier. Our
network covers only portions of the United States. Accordingly, we must route
parts of some domestic and all international calls made by our customers over
leased transmission facilities. In addition, because our network does not
extend to homes or businesses, we must generally route calls through a local
telephone company to reach our network and, ultimately, to reach their final
destinations.

   In many of the foreign jurisdictions in which we conduct or plan to conduct
business, the primary provider of significant in-country transmission
facilities is the national telephone company, which may be the only provider
in that country. Accordingly, we may have to lease transmission capacity at
artificially high rates from such a monopolistic provider, and consequently,
we may not be able to generate a profit on those calls. In addition, national
telephone companies may not be required by law to lease necessary transmission
lines to us or, if applicable law requires national telephone companies to
lease transmission facilities to us, we may encounter delays in negotiating
leases and interconnection agreements and commencing operations. Additionally,
disputes may result with respect to pricing, billing or other terms of these
agreements, and these disputes could affect our ability to continue to operate
in these countries.

Our success depends on our ability to handle a large number of simultaneous
calls, which our systems may not be able to accommodate.

   We expect the volume of simultaneous calls to increase significantly as we
expand our operations. Our network hardware and software may not be able to
accommodate this additional volume. If we fail to maintain an appropriate
level of operating performance, or if our service is disrupted, our reputation
could be hurt and we could lose customers.

Because we are unable to predict definitely the volume of usage and our
capacity needs, we may be forced to enter into disadvantageous contracts that
would reduce our operating margins.

   We may have to enter into additional long-term agreements for leased
capacity. To the extent that we overestimate our call volume, we may be
obligated to pay for more transmission capacity than we actually use,
resulting in costs without corresponding revenue. Conversely, if we
underestimate our capacity needs, we may be required to obtain additional
transmission capacity through more expensive means or such capacity may not be
available.

We may not be able to obtain sufficient funds to grow our business.

   Due to our limited operating history and the nature of our industry, our
future capital needs are difficult to predict. Therefore, we may require
additional capital to fund some or all of the following:

   o unanticipated opportunities;

   o strategic alliances;

   o potential acquisitions;

   o changing business conditions; and

   o unanticipated competitive pressures.


                                       19

<PAGE>

   While we believe we have enough cash and short-term investments to
adequately fund our business for the foreseeable future, we may need to forego
business opportunities relating to the above listed events if we do not obtain
additional financing. Obtaining additional financing will be subject to a
number of factors, including market conditions, our operating performance and
investor sentiment. These factors may make the timing, amount, terms and
conditions of additional financings unattractive to us. If we are unable to
raise additional capital, our growth could be impeded.

Any damage to or failure of our systems or operations could result in
reductions in, or terminations of, our services.

   Our success depends on our ability to provide efficient and uninterrupted,
high-quality services. Our systems and operations are vulnerable to damage or
interruption from natural disasters, power loss, telecommunication failures,
physical or electronic break-ins, sabotage, intentional acts of vandalism and
similar events that may be or may not be beyond our control. Our systems and
operations could also be interrupted by internet service providers or
government owned telecommunications companies that implement network changes
or blocks, which may also be out of our control. While we have built in system
redundancies to reduce this risk, the occurrence of any or all of these events
could still hurt our reputation and cause us to lose customers.

Unauthorized use of our intellectual property by third parties may damage our
brand.

   We regard our patents, service marks, trademarks, trade secrets and other
intellectual property as important to our success. We rely on trademark and
copyright law, trade secret protection and confidentiality agreements with our
employees, customers, partners and others to protect our intellectual property
rights. Despite our precautions, it may be possible for third parties to
obtain and use our intellectual property without authorization. Furthermore,
the laws of some foreign countries may not protect intellectual property
rights to the same extent as do the laws of the United States. It may be
difficult for us to enforce certain of our intellectual property rights
against third parties who may have acquired intellectual property rights by
filing unauthorized applications in foreign countries to register the marks
that we use because of their familiarity with our worldwide operations. Since
Internet related industries such as ours are exposed to the intellectual
property laws of numerous foreign countries and trademark rights are
territorial, there is uncertainty in the enforceability and scope of
protection of our intellectual property. The unauthorized use of our
intellectual property by third parties may damage our brand.

Defending against intellectual property infringement claims could be expensive
and could disrupt our business.

   We cannot be certain that our products and services do not or will not
infringe upon valid patents, trademarks, copyrights or other intellectual
property rights held or claimed by third parties. Multi-Tech, Inc. has filed a
lawsuit against us alleging that we infringe upon its patents. While we have
received a successful preliminary ruling in this case, there can be no assurance
that this ruling will not be appealed and possibly overturned. While this case
is being resolved, we are incurring substantial expenses defending this claim.
If Multi-Tech is successful appealing this ruling, we may be subject to
significant monetary liability and our business may be materially disrupted. For
a complete discussion of the Multi-Tech case, please see Legal Proceedings
below.

   We may also be subject to other legal proceedings and claims from time to
time relating to the intellectual property of others in the ordinary course of
our business. We may incur substantial expenses in defending against those
third-party infringement claims, regardless of their merit. Successful
infringement claims against us may result in substantial monetary liability or
may materially disrupt the conduct of our business.

Our common stock price is likely to be highly volatile.

   The market price of our common stock has been and will likely continue to be
highly volatile, as is the stock market in general, and the market for VoIP
services and telecommunications related companies in particular. Some of the
factors that may materially affect the market price of our common stock are
beyond our control, such as changes in financial estimates by securities
analysts, conditions or trends in the VoIP services and other Internet and
telecommunications related industries, announcements made by our competitors,
or sales of our common stock. These factors may materially adversely affect
the market price of our common stock, regardless of our performance.


                                       20

<PAGE>

         Risks Related to Our Relationship with AT&T/IDT/Liberty Media

   In October 2001, AT&T, IDT Corporation and Liberty Media Corporation formed
NTOP Holdings, LLC, a new Delaware limited liability company which through a
series of transactions among AT&T, IDT and Liberty Media now holds an
aggregate of approximately 50 percent of our outstanding capital stock and 64
percent of the aggregate voting power of our capital stock. IDT controls the
right to vote the shares of Class A common stock held by the LLC in most
matters. This relationship contains certain risks associated with it including
the following:

We may experience conflicts of interest resulting from the LLC's power to
elect the members of our board of directors.

   The LLC, currently controls 64 percent of the aggregate voting power of our
capital stock, and has the power to nominate and elect the members of our board
of directors when such members become eligible for re- election, so long as at
least five members are not affiliated with us, IDT or AT&T, as required by our
bylaws. This power may give rise to significant influence and/or conflicts of
interest with respect to certain decisions involving business opportunities and
similar matters that may arise in the ordinary course of our business or the
business of any of the owners of the LLC.

The holdings of the LLC may limit your ability to influence the outcome of
matters subject to a stockholder vote.

   The LLC is able to exert considerable influence over us, including in
the election of our directors, the appointment of management and the approval
of any other action requiring the approval of our stockholders, including any
amendments to our certificate of incorporation and mergers or sales of our
company or of all of our assets. In addition, we could be prevented from
entering into certain transactions that could be beneficial to us and our
stockholders. Third parties will likely be discouraged from making a tender
offer or bid to acquire us because of the LLC's stock ownership and voting
power.

We have contracted with IDT for various services and for the use of its
telecommunications network, which contracts we may not be able to renew when
they expire.

   In May 1999, we entered into agreements with IDT under which IDT provided
administrative and telecommunication services to us. Since some of these
agreements have expired, we will need to extend them, engage other entities to
perform these services or perform these services ourselves. We cannot assure
you that IDT will continue to provide these services. As a result, we may have
to purchase these services from third parties or devote resources to handle
these functions internally, which may cost us more than we paid IDT for the
same services.

Some of our business relationships with IDT and its affiliates are not covered
by written agreements, and, therefore, IDT could stop them at any time.

   One of IDT's affiliates, Union Telecard Alliance, is our largest customer,
representing approximately 22% of our revenue for fiscal 2002. IDT is our
largest carrier customer, representing approximately 9% of our revenue for
fiscal 2002. While we have understandings in place with both UTA and IDT
relating to the services we provide to them, these understandings have not
been reduced to writing, and therefore may be terminated at any time by either
party, or the terms could change without notice to us. Our relationship with
both UTA and IDT is in good standing, and we do not expect the terms to change
in any material respect while we negotiate and finalize written agreements
with these two parties.

                         Risks Related to Our Industry

Federal, state and international regulations may be passed that could impede
our business.

   The legal and regulatory environment that pertains to our business is
uncertain and changing rapidly. For example, in the United States, the Federal
Communications Commission (FCC) could undertake an examination of whether to
impose surcharges or additional regulations upon certain providers of Internet
telephony. The imposition of regulations on IP communications services may
negatively impact our business.

   In addition, regulatory treatment of Internet telephony outside the United
States varies from country to country. For example, access to certain services
may be negatively impacted by government regulation. We

                                       21

<PAGE>

cannot predict whether these regulations will restrict or prohibit our ability
to provide products and services in the future. These actions and other
similar actions in foreign countries may cause us to lose customers and
revenue.

   New regulations could increase our costs of doing business and prevent us
from delivering our products and services over the Internet, which could
adversely affect our customer base and our revenue. The growth of the Internet
may also be significantly slowed. This could delay growth in demand for our
products and services and limit the growth of our revenue. In addition to new
regulations being adopted, existing laws may be applied to the Internet. We
cannot predict how the laws will develop with regard to IP communications and
the extent of any negative impact that such regulations could have on our
business. New and existing laws may cover issues that include:

   o sales and other taxes;

   o interstate access charges;

   o user privacy;

   o pricing controls;

   o characteristics and quality of products and services;

   o consumer protection;

   o contributions to the Universal Service Fund, which is funded by
     telecommunications carriers for the purpose of supporting local telephone
     service in rural and high cost areas;

   o cross-border commerce;

   o copyright, trademark and patent infringement; and

   o other claims based on the nature and content of Internet materials.

For a more complete description of regulations affecting our business, see
Regulation above.

If the Internet does not continue to grow as a medium for voice
communications, our business will suffer.

   The technology that allows voice communications over the Internet is still
in its early stages of development. Historically, the sound quality of
Internet calls was poor. As the industry has grown, sound quality has
improved, but the technology requires additional refinement. Additionally, the
Internet's capacity constraints may impede the acceptance of Internet
telephony. Callers could experience delays, errors in transmissions or other
interruptions in service that are beyond our control. Making telephone calls
over the Internet must also be accepted as an alternative to traditional
telephone service. Because the Internet telephony market is new and evolving,
predicting the size of this market and its growth rate is difficult. If our
market fails to develop, then we will be unable to grow our customer base and
our opportunity for profitability will be harmed.

Our business will not grow without increased use of the Internet.

   The use of the Internet as a commercial marketplace is at an early stage of
development. Demand and market acceptance for recently introduced products and
services over the Internet are still uncertain. We cannot predict whether
customers will be willing to shift their traditional activities online. The
Internet may not prove to be a viable commercial marketplace for a number of
reasons, including:

   o concerns about security;

   o Internet congestion;

   o inconsistent service; and

   o lack of cost-effective, high-speed access.

   If the use of the Internet as a commercial marketplace does not continue to
grow, we may not be able to grow our customer base, which may prevent us from
achieving profitability.


                                       22

<PAGE>

Our risk management practices may not be sufficient to protect us from
unauthorized transactions or thefts of services.

   As have many others in our industry whose customers use credit cards to
purchase services, we have been the victim of consumer fraud and theft of
service. From time to time, callers have obtained our services without
rendering payment by unlawfully using our access numbers and personal
identification numbers. We attempt to manage these theft and fraud risks
through our internal controls and our monitoring and blocking systems. If
these efforts are not successful, the theft of our services may cause our
revenue to decline significantly. To date, costs related to consumer fraud and
theft have not materially impacted our business or revenues. In addition, the
company has introduced new consumer fraud controls, including pre-purchase
credit card verification, daily tracking of usage patterns, alignment of IP
addresses with customer registration data, as well as post-purchase credit
card verifications.

Item 2. Properties

   Our primary facility is our headquarters and executive offices located on all
or portions of four floors at 520 Broad Street, Newark, New Jersey. We also
locate equipment around the world. Our principal equipment locations are in
Newark, NJ, London, England, Hong Kong, China and Piscataway, NJ. Since the
equipment is portable, the lease arrangements for the equipment locations are
generally short term or at-will. We believe that our facilities are suitable and
adequate for our business for the foreseeable future. A summary of the
materially important leased facilities where we conduct business operations is
as follows:

<TABLE>
<CAPTION>

                                                                                  Total                               Lease
    Domestic Office Locations(1)                                                 Sq. Ft.         Occupant        Expiration Date
    ----------------------------                                                 -------         --------        ---------------
   <S>                                                                           <C>        <C>                  <C>
    Newark, New Jersey .......................................................    69,525        Net2Phone,           05/31/10
                                                                                               Headquarters

    Hackensack, New Jersey ...................................................     8,150(2)      Net2Phone           06/30/04
                                                                                                 Customer
                                                                                                  Service
                                                                                               (now vacant)

    Brick, New Jersey ........................................................    14,663       Net2Phone and         03/31/06
                                                                                             Adir Laboratories

    Boca Raton, Florida ......................................................    51,740(2)    Adir/Netspeak          08/9/10

    West Long Branch, New Jersey .............................................    31,485         Net2Phone           09/30/07
                                                                                               Laboratories

   <CAPTION>
    Foreign Office Locations
    ------------------------
   <S>                                                                           <C>        <C>                  <C>
    Jerusalem, Israel ........................................................     1,800       Net2Phone MEA         07/14/03

    Warsaw, Poland ...........................................................     2,153         Net2Phone            Month
                                                                                                  Global             to month
</TABLE>

---------------
(1) We lease approximately 20,000 additional square feet of office space in New
    York, New York, and Boston, Massachusetts that is currently vacant, or
    close to vacant. We have either subleased or are currently attempting to
    sublease this space.
(2) As a result of our restructuring in early 2002, and the reduction of work
    force that was part of this restructuring, we are not utilizing all of the
    square footage at these facilities and we are attempting to sublease parts
    of this space.



Item 3. Legal Proceedings

 Multi-Tech

   On February 15, 2000, Multi-Tech Systems, Inc. filed suit against Net2Phone
and other companies in the United States Federal District Court in
Minneapolis, Minnesota. Multi-Tech alleged that "the defendant

                                       23

<PAGE>

companies are infringing because they are providing the end users with the
software necessary to simultaneously transmit voice and data on their computers
in the form of making a phone call over the Internet." We continue to defend the
lawsuit vigorously. On August 16, 2002, following an initial hearing, called a
Markman hearing, the Court issued an order construing the claims of all of the
patents subject to the lawsuit that Net2Phone considers favorable to its
non-infringement defenses. In light of the order, Net2Phone expects Multi-Tech
to agree to a stipulation of non-infringement and joint motion for entry of
final judgment dismissing all of Multi-Tech's infringement claims. Multi-Tech is
likely to appeal the Markman order to the Circuit Court of Appeals contesting
the Court's construction of the patent claims.

 Class-Actions

   Four substantially similar class-action lawsuits were filed in the United
States District Court for the Southern District of New York on behalf of all
persons who acquired our stock between July 29, 1999 and December 6, 2000.
Net2Phone, certain of our executive officers and underwriters involved in our
initial public offering were named as defendants in these complaints. The
complaints allege, in part, that certain underwriters of our initial public
offering violated federal securities laws by failing to disclose that they had
solicited and received undisclosed commissions and allocated shares in our
initial public offering to those investors in exchange for their agreement to
purchase our shares in the after-market at pre-determined prices. The complaints
also allege that, whether or not Net2Phone and the named executives were aware
of the underwriters' arrangements, Net2Phone and the named executives have
statutory liability under the federal securities laws for issuing a registration
statement in connection with our initial public offering that failed to disclose
that these allegedly undisclosed arrangements existed. The suits against us are
substantially the same as suits making the same allegations that have been filed
against more than 100 other companies that had their initial public offerings at
or about the same time. The deadline for all defendants to respond to the
complaints has been extended by the court to which the various cases have been
assigned. We recently have been able to secure the voluntary dismissal of our
executive officers from the lawsuits. In addition, our underwriting agreement
with our underwriters provides for indemnification of Net2Phone and its
executives and directors for liabilities arising out of misstatements in our
registration statement attributable to material non-disclosures by the
underwriters. We intend to pursue our indemnification claims against the
underwriters. In addition, we maintain directors and officers liability
insurance coverage which should substantially cover the costs of defending the
various suits. However an unfavorable decision in one or more of these cases
could have a material adverse effect on our business operations, financial
condition, results of operations and cash flows.

 Cisco Systems

   In August 2002, Net2Phone and its subsidiary, ADIR Technologies, consummated
the settlement of their lawsuit filed in the United States District Court for
the District of New Jersey against Cisco Systems, Inc. and a Cisco employee who
had served as a director of Adir. The complaint sought compensatory and punitive
damages based upon claims for misappropriation of trade secrets, fraud, unfair
competition, breach of contract and breach of fiduciary duties. The suit arose
out of the relationships that had been created in connection with Cisco's and
Net2Phone's original investments in Adir in 2000 for purposes of developing
Adir's VoIP software and out of Adir's subsequent purchase of NetSpeak, Inc. in
August 2001. The parties agreed to settle the suit on July 31, 2002. Under the
terms of the settlement, during the first quarter of fiscal 2003, Net2Phone
received the shares representing 18.5% of Adir owned by Cisco and SoftBank Asia
Infrastructure Fund and Cisco paid Net2Phone and Adir the sum of $19,500,000.

Item 4. Submission of Matters to a Vote of Security Holders

   No matters were submitted to our stockholders during the fourth quarter of
the fiscal year ended July 31, 2002.


                                       24

<PAGE>

                                    PART II


Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Market Information

   Our stock is quoted on the Nasdaq National Market under the ticker symbol
"NTOP." There is no public market for our Class A common stock. The following
table sets forth for the periods indicated the high and low sale prices per
share for our common stock as reported on the Nasdaq National Market.

        Year Ended July 31, 2002                               High      Low
        ------------------------                               ----      ---
        First Quarter.....................................     $6.11    $2.65
        Second Quarter ...................................     $6.80    $4.48
        Third Quarter.....................................     $5.87    $4.48
        Fourth Quarter ...................................     $5.50    $3.00

        Year Ended July 31, 2001                               High      Low
        ------------------------                               ----      ---
        First Quarter.....................................    $33.81   $16.70
        Second Quarter ...................................    $20.25    $6.84
        Third Quarter.....................................    $13.44    $7.38
        Fourth Quarter ...................................     $9.46    $4.10

   On October 17, 2002, the last reported sale price of our common stock on the
Nasdaq National Market was $2.22 per share.

Holders

   As of October 17, 2002, there were approximately 379 stockholders of record
of our common stock and 11 stockholders of record of our Class A common stock,
par value $.01 per share.

Dividend Policy

   We have not paid any cash dividends in the past and do not intend to pay
cash dividends on our capital stock for the foreseeable future. Instead, we
intend to retain all earnings, if any, for use in the operation and expansion
of our business.

Equity Compensation Plan Information

   The following table provides, as of July 31, 2002, information with respect
to compensation plans (including individual compensation arrangements) under
which our equity securities are authorized for issuance.

<TABLE>
<CAPTION>
                                                (a)                               (b)                                (c)
---------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>                              <C>                            <C>
 Plan Category                       Number of securities to be                                         Number of securities
                                      issued upon exercise of          Weighted-average exercise      remaining available for
                                   outstanding options, warrants     price of outstanding options,  future issuance under equity
                                             and rights                   warrants and rights      compensation plans (excluding
                                                                                                      securities reflected in
                                                                                                            column (a))
---------------------------------------------------------------------------------------------------------------------------------
 Equity compensation plans
 approved by security holders                10,623,023(1)                       $5.59                       6,316,977
---------------------------------------------------------------------------------------------------------------------------------
 Equity compensation plans not
 approved by security holders                   150,000(2)                       $4.36                               0
---------------------------------------------------------------------------------------------------------------------------------
 Total                                       10,773,023                          $5.59                       6,316,977
</TABLE>

                                       25

<PAGE>

---------------
(1) Represents stock options issued pursuant to 1999 Net2Phone Stock Option
    Plan.
(2) On August 6, 2001, we granted options to purchase 50,000 shares of our
    common stock to each of three employees of Aplio, S.A., a subsidiary of
    Net2Phone. The exercise price per share of these options was $4.36, subject
    to certain adjustments. The options were fully vested upon the execution of
    the stock option agreements, and may be exercised through January 3, 2005.

Unregistered Sale of Common Stock

   In connection with the termination of Ilan Slasky's employment, Mr. Slasky
sold 500 shares of the common stock of Adir Technologies, Inc., our
majority-owned subsidiary, to IDT Corporation. On or about January 24, 2002, IDT
transferred the shares of Adir to us in exchange for 273,798 shares of our
common stock valued at $1.4 million or $5.20 per share, the closing price of our
common stock on January 24, 2002. Under certain circumstances, we are required
to guarantee to IDT that the shares still owned by it on January 31, 2007 will
have a market value of at least $5.20 per share on that date.

   The issuance of the shares of our common stock to IDT was exempt from the
registration provisions of the Securities Act of 1933, pursuant to Section 4(2)
of the Securities Act for transactions not involving a public offering, based on
the fact that the common stock was offered and sold to an accredited investor
who had access to financial and other relevant data concerning Net2Phone, its
financial condition, business and assets.




                                       26

<PAGE>

Item 6. Selected Financial Data

   The following selected financial data should be read in conjunction with our
financial statements and related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in
Item 7. The statement of operations data for fiscal 1998, fiscal 1999, fiscal
2000, fiscal 2001 and fiscal 2002 and the balance sheet data as of July 31,
1998, 1999, 2000, 2001 and 2002 are derived from our financial statements.

<TABLE>
<CAPTION>
                                                                                Fiscal Year Ended July 31,
                                                      -----------------------------------------------------------------------------
Statement of Operations Data:                             1998           1999             2000            2001             2002
                                                      ------------   ------------    -------------    -------------   -------------
<S>                                                   <C>            <C>             <C>              <C>             <C>
Revenue:
  Service.........................................    $ 10,490,972   $ 32,648,305    $  61,253,096    $ 143,309,997   $ 133,143,796
  Product.........................................       1,515,000        608,152       11,148,094        6,888,491       4,711,369
                                                      ------------   ------------    -------------    -------------   -------------
  Total revenue...................................      12,005,972     33,256,457       72,401,190      150,198,488     137,855,165
                                                      ------------   ------------    -------------    -------------   -------------
Costs and expenses:
  Services cost of revenue........................       6,576,523     17,554,074       34,700,401      102,805,831      72,235,412
  Products cost of revenue........................         272,236        263,936        6,286,392        5,605,022       6,266,674
                                                      ------------   ------------    -------------    -------------   -------------
  Total direct cost of revenue (exclusive of items
   shown below)...................................       6,848,759     17,818,010       40,986,793      108,410,853      78,502,086
Selling, general and administrative...............       7,975,394     19,664,239      104,998,346      168,002,685     117,170,453
Depreciation and amortization.....................         726,508      2,316,545        6,804,412       23,349,538      23,979,448
Restructuring, severance, impairment and other
  items...........................................              --             --               --       70,100,860     143,191,146
Acquired in-process research and development......              --             --               --               --      13,850,000
Non-cash compensation expense.....................              --     17,919,541       48,124,333       20,544,829      18,955,673
                                                      ------------   ------------    -------------    -------------   -------------
 Total costs and expenses.........................      15,550,661     57,718,335      200,913,884      390,408,765     395,648,805
                                                      ------------   ------------    -------------    -------------   -------------
Loss from operations..............................      (3,544,689)   (24,461,878)    (128,512,694)    (240,210,277)   (257,793,640)
Interest income, net..............................              --       (243,314)       9,672,815       18,530,609       4,162,088
Income (loss) on equity investments and other
  expense, net....................................              --             --          505,874     (146,972,698)     (7,886,961)
 Net loss before minority interests...............      (3,544,689)   (24,705,192)    (118,334,005)    (368,652,366)   (261,518,515)
Minority interests................................              --             --               --       (2,676,595)    (15,590,626)
 Net loss.........................................      (3,544,689)   (24,705,192)    (118,334,005)    (365,975,771)   (245,927,887)
                                                      ------------   ------------    -------------    -------------   -------------
Redeemable preferred stock dividends..............              --    (29,219,362)              --               --              --
Redeemable common stock accretion.................              --             --               --         (531,999)       (133,000)
                                                      ------------   ------------    -------------    -------------   -------------
 Net loss available to common stockholders........    $ (3,544,689)  $(53,924,554)   $(118,334,005)   $(366,507,770)  $(246,060,887)
                                                      ------------   ------------    -------------    -------------   -------------
 Net loss per common share -- basic and diluted...    $      (0.12)  $      (1.73)   $       (2.29)   $       (6.25)  $       (4.21)
                                                      ------------   ------------    -------------    -------------   -------------
 Weighted average number of common shares used in
   calculation of basic and diluted net loss per
   common share...................................      30,186,000     31,236,415       51,738,918       58,664,580      58,442,337
                                                      ------------   ------------    -------------    -------------   -------------
Cash, cash equivalents, and marketable securities.    $     10,074   $ 20,379,048    $ 249,294,250    $ 253,968,496   $  89,986,644
Working capital (deficit) ........................     (11,149,553)     6,303,452      106,371,979      221,341,679      60,321,000
Total assets......................................       6,975,108     50,816,891      411,728,433      414,644,774     171,695,560
Accounts payable (receivable) to (from) IDT.......      11,814,988      3,735,395        4,883,111       14,401,290       (681,591)
Loan payable to IDT...............................              --     14,000,000               --               --              --
Total stockholders' (deficit) equity..............      (5,649,994)    (4,062,867)     331,886,546      273,828,532      56,602,399
</TABLE>

                                       27

<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

   The following discussion should be read in conjunction with our financial
statements and notes thereto included elsewhere in this report.


                   FORWARD-LOOKING AND CAUTIONARY STATEMENTS


   We may from time to time make written or oral forward-looking statements,
including those contained in the following section. These forward-looking
statements involve risks and uncertainties and actual results could differ
materially from those discussed in the forward-looking statements. For this
purpose, any statements contained in this section that are not statements of
historical fact may be deemed to be forward-looking statements. Factors which
may affect our results include, but are not limited to, our ability to expand
our customer base, our ability to develop additional and leverage our existing
distribution channels for our products and solutions, dependence on strategic
and channel partners including their ability to distribute our products and
meet or renew their financial commitments, our ability to address
international markets, the effectiveness of our sales and marketing
activities, the acceptance of our products in the marketplace, the timing and
scope of deployments of our products by customers, fluctuations in customer
sales cycles, customers' ability to obtain additional funding, technical
difficulties with respect to our products or products in development, the need
for ongoing product development in an environment of rapid technological
change, the emergence of new competitors in the marketplace, our ability to
compete successfully against established competitors with greater resources,
the uncertainty of future governmental regulation, our ability to manage
growth, obtain patent protection, and obtain additional funds, general
economic conditions and other risks discussed in this report and in our other
filings with the Securities and Exchange Commission. All forward-looking
statements and risk factors included in this document are made as of the date
hereof, based on information available to us as of the date thereof, and we
assume no obligation to update any forward-looking statement or risk factors.

Overview

   We began our operations in November 1995, launched our first Net2Phone
product in July 1996, and were established as a separate subsidiary of IDT in
October 1997. We have incurred net operating losses since inception and expect
to incur additional losses for the foreseeable future. During the past twelve
months, we have aggressively consolidated our company to focus on three primary
lines of business. We have cut our expenses through a series of reductions in
workforce and de-emphasized our activities in certain markets to focus our
resources on what we believe are opportunities with higher gross margins. The
financial impact of these expense reduction initiatives is described in more
detail in the discussion of restructuring severance, impairment and other
special items below as well as in Note 22 of our consolidated financial
statements included elsewhere in this Form 10-K.

   During the most recent four fiscal quarters, we have attained improved
earnings before interest, taxes, depreciation and amortization, or EBITDA (which
excludes restructuring, severance, impairment and other items; inventory
obsolescence expense; certain one-time selling, general and administrative
expenses; the write-off of acquired in-process research and development; and,
non-cash compensation charges from the issuance of stock options). EBITDA losses
have significantly narrowed in fiscal 2002 from $19.3 million in the three
months ended October 31, 2001, to $15.7 million for the three months ended
January 31, 2002, to $11.7 million for the three months ended April 30, 2002, to
$5.4 million for the three months ended July 31, 2002.

   Financial analysts generally consider EBITDA to be an important measure of
our operating performance. However, EBITDA should be considered in addition
to, not as a substitute for, operating loss, net loss, cash flow and other
measures of financial performance and liquidity reported in accordance with
generally accepted accounting principles.

Critical Accounting Policies

   Our consolidated financial statements have been prepared in accordance with
generally accepted accounting principles. These generally accepted accounting
principles require management to make estimates and assumptions 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 net sales and expenses during the reporting period. We
continually evaluate our estimates, including those related to revenue
recognition, bad

                                       28

<PAGE>

debts, intangible assets, income taxes, fixed assets, access line costs,
restructuring, contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the facts and circumstances. Actual results may differ from
these estimates under different assumptions or conditions.

   We believe the following critical accounting policies impact our most
difficult, subjective and complex judgments used in the preparation of our
consolidated financial statements, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain. For a
more detailed discussion of these and other accounting policies, please see
Note 1 of the Notes to consolidated financial statements included elsewhere in
this Form 10-K:

   Revenue Recognition. Our primary source of revenue is communication
services revenue from the sale of minutes over our voice over Internet
protocol, or VoIP, network. We sell these minutes, or access to these minutes,
through our various businesses, including our international communications
services group and our domestic retail services group. Our international
communications service revenue is recognized as service is provided, that is,
as minutes are used. Our retail sales revenue, which consists primarily of
pre-paid calling card revenue, is also recognized as our service is provided,
that is, as minutes are used, or when service fees are charged. We also
recognize revenue from pre-payments for our services after we conduct
evaluations of outstanding remaining pre-payment balances and determine, based
on historical data, that such balances are not likely to be utilized. The sale
of equipment with software necessary to provide our services is recognized
when such products are delivered, collection of payments is assured and there
are no significant future obligations. To date, we have recognized no revenue
from our broadband business.

   Impairment of Long-Lived Assets. As of July 31, 2002, we had fixed assets
with a net carrying value of $32.9 million, intangible assets of $1.7 million
and goodwill of $1.7 million. The recoverability of long-lived assets and
certain identifiable intangible assets are evaluated when events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. An impairment loss will be recognized when estimated future
undiscounted cash flows expected to result from the use of the asset and its
eventual disposition are less than its carrying amount, with the loss measured
based on discounted expected cash flows. Goodwill and indefinite-lived
intangible assets are tested for impairment annually, or upon an indication
that their value may be impaired.

   Expense Recognition versus Capitalized Costs. Purchases that provide
benefit to future periods and have useful lives greater than one year are
capitalized. All other purchases are expensed in the period the underlying
goods and/or services are received.

Specifically:

   o Equipment and furniture and fixtures are recorded at cost and depreciated
     using the straight-line method over the estimated useful lives of the
     assets, which range from five to fifteen years.

   o Computer software is amortized using the straight-line method over the
     shorter of five years or the term of the related agreement.

   o Software development costs for the internal development of new software
     products and substantial enhancements to existing software products are
     expensed as incurred until technological feasibility has been
     established, at which time any additional costs would be capitalized. As
     we have completed our software development concurrently with the
     establishment of technological feasibility, we have not capitalized these
     costs. We capitalize certain costs incurred in connection with developing
     or obtaining internal use software. These costs consist of payments made
     to third parties and the salaries of employees working on such software
     development.


                                       29

<PAGE>

Results of Operations

   The following table sets forth certain items in our statement of operations
as a percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>

                                                                                  Fiscal Year Ended July 31,
                                                                                  --------------------------
                                                                                   2000      2001      2002
                                                                                  ------    -------   ------
                                                                                            Percent
<S>                                                                               <C>       <C>       <C>
Statement of Operations Data:
Revenue:
  Service Revenue...............................................................    84.6      95.4      96.6
  Product Revenue...............................................................    15.4       4.6       3.4
                                                                                  ------    ------    ------
   Total revenue................................................................   100.0     100.0     100.0
                                                                                  ------    ------    ------
Costs and expenses:
  Service cost of revenue.......................................................    47.9      68.5      52.4
  Product cost of revenue.......................................................     8.7       3.7       4.5
                                                                                  ------    ------    ------
   Total direct costs of revenue (exclusive of items shown below)...............    56.6      72.2      56.9
  Selling, general and administrative...........................................   145.1     111.8      85.0
  Depreciation and amortization.................................................     9.4      15.5      17.4
  Restructuring, severance, impairment and other items..........................      --      46.7     103.9
  Acquired in-process research and development..................................      --        --      10.0
  Non-cash compensation expense.................................................    66.4      13.7      13.8
                                                                                  ------    ------    ------
   Total costs and expenses.....................................................   277.5     259.9     287.0
                                                                                  ------    ------    ------
Loss from operations............................................................  (177.5)   (159.9)   (187.0)
Interest income, net............................................................    13.4      12.3       3.0
Income (loss) on equity investments and other expense, net......................     0.7     (97.9)     (5.7)
                                                                                  ------    -------   ------
Net loss before minority interests..............................................  (163.4)   (245.5)   (189.7)
Minority interests..............................................................      --      (1.8)    (11.3)
                                                                                  ------    ------    ------
Net loss........................................................................  (163.4)   (243.7)   (178.4)
Redeemable common stock accretion...............................................      --       (.4)      (.1)
                                                                                  ------    ------    ------
   Net loss available to common stockholders....................................  (163.4)   (244.1)   (178.5)
                                                                                  ------    ------    ------
</TABLE>

Comparison of Fiscal Years Ended July 31, 2002 and 2001

   Revenue. Our primary source of revenue is communication services revenue from
the sale of minutes over our voice over Internet protocol, or VoIP, network. We
sell these minutes, or access to these minutes, through our various business
groups, including our international communications services group and our
domestic retail services group. Our international communications service revenue
is recognized as service is provided, that is, as minutes are used. We also earn
revenue from the sale of Internet telephony equipment. Our aggregate revenue
decreased 8 percent from $150.2 million in fiscal 2001 to $137.9 million in
fiscal 2002. The decrease in revenue was primarily due to management's active
restructuring of our company during the fiscal year. We diminished our
activities in certain sales channels, such as Carrier Services, where we were
experiencing relatively low gross margins and focused our activities in those
sales channels, such as Channel Sales and Distribution, that have generated
relatively higher gross margins. We significantly reduced our workforce and
scaled back certain unprofitable services, including our sale of disposable
calling cards and wholesale termination of telecommunications traffic. Service
revenue decreased 7 percent from $143.3 million in fiscal 2001 to $133.1 million
in fiscal 2002. This decrease, and the aggregate revenue decrease, was primarily
due to the aforementioned restructuring. Product revenue decreased 32 percent
from $6.9 million in fiscal 2001 to $4.7 million in fiscal 2002. This decrease
was due to the factors noted above as well as the elimination of certain
consumer distribution channels as we focused more on product sales through our
Channel Sales and Distribution unit.

   Direct Cost of Revenue, Excluding Depreciation and Amortization. Our direct
cost of revenue consists primarily of network costs associated with carrying
our customers' traffic on our network and leased networks, routing their calls
through a local telephone company to reach their final destination, the
wholesale costs of Internet telephony devices, ad serving costs and e-mail box
hosting fees. It also includes the cost of purchasing,

                                       30

<PAGE>

storing and shipping Internet telephony equipment. Total direct cost of
revenue, excluding depreciation and amortization, decreased by 28 percent from
$108.4 million in fiscal 2001 to $78.5 million in fiscal 2002. Similarly,
direct cost of service revenue decreased 30 percent from $102.8 million in
fiscal 2001 to $72.2 million in fiscal 2002. As a percentage of total revenue,
total direct costs decreased from 72.2 percent in fiscal 2001 to 56.9 percent
in fiscal 2002 and direct cost of service revenue decreased from 71.7 percent
in fiscal 2001 to 54.2 percent in fiscal 2002. These decreases are primarily
attributable to the effective restructuring of our network for more focused
and intensive use, aggressive price negotiations of termination costs and the
impact of removing our subsidization of free minutes to strategic partners
such as Microsoft and Yahoo!. The direct cost of product revenues increased 12
percent from $5.6 million in fiscal 2001 to $6.3 million in fiscal 2002. As a
percentage of product revenue, excluding $3.0 million and $2.7 million of
inventory obsolescence expense in fiscal years 2001 and 2002, respectively,
these costs increased from 38 percent in fiscal 2001 to 74 percent in fiscal
2002. The increase in direct costs as a percentage of product revenue is due
to the emphasis of selling products through the Channel Sales and Distribution
unit to international distributors to increase significant volumes of traffic
over our network rather than selling to domestic consumers for individual use.

   Selling, General and Administrative. Selling, general and administrative
expenses consist of the salaries of our employees and associated benefits; the
expenses associated with acquiring customers, including commissions paid to
our sales partners, advertising costs, travel, entertainment, referral fees
and amounts paid to our strategic partners in connection with revenue-sharing
arrangements and the costs of insurance, legal, rent, utilities, shipping,
consulting and other items. Selling, general and administrative expenses
decreased 30 percent from $168.0 million in fiscal 2001 to $117.2 million in
fiscal 2002. As a percentage of total revenue, these costs decreased from
111.8 percent in fiscal 2001 to 85.0 percent in fiscal 2002. In the second
quarter of fiscal 2001, we incurred a one-time non-recurring termination
charge of $31.0 million related to marketing and advertising expenses
associated with the termination of our agreement with Yahoo!. Selling, general
and administrative costs have decreased as a result of  operating more
efficiently and by leveraging our existing infrastructure to support future
growth. The portion of selling, general and administrative costs driven by
payroll costs has decreased markedly during fiscal 2002 as the number of full-
time employees on staff dropped from 695 on July 31, 2001 to 290 on July 31,
2002. We anticipate selling, general and administrative expenses to continue
to decrease in fiscal 2003 due to the restructurings of our operations that
were announced in fiscal 2002 and the first quarter of fiscal 2003.

   Depreciation and Amortization. Depreciation and amortization increased 3.0
percent from $23.3 million in fiscal 2001 to $24.0 million in fiscal 2002,
primarily due to a 53.4 percent increase in capital equipment purchased during
fiscal 2001, to $72.9 million, from $47.4 million purchased during fiscal
2000. However, the overall increase in depreciation and amortization in fiscal
2002 was mitigated by the impact of a $70.6 million impairment of long-lived
assets recorded on April 30, 2002. As a percentage of total revenue,
depreciation and amortization increased to 17.4 percent in fiscal 2002 from
15.5 percent in fiscal 2001. Depreciation and amortization will decrease in
fiscal 2003 as a direct result of the recognition of the impairment of long-
lived assets on April 30, 2002.

   Restructuring, Severance, Impairment and other items. Restructuring,
severance, impairment and other items increased from $70.1 million in fiscal
2001 to $143.2 million in fiscal 2002. The following table summarizes the
charges included in restructuring, severance, impairment and other items in
the statements of operations:
<TABLE>
<CAPTION>

                                                          For the year ended July 31,
                                                          ---------------------------
                                                             2001            2002
                                                          -----------    ------------
    <S>                                                   <C>            <C>
       Impairment of long-lived assets................    $        --    $ 83,940,197
       Exit costs.....................................     55,828,882      14,500,223
       Workforce reductions...........................        469,117      13,881,918
       CEO & CFO separation agreements................             --      12,623,149
       Impairment of goodwill.........................             --      11,543,232
       Impairment of intangible assets................             --       4,226,870
       Cisco litigation related expense...............             --       1,571,665
       Other asset impairments........................     13,802,861         903,892
                                                          -----------    ------------
        Total ........................................    $70,100,860    $143,191,146
                                                          ===========    ============
</TABLE>


                                       31

<PAGE>

   o Impairment of Long-lived Assets

   When an indicator of impairment of our long-lived assets exists, we review
the recorded value of such assets to determine if the future cash flows to be
derived from these assets will be sufficient to recover the remaining recorded
asset values. We considered the resignations of the Chief Executive and Chief
Financial Officers earlier in the fiscal year and the plan to restructure our
operations and eliminate various lines of development to be indicators of
potential impairment. As a result, an impairment charge of $83.9 million was
recognized during the third quarter of fiscal 2002 when it was determined that
the future undiscounted cash flows of our long-lived assets were estimated to
be insufficient to recover their related carrying values. As such, the
carrying values of these assets were written down to our estimated fair value.
Fair value was estimated using the present value of expected future cash
flows.

   o Separation Agreements

   In October 2001, Howard Balter resigned as our Chief Executive Officer.
Pursuant to an agreement between Mr. Balter and the Company, Mr. Balter waived
various rights under his employment agreement, entered into a 30 month
restrictive non-compete covenant and agreed to provide consulting services for a
15 month period, all in exchange for the settlement of various loans from the
Company and the guarantee of continued benefits for a similar period. In
addition, Mr. Balter's options were repriced at the conclusion of the first
three months of the consultancy period. Mr. Balter waived all rights to assert
any claims against Net2Phone and ADIR relating to his employment agreement with
Net2Phone. The aggregate principal amount of Mr. Balter's borrowing from
Net2Phone and ADIR was $4.4 million. In addition, Net2Phone had guaranteed the
repayment of a bank loan to Mr. Balter in the principal sum of $5.0 million.
Net2Phone repaid the bank loan and forgave $2 million of the other indebtedness
after the completion of the first three months of Mr. Balter's consulting
arrangement and agreed to forgive the balance after the completion of the entire
consulting period. As a result of this agreement, there was a charge of $9.5
million in fiscal 2002. The charge primarily consists of $3.8 million for the
repricing of options, $5.4 million of loan forgiveness, and approximately $0.2
million of amortization of the non-compete covenant which was valued at $0.8
million. There will be future charges of approximately $2.0 million relating to
this separation agreement.

   In January 2002, Ilan Slasky tendered his resignation as our Chief Financial
Officer. Mr. Slasky's resignation became effective upon his successor's
assumption of the responsibility in March 2002. Pursuant to an agreement
between Mr. Slasky and the Company, Mr. Slasky waived various rights under his
employment agreement, entered into a 2 year restrictive non-compete covenant
and agreed to provide consulting services for a 4 year period all in exchange
for settlement of various loans with the Company and the guarantee of
continued benefits for a similar period. In addition, Mr. Slasky's options
were repriced on January 31, 2002. Mr. Slasky waived all of his rights under
his employment agreement with Net2Phone. The aggregate principal sum of
Mr. Slasky's borrowings from Net2Phone was $1.5 million. Net2Phone agreed to
forgive the loans in four equal installments upon the completion of each of
the four years of his consulting arrangement. As a result of this agreement,
there was a charge of $2.6 million in fiscal 2002. There will be future
charges of approximately $1.8 million relating to this separation agreement.
In connection with the termination of his employment, Mr. Slasky sold 500
shares of ADIR stock to IDT Corporation. IDT then transferred the ADIR shares
to us for 273,798 shares of Net2Phone common stock valued at $1.4 million or
$5.20 per share, the closing price of the stock on January 24, 2002. Under
certain circumstances, Net2Phone is required to guarantee to IDT that the
shares still owned by it on January 31, 2007 will have a market value of at
least $5.20 per share on that date. During the year ended July 31, 2002, the
Company recorded a mark-to-market adjustment of approximately $0.4 million
relating to this guarantee.

   o November 2001 Restructuring

   In November 2001, we announced plans to restructure our operations, which
included the elimination of various lines of development business related to
voice recognition products and specific products designed for small to mid-
sized businesses, relocation of certain facilities, and a reduction in
workforce by 270 employees. As a result of this restructuring, there was a
charge of $0.9 million related to the write-down of certain Aplio assets and a
litigation-related reserve, $6.2 million related to terminated employees,
$1.9 million related to the reduction of operations at various locations and
$1.4 million related to elimination of various equipment and network build-

                                       32

<PAGE>

outs. All of the $6.2 million of involuntary termination benefits have been
paid and charged against the liability. All 270 employees to be terminated
under the plan were terminated in November when the plan was announced.

   o February 2002 Restructuring

   On February 15, 2002, ADIR announced a reduction of workforce by 60
employees. ADIR reduced its workforce since much of its business plans and
activities focused on developing software for Cisco equipment and a dispute
had arisen with Cisco with respect to the scope of Cisco's obligations
relating to the development and sale of the software of Adir and its NetSpeak
subsidiary. The dispute led to litigation with Cisco. ADIR recorded a charge
of $1.4 million related to the terminated employees. As of July 31, 2002, all
of the involuntary termination benefits have been paid and charged against the
liability.

   In addition, due to these events, the Company determined that it was
necessary to perform an impairment test of ADIR's goodwill. As a result of the
impairment test, which was performed in accordance with SFAS No. 142, a
goodwill impairment loss of $11.5 million was recognized during the third
quarter of fiscal 2002. The fair value used to measure the impairment was
estimated using the present value of expected future cash flows.

   On February 21, 2002, we announced plans to reduce our workforce by 85
employees or approximately 28%. We underwent a significant restructuring
process, identifying business lines that required lower capital expenditures
and provided a greater return on investment with higher margins. As such, we
significantly reduced our workforce and scaled back certain unprofitable
businesses, including our disposable calling card business and our wholesale
termination business. We recorded severance of $3.5 million relating to the
workforce reduction. As of July 31, 2002, all of the $3.5 million of
involuntary termination benefits have been paid and charged against the
liability. In addition, we recorded a charge of $4.7 million related to the
elimination of specific connectivity and network related costs and $0.6 million
related to the relocation of certain facilities.

   As a result of the plan to restructure our operations and eliminate various
lines of development, an impairment review of our long-lived assets and
identifiable intangible assets was conducted as of April 30, 2002, in
accordance with SFAS No. 121. As a result of this analysis, we recorded
impairment charges of approximately $2.0 million related to customer lists,
$0.5 million related to technology and $1.7 million related to developed
product technology assets. The impairment charge was calculated as the amount
by which the carrying amount of the assets exceeded their fair values. Fair
value was estimated using the present value of expected future cash flows.

   o April 2002 Restructuring

   On April 30, 2002, we communicated plans to further reduce our workforce by
20 employees. We scaled back on our technical development team, which had been
working on projects related to the restructured businesses. We recorded
severance of $0.9 million related to this additional workforce reduction. As
of July 31, 2002, $0.7 million of termination benefits have been paid and
charged against the liability.

   o May 2002 Restructuring

    As a result of unresolved negotiations with Cisco, ADIR announced an
additional reduction of workforce by 30 employees in May 2002. In connection
with the significant workforce reductions, ADIR recorded a charge of
$4.7 million relating to the anticipated loss relating to the exit of several
leases. ADIR recorded an additional liability in the quarter ended July 31,
2002 related to the May 2002 workforce reduction and the termination of
employment contracts of two of its officers of $2.0 million. As of July 31,
2002, approximately $0.4 million of involuntary termination benefits have been
paid and charged against the liability.

   o Sale of Business

   On May 20, 2002, we exited our web-based banner advertising business by
selling its assets and the assets of Mail.com to the management group of this
division. As a result of the transaction, we incurred a $1.8 million loss and
we retain a 10 percent equity interest in the entity formed to acquire the
business.

   o Litigation expenses

   On March 19, 2002 we filed suit in the United States District Court for the
District of New Jersey against Cisco Systems, Inc. and a Cisco executive who
had been a member of the ADIR board of directors. The suit arose

                                       33

<PAGE>

out of the relationships that had been created in connection with Cisco's and
Net2Phone's original investments in ADIR and out of ADIR's subsequent purchase
of NetSpeak, Inc. in August 2001. In August 2002, Net2Phone and its ADIR
subsidiary consummated the settlement of their lawsuit. For the quarter ended
July 31, 2002, we recorded $1.6 million of legal and other expenses related to
the settlement. The parties settled the suit and all related claims against
Cisco and the Cisco executive in exchange for: (i) the transfer during the first
quarter of fiscal 2003, of Cisco's and Softbank Asia Infrastructure Fund's
respective 11.5 percent and 7.0 percent interests in ADIR, and (ii) the payment
by Cisco, during such quarter, of $19.5 million to Net2Phone and ADIR. As a
result of this settlement, the Company will recognize, for the quarter ended
October 31, 2002, a gain of $58.4 million consisting of a $38.9 million
reduction in minority interests as a result of the transfer of the ADIR shares
and receipt of settlement proceeds of $19.5 million. For the quarter ended July
31, 2002, we recorded $1.6 million of legal and other expenses related to the
settlement.

   o Fiscal 2001 Charges

   In fiscal 2001, the operations of our Aplio, S.A. subsidiary were
discontinued. It was determined that substantially all of Aplio's asset values
would not be recoverable, resulting in charges of $55.9 million associated
with discontinuing the Aplio operations. Separately, unrelated to Aplio, a
restructuring expense of $13.6 million was recorded based on our view that
certain pre-paid advertising agreements and related software would provide no
future benefits to us. Lastly, we incurred $0.5 million in severance expense
through a reduction in force initiated in July 2001.

   Acquired in-process research and development. Purchased in-process research
and development ("IPR&D") represents the value assigned in a purchase business
combination to research and development projects of the acquired business that
had commenced but had not yet been completed at the date of acquisition and
which have no alternative future use. In accordance with SFAS No. 2,
"Accounting for Research and Development Costs," as clarified by FASB
Interpretation No. 4, amounts assigned to IPR&D meeting the above stated
criteria must be charged to expense as part of the allocation of the purchase
price of the business combination. Accordingly, charges totaling $13.9 million
were recorded during fiscal 2002 as part of the allocation of the purchase
price related to the acquisition of NetSpeak.

   The IPR&D relates primarily to advanced telephony software products for
Internet protocol ("IP") networks. The Route Server Infrastructure Product
provides real-time IP address resolution ensuring high performance,
scalability and reliability. The Route Server virtual private network ("VPN")
product integrated with the infrastructure product creates a solution that
enables service providers to address the long distance service market. The
Residential Cable Solution product provides routing and call management for
end-user cable subscribers.

   The valuation of the IPR&D included both cost and income valuation
approaches, and utilized replacement cost and discounted cash flow
methodologies for various aspects of the analysis. The calculations were based
on estimates of operating earnings, capital charges, and working capital
requirements to support the cash flows attributed to the technologies.
Discount rates reflecting the stage of development, complexity and the risk
associated with each technology were used to value IPR&D. The fair value total
of $13.9 million has been assigned as follows: Route Server Infrastructure --
$10.3 million; Route Server VPN -- $2.9 million, Residential Cable Solution --
$0.7 million. Development of the Route Server Infrastructure and Route Server
VPN products were completed during the second quarter of fiscal 2002.
Effective February 14, 2002, further research and development of the
Residential Cable Solution product was suspended while ADIR reevaluates the
product's anticipated attractivness relative to current market conditions.

   Non-cash compensation expense. The non-cash compensation charge from the
issuance of stock options decreased 1 percent from $20.5 million in fiscal 2001
to $19.0 million in fiscal 2002. As a percentage of total revenue, these costs
increased from 13.7 percent in fiscal 2001 to 13.8 percent in fiscal 2002. On
December 18, 2001 the Board of Directors approved the repricing of options
outstanding under Net2Phone's 1999 Amended and Restated Stock Option and
Incentive Plan. During fiscal 2002, the company recorded $0.6 million of
compensation expense related to this repricing. The repriced options are subject
to variable accounting treatment and therefore must be marked-to-market each
quarter. Based on Net2Phone's stock price at July 31, 2002, there will be future
charges of approximately $0.2 million relating to this repricing arrangement.
The

                                       34

<PAGE>

company will continue to incur these charges over the vesting period and with
respect to repricings, until the options are exercised.

   Loss from Operations. Loss from operations was $257.8 million in fiscal
2002 as compared to loss from operations of $240.2 million in fiscal 2001.
Excluding the non-cash compensation charge, acquired in-process research and
development and the restructuring, severance, impairment and other items
described above, our loss from operations in fiscal 2002 and fiscal 2001 would
have been $81.8 million and $118.6 million, respectively. This reduction in
the loss from operations (excluding the non-cash compensation charge, acquired
in-process research and development and the restructuring, severance,
impairment and other items described above) is a result of the company's
continuous cost management initiatives and elimination of certain expenses
directly related to the restructurings of our operations that were announced
during fiscal 2002.

   Interest Income, net. Interest income consists primarily of interest earned
on cash and cash equivalents. Interest income decreased 77 percent from
$18.5 million in fiscal 2001 to $4.2 million in fiscal 2002. The decrease in
interest income primarily results from lower cash balances and interest rate
reductions. We anticipate reduced interest income from interest bearing
accounts due to lower interest rates and cash balances.

   Loss on equity investments and other expense, net. Loss on equity
investments and other expense, net decreased from $147 million in fiscal 2001
to $7.9 million in fiscal 2002. In the second quarter of fiscal 2002, all
806,452 Yahoo! shares were sold for gross proceeds of approximately
$14.8 million, resulting in a gain of approximately $0.6 million. In the
second quarter of fiscal 2002, 321,027 shares of "Speechworks" were sold for
gross proceeds of approximately $3.1 million, resulting in a loss of
approximately $0.9 million. During the third quarter of fiscal 2002, we
recorded a loss relating to an other-than-temporary decline in value for
several of its costs method investments, resulting in a charge to other
expense of approximately $6.9 million and a loss relating to the sale of
equipment of approximately $1.4 million. During fiscal 2001 we recorded a loss
of approximately $116.8 million relating to a permanent write-down of our
investment in shares of Yahoo!, Inc. common stock, in addition we recorded a
loss relating to an other-than-temporary decline in value for our equity
investment in Alonet S.A., Webley and WebDialogs, totaling approximately
$27.7 million. Also, during the fourth quarter of fiscal 2001, we recorded a
loss relating to an other-than-temporary decline in value for several other of
our cost method investments of approximately $4.3 million. Lastly, we recorded
a net gain of $5.2 million relating to equity collars during the year ended
July 31, 2001. The net gain was comprised of income of approximately
$16.9 million recorded in the first quarter of fiscal 2001 as a result of the
change in value of the time value component of the equity collars, which was
partially offset by a loss of approximately $11.7 million recorded in the
second quarter of fiscal 2001 upon termination of the equity collars.

Comparison of Fiscal Years Ended July 31, 2001 and 2000

   Revenue. Revenue increased 108 percent from $72.4 million in fiscal 2000 to
$150.2 million in fiscal 2001. The increase in revenue was primarily due to an
increase in billed minutes of use resulting from additional marketing of our
products and services. Specifically, revenue from services increased 134
percent from $61.3 million in fiscal 2000 to $143.3 million in revenue in
fiscal 2001. Revenue from products decreased 38 percent from $11.1 million in
fiscal 2000 to $6.9 million in fiscal 2001 as we discontinued certain selling
channels, primarily retail stores in the domestic market.

   Direct Cost of Revenue, Excluding Depreciation and Amortization. Total
direct cost of revenue, excluding depreciation and amortization, increased by
165 percent from $41.0 million in fiscal 2000 to $108.4 million in fiscal
2001. As a percentage of total revenue, these costs increased from 56.6
percent in fiscal 2000 to 72.2 percent in fiscal 2001. This increase is
primarily attributable to the impact of our subsidization of free minutes to
strategic partners such as Microsoft and Yahoo! as well as monthly recurring
costs from leased lines and other connectivity in anticipation of increased
traffic volumes from our various distribution relationships.

   Selling, General and Administrative. Selling, general and administrative
expenses increased 60 percent from $105.0 million in fiscal 2000 to $168.0
million in fiscal 2001. As a percentage of total revenue, these costs decreased
from 145 percent in fiscal 2000 to 112 percent in fiscal 2001. In the second
quarter of fiscal 2001, we incurred a termination charge of $31.0 million
related to marketing and advertising expenses associated with agreements
established with our strategic partners. The overall expense increase was also
attributable to the additional organizational infrastructure and increase in
personnel as we continued to build our operations, product

                                       35

<PAGE>

development, customer service, marketing and business development functions
and reflects the impact of acquisitions.

   Depreciation and Amortization. Depreciation and amortization increased 243
percent from $6.8 million in fiscal 2000 to $23.3 million in fiscal 2001. As a
percentage of total revenue, these costs increased to 15.5 percent in fiscal
2001 from 9.4 percent in fiscal 2000.

   Restructuring, Severance, Impairment and other items. In the third quarter
of fiscal 2001, we decided to discontinue the operations of our Aplio
subsidiary. In connection with the decision, we wrote-off substantially all of
Aplio's intangible and fixed assets as their values would not be recoverable.
We recorded an additional charge of $2 million in the fourth quarter of fiscal
2001 related to Aplio employee terminations. In addition, we have written off
and recorded reserves related to advertising agreements and the write-off of
software since we have determined that there are no future benefits are
expected from these assets and commitments. The restructuring charges
consisted of $53.0 million of asset write-offs and $13.5 million of accruals
for payments due under contracts.

   Non-cash compensation expense. We recognized significant charges relating to
non-cash executive compensation expense in fiscal 2001 and fiscal 2000 and will
recognize additional significant charges on an ongoing basis, in connection with
the grants of options to purchase shares of our common stock in December 1999
and the transaction with AT&T in August 2000. As a percentage of total revenue,
the compensation charge from issuance of stock options was 13.7 percent in
fiscal 2001 as compared to 66.4 percent in fiscal 2000.

   Loss from Operations.  Loss from operations was $240.2 million in fiscal
2001 as compared to loss from operations of $128.5 million in fiscal 2000.
Excluding the non-cash compensation charge, the one-time non-recurring
termination costs and restructuring costs and other charges described above,
our loss from operations in fiscal 2001 and fiscal 2000 would have been
$118.6 million and $52.6 million, respectively. This change is due to the
increase in both selling and marketing expenses as well as general and
administrative expenses we incurred as we expanded our distribution
relationships, corporate infrastructure and human resources.

   Interest Income, net. Interest income consists primarily of interest earned
on cash and cash equivalents. Interest income increased 91 percent from
$9.7 million in fiscal 2000 to $18.5 million in fiscal 2001. The interest
income resulted from the investment of the proceeds of sales of our stock.

   Loss on equity investments and other expense, net. During fiscal 2001 we
recorded a loss of approximately $116.8 million relating to a permanent write-
down of our investment in shares of Yahoo!, Inc. common stock, in addition we
recorded a loss relating to an other-than-temporary decline in value for our
equity investment in Alonet S.A., Webley and WebDialogs, totaling
approximately $27.7 million. Also, during the fourth quarter of fiscal 2001,
we recorded a loss relating to an other-than-temporary decline in value for
several other of our cost method investments of approximately $4.3 million.
Lastly, we recorded a net gain of $5.2 million relating to equity collars
during the year ended July 31, 2001. The net gain was comprised of income of
approximately $16.9 million recorded in the first quarter of fiscal 2001 as a
result of the change in value of the time value component of the equity
collars, which was partially offset by a loss of approximately $11.7 million
recorded in the second quarter of fiscal 2001 upon termination of the equity
collars. The balance in fiscal 2000 of $0.5 million primarily relates to a gain
on the equity collar.

Related Party Transaction

 IDT Corporation

   In fiscal 2002, 2001 and 2000, we provided carrier services to IDT
Corporation, our controlling shareholder, of $12.5 million, $21.9 million and
$11.2 million, respectively, and sold disposable calling cards to IDT affiliates
totalling $17.3 million, $31.6 million and $7.8 million, respectively. In fiscal
2002, services provided to IDT and its affiliates accounted for 31 percent of
total revenue. As we focus on opportunities in the Channel Sales and
Distribution unit and de-emphasize sales of domestic disposable calling cards
and services provided to carriers, we anticipate the percentage of sales
generated by transactions with IDT and its affiliates to decline.

   In fiscal 2002, 2001 and 2000, we purchased wholesale carrier services from
IDT of $24.5 million, $43.1 million and $18.8 million, respectively. Carrier
charges paid to IDT represent 39.5% of our service revenue costs in fiscal 2002.

   Our corporate headquarters and several other facilities are leased from IDT.
In fiscal 2002 and fiscal 2001, we paid IDT $4.1 million and $3.4 million,
respectively in facilities lease payments.

   The due from (to) IDT balances represent net amounts due from (to) IDT to
(by) us principally for wholesale carrier telecommunication services and lease
payments. On July 31, 2002, IDT owed us $0.7 million. The average balance we
owed to IDT during the years ended July 31, 2002 and July 31, 2001, was $6.8
million and $9.6 million, respectively.

Liquidity and Capital Resources

   As of July 31, 2002, we had cash, cash equivalents and marketable securities
of $108.7 million and working capital of $60.3 million. Early in fiscal 2003,
we consummated settlement of litigation with Cisco. Cash proceeds from the
settlement increased cash and working capital by $19.5 million. Net cash used
in operating activities was $90.6 million during fiscal 2002, compared with
$115.1 million during fiscal 2001. The decrease in negative cash flow from
operating activities is primarily due to the changes in working capital as a
result of the timing of receipts and disbursements and significantly reduced
operating costs, excluding restrucuturing, severance, impairment and other
items.

   Net cash used in investing activities increased from $39.7 million during
fiscal 2001 to $49.1 million in fiscal 2002. Our capital expenditures
decreased from $72.9 million in fiscal 2001 to $17.9 million in fiscal 2002,

                                       36

<PAGE>

as we completed the majority of the expansion of our domestic and
international network infrastucture. The net cash from the proceeds from the
sale of marketable securities decreased from $180.2 million in fiscal 2001 to
$89.4 million in fiscal 2002. In addition, the net cash used for purchases of
marketable securities decreased from $142.2 million during fiscal 2001 to
$75.0 million during fiscal 2002. Net cash used for the acquisition of
NetSpeak Corporation was $27.8 million in fiscal 2002.

   Net cash provided by financing activities decreased from $291.9 million
during fiscal 2001 to $8.8 million in fiscal 2002. We received $296.0 million
in net proceeds related to the sale of common stock to a subsidiary of AT&T
Corp. in fiscal 2001. In addition, during fiscal 2001 the Company recognized
$48.2 million of proceeds from the issuance of preferred stock by ADIR, and
repurchased 4,361,600 shares of our common stock for $56.9 million. During
fiscal 2002, the Company received $14.0 million in a private placement of
shares of preferred stock for ADIR. The Company does not have an interest in
any off balance sheet financing vehicles.

   We believe that, based upon our present business plan, our existing cash
resources will be sufficient to meet our currently anticipated working capital
and capital expenditure requirements, and to fund any potential operating cash
flow deficits for at least the next twelve months. If our growth exceeds
current expectations or if we acquire the business or assets of another
company, or if our operating cash flow deficit exceeds our expectations to the
point that we cannot meet our working capital and capital expenditure
requirements, we will need to raise additional capital from equity or debt
sources. There can be no assurance that we will be able to raise such capital
on favorable terms or at all. If we are unable to obtain such additional
capital, we may be required to reduce the scope of our anticipated expansion,
which could have a material effect on our business, financial condition, or
results of operations.

Quarterly Results of Operations

   The following table sets forth certain quarterly financial data for the
eight quarters ended July 31, 2002. This quarterly information is unaudited,
has been prepared on the same basis as the annual financial statements, and,
in our opinion, reflects all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the information for periods
presented.


                                       37

<PAGE>

<TABLE>
<CAPTION>
                                                                                              Quarter Ended
                                                                       ------------------------------------------------------------
                                                                        Oct. 31,         Jan. 31,        April 30,       July 31,
                                                                          2000             2001            2001            2001
                                                                      ------------    -------------    -------------   ------------
<S>                                                                   <C>             <C>              <C>             <C>
Revenue:
   Service.........................................................   $ 26,940,727    $  33,896,534    $  39,940,437   $ 42,532,299
   Product.........................................................      3,868,343          756,873          674,017      1,589,258
                                                                      ------------    -------------    -------------   ------------
   Total revenue...................................................     30,809,070       34,653,407       40,614,454     44,121,557
Costs and expenses:
  Direct cost of revenue
   Service Cost of revenue.........................................     16,919,644       25,196,360       33,857,872     26,831,955
   Product Cost of revenue.........................................      1,791,623          638,540        3,664,699       (489,840)
                                                                      ------------    -------------    -------------   ------------
  Total direct cost of revenue (exclusive of items shown below)....     18,711,267       25,834,900       37,522,571     26,342,115
  Selling, general and administrative..............................     29,969,670       66,721,068       36,483,890     34,828,058
  Depreciation and amortization....................................      5,653,628        6,630,235        5,082,920      5,982,755
  Restructuring severance, impairment and other items..............             --               --       66,500,044      3,600,815
  Non-cash compensation expense....................................      4,769,904        5,205,852        5,151,264      5,417,809
                                                                      ------------    -------------    -------------   ------------
   Total costs and expenses........................................     59,104,469      104,392,055      150,740,689     76,171,552
Loss from operations ..............................................    (28,295,399)     (69,738,648)    (110,126,235)   (32,049,995)
Interest income, net ..............................................      5,991,516        5,875,127        3,549,983      3,113,982
Loss on equity investments and other expense, net .................     16,938,120     (112,856,355)     (12,587,049)   (38,467,414)
                                                                      ------------    -------------    -------------   ------------
Loss before minority interests ....................................     (5,365,763)    (176,719,876)    (119,163,301)   (67,403,427)
Minority interests ................................................       (193,284)        (498,598)        (283,476)    (1,701,237)
                                                                      ------------    -------------    -------------   ------------
Net loss ..........................................................   $ (5,172,479)   $(176,221,278)   $(118,879,825)  $(65,702,190)
                                                                      ============    =============    =============   ============

<CAPTION>

                                                                                        As a Percentage of Revenue
                                                                       ------------------------------------------------------------
<S>                                                                   <C>             <C>              <C>             <C>
Revenue:
  Service..........................................................           87.4%            97.8%            98.3%          96.4%
  Product..........................................................           12.6              2.2              1.7            3.6
                                                                      ------------    -------------    -------------   ------------
   Total revenue...................................................          100.0            100.0            100.0         100.00
Costs and expenses:
  Direct cost of revenue
   Service Cost of revenue.........................................           54.9             72.7             83.4           60.8
   Product Cost of revenue.........................................            5.8              1.9              9.0           (1.1)
                                                                      ------------    -------------    -------------   ------------
  Total direct cost of revenue (exclusive of items shown below)....           60.7             74.6             92.4           59.7
  Selling, general and administrative..............................           97.3            192.5             89.8           78.9
  Depreciation and amortization....................................           18.4             19.1             12.5           13.6
  Restructuring severance, impairment and other items..............             --               --            163.7            8.2
  Non-cash compensation expense....................................           15.5             15.0             12.7           12.3
                                                                      ------------    -------------    -------------   ------------
   Total costs and expenses........................................          191.8            301.2            371.1          172.7
                                                                      ------------    -------------    -------------   ------------
Loss from operations ..............................................          (91.8)          (201.2)          (271.1)         (72.7)
Interest income, net ..............................................           19.4             17.0              8.7            7.1
Loss on equity investments and other expense, net .................           55.0           (325.8)           (31.0)         (87.2)
                                                                      ------------    -------------    -------------   ------------
Loss before minority interests ....................................          (17.4)          (510.0)          (293.4)        (152.8)
Minority interests ................................................            (.6)            (1.4)             (.7)          (3.9)
                                                                      ------------    -------------    -------------   ------------
Net loss ..........................................................          (16.8)%         (508.6)%         (292.7)%       (148.9)
                                                                      ============    =============    =============   ============
</TABLE>



                                       38

<PAGE>


<TABLE>
<CAPTION>

                                                                                               Quarter Ended
                                                                        -----------------------------------------------------------
                                                                         Oct. 31,        Jan. 31,        April 30,       July 31,
                                                                           2001            2002            2002            2002
                                                                       ------------    ------------    -------------   ------------
<S>                                                                    <C>             <C>             <C>             <C>
Revenue:
   Service..........................................................   $ 41,346,925    $ 37,196,402    $  29,652,563   $ 24,947,906
   Product..........................................................      1,543,800         642,395          910,941      1,614,233
                                                                       ------------    ------------    -------------   ------------
   Total revenue....................................................     42,890,725      37,838,797       30,563,504     26,562,139
Costs and expenses:
  Direct cost of revenue
   Services cost of revenue.........................................     22,856,409      19,588,283       16,230,946     13,559,774
   Products cost of revenue.........................................      1,222,327       2,914,450          599,442      1,530,455
                                                                       ------------    ------------    -------------   ------------
  Total direct cost of revenue (exclusive of items shown below).....     24,078,736      22,502,733       16,830,388     15,090,229
  Selling, general and administrative...............................     38,104,506      36,559,470       25,397,618     17,108,858
  Depreciation and amortization.....................................      6,738,667       7,330,861        7,046,205      2,863,715
  Restructuring severance, impairment and other items...............      5,910,679      15,286,572      114,435,986      7,557,909
  Acquired in-process research and development......................     13,850,000              --               --             --
  Non-cash compensation expense.....................................      4,888,230       6,195,073        6,435,123      1,437,247
                                                                       ------------    ------------    -------------   ------------
   Total costs and expenses.........................................     93,570,818      87,874,709      170,145,320     44,057,958
                                                                       ------------    ------------    -------------   ------------
  Loss from operations..............................................    (50,680,093)    (50,035,912)    (139,581,816)   (17,495,819)
  Interest income, net..............................................      1,934,799         923,703          583,671        719,915
  (Loss) income on equity investments and other expense, net........             --        (108,872)      (8,179,476)       401,387
                                                                       ------------    ------------    -------------   ------------
  Loss before minority interests....................................    (48,745,294)    (49,221,081)    (147,177,621)   (16,374,517)
  Minority interests................................................     (7,390,208)     (2,907,225)      (8,685,276)     3,392,083
                                                                       ------------    ------------    -------------   ------------
  Net loss..........................................................   $(41,355,086)   $(46,313,856)   $(138,492,345)  $(19,766,600)
                                                                       ============    ============    =============   ============

<CAPTION>

                                                                                        As a Percentage of Revenue
                                                                        -----------------------------------------------------------
<S>                                                                    <C>             <C>             <C>             <C>
Revenue:
   Service..........................................................           96.4%           98.3%            97.0%          93.9%
   Product..........................................................            3.6             1.7              3.0            6.1
                                                                       ------------    ------------    -------------   ------------
   Total revenue....................................................          100.0           100.0            100.0          100.0
Costs and expenses:
  Direct cost of revenue
   Services cost of revenue.........................................           53.3            51.8             53.1           51.0
   Products cost of revenue.........................................            2.8             7.7              2.0            5.8
                                                                       ------------    ------------    -------------   ------------
  Total direct cost of revenue (exclusive of items shown below).....           56.1            59.5             55.1           56.8
  Selling, general and administrative...............................           88.8            96.6             83.1           64.4
  Depreciation and amortization.....................................           15.7            19.4             23.1           10.8
  Restructuring severance, impairment and other items...............           13.8            40.4            374.4           28.5
  Acquired in-process research and development......................           32.3              --               --            0.0
  Non-cash compensation expense.....................................           11.4            16.4             21.1            5.4
                                                                       ------------    ------------    -------------   ------------
   Total costs and expenses.........................................          218.2           232.2            556.7          165.9
                                                                       ------------    ------------    -------------   ------------
  Loss from operations..............................................         (118.2)         (132.2)          (456.7)         (65.9)
  Interest income, net..............................................            4.5             2.4              1.9            2.7
  (Loss) income on equity investments and other expense, net........             --            (0.3)           (26.8)           1.5
                                                                       ------------    ------------    -------------   ------------
  Loss before minority interests....................................         (113.6)         (130.1)          (481.6)         (61.6)
  Minority interests................................................          (17.2)           (7.7)           (28.4)          12.8
  Net loss..........................................................          (96.4)%        (122.4)%         (453.1)%        (74.4)
                                                                       ============    ============    =============   ============
</TABLE>



                                       39

<PAGE>

Contractual Obligations and Commercial Commitments

   The following table provides a summary of our contractual obligations and
commercial commitments. Additional detail about these items is included in the
notes to the consolidated financial statements.

<TABLE>
<CAPTION>

                                                                            Payments Due by Period
                                                  ---------------------------------------------------------------------------
Contractual Obligations                             Total       Less than 1 year    1-3 years      4-5 years    After 5 years
-----------------------                          -----------    ----------------   -----------    ----------    -------------
<S>                                              <C>            <C>                <C>            <C>           <C>
Capital lease obligations ....................   $ 5,672,585      $ 3,002,608      $ 2,669,977    $       --     $       --
Operating leases .............................    29,126,362        3,955,035        8,451,356     7,784,826      8,935,145
Other long term obligations ..................    17,378,006       17,241,268               --            --             --
                                                 -----------      -----------      -----------    ----------     ----------
Total contractual obligations ................   $52,176,953      $24,198,911      $11,121,333    $7,784,826     $8,935,145
                                                 ===========      ===========      ===========    ==========     ==========
</TABLE>


Effects of Terrorism Threats

   We believe the downturn in travel following the terrorist activities of
September 11, 2001 has negatively impacted the sales of certain of our
services that have been effectively marketed to travelers in prior years.
However, we have not measured such effects and, overall, have no reason to
believe that such effects have been material.

Effects of Inflation

   Due to relatively low levels of inflation over the last several years,
inflation has not had a material effect on our results of operations.

Subsequent Events

 Settlement of Litigation

   In July 2002, Net2Phone and its ADIR subsidiary agreed to settle a suit we
had filed on March 19, 2002 in the United States District Court for the
District of New Jersey against Cisco Systems ("Cisco") and a Cisco executive
who had been a member of the ADIR board of directors. The suit arose out of
the relationships that had been created in connection with Cisco's and
Net2Phone's original investments in ADIR and out of ADIR's subsequent purchase
of NetSpeak, Inc. in August 2001. The parties settled the suit and all related
claims against Cisco and the Cisco executive in exchange for: (i) the
transfer, during the first quarter of fiscal 2003, to Net2Phone of Cisco's and
Softbank Asia Infrastructure Fund's respective 11.5 percent and 7.0 percent
interests in ADIR, and (ii) the payment by Cisco, during such quarter, of
$19.5 million to Net2Phone and ADIR. As a result of this settlement, we will
recognize, for the quarter ended October 31, 2002, a gain of $58.4 million
consisting of a $38.9 million reduction in minority interests as a result of
the transfer of the ADIR, shares and receipt of settlement proceeds of
$19.5 million. In addition, for the quarter ended July 31, 2002, we recorded
$1.6 million of

                                       40

<PAGE>

legal and other expenses related to the settlement that are included in
Restructuring, severance, impairment and other special items.

 October 2002 Restructuring

   On October 24, 2002, we announced that we are consolidating the development
and support of our products for both our core businesses and our broadband
effort within one unit working on standards-based solutions that will service
the entire organization. This consolidation will reduce our staff by 20
percent, or 63 employees, resulting in an annual cost savings of approximately
$9.0 million. We will record a restructuring charge for this consolidation,
which includes severance payments and office space reduction expenses, during
the quarter ending October 31, 2002.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

   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 are not exposed to market
risks from changes in foreign currency exchange rates or commodity prices. We
do not hold derivative financial instruments nor do we hold securities for
trading or speculative purposes. We are exposed to changes in interest rates
primarily from our investments in cash equivalents. Under our current
policies, we do not use interest rate derivative instruments to manage our
exposure to interest rate changes.

Item 8. Financial Statements and Supplementary Data

   The 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 and are set forth on pages F-2 through F-29 hereto.

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

   Information under the captions "Board of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in our Proxy Statement for the 2002
Annual Meeting of Stockholders, are incorporated herein by reference. Certain
information concerning our executive officers is set forth in Part I of this
Form 10-K under the caption "Executive Officers."

Item 11. Executive Compensation

   Information set forth under the captions "Executive Compensation" and "Board
of Directors" in our Proxy Statement is incorporated herein by reference. The
sections captioned "Report of the Compensation Committee on Executive
Compensation", "Report of the Audit Committee", and "Stock Price Performance
Graph" in our Proxy Statement are not incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

   Information set forth under the caption "Information Regarding Beneficial
Ownership of Principal Stockholders, Directors and Management" in our Proxy
Statement is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

   Information set forth under the caption entitled "Certain Relationships and
Related Transactions" in our Proxy Statement is incorporated herein by
reference.

Item 14. Controls and Procedures

   Not applicable because the Form 10-K is filed for a period ending before
August 29, 2002.


                                       41

<PAGE>

                                    PART IV


Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

   (a) (1) Financial Statements.

   The 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.

    (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.

    (3) Exhibits.

   The exhibits required by Item 601 of Regulation S-K filed as part of, or
incorporated by reference in, this Form 10-K are listed below in (c).

   (b) Reports on Form 10-K

       None.

   (c) Exhibits

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

<TABLE>
<CAPTION>
  Exhibit
    No.                                                            Description
    ---                                                            -----------
<S>           <C>
3.1           Amended and Restated Certificate of Incorporation (Incorporated by reference from our registration statement on Form
              S-1 (Registration No. 333-59751)).
3.2           Amended and Restated Bylaws (Incorporated by reference from our Current Report on Form 8-K filed on August 21, 2000).
3.3           Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant (Incorporated by reference
              from our registration statement on Form S-1 (Registration No. 333-59751)).
3.4           Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant(Incorporated by reference
              from our registration statement on Form S-1 (Registration No. 333-59751)).
3.5           Certificate of Amendment to the Amended and Restated Certificate of Incorporation (Incorporated by reference from our
              Annual Report on Form 10-K for the fiscal year ended July 31,2000) .
4.1           Specimen Common Stock Certificate of the Registrant (Incorporated by reference from our registration statement on
              Form S-1 (Registration No. 333-59751)).
10.3          Bundling and Distribution Services Agreement, dated as of January 31, 1999, by and between NetScape Communications
              Corporation and the Registrant (Incorporated by reference from our Current Report on Form 8-K filed on August 21,
              2000).
10.4          General License Terms & Conditions, dated as of January 31, 1999, by and between Netscape Communications Corporation
              and the Registrant.
10.5          Trademark License Agreement, dated as of January 31, 1999, by and between Netscape Communications Corporation and the
              Registrant Assignment.
10.6          Internet/Telecommunications Agreement, dated as of May 7, 1999, by and between IDT and the Registrant.
10.7          Joint Marketing Agreement, dated as of May 7, 1999, by and between IDT and the Registrant.
10.8          IDT Services Agreement, dated as of May 7, 1999, by and between IDT and the Registrant.
10.9          Net2Phone Services Agreement, dated as of May 7, 1999, by and between IDT and the Registrant.
10.10         Assignment Agreement, dated as of May 7, 1999, by and between IDT and the Registrant.
10.11         Tax Sharing and Indemnification Agreement, dated as of May 7, 1999, by and between IDT and the Registrant
              (Incorporated by reference from our registration statement on Form S-1 (Registration No. 333-59751)).
10.12         Separation Agreement, dated as of May 7, 1999, by and between IDT and the Registrant (Incorporated by reference from
              our registration statement on Form S-1 (Registration No. 333-59751)).
10.13         The Registrant's Amended and Restated 1999 Stock Option and Incentive Plan (Incorporated by reference from our Proxy
              Statement dated June 6, 2000).+
10.14         Series A Subscription Agreement, dated as of May 13, 1999, by and between the Investors listed therein and the
              Registrant (Incorporated by reference from our registration statement on Form S-1 (Registration No. 333-59751)).
</TABLE>



                                       42

<PAGE>


<TABLE>
<CAPTION>
  Exhibit
    No.                                                            Description
    ---                                                            -----------
<S>           <C>
10.15         Series A Preferred Shareholder Registration Rights Agreement, dated as of May 13, 1999, by and between the Investors
              listed therein and the Registrant (Incorporated by reference from our registration statement on Form S-1
              (Registration No. 333-59751)).
10.16         Form of Warrant to Purchase Common Stock (Incorporated by reference from our registration statement on Form S-1
              (Registration No. 333-59751)).
10.17         Promissory Note of Registrant to IDT, dated as of May 12, 1999(Incorporated by reference from our registration
              statement on Form S-1 (Registration No. 333-59751)).
10.18         Form of Loan Agreement between the Registrant and each of its executive officers(Incorporated by reference from our
              registration statement on Form S-1 (Registration No. 333-59751)) .
10.19         Form of Stock Option Agreement for Executive Officers (Incorporated by reference from our registration statement on
              Form S-1 (Registration No. 333-59751)).+
10.20#        IP Telephony Services Distribution and Interactive Marketing Agreement, dated as of July 15, 1999, by and between
              ICQ, Inc. and the Registrant (Incorporated by reference from our registration statement on Form S-1 (Registration No.
              333-59751)).
10.21#        Stock Subscription Warrant, dated July 15, 1999, by and between America Online, Inc. and the Registrant (Incorporated
              by reference from our registration statement on Form S-1 (Registration No. 333-59751)).
10.22         Stock Purchase Agreement, dated as of June 16, 2000, by and between Registrant and the shareholders of Aplio named
              therein (Incorporated by reference from our Current Report on Form 8-K filed on July 24, 2000)
10.23         Subscription Agreement, dated as of August 11, 2000, by and between AT&T Corp. and the Registrant (Incorporated by
              reference from our Current Report on Form 8-K filed on August 21, 2000)
10.24         Registration Rights Agreement, dated as of August 11, 2000, by and AT&T Corp. and the Registrant (Incorporated by
              reference from our Current Report on Form 8-K filed on August 21, 2000)
10.25         Employment Agreement executed by the Registrant and Clifford M. Sobel (Incorporated by reference from our Annual
              Report on Form 10-K/A for the fiscal year ended July 31, 2000).+
10.26         Employment Agreement executed by the Registrant and Stephen M. Greenberg (Incorporated by reference from our Annual
              Report on Form 10-K/A for the fiscal year ended July 31, 2000).+
10.27         Employment Agreement executed by the Registrant and Howard S. Balter (Incorporated by reference from our Annual
              Report on Form 10-K/A for the fiscal year ended July 31, 2000).+
10.28         Employment Agreement executed by the Registrant and Ilan Slasky (Incorporated by reference from our Annual Report on
              Form 10-K/A for the fiscal year ended July 31, 2000).+
10.29         Lease for premises located at 520 Broad Street, Newark, New Jersey (Incorporated by reference from our Annual Report
              on Form 10-K for the fiscal year ended July 31, 2000).
10.30         Form of Promissory Note between Adir Technologies, Inc. and certain executive officers of the Registrant
              (Incorporated by reference from our Annual Report on Form 10-K for the fiscal year ended July 31, 2000)
10.31         Agreement and Plan of Merger, dated as of June 11, 2001, by and among Adir Technologies, Inc., A Tech Merger Sub,
              Inc. and Netspeak (Incorporated by reference from our Current Report on Form 8-K filed on June 21, 2001)
10.32*        Employment Agreement executed by the Registrant and Bruce Shoulson, dated January 8, 2001.+
10.33*        Employment Agreement executed by the Registrant and Glenn Williams, dated March 1, 2001.+
21.1*         Subsidiaries
23.1*         Consent of Ernst & Young LLP.
24            Power of Attorney (included in signature page).
99.1*         Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
              adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
</TABLE>

---------------
*   Filed herewith
#   Confidential treatment granted as to parts of this document.
+   Management contract or compensation plan.

   (d) Financial statement schedules required by Regulation S-X (17 CFR 210)
which are excluded from the annual report to shareholders by Rule 14a-3(b).

   Reference is hereby made to page F-29 for Schedule II--Valuation and
Qualifying Accounts.


                                       43

<PAGE>


                                NET2PHONE, INC.

            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE


<TABLE>
<S>                                                                                           <C>
Report of Independent Auditors............................................................     F-2

Consolidated Balance Sheets as of July 31, 2002 and 2001..................................     F-3

Consolidated Statements of Operations for the years ended July 31, 2002, 2001 and 2000....     F-4

Consolidated Statements of Stockholders' Equity for the years ended July 31, 2002,
  2001 and 2000...........................................................................     F-5

Consolidated Statements of Cash Flows for the years ended July 31, 2002, 2001 and 2000....     F-6

Notes to Consolidated Financial Statements................................................     F-7

The following consolidated financial statement schedule of Net2Phone, Inc. and
  Subsidiaries is included in Item 15(d):

 Schedule II-Valuation and Qualifying Accounts ...........................................    F-29
</TABLE>



                                      F-1

<PAGE>

The Board of Directors and Stockholders
 Net2Phone, Inc.

   We have audited the accompanying consolidated balance sheets of Net2Phone,
Inc. (the "Company") as of July 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended July 31, 2002. Our audits also
included the financial statement schedule listed in the index at item 15(d).
These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 provide a
reasonable basis for our opinion.

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at July 31,
2002 and 2001 and the results of its operations and its cash flows for each of
the three years in the period ended July 31, 2002, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.


                                                           /s/ Ernst & Young LLP

New York, New York
October 28, 2002


                                      F-2

<PAGE>

                                Net2Phone, Inc.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                             July 31,
                                                   -----------------------------
                                                       2002             2001
                                                   -------------   -------------
<S>                                                <C>             <C>
Assets:
Current assets:
  Cash and cash equivalents....................    $  64,215,732   $ 195,140,568
  Marketable securities - current..............       25,770,912      58,827,928
  Trade accounts receivable, net of allowance
   for doubtful accounts of $314,426 (2002) and
   $1,900,000 (2001)...........................        2,866,132       8,705,576
  Prepaid contract deposits....................          726,034       7,446,450
  Inventory....................................        2,286,014       4,160,877
  Prepaid expenses.............................        4,335,587       4,178,798
  Notes receivable from employees..............        7,778,984       7,354,449
  Due from IDT.................................          681,591              --
  Other current assets.........................        5,477,444       4,999,067
                                                   -------------   -------------
   Total current assets........................      114,138,430     290,813,713
  Property and equipment, net..................       32,875,168     108,398,276
  Investments..................................        1,528,661       8,591,164
  Marketable securities -- long term...........       18,703,713              --
  Intangible assets, net.......................        3,447,577       6,544,859
  Other assets.................................        1,002,011         296,762
                                                   -------------   -------------
   Total assets................................    $ 171,695,560   $ 414,644,774
                                                   =============   =============
Liabilities and Stockholders' Equity:
Current liabilities:
  Accounts payable.............................    $   7,727,241   $  15,689,484
  Accrued expenses.............................       27,266,321      20,268,212
  Deferred revenue.............................        8,195,877       7,516,066
  Capital lease obligations-short term.........        3,002,608              --
  Current portion of long-term obligations.....        7,625,383      11,596,982
  Due to IDT...................................               --      14,401,290
                                                   -------------   -------------
   Total current liabilities...................       53,817,430      69,472,034
Accrued expenses ..............................        1,972,430         366,667
Capital lease obligations-long term ...........        2,669,977              --
Long-term obligations .........................               --       8,349,253
                                                   -------------   -------------
   Total liabilities...........................       58,459,837      78,187,954
Minority interests ............................       46,880,701      48,724,032
Redeemable common stock, $.01 par value;
  294,046 and 410,595 shares outstanding.......        9,752,623      13,904,256
Commitments and contingencies
Stockholders' equity:
  Common stock, $.01 par value; 200,000,000
   shares authorized including redeemable
   shares; 33,870,919 and 29,146,499 shares
   issued and outstanding......................          338,709         291,465
  Class A stock, $.01 par value, 37,924,250
   shares authorized; 28,994,700 and 32,315,500
   shares issued and outstanding...............          289,947         323,155
  Additional paid-in capital...................      885,165,142     883,140,001
  Accumulated deficit..........................     (773,265,478)   (514,765,057)
  Accumulated other comprehensive income.......          239,683         149,685
  Deferred compensation........................      (12,918,669)    (34,885,132)
  Loans to stockholders........................       (2,040,394)    (3,512,998)
  Treasury stock, at cost......................      (41,206,541)    (56,912,587)
                                                   -------------   -------------
   Total stockholders' equity .................       56,602,399     273,828,532
                                                   -------------   -------------
   Total liabilities and stockholders' equity .    $ 171,695,560   $ 414,644,774
                                                   =============   =============
</TABLE>


                            See accompanying notes.


                                      F-3

<PAGE>

                                Net2Phone, Inc.

                     CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>

                                                                                                  Year ended July 31,
                                                                                    -----------------------------------------------
                                                                                         2002             2001             2000
                                                                                    -------------    --------------   -------------
<S>                                                                                 <C>              <C>              <C>
Revenue:
Service revenue.................................................................    $ 133,143,796    $  143,309,997   $  61,253,096
Product revenue.................................................................        4,711,369         6,888,491      11,148,094
                                                                                    -------------    --------------   -------------
   Total revenue................................................................      137,855,165       150,198,488      72,401,190
Costs and expenses:
Direct cost of revenue:
 Service cost of revenue........................................................       72,235,412       102,805,831      34,700,401
 Product cost of revenue........................................................        6,266,674         5,605,022       6,286,392
                                                                                    -------------    --------------   -------------
   Total direct cost of revenue (exclusive of
    items shown below)..........................................................       78,502,086       108,410,853      40,986,793
Selling, general and administrative.............................................      117,170,452       168,002,685     104,998,346
Depreciation and amortization...................................................       23,979,448        23,349,538       6,804,412
Restructuring, severance, impairment, and other items...........................      143,191,146        70,100,860              --
Acquired in-process research and development                                           13,850,000                --              --
Non-cash compensation expense...................................................       18,955,673        20,544,829      48,124,333
                                                                                    -------------    --------------   -------------
   Total costs and expenses.....................................................      395,648,805       390,408,765     200,913,884
                                                                                    -------------    --------------   -------------
Loss from operations............................................................     (257,793,640)     (240,210,277)   (128,512,694)
Interest income, net............................................................        4,162,088        18,530,609       9,672,815
Income (loss) on equity investments and other expense, net......................       (7,886,961)     (146,972,698)        505,874
                                                                                    -------------    --------------   -------------
Loss before minority interests..................................................     (261,518,513)     (368,652,366)   (118,334,005)
Minority interests..............................................................       15,590,626         2,676,595              --
                                                                                    -------------    --------------   -------------
Net loss........................................................................     (245,927,887)     (365,975,771)   (118,334,005)
Redeemable common stock accretion...............................................         (133,000)         (531,999)             --
                                                                                    -------------    --------------   -------------
Net loss available to common shareholders.......................................    $(246,060,887)   $(366,507,770)   $(118,334,005)
                                                                                    =============    ==============   =============
Net loss per common share -- basic
  and diluted...................................................................    $       (4.21)   $       (6.25)   $       (2.29)
                                                                                    =============    ==============   =============
Weighted average number of common shares used in the calculation of basic and
  diluted net loss per common share.............................................       58,442,337        58,664,580      51,738,918
                                                                                    =============    ==============   =============
</TABLE>




                            See accompanying notes.


                                      F-4

<PAGE>


                                Net2Phone, Inc.
                Consolidated Statements of Stockholders' Equity
                     Years ended July 31, 2000, 2001, 2002

<TABLE>
<CAPTION>

                                        Common Stock             Class A Stock         Additional
                                   ---------------------    ----------------------      Paid-in        Accumulated
                                     Shares      Amount       Shares       Amount       Capital          Deficit
                                   ----------   --------    -----------   --------    ------------   --------------
<S>                                <C>          <C>         <C>           <C>         <C>            <C>
Balance at July 31, 1999.......     4,819,777   $ 48,198     27,622,089   $276,220    $ 61,126,266   $ (30,455,286)
Net loss for the year ended
 July 31, 2000.................            --         --             --         --              --    (118,334,005)
Foreign currency translation...            --         --             --         --              --               --
Unrealized equity securities
 loss, net.....................            --         --             --         --              --               --
Comprehensive loss.............
Issuance of Common Stock in
 initial public offering.......     6,210,000     62,100              -         --      83,744,373               --
Conversion of Preferred Stock
 to
 Class A Stock.................            --         --      9,420,000     94,200      27,834,800               --
Conversion of Class A Stock to
 Common Stock..................     3,125,339     31,253    (3,125,339)    (31,253)             --               --
Exercise of stock options......     1,272,239     12,722             --         --       8,876,022               --
Amortization of deferred
 compensation..................            --         --             --         --              --               --
Repayment of loans to
 stockholders..................            --         --             --         --              --               --
Secondary equity offering......     3,400,000     34,000             --         --     177,348,364               --
Issuance of common stock to
 Yahoo! Inc....................     2,777,778     27,778             --         --     149,972,222               --
Deferred compensation from
 stock option grants and
 regrants......................            --         --             --         --      46,462,358               --
                                   ----------   --------    -----------   --------    ------------   --------------
Balance at July 31, 2000.......    21,605,133    216,051     33,916,750    339,167     555,364,405     (148,789,291)
Net loss for the year ended
 July 31, 2001.................            --         --             --         --              --     (365,975,766)
Foreign currency translation...            --         --             --         --              --               --
Realized loss included in
 statement of operations, net..            --         --             --         --              --               --
Comprehensive loss.............
Issuance of Common Stock to
 AT&T..........................            --         --      4,000,000     40,000     295,943,720               --
Repurchase of Common Stock.....            --         --             --         --              --               --
Conversion of Class A stock to
 common stock..................     5,601,250     56,012     (5,601,250)   (56,012)             --               --
Exercise of stock options......     1,789,726     17,897             --         --       7,180,214               --
Repayment of loans to
 stockholders..................            --         --             --         --              --               --
Release of escrow shares.......       150,390      1,505             --         --              --               --
Accretion of redeemable common
 stock.........................            --         --             --         --        (531,999)              --
Amortization of deferred
 compensation..................            --         --             --         --              --               --
Deferred compensation..........            --         --             --         --      25,183,661               --
                                   ----------   --------    -----------   --------    ------------   --------------
Balance at July 31, 2001 ......    29,146,499    291,465     32,315,500    323,155     883,140,001     (514,765,057)
Net loss for the year ended
 July 31, 2002.................            --         --             --         --              --     (245,927,887)
Foreign currency translation...            --         --             --         --              --               --
Comprehensive loss.............            --         --             --         --              --               --
Repurchase of Common Stock.....            --         --             --         --              --               --
Treasury share donation for
 charitable contribution.......            --         --             --         --              --       (8,718,045)
Issuance of shares to IDT from
 Treasury Stock................            --         --             --         --              --       (3,598,550)
Conversion of Class A stock to
 common stock..................     3,320,800     33,208     (3,320,800)   (33,208)             --               --
Exercise of stock options......     1,403,620     14,036             --         --         558,511               --
Repricing of stock options.....            --         --             --         --       1,515,586               --
Recission of exercised stock
 options.......................            --         --             --         --         217,044               --
Accretion of redeemable common
 stock.........................            --         --             --         --        (266,000)              --
Amortization of deferred
 compensation..................            --         --             --         --              --               --
Loan forgiveness...............            --         --             --         --              --               --
Other..........................            --         --             --         --              --         (255,939)
                                   ----------   --------    -----------   --------    ------------   --------------
Balance at July 31, 2002.......    33,870,919   $338,709     28,994,700   $289,947    $885,165,142   $ (773,265,478)
                                   ==========   ========    ===========   ========    ============   ==============

<CAPTION>

                                    Accumulated
                                       Other                                             Treasury Stock               Total
                                   Comprehensive      Deferred        Loans to      -------------------------     Stockholders'
                                   Income (Loss)    Compensation    Stockholders     Shares        Amount       Equity (Deficit)
                                   -------------   -------------    ------------   ---------    -------------   ----------------
<S>                                <C>             <C>              <C>            <C>          <C>             <C>
Balance at July 31, 1999.......    $          --   $ (31,908,275)   $ (3,149,990)         --    $          --     $  (4,062,867)
Net loss for the year ended
 July 31, 2000.................               --              --              --          --               --      (118,334,005)
Foreign currency translation...           47,239              --              --          --               --            47,239
Unrealized equity securities
 loss, net.....................     (41,805,082)              --              --          --               --       (41,805,082)
                                                                                                                  -------------
Comprehensive loss.............                                                                                    (160,091,848)
Issuance of Common Stock in
 initial public offering.......               --              --              --          --               --        83,806,473
Conversion of Preferred Stock
 to
 Class A Stock.................               --              --              --          --               --        27,929,000
Conversion of Class A Stock to
 Common Stock..................               --              --              --          --               --                --
Exercise of stock options......               --              --       (716,702)          --               --         8,172,042
Amortization of deferred
 compensation..................               --      48,124,333              --          --               --        48,124,333
Repayment of loans to
 stockholders..................               --              --         627,049          --               --           627,049
Secondary equity offering......               --              --              --          --               --       177,382,364
Issuance of common stock to
 Yahoo! Inc....................               --              --              --          --               --       150,000,000
Deferred compensation from
 stock option grants and
 regrants......................               --     (46,462,358)             --          --               --                --
                                   -------------   -------------    ------------   ---------    -------------     -------------
Balance at July 31, 2000.......      (41,757,843)    (30,246,300)     (3,239,643)         --               --       331,886,546
Net loss for the year ended
 July 31, 2001.................               --              --              --          --               --      (365,975,766)
Foreign currency translation...          461,551              --              --          --               --           461,551
Realized loss included in
 statement of operations, net..       41,445,977              --              --          --               --        41,445,977
                                                                                                                  -------------
Comprehensive loss.............                                                                                    (324,068,238)
Issuance of Common Stock to
 AT&T..........................               --              --              --          --               --       295,983,720
Repurchase of Common Stock.....               --              --              --   4,361,600      (56,912,587)      (56,912,587)
Conversion of Class A stock to
 common stock..................               --              --              --          --               --                --
Exercise of stock options......               --              --        (514,500)         --               --         6,683,612
Repayment of loans to
 stockholders..................               --              --         241,145          --               --           241,145
Release of escrow shares.......               --              --              --          --               --             1,505
Accretion of redeemable common
 stock.........................               --              --              --          --               --          (531,999)
Amortization of deferred
 compensation..................               --      20,544,829              --          --               --        20,544,829
Deferred compensation..........               --    (25,183,661)              --          --               --                --
                                   -------------   -------------    ------------   ---------    -------------   ----------------
Balance at July 31, 2001 ......          149,685     (34,885,132)    (3,512,998)   4,361,600     (56,912,587)       273,828,532
Net loss for the year ended
 July 31, 2002.................               --              --              --          --               --      (245,927,887)
Foreign currency translation...           89,998              --              --          --               --            89,998
                                                                                                                  -------------
Comprehensive loss.............               --              --              --          --               --      (245,837,889)
Repurchase of Common Stock.....               --              --              --     120,000         (510,173)         (510,173)
Treasury share donation for
 charitable contribution.......               --              --              --    (600,000)      11,670,044         2,951,999
Issuance of shares to IDT from
 Treasury Stock................               --              --              --    (273,798)       5,022,298         1,423,748
Conversion of Class A stock to
 common stock..................               --              --              --          --               --                --
Exercise of stock options......               --              --              --          --               --           572,547
Repricing of stock options.....               --       3,654,851              --          --               --         5,170,437
Recission of exercised stock
 options.......................               --              --              --     142,980         (476,123)         (259,079)
Accretion of redeemable common
 stock.........................               --              --              --          --               --          (266,000)
Amortization of deferred
 compensation..................               --      18,055,673              --          --               --        18,055,673
Loan forgiveness...............               --              --       1,472,604          --               --         1,472,604
Other..........................               --         255,939              --          --               --                --
                                   -------------   -------------    ------------   ---------    -------------     -------------
Balance at July 31, 2002.......    $     239,683   $ (12,918,669)   $ (2,040,394)  3,750,782    $ (41,206,541)    $  56,602,399
                                   =============   =============    ============   =========    =============     =============
</TABLE>

                            See accompanying notes.

                                      F-5

<PAGE>


                                 Net2Phone, Inc.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>

                                                                                                   Year ended July 31,
                                                                                     ----------------------------------------------
                                                                                          2002            2001             2000
                                                                                     -------------    -------------   -------------
<S>                                                                                  <C>              <C>             <C>
Operating activities:
 Net loss........................................................................    $(245,927,887)   $(365,975,771)  $(118,334,005)
Adjustments to reconcile net loss to net cash used in operating activities:
 Depreciation and amortization ..................................................       23,979,448       23,349,538       6,804,412
 Write-off of inventory..........................................................        2,772,929               --              --
 Non-cash compensation expense...................................................       18,955,673       20,544,829      48,124,333
 Loss on sale of assets..........................................................        1,921,031               --              --
 Write-down of investments.......................................................        7,250,850      116,778,380              --
 Write-off of acquired in-process research and development.......................       13,850,000               --              --
 Impairment of assets............................................................       83,940,197       78,526,762              --
 Impairment of goodwill and intangible assets....................................       15,770,102               --              --
 Restructuring, severance, impairment and other non-cash charges.................       41,694,417               --              --
 Loss on sale of business........................................................        1,786,397               --              --
 Issuance of common stock to charitable foundation...............................        2,951,999               --              --
 Gain on derivative instrument...................................................               --       (5,235,240)       (516,610)
 Minority interests..............................................................      (15,590,626)      (2,676,595)             --
 Changes in assets and liabilities:
   Accounts receivable...........................................................        4,252,246       (2,643,586)     (9,119,258)
   Other assets..................................................................       (2,879,805)       9,347,660     (17,852,774)
   Accounts payable and accrued expenses.........................................      (29,625,690)       4,844,346      29,048,759
   Deferred revenue..............................................................         (177,392)       2,505,115       2,640,319
   Net (repayments to) advances from IDT Corporation.............................      (15,559,004)       5,518,179     (12,852,284)
                                                                                     -------------    -------------   -------------
Net cash used in operating activities............................................      (90,635,115)    (115,116,383)    (72,057,108)
Investing activities:
 Purchases of property and equipment.............................................      (17,852,133)     (72,904,536)    (47,386,058)
 Proceeds from derivative instrument.............................................               --       25,221,850              --
 Purchases of marketable securities..............................................      (74,964,803)    (142,199,630)   (132,627,812)
 Payments of long-term obligations...............................................               --       (2,094,468)             --
 Payments of acquisition related obligations.....................................      (13,889,245)              --              --
 Proceeds from the sale of marketable securities.................................       89,421,326      180,243,672      49,446,291
 Acquisitions, net of cash acquired..............................................      (27,764,037)      (6,473,750)     (6,563,576)
 Issuance of notes receivable....................................................       (3,911,942)      (7,316,049)     (3,450,000)
 Investments.....................................................................               --      (14,170,557)    (19,845,349)
 Other...........................................................................         (146,108)              --              --
                                                                                     -------------    -------------   -------------
Net cash used in investing activities............................................      (49,106,942)     (39,693,468)   (160,426,504)
Financing activities:
 Proceeds from the sale of common stock..........................................               --      295,983,720     261,188,838
 Proceeds from the issuance of subsidiary preferred stock........................       13,998,770       48,158,937              --
 Payments of capital lease obligations...........................................       (1,937,787)              --              --
 Proceeds from exercise of stock options.........................................          572,547        6,683,612       8,172,041
 Purchases of redeemable common stock ...........................................       (3,306,136)      (2,109,907)             --
 Repurchase of common stock......................................................         (510,173)     (56,912,587)             --
 Other...........................................................................               --          106,052         627,049
                                                                                     -------------    -------------   -------------
Net cash provided by financing activities .......................................        8,817,221      291,909,827     269,987,928
                                                                                     -------------    -------------   -------------
Effect of exchange rate on cash .................................................               --          166,364          (9,136)
                                                                                     -------------    -------------   -------------
Net (decrease) increase in cash and cash equivalents.............................     (130,924,836)     137,266,340      37,495,180
Cash and cash equivalents at beginning of period.................................      195,140,568       57,874,228      20,379,048
                                                                                     -------------    -------------   -------------
Cash and cash equivalents at end of period.......................................    $  64,215,732    $ 195,140,568   $  57,874,228
                                                                                     =============    =============   =============
Supplemental disclosure of cash flow information:
Cash payments made for interest..................................................    $     450,209    $          --   $     558,335
Cash payments made for income taxes..............................................               --               --              --
                                                                                     =============    =============   =============
Supplemental disclosure of non-cash investing activities:
Redeemable common stock issued for an acquisition................................    $          --    $          --   $  20,687,500
Common stock issued for marketable securities....................................               --               --     150,000,000
                                                                                     =============    =============   =============
Supplemental disclosure of non-cash financing activities:
Conversion of preferred stock to Class A common stock............................    $          --    $          --   $  27,929,000
                                                                                     =============    =============   =============
</TABLE>


                             See accompanying notes.


                                       F-6

<PAGE>

                                 Net2Phone, Inc.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  July 31, 2002


1. Description of Business and Basis of Presentation

   The accompanying consolidated financial statements reflect the historical
financial information of Net2Phone, Inc. and Subsidiaries (collectively the
"Company"). The Company was incorporated in October 1997, to operate and
develop its Internet telephony business. Prior to such time, the Company's
business was conducted as a division of IDT Corporation ("IDT").

   The Company's statements of operations include allocations of certain costs
and expenses from IDT. Although such allocations are not necessarily
indicative of the costs that would have been incurred if the Company operated
as an unaffiliated entity, management believes that the allocation methods are
reasonable.

   On August 11, 2000, AT&T purchased four million newly-issued Class A shares
of the Company at a price of $75 per share. In addition, AT&T purchased
14.9 million Class A shares from IDT for $75 per share, giving AT&T
approximately a 39 percent voting stake and approximately a 32 percent
economic stake in the Company.

   On October 23, 2001, IDT entered into an agreement to lead a consortium that
would concentrate ownership of approximately 50% (but representing 64% of the
voting power) of the Company. The consortium consists of IDT, Liberty Media
Corporation ("Liberty"), and AT&T Corporation ("AT&T"). As part of the
agreement, IDT and AT&T contributed their shares of Net2Phone (approximately
10.0 million and 18.9 million shares, respectively) to a newly formed Limited
Liability Company (LLC). Liberty then acquired a substantial portion of the
LLC's units from AT&T, while IDT increased its stake and AT&T retained a
significant interest. IDT controls the right to vote the shares of Class A
common stock held by the LLC in most matters.

2. Summary of Significant Accounting Policies

 Principles of Consolidation

   The consolidated financial statements include the accounts of the Company
and all companies in which the Company has a controlling voting interest
("subsidiaries"), as if the Company and its subsidiaries were a single
company. Significant intercompany accounts and transactions between
consolidated subsidiaries have been eliminated in consolidation.

   The effect of any changes in the Company's ownership interests resulting
from the issuance of equity capital by consolidated subsidiaries or equity
investors to unaffiliated parties is included in gain on sales of subsidiary
stock.

 Use of Estimates

   The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from those
estimates.

 Reclassifications

   Certain prior year amounts have been reclassified to conform to the current
year presentation.

 Earnings (Loss) Per Share

   Basic earnings (loss) per share is computed by dividing the net income
(loss) applicable to common shares by the weighted average of common shares
outstanding during the period. Diluted earnings (loss) per share adjusts basic
earnings (loss) per share for the effects of convertible securities, stock
options and other potentially dilutive financial instruments, only in the
periods in which such effect is dilutive. There were no dilutive securities in
any of the periods presented herein.


                                       F-7
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002

   The shares issuable upon the exercise of stock options and warrants are
excluded from the calculation of net loss per share as their effect would be
antidilutive.

 Foreign currency translation

   The financial statements of the Company's foreign subsidiary has been
translated into U.S. dollars in accordance with Financial Accounting Standards
Board Statement ("SFAS") No. 52, "Foreign Currency Translation." Statement of
operations amounts have been translated using the average exchange rates for
the respective years. Monetary assets and liabilities are translated at end-
of-period exchange rates. The gains or losses resulting from the change in
exchange rates have been reported as a component of accumulated other
comprehensive income (loss). Foreign currency translation gains and losses are
included in the results of operations as incurred.

 Cash and Cash Equivalents

   The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash and cash
equivalents are carried at cost which approximates market value.

 Inventory

   Inventories are stated at the lower of cost or market. Cost is computed on a
specific identification basis. For the year ended July 31, 2002, direct cost
of revenue includes an inventory write-down of $2.8 million that relates to
inventory identified as obsolete or slow-moving. This inventory has been
written down to its net realizable value.

 Property and Equipment

   Equipment and furniture and fixtures are recorded at cost and depreciated
using the straight-line method over the estimated useful lives of the assets,
which range from five to fifteen years.

   Computer software is amortized using the straight-line method over the
shorter of five years or the term of the related agreement.

 Software Development Costs

   Costs for the internal development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, at which time any additional
costs would be capitalized. As the Company has completed its software
development concurrently with the establishment of technological feasibility,
it has not capitalized these costs. Software development costs are the
Company's only research and development expenditures. For the years ended
July 31, 2002, 2001, and 2000, research and development costs totaled
approximately $11,185,000, $10,360,000, and $4,692,000, respectively.

 Capitalized Internal Use Software Costs

   The Company capitalizes certain costs incurred in connection with developing
or obtaining internal use software. These costs consist of payments made to
third parties and the salaries of employees working on such software
development. For the years ended July 31, 2002, 2001 and 2000, the Company has
capitalized approximately $7,256,000, $17,672,000, and $7,925,000, respectively,
of internal use software costs as computer software.

 Long-Lived Assets

   The Company reviews the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The analysis of
the recoverability utilizes undiscounted cash flows. The measurement of the
loss, if any, will be calculated as the amount by which the carrying amount of
the asset exceeds the fair value of the asset.


                                       F-8
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002

 Revenue Recognition

   Internet telephony service revenue, including pre-paid calling card revenue,
is recognized as service is provided, that is, as minutes are used and service
charges are levied.

   The Company also recognizes revenue from pre-payments for services after it
conducts evaluations of outstanding, remaining pre-payment balances and
determines, based on historical data, that such balances are not likely to be
utilized.

   The sale of equipment with software necessary to provide the Company's
services is recognized when such products are delivered, collection of
payments are assured and there are no significant future obligations.

   Pre-payments for communications services are deferred and recognized as
revenue as the communications services are provided.

 Direct Cost of Revenue

   Direct cost of revenue consists primarily of telecommunication costs,
connectivity costs, and the cost of equipment sold to customers. Direct cost
of revenue excludes depreciation and amortization.

 Advertising Costs

   The Company expenses the costs of advertising as incurred. The Company has
historically purchased banner advertising on other companies' web sites
pursuant to contracts which include the guarantee of (i) a minimum number of
impressions, (ii) the number of times that an advertisement appears in pages
displayed to users of the web site, or (iii) a minimum amount of revenue that
will be recognized by the Company from customers directed to the Company's Web
site as a direct result of the advertisement. The Company recognizes expense
with respect to such advertising ratably over the period in which the
advertisement is displayed. In addition, some agreements require additional
payments as additional impressions are delivered. Such payments are expensed
when the impressions are delivered.

   In one case, the Company entered into an agreement with no specified term of
years. In this case, the Company amortizes as expense the lesser of (i) the
number of impressions to date/minimum guaranteed impressions, or (ii) revenue
to date/minimum guaranteed revenue as a percentage of the total payments.

   For the years ended July 31, 2002, 2001 and 2000 advertising expense totaled
approximately $3.7 million, $55.1 million, and $28.5 million, respectively.

   In addition, the Company incurred approximately $45.9 million in fiscal 2001
and $28.0 million in fiscal 2000 of costs to terminate advertising arrangements.
In fiscal 2001, $31.4 million of these costs are included in selling and
marketing and $14.5 million are included in restructuring and other charges in
the accompanying statement of operations. In fiscal 2000, these costs were
included in selling and marketing.

 Income Taxes

   The Company accounts for income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities.

 Stock Based Compensation

   The Company accounts for stock options issued to employees using the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations.
Compensation expense for stock options issued to employees is measured as the
excess of the quoted market price of the Company's stock at the date of grant
over the amount an employee must pay to acquire the stock.


                                       F-9
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002

   The Company applies the disclosure-only provisions of SFAS No. 123 with
respect to stock options issued to the Company's employees.

 Current Vulnerability Due to Certain Concentrations

   Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash, cash equivalents, marketable
securities and trade receivables. Concentrations of credit risk with respect
to trade receivables are limited due to the large number of customers
comprising the Company's customer base.

   Management regularly monitors the creditworthiness of its domestic and
international customers and believes that it has adequately provided for any
exposure to potential credit losses.

 Recent Accounting Pronouncements

   In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This standard provides the accounting for the cost of legal
obligations associated with the retirement of long-lived assets. SFAS No. 143
requires that companies recognize the fair value of a liability for asset
retirement obligations in the period in which the obligations are incurred and
capitalize that amount as a part of the book value of the long-lived asset. We
are required to adopt SFAS No. 143 effective August 1, 2002. We do not expect
the impact of the adoption of SFAS No. 143 to have a material effect on our
results of operations or financial position.

   In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." This standard supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," and the provisions of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," with regard to reporting the effects of a disposal of a segment
of a business. SFAS No. 144 establishes a single accounting model for assets
to be disposed of by sale and addresses several SFAS No. 121 implementation
issues. We are required to adopt SFAS No. 144 effective August 1, 2002. We do
not expect the impact of the adoption of SFAS No. 144 to have a material
effect on our results of operations or financial position.

   In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in Restructuring)." EITF Issue
No. 94-3 required accrual of liabilities related to exit and disposal activity
to be recognized when the liability is incurred. The provisions of SFAS No.
146 are effective for exit or disposal activities that are initiated after
December 31, 2002.


                                      F-10
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002


3. Goodwill and Other Intangible Assets

   Effective August 1, 2001, the Company adopted SFAS No. 141 and SFAS No. 142.
SFAS No. 141, "Business Combinations," requires business combinations
initiated after June 30, 2001 to be accounted for using the purchase method of
accounting. It also specifies the types of acquired intangible assets that are
required to be recognized and reported separate from goodwill.

   SFAS No. 142, "Goodwill and Other Intangible Assets," no longer permits the
amortization of goodwill and indefinite-lived intangible assets. Instead,
these assets must be tested for impairment at least annually. The impairment
test uses a fair value approach rather than the undiscounted cash flows
approach previously required by SFAS No. 121. The goodwill impairment test
under SFAS No. 142 requires a two-step approach, which is performed at the
reporting unit level, as defined in SFAS No. 142. Step one identifies
potential impairments by comparing the fair value of the reporting unit to its
carrying amount. Step two, which is only performed if there is a potential
impairment, compares the carrying amount of the reporting unit's goodwill to
its implied value, as defined in SFAS No. 142. If the carrying amount of the
reporting unit's goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized for an amount equal to that excess. Upon
adopting SFAS No. 142, the Company reassessed the useful lives of its
intangible assets and determined them to be appropriate. The adoption of SFAS
No. 142 on August 1, 2001 did not have any impact on the Company.

   The following tables present the pro forma impact of SFAS No. 142 on
reported net loss available to common shareholders and loss per common share
had the standard been in effect for the years ended July 31, 2001 and 2000:
<TABLE>
<CAPTION>

                                                                                              Years ended July 31,
                                                                                 ----------------------------------------------
                                                                                     2002             2001            2000
                                                                                 -------------   -------------    -------------
    <S>                                                                          <C>             <C>              <C>
    Reported net loss available to common shareholders.......................    $(245,927,887)  $(366,507,770)   $(118,334,005)
    Goodwill amortization....................................................               --       1,978,222          339,136
                                                                                 -------------   -------------    -------------
    Pro forma net loss available to common shareholders......................    $(245,927,887)  $(364,529,548)   $(117,994,869)
                                                                                 =============   =============    =============
    </TABLE>



    <TABLE>
    <CAPTION>

                                                                                              Years ended July 31,
                                                                                 ----------------------------------------------
                                                                                     2002             2001            2000
                                                                                 -------------   -------------    -------------
    <S>                                                                          <C>             <C>              <C>
    Basic and diluted loss per common share..................................    $       (4.21)  $       (6.25)   $       (2.29)
    Goodwill amortization....................................................               --            0.03             0.01
                                                                                 -------------   -------------    -------------
    Pro forma loss per common share -- basic and diluted.....................    $       (4.21)  $       (6.22)   $       (2.28)
                                                                                 =============   =============    =============
</TABLE>


   The changes in the carrying amount of goodwill, net of accumulated
amortization for the year ended July 31, 2002, are as follows:
<TABLE>
<CAPTION>

                                                                             Goodwill, net
                                                                             -------------
          <S>                                                                <C>
          Balance at August 1, 2001 ......................................    $  1,925,295
          Goodwill acquired during the year ..............................      11,543,232
          Impairment loss (see footnote 22) ..............................     (11,543,232)
          Goodwill of business disposed...................................        (216,209)
                                                                              ------------
          Balance at July 31, 2002 .......................................    $  1,709,086
                                                                              ============
</TABLE>


                                      F-11
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002


   The major components and average useful lives of our other acquired
intangible assets follows:
<TABLE>
<CAPTION>

                                                                                July 31, 2002                July 31, 2001
                                                                           -------------------------    -------------------------
                                                                            Gross                         Gross
                                                                Period     Carrying     Accumulated     Carrying     Accumulated
                                                                (mos.)      Amount      Amortization     Amount      Amortization
                                                                ------    ----------    ------------   ----------    ------------
   <S>                                                          <C>       <C>           <C>            <C>           <C>
   Developed product technology..............................       36    $       --     $      --     $       --     $      --
   Customer lists............................................       60            --            --      3,000,000      (200,000)
   Technology................................................       35       160,000       (36,923)     1,000,000       (86,208)
   Trademark.................................................       36     1,288,825      (225,864)       983,991       (78,222)
   Non-compete covenants.....................................    24-30       800,000      (247,547)            --            --
                                                                 -----    ----------     ---------     ----------     ---------
                                                                          $2,248,825     $(510,334)    $4,983,991     $(364,430)
                                                                          ==========     =========     ==========     =========
</TABLE>


   Intangible assets (other than goodwill and intangible assets with indefinite
lives) are amortized on a straight-line basis. Intangible assets amortization
expense for the years ended July 31, 2002, 2001, and 2000 was $1.5 million,
$4.0 million, and $1.0 million, respectively. Intangible assets amortization
expense is estimated to be $0.7 million in fiscal 2003, $0.5 million in fiscal
2004, $0.2 million in fiscal 2005, $0.2 million in fiscal 2006.

   During the first quarter of fiscal 2002, the Company recorded goodwill of
$9.2 million and developed product technology of $2.1 million related to the
NetSpeak acquisition in August 2001 (see footnotes 6 and 22).

   During the second quarter of fiscal 2002, the Company recorded goodwill of
approximately $2.3 million relating to shares of ADIR Technologies, Inc.
("ADIR") repurchased from the Company's Chief Executive Officer and Chief
Financial Officer in connection with their separation agreements as discussed
in more detail in footnote 22, restructuring, severance, impairment and other
items.

   See footnote 22 for information regarding impairment charges recorded in the
third quarter of Fiscal 2002 on goodwill and identifiable intangible assets.

4. Financial Instruments

   Effective August 1, 1999 the Company adopted FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities ("FAS 133"). FAS
133 requires that all derivative financial instruments, such as interest rate
swap contracts and foreign exchange contracts, be recognized in the financial
statements and measured at fair value regardless of the purpose or intent for
holding them. Changes in the fair value of derivative financial instruments
are either recognized periodically in income or shareholders' equity (as a
component of comprehensive income), depending on whether the derivative is
being used to hedge changes in fair value or cash flows. For the years ended
July 31, 2002, 2001 and 2000, the Company recorded a gain of approximately $0,
$5.2 million and $0.5 million, respectively, related to its derivative
instruments.

   The carrying value of the Company's financial instruments which include our
investments (see Note 9), marketable securities (see Note 7), and long-term
obligations (see Note 6), approximates fair value. Certain equity investments,
included in investments, are reflected at their carrying value because quoted
market prices do not exist. The balance of these investments at July 31, 2002
and 2001 are $1.5 million and $8.6 million respectively. The fair value of
financial instruments is generally determined by reference to market values
resulting from trading on a national securities exchange or in an over-the-
counter market. In cases where quoted market prices are not available, such as
for derivative financial instruments, fair value is based on estimates using
present value or other valuation techniques. The fair value of the Company's
long-term obligation was estimated using a discounted cash flow analysis,
based on current market interest rates. It was not practicable to estimate the
fair value of certain of the Company's equity investments because of the lack
of quoted market prices and the inability to estimate fair value without
incurring excessive costs.

                                      F-12
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002


5. Aplio Acquisition

   On July 7, 2000, the Company acquired all of the outstanding capital stock
of Aplio, S.A ("Aplio") a company located in France with technology that
enables Voice Over Internet Protocol ("VOIP") devices. Consideration consisted
of $2.9 million in cash at closing and 582,749 shares of the Company's
redeemable common stock which were valued at $35.50 and are redeemable at
$36.947 per share, promissory notes aggregating $6.5 million, $1.4 million in
acquisition related costs and $4.8 million in cash to be paid within eighteen
months of the closing of the transaction. In addition, the Company was
required to pay two contingent cash payments of $2.8 million each on July 7,
2001 and July 7, 2002 and a third payment of $2.5 million on July 7, 2003. As
collateral for the first two contingent payments, the company placed 150,329
shares of its common stock in escrow. Certain of the selling shareholders also
were given the right to require the Company to repurchase their shares on
various dates prior to January 31, 2002.

   The aggregate purchase price of $36.2 million plus the fair value of net
liabilities assumed of $2.7 million totaled approximately $38.9 million which
was allocated as follows: approximately $17.7 million to goodwill,
$13.9 million to technology, $2.3 million to trademark, $4.5 million to
patents and $0.5 million to workforce.

   This acquisition was accounted for as a purchase, and accordingly, the net
assets and results of operations of the acquired business have been included
in the consolidated financial statements from July 7, 2000, the date of
acquisition.

   As of June 7, 2001, the Company entered into a Settlement Agreement with
certain former Aplio shareholders pursuant to which the Company redeemed
116,549 shares for a total of $4.3 million, of which $1.0 million was paid
before July 31, 2001, and the balance was paid in August 2001. On April 30,
2003, the Company has the option of redeeming the remaining 294,046 shares of
the Company's stock owned by these same shareholders for $10.9 million or
simply paying the excess, if any, of $36.947 per share over the market value
of the shares at that time. In exchange, these shareholders waived their
rights to receive $2.0 million held back by the Company at the closing to
secure certain indemnification obligations. As a result, the Company has
recorded $9.8 million of redeemable stock as of July 31, 2002 based on the
excess of $36.947 over the value of 294,046 shares of the Company's common
stock on such date.

   As of July 31, 2001, the Company entered into Settlement Agreements with
three other former shareholders of Aplio pursuant to which the Company agreed
to pay to such shareholders the aggregate sum of $6.6 million in two
installments on August 31, 2001 and January 8, 2002. In addition, the Company
agreed to pay such shareholders on April 30, 2003 the aggregate sum of $8.3
million, reduced by the market value at that time of the 291,279 shares
(including the 150,329 shares released to such shareholders from escrow) of
the Company's stock owned by such shareholders. In exchange, these
shareholders waived their rights to receive $1.0 million held back by the
Company at the closing to secure certain indemnification obligations. As a
result, the Company has recorded a liability of $7.6 million as of July 31,
2002 based on the excess of $8.3 million over the value of 291,279 shares of
the Company's common stock on such date.

   In the third quarter of Fiscal 2001, the Company decided to discontinue
Aplio's operations. See Note 22.

6. ADIR Technologies, Inc.

   In the first quarter of Fiscal 2001, ADIR, a subsidiary of Net2Phone,
designated 135,000 shares of its preferred stock as Series A and sold 13,277
of such shares to Cisco Systems, Softbank and IDT in a private placement
transaction for aggregate gross proceeds of approximately $23.2 million. In
addition, ADIR sold 18,525 shares of its common stock in Fiscal 2001 to
employees of Net2Phone and ADIR in exchange for promissory notes of
approximately $3.2 million, which was below the aggregate value of such shares
of $21.1 million. Accordingly, the discount of approximately $17.9 million is
being amortized over the vesting period of such shares. The Company has
recorded compensation expense of $4.5 million and $3.9 million in Fiscal 2002
and 2001, respectively, from the amortization of this discount. The expense is
recorded in non-cash compensation expense in the accompanying statements of
operations.

   In the fourth quarter of Fiscal 2001, ADIR raised an additional $25 million
in exchange for 9,905 shares of its Series B preferred stock from its previous
investors, Cisco Systems and Softbank.

                                      F-13
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002


   On August 14, 2001, ADIR acquired all of the issued and outstanding capital
stock of NetSpeak Corporation ("NetSpeak"). Results of operations for NetSpeak
have been included in the accompanying financial statements since August 14,
2001. The primary reason for the acquisition of NetSpeak was the belief that
its route server and associated software would allow ADIR to offer a broader
product base to its customers.

   NetSpeak was a strategic partner of Cisco Systems and Cisco was an important
investor in and a strategic partner of ADIR. ADIR bid against at least one
other party for NetSpeak and the purchase price finally agreed to was
determined based upon the assets being received and the future revenue
projections.

   The total aggregate consideration paid for the acquisition was $48.1 million.
The purchase price allocation was as follows:
<TABLE>
<CAPTION>
          <S>                                                                  <C>
          Current assets ...................................................   $23,375,400
          Current liabilities ..............................................    (3,567,200)
          Property, plant and equipment ....................................     2,294,500
          Other assets .....................................................       802,100
          Development product technology ...................................     2,140,000
          In-process research and development ..............................    13,850,000
          Goodwill .........................................................     9,188,700
                                                                               -----------
                                                                               $48,083,500
                                                                               ===========
</TABLE>


   See footnotes 21 and 22 for additional information regarding litigation with
Cisco relating to ADIR and its impact on goodwill and intangible assets
recorded in connection with the NetSpeak acquisition.

   Purchased in-process research and development ("IPR&D") represents the value
assigned in a purchase business combination to research and development
projects of the acquired business that had commenced but had not yet been
completed at the date of acquisition and which have no alternative future use.
In accordance with SFAS No. 2, "Accounting for Research and Development
Costs," as clarified by FASB Interpretation No. 4, amounts assigned to IPR&D
meeting the above stated criteria must be charged to expense as part of the
allocation of the purchase price of the business combination. Accordingly,
charges totaling $13.9 million were recorded during Fiscal 2002 as part of the
allocation of the purchase price related to the acquisition of NetSpeak.

   The IPR&D relates primarily to advanced telephony software products for
Internet protocol ("IP") networks. The Route Server Infrastructure Product
provides real-time IP address resolution ensuring high performance scalability
and reliability. The Route Server virtual private network ("VPN") product
integrated with the infrastructure product creates a solution that enables
service providers to address the long distance service market. The Residential
Cable Solution product provides routing and call management for end-user cable
subscribers.

   The valuation of the IPR&D included both cost and income valuation
approaches, and utilized replacement cost and discounted cash flow
methodologies for various aspects of the analysis. The calculations were based
on estimates of operating earnings, capital charges, and working capital
requirements to support the cash flows attributed to the technologies.
Discount rates reflecting the stage of development, complexity and the risk
associated with each technology were used to value IPR&D. The fair value total
of $13.9 million has been assigned as follows: Route Server Infrastructure --
$10.3 million; Route Server VPN -- $2.9 million; Residential Cable Solution --
$0.7 million. Development of the Route Server Infrastructure and Route Server
VPN products were completed during the second quarter of fiscal 2002.
Effective February 14, 2002, further research and development of the
Residential Cable Solution product was suspended while ADIR reevaluates the
product's anticipated attractiveness relative to current market conditions.


                                      F-14
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002


7. Marketable Securities

   Marketable securities consist of equity securities, U.S. Government Agency
Obligations and commercial paper. Debt securities with original maturities of
greater than three months at the time of purchase are classified as marketable
securities and are carried at amortized cost and interest on these securities
is included in interest income as earned. The following is a summary of the
marketable securities at July 31, 2002:

<TABLE>
<CAPTION>

                                                                                                Gross        Gross
                                                                                Carrying     Unrealized    Unrealized       Fair
                                                                                 Amount         Gains        Losses        Value
                                                                              -----------    ----------    ----------   -----------
<S>                                                                           <C>            <C>           <C>          <C>
   Short-term:
   Held-to-maturity securities:
   U.S. Government Agency Obligations......................................   $25,000,000     $     --      $    --     $25,000,000
   Commercial paper........................................................       770,912        3,376         (999)        773,289
                                                                              -----------     --------      -------     -----------
      Total short-term.....................................................   $25,770,912     $  3,376      $  (999)    $25,773,289
                                                                              ===========     ========      =======     ===========

   Long-term:
   Held-to-maturity securities:
   U.S. Government Agency Obligations......................................   $17,428,706     $134,921      $(1,110)    $17,562,517
   Commercial paper........................................................     1,275,007        8,148       (1,100)      1,282,055
                                                                              -----------     --------      -------     -----------
      Total long-term......................................................   $18,703,713     $143,069      $(2,210)    $18,844,572
                                                                              ===========     ========      =======     ===========
</TABLE>


   The following is a summary of the marketable securities at July 31, 2001:

<TABLE>
<CAPTION>

                                                                                                Gross        Gross
                                                                                Carrying     Unrealized    Unrealized       Fair
                                                                                 Amount         Gains        Losses        Value
                                                                              -----------    ----------    ----------   -----------
<S>                                                                           <C>            <C>           <C>          <C>
   Short term:
   Held-to-maturity securities:
   U.S. Government Agency Obligations......................................   $23,000,000     $     --       $  --      $23,000,000
   Corporate notes.........................................................    17,974,587      135,013          --       18,109,600
                                                                              -----------     --------       -----      -----------
                                                                              $40,974,587     $135,013       $  --      $41,109,600
                                                                              ===========     ========       =====      ===========
   Available-for-sale securities:
   Yahoo! common stock.....................................................   $14,209,684
   Speechworks common stock................................................     3,643,657
                                                                              -----------
                                                                               17,853,341
                                                                              -----------
                                                                              $58,827,928
                                                                              ===========
</TABLE>


   In March 2000, the Company acquired 806,452 shares of Yahoo! Inc. in exchange
for 2,777,778 shares of the Company's common stock at a then equivalent market
value of approximately $150.0 million. During Fiscal 2001, the Company recorded
a $136.0 million loss relating to an other than temporary decline in the market
value of its Yahoo! shares, resulting in a new cost basis. In the second quarter
of fiscal 2002, all 806,452 shares were sold for gross proceeds of approximately
$14.8 million, resulting in a gain of approximately $0.6 million that is
recorded in "Income (loss) on equity investments and other expense, net" on the
accompanying statements of operations.

   In August 2000, the Company purchased 321,027 shares of common stock at
$12.46 per share of Speechworks, International, Inc. ("Speechworks") for a total
cost of approximately $4.0 million. In the second quarter of fiscal 2002, all
321,027 shares were sold for gross proceeds of approximately $3.1 million,
resulting in


                                      F-15
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002


a loss of approximately $0.9 million that is recorded in "Income (loss) on
equity investments and other expense, net" on the accompanying statements of
operations.

8. Property and Equipment

   Property and equipment consists of the following:
<TABLE>
<CAPTION>

                                                                  July 31,
                                                         ---------------------------
                                                            2002            2001
                                                         -----------   -------------
    <S>                                                  <C>           <C>
       Equipment.....................................    $23,676,020   $  90,983,234
       Computer software.............................     10,405,060      31,397,724
       Furniture and fixtures........................      1,611,331      10,929,592
                                                         -----------   -------------
                                                          35,692,411     133,310,550
       Accumulated depreciation......................     (2,817,243)   (24,912,274)
                                                         -----------   -------------
       Property and equipment, net...................    $32,875,168   $ 108,398,276
                                                         ===========   =============
</TABLE>


   Fixed assets under capital leases aggregated $1.9 million and $0 at July 31,
2002 and 2001, respectively. The accumulated amortization related to these
assets under capital leases was $0.1 million and $0 at July 31, 2002 and 2001,
respectively. Amortization of assets recorded under capital leases is included
in depreciation and amortization expense in the accompanying consolidated
statements of operations.

   Depreciation and amortization of fixed assets for the years ended July 31,
2002, 2001 and 2000 was approximately $24.0 million, $17.1 million, and
$5.5 million, respectively.

   See footnote 22 for information regarding impairment charges recorded in the
third quarter of Fiscal 2002 on property and equipment.

9. Investments

   In February 2000, the Company acquired 1,696,667 shares of WebDialogs Series
D Convertible Preferred stock at $5.893 per share. WebDialogs is an e-commerce
enabler that focuses on collaborative browsing applications. During the fourth
quarter of fiscal 2001, the Company recorded a loss relating to an other-than-
temporary decline in value of its investment, resulting in a charge to other
expense of approximately $10.0 million.

   In April 2000, the Company acquired 38,352 shares of Webley Systems, Inc.
Series B Preferred stock at $195.56 per share. Webley is a unified
communications and messaging provider. During the fourth quarter of fiscal
2001, the Company recorded a loss relating to an other-than-temporary decline
in value of its investment, resulting in a charge to other expense of
approximately $7.6 million.

   In December 2000, the Company acquired 2,859,569 shares at $1.3988 and
1,573,096 shares at $1.907 of Alonet S.A. ("Alonet") common stock and
converted loans of $4 million into common stock of Alonet. During the third
quarter of fiscal 2001, Alonet ceased operations and the Company wrote-off the
investment, resulting in a loss of $10.3 million.

   Also during the fourth quarter of fiscal 2001, the Company recorded a loss
relating to an other-than-temporary decline in value for several other of its
cost method investments, resulting in a charge to other expense of
approximately $4.3 million.

   As a result of the Company's plan to restructure its operations and eliminate
various lines of development announced in the third quarter of Fiscal 2002, the
Company wrote-off the value of several of its cost method investments which were
no longer deemed to be strategic to its business. In addition, an
other-than-temporary impairment charge was recorded with respect to one of the
Company's cost method investments that the Company continues to believe is
strategic to its business. The charge was recorded to reduce the carrying value
of the investment to


                                      F-16
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002


fair value determined based on a recent third-party financing completed by the
investee. These charges totaled $6.9 million and are reflected in Income
(loss) on equity investments and other expense, net in the statements of
operations.

   The Company has invested in minority holdings of several other technology
companies. Such investments are recorded at cost and amounted to approximately
$1.5 million at July 31, 2002 and $4.6 million at July 31, 2001.

10. Leasing Arrangements

   The Company leases certain facilities and equipment for use in its
operations under both capital and operating leases. The Company entered into
several new capital lease agreements during the year ended July 31, 2002.

   The aggregate minimum rental commitments under noncancelable leases for the
periods shown at July 31, 2002, are as follows:
<TABLE>
<CAPTION>

    Fiscal Years
      ------------                                 Capital Leases   Operating Leases
                                                   --------------   ----------------
    <S>                                            <C>              <C>
    2003 ......................................     $ 3,098,890        $ 4,187,985
    2004 ......................................       2,587,259          4,377,628
    2005 ......................................         278,375          4,241,928
    2006 ......................................              --          3,971,568
    2007 ......................................              --          3,813,258
    Thereafter ................................              --          8,935,145
                                                    -----------        -----------
    Total minimum rental commitments ..........       5,964,524        $29,527,512
                                                                       ===========
    Less amounts due for interest .............        (291,939)
    Less current portion ......................      (3,002,608)
                                                   --------------
    Capital lease obligations -- long-term
      portion..................................     $ 2,669,977
                                                   ==============
</TABLE>


   Rent expense for the years ended July 31, 2002, July 31, 2001 and July 31,
2000 was $8.2 million, $5.3 million, and $1.4 million, respectively.

   As of July 31, 2002, the aggregate minimum sublease rentals to be received
in the future for operating subleases is approximately $0.4 million.


                                      F-17
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002


11. Loss Per Share

   The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>

                                                                                              Year ended July 31,
                                                                                -----------------------------------------------
                                                                                    2002             2001             2000
                                                                                -------------   -------------    --------------
    <S>                                                                         <C>             <C>              <C>
    Numerator:
      Net loss..............................................................    $(245,927,887)  $(365,975,771)   $(118,334,005)
      Redeemable common stock accretion.....................................         (133,000)       (531,999)               --
                                                                                -------------   -------------    --------------
    Numerator for basic and diluted loss per common share-net loss available
      for
      common stockholders...................................................    $(246,060,887)  $(366,507,770)   $ (118,334,005)
                                                                                =============   =============    ==============
    Denominator
      Denominator for basic and dilutive loss per common share-weighted
      average shares........................................................       58,442,337      58,664,580        51,738,918
                                                                                =============   =============    ==============
    Basic and diluted loss per share........................................    $       (4.21)  $       (6.25)   $        (2.29)
                                                                                =============   =============    ==============
</TABLE>


   The following securities have been excluded from the dilutive per share
computation as they are antidilutive:
<TABLE>
<CAPTION>

                                                                                                   Year ended July 31,
                                                                                           ------------------------------------
                                                                                              2002         2001         2000
                                                                                           ----------   ----------    ---------
    <S>                                                                                    <C>          <C>           <C>
    Stock Options......................................................................    10,623,023   12,069,098    8,450,984
</TABLE>


12. Stock Repurchase Program

   In October 2000, the Board of Directors authorized a share buyback program
through which the Company may repurchase up to five million shares of common
stock in the open market. As of July 31, 2002, the Company had repurchased
4,481,600 shares under this program.

13. Related Party Transactions

 IDT

   In fiscal 2002, 2001 and 2000 we provided carrier services to IDT of
$12.5 million, $21.9 million and $11.2 million, respectively, and sold
disposable calling cards to IDT affiliates totaling $17.3 million,
$31.6 million and $7.8 million, respectively.

   In fiscal 2002, 2001 and 2000, we purchased wholsesale carrier services from
IDT of $24.5 million, $43.1 million and $18.8 million, respectively.

   Our corporate headquarters and several other facilities are leased from IDT.
In fiscal 2002 and fiscal 2001, we paid IDT $4.1 million and $3.4 million,
respectively, in facilities lease payments.

   The due from (to) IDT balances represent net amounts due from (to) IDT to
(by) us principally for wholsesale carrier telecommunication services and lease
payments. On July 31, 2002, IDT owed us $0.7 million. The average balance we
owed to IDT during the years ended July 31, 2002 and July 31, 2001, was $6.8
million and $9.6 million, respectively.


                                      F-18
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002


   The activity in the Due to IDT account was as follows:

<TABLE>
<CAPTION>

                                                                                                    Year ended July 31,
                                                                                       --------------------------------------------
                                                                                           2002            2001            2000
                                                                                       ------------    ------------   -------------
<S>                                                                                    <C>             <C>            <C>
Opening Balance....................................................................    $ 14,401,290    $  4,883,111   $  17,735,395
Charges to IDT affiliate for purchases of disposable calling cards from Net2Phone..     (17,312,965)    (31,619,815)     (7,844,575)
Charges to IDT for services provided by Net2Phone..................................     (12,462,765)    (21,900,438)    (11,224,814)
Charges to Net2Phone for services provided to IDT..................................      28,542,078      51,460,583      18,815,668
Expenses paid by IDT on behalf of Net2Phone requiring Net2Phone remittance.........       2,145,919       6,974,128      15,896,162
Expenses paid by Net2Phone on behalf of IDT requiring
  IDT reimbursement................................................................      (3,661,223)             --              --
Payments received from IDT.........................................................      21,366,075      33,144,240       5,874,000
Payments remitted to IDT...........................................................     (33,700,000)    (28,540,519)   (34,368,725)
                                                                                       ------------    ------------   -------------
Ending Balance.....................................................................    $   (681,591)   $ 14,401,290   $   4,883,111
                                                                                       ============    ============   =============
</TABLE>


 Agreements with Officers

   In April 2002, the Company loaned the sum of $3.6 million to the Company's
Chief Executive Officer ("CEO"). The loan bears interest at a market rate and
principal and interest are due on April 9, 2005 ("Maturity Date"). The loan is
non-recourse to the CEO and is secured by options to purchase 300,000 shares
of the Company's common stock granted to the CEO in April 2002.

   Under certain circumstances, the Board of Directors may request the CEO to
exercise sufficient options and sell sufficient stock to pay the unpaid
balance of the loan. In addition, the Board may request that the CEO not sell
the stock which will result in the unpaid loan and interest balance being
reduced based upon a formula set forth in the loan agreement. On the Maturity
Date, the CEO will have to return to the Company all or a portion of the
unexercised options and/or shares of unsold stock and his unpaid loan and
accrued interest balance will be reduced based upon a formula set forth in the
loan agreement.

   Due to the uncertainty surrounding the number of options the CEO will
ultimately receive, the Company will account for the options using a variable
accounting model until the options are exercised or returned to the Company.
Furthermore, due to the non-recourse nature of the loan, the Company will record
compensation expense for the $3.6 million principal amount of the note over the
CEO's three-year employment period. However, total compensation expense will be
calculated at each reporting date as the greater of the compensation expense
resulting from (i) variable accounting treatment of the options, or
(ii) amortizing the $3.6 million loan balance over the employment period.

   For the year ended July 31, 2002, the Company recorded compensation expense
of $0.4 million relating to this agreement.

   Pursuant to an agreement with the Company's General Counsel, the Company has
guaranteed that the value (as defined in the agreement) of 150,000 options to
purchase the Company's common stock held by the General Counsel will be at least
$1.6 million on January 7, 2004. To the extent the value of such options is less
than $1.6 million, the Company will pay the General Counsel the difference in
cash. As a result, the Company is amortizing the $1.6 million guaranteed option
value over the three-year term of the agreement. During the year ended July 31,
2002, the Company recorded $0.8 million of compensation expense in connection
with this agreement.


                                      F-19
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002


14. Income Taxes

   Significant components of the Company's deferred tax assets and liabilities
consists of the following:
<TABLE>
<CAPTION>

                                                                                  July 31,
                                                                        -----------------------------
                                                                            2002            2001
                                                                       -------------    -------------
    <S>                                                                <C>              <C>
    Deferred tax asset:
      Net operating loss carryforward...............................   $ 207,189,358    $ 159,736,632
      Compensation charge from issuance of stock
       options .....................................................       7,987,629        2,561,271
      Restructuring costs...........................................      35,581,610       12,318,797
      Contribution carryover........................................       1,325,126           88,559
    Deferred tax liabilities
      Depreciation..................................................     (13,436,203)      (6,891,642)
      Other.........................................................        (304,060)        (304,060)
                                                                       -------------    -------------
      Net deferred tax asset........................................     238,343,460      167,509,557
      Valuation allowance...........................................    (238,343,460)    (167,509,557)
                                                                       -------------    -------------
    Total deferred tax assets ......................................   $          --    $          --
                                                                       =============    =============
</TABLE>


   The net deferred tax assets have been fully offset by a valuation allowance
due to the uncertainty of the realization of the assets.

   At July 31, 2002, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $505.0 million expiring in years
through 2022. These net operating loss carryforwards may be limited by both
the future taxable earnings of the Company and limitations imposed by IRC
Section 382.
<TABLE>
<CAPTION>

                                                                                               Year ended July 31,
                                                                                   --------------------------------------------
                                                                                       2002            2001            2000
                                                                                   ------------   -------------    ------------
    <S>                                                                            <C>            <C>              <C>
    Tax at effective rate......................................................    $(86,712,189)  $(128,091,520)   $(41,416,902)
    Non-deductible expenses....................................................      21,916,195      15,127,050       3,787,484
    Losses for which no benefit is provided....................................      64,795,994     112,964,470      37,629,418
                                                                                   ------------   -------------    ------------
    Tax Provision..............................................................    $         --   $          --    $         --
                                                                                   ============   =============    ============
</TABLE>


15. Charitable Contributions

   On December 31, 2001, Net2Phone transferred 600,000 shares of its common
stock to the Net2Phone Charitable Foundation Philanthropic Fund established
under the auspices of the Jewish Community Foundation of MetroWest. The fair
value of the shares contributed was approximately $3.0 million and is reflected
as a general and administrative cost for the year ended July 31, 2002. The
shares were transferred to the Net2Phone Charitable Foundation, Inc., a New
Jersey not-for profit corporation that, on February 13, 2002, was determined
by the Internal Revenue Service to be a 501(c)(3) organization. The shares,
which may not be publicly sold at this time without registration, or as
otherwise permitted under applicable securities laws, are to be used as
collateral to support non-interest bearing loans of $1.0 million each from
Net2Phone and IDT Corporation. The $1.0 million IDT loan was made on May 24,
2002. The $1.0 million Net2Phone loan has not yet been made. The proceeds of the
loans are to be used to provide liquidity to the Foundation for purposes of
matching charitable gifts contributed by employees of Net2Phone and ADIR in
accordance with a matching charitable gift program approved by the Board of
Directors of Net2Phone in March 2001. Certain executives of Net2Phone are also
trustees and officers of the Foundation.


                                      F-20
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002


16. Other Comprehensive Income

   The accumulated balances for each classification of other comprehensive
income (loss) consists of the following:
<TABLE>
<CAPTION>

                                                                                 Unrealized gain                   Accumulated
                                                                                    (loss) on        Foreign          other
                                                                                  available for      Currency     comprehensive
                                                                                 sale securities   Translation    income (loss)
                                                                                 ---------------   -----------    -------------
    <S>                                                                          <C>               <C>            <C>
    Beginning balance at July 31, 1999.......................................     $         --       $     --     $         --
    Change during period.....................................................      (41,805,082)        47,239      (41,757,843)
                                                                                  ------------       --------     ------------
    Balance at July 31, 2000.................................................      (41,805,082)        47,239      (41,757,843)
    Change during period.....................................................       41,445,977        461,551       41,907,528
                                                                                  ------------       --------     ------------
    Balance at July 31, 2001.................................................        (359,105)        508,790          149,685
    Change during period.....................................................               --         89,998           89,998
                                                                                  ------------       --------     ------------
    Balance at July 31, 2002.................................................     $   (359,105)      $598,788     $    239,683
                                                                                  ============       ========     ============
</TABLE>


   During the year ended July 31, 2001, a $41.4 million impairment loss was
realized on availabe-for-sale securities.

17. Stockholders' Equity

 Initial Public Offering

   On August 3, 1999, the Company completed an initial public offering (the
"IPO") of 6,210,000 shares of common stock at an initial public offering price
of $15.00 per share, resulting in net proceeds of approximately $83.8 million.

 Second Public Offering

   On December 1, 1999, the Company completed a public offering of 7,245,000
shares of common stock at a price of $55.00 per share. 3,845,000 shares were
sold by selling stockholders and 3,400,000 shares were sold by Net2Phone. Net
proceeds to Net2Phone, after deducting underwriting discounts and commissions
and offering expenses were approximately $177.4 million.

 Increase in Authorized Shares

   The Company designated 15,000,000 shares of its capital stock as Class A
stock. The terms of the Class A stock are identical to those of common stock
except for voting and conversion rights and restrictions on transferability.
The Class A stock is entitled to two votes per share.

   On July 6, 2000, the Company's shareholders gave approval to issue 4,000,000
newly authorized shares of Class A common stock to AT&T for an aggregate
purchase price of $300.0 million. This transaction was consummated in August
2000.

 Stock Options

   In April 1999, the Company adopted a stock option and incentive plan, as
amended (the "Plan"). Pursuant to the Plan, the Company's officers, employees
and non-employee directors, as well as those of IDT, are eligible to receive
awards of incentives and non-qualified stock options, stock appreciation
rights, limited stock appreciation rights and restricted stock. There are
currently 16,940,000 shares of common stock authorized for issuance under the
plan.

   The Compensation Committee of the Board of Directors is responsible for
determining the type of award, when and to whom awards are granted, the number
of shares and terms of the awards and the exercise price. The options are
exercisable for a period not to exceed ten years from the date of the grant.
Vesting periods range from immediately to four years.

   In the fourth quarter of fiscal 1999, the Company granted options to
purchase 8,821,500 shares of common stock at exercise prices ranging from
$3.33 to $15.00 per share to employees of the Company and employees of IDT.
The options generally vest over periods up to four years and expire ten years
from the date of grant. In connection with the exercise of such options, the
Company extended $3.1 million of recourse loans to employees. In order to obtain
the loans, optionees agreed to the cancellation of 23,382 outstanding options.


                                      F-21
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002


   During the quarter ended July 31, 2000, stock options issued to certain
officers and employees of the Company were accelerated in accordance with the
original stock option awards and as a result the Company recorded
approximately $12.5 million in compensation charges as a result of the
acceleration. During the quarter ended July 31, 2000, stock options issued to
certain officers and employees of IDT were modified and as a result, the
Company recorded $18.3 million in compensation charges.

   On December 18, 2001 the Board of Directors approved the repricing of
options outstanding under Net2Phone's 1999 Amended and Restated Stock Option
and Incentive Plan to purchase shares of Net2Phone's common stock, par value
$0.01 per share, granted on or before December 18, 2001. There were options to
purchase 6,373,863 shares of Common Stock outstanding and eligible to be
repriced in this offer.

   The exercise price per share of the repriced options ranged from $3.50 per
share to $7.00 per share. For the year ended July 31, 2002, the company recorded
non-cash compensation charges of approximately $0.6 million, related to this
repricing. The repriced options are subject to variable accounting treatment and
therefore must be marked-to-market each quarter.

   For the years ended 2002, 2001 and 2000, the Company recorded compensation
expense of $13.7 million, $16.2 million, and $48.1 million respectively, from
the issuance of stock options. All of the Company's non-cash compensation is
attributable to general and administrative expenses.

   Deferred compensation at July 31, 2002 resulting from the issuance of stock
options, based on Net2Phone's stock price at July 31, 2002, is expected to be
$3.4 million is being charged to expense over the vesting period of the stock
options as follows: fiscal 2003, $1.8 million; fiscal 2004, $1.1 million; and
fiscal 2005, $0.5 million.

   A summary of stock option activity under the Company's stock option plan is
as follows:
<TABLE>
<CAPTION>

                                                                    Weighted Average
                                                         Shares      Exercise Price
                                                       ----------   ----------------
    <S>                                                <C>          <C>
    Outstanding at July 31, 1999 ..................     7,445,900        $ 7.90
    Granted .......................................     2,371,689         35.73
    Exercised .....................................    (1,177,429)         7.55
    Cancelled .....................................      (182,351)        26.83
    Forfeited .....................................        (6,825)        14.49
                                                       ----------
    Outstanding at July 31, 2000 ..................     8,450,984         15.77
    Granted .......................................     6,157,137         16.19
    Exercised .....................................    (1,671,835)         3.96
    Cancelled .....................................      (704,086)        23.40
    Forfeited .....................................       (83,334)        26.06
                                                       ----------
    Outstanding at July 31, 2001 ..................    12,148,866
    Granted .......................................     9,296,022          4.20
    Exercised .....................................    (1,112,621)         0.51
    Cancelled .....................................    (4,351,608)        18.06
    Forfeited .....................................    (5,357,636)        20.04
                                                       ----------
    Outstanding at July 31, 2002 ..................    10,623,023
</TABLE>


                                      F-22
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002


   The following table summarizes the status of the stock options outstanding
and exercisable at July 31, 2002:

<TABLE>
<CAPTION>
                                                         Stock Options Outstanding                   Stock Options Exercisable
                                           ------------------------------------------------------    --------------------------
                                                                   Weighted
                                                                   Remaining          Weighted                      Weighted
                                                               Contractual Life       Average       Number of       Average
         Range of Exercise Prices          Number of Options      (in years)       Exercise Price    Options     Exercise Price
         ------------------------          -----------------   ----------------    --------------   ---------    --------------
   <S>                                     <C>                 <C>                 <C>              <C>          <C>
   $ 0.01 -  0.01                                    68,000           8.0              $ 0.01          68,000        $ 0.01
   $ 3.33 -  4.70                                 5,154,738           7.7              $ 3.46       3,951,069        $ 3.44
   $ 5.00 -  7.37                                 4,847,931           8.4              $ 5.73       2,266,637        $ 5.97
   $ 9.87 - 10.69                                    15,500           8.4              $10.40          11,375        $10.59
   $15.00 - 16.75                                   258,551           6.8              $15.31         238,676        $15.20
   $25.00 - 35.00                                   175,928           4.0              $29.57         118,177        $31.64
   $42.25 - 48.50                                   102,375           7.4              $43.37          69,932        $43.89
                                                 ----------                                         ---------
                                                 10,623,023                                         6,723,866
                                                 ==========                                         =========
</TABLE>

   The weighted average fair value of options granted was $3.98 and $13.63 for
the years ended July 31, 2002 and 2001. Pro forma information regarding net
loss and loss per share has been determined as if the Company had accounted
for employee stock options under the fair value method. The fair value of the
stock options was estimated at the date of grant using the Black-Scholes
option pricing model with the following assumptions for vested and non-vested
options:
<TABLE>
<CAPTION>

    Assumptions                                        July 31, 2002   July 31, 2001
      -----------                                      -------------   -------------
    <S>                                                <C>             <C>
    Average risk-free interest rate ...............          4.29%           5.71%
    Dividend yield ................................            --              --
    Volatility factor of the expected market price
      of the Company's common stock................           108%            120%
    Average life ..................................       5 years         5 years
</TABLE>


   The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics that are
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
Options.

   For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.

   The Company's pro forma information is as follows:
<TABLE>
<CAPTION>

                                                                                            For the year ended July 31,
                                                                                    -------------------------------------------
                                                                                        2002           2001            2000
                                                                                    ------------   ------------    ------------
    <S>                                                                             <C>            <C>             <C>
    Pro forma net loss available to common stockholders.........................    $266,593,677   $430,493,643    $146,364,946
    Pro forma net loss per common share.........................................    $       4.56   $       7.34    $       2.83
</TABLE>


                                      F-23
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002


18. 401(K) Plan

   In October 1999, the Company established a 401(k) Plan which permits
employees to make contributions to the plan on a pre-tax salary reduction basis
in accordance with the Internal Revenue Code. All full-time employees are
eligible to participate in the plan after completing three months of service.
Eligible employees may contribute up to 15% of their annual compensation,
subject to IRS limitations. Prior to January 2002, the Company matched a
discretionary amount of the employees' contributions in cash. Beginning
January 1, 2002, the Company matches a discretionary amount of the employees'
contributions in Company common shares. As of July 31, 2002, the Company had yet
to contribute any shares of common stock to the matching plan. The Company made
cash contributions of approximately $0.8 million, $1.0 million and $0.2 million
for the years ended July 31, 2002, 2001 and 2000, respectively and bore the
administrative cost of the Plan.

19. Commitments

 Letters of Credit

   As of July 31, 2002, the Company has letters of credit outstanding totaling
$23.0 million, of which $20.1 million expires during fiscal 2003 and the
remainder expire in 2004 through 2009. The letters of credit primarily relate to
payments the Company is required to make as a result of the Aplio settlement
agreements (see note 5).

20. Customer and Geographical Area

   Revenues from customers outside the United States represented approximately
45%, 24% and 34% of total revenues during the years ended July 31, 2002, 2001
and 2000, respectively. No single geographic area accounted for more than 10%
of total revenue during the years ended July 31, 2001, 2000 and 1999. No
customer accounted for more than 10% of revenue during the years ended July 31,
2001, 2000 and 1999.

21. Legal Proceedings

 Multi-Tech

   On February 15, 2000, Multi-Tech Systems, Inc. filed suit against Net2Phone
and other companies in the United States Federal District Court in
Minneapolis, Minnesota. Multi-Tech alleged that "the defendant companies are
infringing because they are providing the end users with the software
necessary to simultaneously transmit voice and data on their computers in the
form of making a phone call over the Internet." We continue to defend the
lawsuit vigorously. On August 16, 2002, following an initial hearing, called a
Markman hearing, the Court issued an order construing the claims of all the
patents in suit that Net2Phone considers favorable to its non-infringement
defenses. In light of the order, Net2Phone expects Multi-Tech to agree to a
stipulation of non-infringement and joint motion for entry of final judgment
dismissing all of Multi-Tech's infringement claims, with Multi-Tech intending
to appeal the Markman order to the Circuit Court of Appeals contesting the
Court's construction of the patent claims.

 Class-Actions

   Four substantially similar class-action lawsuits were filed in the United
States District Court for the Southern District of New York on behalf of all
persons who acquired our stock between July 29, 1999 and December 6, 2000.
Net2Phone, certain of our executive officers, directors and underwriters
involved in our initial public


                                      F-24
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002


offering are named as defendants in these complaints. The complaints allege,
in part, that certain underwriters of our initial public offering violated
federal securities laws by failing to disclose that they had solicited and
received undisclosed commissions and allocated shares in our initial public
offering to those investors in exchange for their agreement to purchase our
shares in the after-market at pre-determined prices. The complaints also
allege that, whether or not Net2Phone and the named executives were aware of
the underwriters' arrangements, Net2Phone and the named executives have
statutory liability under the federal securities laws for issuing a
registration statement in connection with our initial public offering that
failed to disclose that these allegedly undisclosed arrangements existed. The
suits against us are substantially the same as suits making the same
allegations that have been filed against more than 100 other companies that
had their initial public offerings at or about the same time. The deadline for
all defendants to respond to the complaints has been extended by the court to
which the various cases have been assigned. Our underwriting agreement with
our underwriters provides for indemnification of Net2Phone and its executives
and directors for liabilities arising out of misstatements in our registration
statement attributable to material non-disclosures by the underwriters. We
intend to pursue our indemnification claims against the underwriters. In
addition, we maintain directors and officers liability insurance coverage
which should substantially cover the costs of defending the various suits.
However an unfavorable decision in these areas could have a material adverse
effect on our business operations, financial condition, results of operations
and cash flows.

22. Restructuring, Severance, Impairment and Other Items

   The following table summarizes the charges included in Restructuring,
severance, impairment and other items in the statements of operations:
<TABLE>
<CAPTION>

                                                          For the year ended July 31,
                                                          ---------------------------
                                                              2002            2001
                                                          ------------    -----------
    <S>                                                   <C>             <C>
    Impairment of long-lived assets ..................    $ 83,940,197    $        --
    Exit Costs .......................................      14,500,223     55,828,882
    Workforce reductions .............................      13,881,918        469,117
    CEO & CFO separation agreements ..................      12,623,149             --
    Impairment of goodwill ...........................      11,543,232             --
    Impairment of intangible assets ..................       4,226,870             --
    Cisco litigation related expenses.................       1,571,665             --
    Other asset impairments ..........................         903,892     13,802,861
                                                          ------------    -----------
       Total..........................................    $143,191,146    $70,100,860
                                                          ============    ===========
</TABLE>


Impairment of Long-lived Assets

   When an indicator of impairment of the Company's long-lived assets exists,
the Company reviews the recorded value of such assets to determine if the
future cash flows to be derived from these assets will be sufficient to
recover the remaining recorded asset values. The Company considered the
resignation of the Chief Executive and Chief Financial Officers and the plan
to restructure its operations and eliminate various lines of development to be
indicators of potential impairment. As a result, an impairment charge of
$83.9 million was recognized during the third quarter of fiscal 2002 when it
was determined that the future undiscounted cash flows of the Company's long-
lived assets were estimated to be insufficient to recover their related
carrying values. As such, the carrying values of these assets were written
down to the Company's estimated fair value. Fair value was estimated using the
present value of expected future cash flows.

 Separation Agreements

   In October 2001, Howard Balter resigned as the Company's Chief Executive
Officer. Pursuant to an agreement between Mr. Balter and the Company,
Mr. Balter agreed to waive various rights under his employment


                                      F-25
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002


agreement, entered into a 30 month restrictive non-compete covenant and will
provide consulting services for a 15 month period in exchange for settlement of
various loans with the Company and the guarantee of continued benefits for a
similar period. In addition, Mr. Balter's options were repriced at the
conclusion of the first three months of the consultancy period. Mr. Balter
waived all rights to assert any claims against Net2Phone and ADIR relating to
his employment agreement with Net2Phone. The aggregate principal amount of Mr.
Balter's borrowing from Net2Phone and ADIR was $4.4 million. In addition,
Net2Phone had guaranteed the repayment of a bank loan to Mr. Balter in the
principal sum of $5.0 million. Net2Phone agreed to repay the bank loan and to
forgive $2 million of the other indebtedness after the completion of the first
three months of his consulting arrangement and the balance after the completion
of the entire consulting period. As a result of this agreement, there was a
charge of $9.5 million in fiscal 2002. The charge primarily consists of $3.8
million for the repricing of options, $5.4 million of loan forgiveness, and
approximately $0.2 million of amortization of the non-compete covenant which was
valued at $0.8 million. There will be future charges of approximately $2.0
million relating to this separation agreement.

   In January 2002, Ilan Slasky tendered his resignation as the Company's Chief
Financial Officer to become effective upon his successor's assumption of the
responsibility. Pursuant to an agreement between Mr. Slasky and the Company,
Mr. Slasky agreed to waive various rights under his employment agreement,
entered into a 2 year restrictive non-compete covenant and will provide
consulting services for a 4 year period in exchange for settlement of various
loans with the Company and the guarantee of continued benefits for a similar
period. In addition, Mr. Slasky's options were repriced on January 31, 2002. Mr.
Slasky waived all of his rights under his employment agreement with Net2Phone.
The aggregate principal sum of Mr. Slasky's borrowings from Net2Phone was $1.5
million. Net2Phone agreed to forgive the loans in four equal installments upon
the completion of each of the four years of his consulting arrangement. As a
result of this agreement, there was a charge of $2.7 million in fiscal 2002.
There will be future charges of approximately $1.8 million relating to this
separation agreement. In connection with the termination of his employment, Mr.
Slasky sold 500 shares of ADIR stock to IDT Corporation. IDT then transferred
the ADIR shares to the Company for 273,798 shares of Net2Phone common stock
valued at $1.4 million or $5.20 per share, the closing price of the stock on
January 24, 2002. Under certain circumstances, Net2Phone is required to
guarantee to IDT that the shares still owned by it on January 31, 2007 will have
a market value of at least $5.20 per share on that date. During the year ended
July 31, 2002, the Company recorded a mark-to- market adjustment of
approximately $0.4 million relating to this guarantee.

 November Restructuring

   In November 2001, the Company announced plans to restructure its operations,
which include the elimination of various lines of development business related
to Voice Hosting products and specific Enterprise products, relocation of
certain facilities, and a reduction in workforce by approximately 270 employees.
As a result of this restructuring, there was a charge of $0.9 million related to
the write-down of certain Aplio assets and a litigation-related reserve, $6.2
million related to terminated employees, $1.9 million related to the reduction
of operations at various locations, and $1.3 million related to elimination of
various equipment and network build-outs. As of July 31, 2002, all of the $6.2
million of involuntary termination benefits have been paid and charged against
the liability. All 270 employees to be terminated under the plan were terminated
in November when the plan was announced.

 February Restructuring

   On February 15, 2002, ADIR announced a reduction of workforce by 60
employees. ADIR reduced its workforce since much of its business plans and
activities focused on developing software for Cisco equipment and an impasse
was reached with Cisco refusing to honor commitments provided to Net2Phone
during ADIR's formation (see note 23). ADIR recorded a charge of approximately
$1.4 million related to the terminated employees. As of July 31, 2002, all of
the involuntary termination benefits have been paid and charged against the
liability.


                                      F-26
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002


   In addition, due to these events, the Company determined that it was
necessary to perform an impairment test of ADIR's goodwill. As a result of the
impairment test, which was performed in accordance with SFAS No. 142, a
goodwill impairment loss of $11.5 million was recognized during the third
quarter of fiscal 2002. The fair value used to measure the impairment was
estimated using the present value of expected future cash flows.

   On February 21, 2002, the Company announced plans to reduce its workforce by
85 employees or approximately 28%. The Company underwent a significant
restructuring process, identifying business lines that required lower capital
expenditures and provided a greater return on investment with higher margins. As
such, the Company significantly reduced its workforce and scaled back certain
unprofitable businesses, including its disposable calling card business and its
wholesale termination business. By reducing its workforce and eliminating some
associated allocated costs, the Company was able to retain the profitable
calling cards and terminating routes. The Company recorded a severance charge of
approximately $3.5 million relating to the workforce reduction. As of July 31,
2002, all of the involuntary termination benefits have been paid and charged
against the liability. In addition, the Company recorded a charge of $4.7
million related to the elimination of specific connectivity and network related
costs and $0.6 million related to the abandonment of certain leases.

   As a result of the plan to restructure its operations and eliminate various
lines of development, an impairment review of our long-lived assets and
identifiable intangible assets was conducted as of April 30, 2002, in accordance
with SFAS No. 121. As a result of this analysis, the Company recorded impairment
charges of approximately $2.0 million related to customer lists, $0.5 million
related to technology and $1.7 million related to developed product technology
assets. The impairment charge was calculated as the amount by which the carrying
amount of the assets exceeded their fair values. Fair value was estimated using
the present value of expected future cash flows.

 April Restructuring

   On April 30, 2002, the Company communicated plans to further reduce its
workforce by 20 employees. The Company scaled back on its technical development
team, which had been working on projects related to the restructured businesses.
The Company recorded severance of approximately $0.9 million related to this
additional workforce reduction. As of July 31, 2002, $0.7 million of termination
benefits have been paid.

 May Restructuring

   As a result of unresolved negotiations with Cisco, ADIR announced an
additional reduction of workforce by 30 employees in May 2002. In connection
with the significant workforce reductions, ADIR will attempt to exit several
leases and therefore recorded a charge of $4.7 million relating to the loss on
these lease commitments. ADIR recorded an additional liability in the fourth
quarter related to the May 2002 workforce reduction and the termination of
employment contracts of two of its officers of $2.3 million. As of July 31,
2002, approximately $0.4 million of involuntary termination benefits have been
paid and charged against the liability.

 Sale of Business

   On May 20, 2002, we exited our web-based banner advertising business by
selling its assets and the assets of Mail.com to the management group of this
division. As a result of the transaction, we incurred a $1.8 million loss and
we retain a 10% equity interest in the entity formed to acquire the business.

 Litigation expenses

   On March 19, 2002 we filed suit in the United States District Court for the
District of New Jersey against Cisco Systems, Inc. and a Cisco executive who
had been a member of the ADIR board of directors. The suit arose out of the
relationships that had been created in connection with Cisco's and Net2Phone's
original investments in ADIR and out of ADIR's subsequent purchase of
NetSpeak, Inc. in August 2001. In July 2002, Net2Phone and its ADIR subsidiary
agreed to settle the suit. For the quarter ended July 31, 2002, we recorded
$1.6 million of legal and other expenses related to the settlement. The
parties settled the suit and all related claims against Cisco and


                                      F-27
<PAGE>

                                 Net2Phone, Inc.
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
                                  July 31, 2002


the Cisco executive in exchange for: (i) the transfer, during the first quarter
of fiscal 2003, to Net2Phone of Cisco's and Softbank Asia Infrastructure Fund's
respective 11.5% and 7.0% interests in ADIR, and (ii) the payment by Cisco,
during such quarter, of $19.5 million to Net2Phone and ADIR. As a result of this
settlement, the Company will recognize, for the quarter ended October 31, 2002,
a gain of $58.4 million consisting of a $38.9 million reduction in Minority
interests as a result of the transfer of the ADIR shares and receipt of
settlement proceeds of $19.5 million. For the quarter ended July 31, 2002, we
recorded $1.6 million of legal and other expenses related to the settlement.

 Fiscal 2001 Charges

   In fiscal 2001, the operations of our Aplio subsidiary were discontinued. It
was determined that substantially all of Aplio's asset values would not be
recoverable, resulting in charges of $55.9 million associated with
discontinuing the Aplio operation. Separately, unrelated to Aplio, a
Restructuring expense of $13.6 million was recorded based on our view that
certain pre-paid advertising agreements and related software would provide no
future benefits to us. Lastly, we incurred $0.5 million in severance expense
through a reduction in force initiated in July 2001.

23. Subsequent events

 Settlement of lititgation

   In August 2002, Net2Phone and its ADIR subsidiary consummated the settlement
of their lawsuit in the United States District Court for the District of New
Jersey against Cisco and a Cisco executive who had been a member of the ADIR
board of directors. The suit arose out of the relationships that had been
created in connection with Cisco's and Net2Phone's original investments in
ADIR and out of ADIR's subsequent purchase of NetSpeak, Inc. in August 2001.
The parties settled the suit and all related claims against Cisco and the
Cisco executive in exchange for: (i) the transfer, during the first quarter of
fiscal 2003, to Net2Phone of Cisco's and Softbank Asia Infrastructure Fund's
respective 11.5% and 7.0% interests in ADIR, and (ii) the payment by Cisco,
during such quarter, of $19.5 million to Net2Phone and ADIR. As a result of
this settlement, the Company will recognize, for the quarter ended October 31,
2002, a gain of $58.4 million consisting of a $38.9 million reduction in
Minority interests as a result of the transfer of the ADIR shares and receipt
of settlement proceeds of $19.5 million. In addition, for the quarter ended
July 31, 2002, we recorded $1.6 million of legal and other expenses related to
the settlement that are included in Restructuring, severance, impairment and
other special items.

 October 2002 Restructuring

   On October 24, 2002, the Company announced that it is consolidating the
development and support of its products for both its core business and its
broadband effort within one unit working on standards-based solutions that will
service the entire organization. This consolidation will reduce the Company's
staff by 20%, or 63 employees. The Company will record a restructuring charge
for this consolidation, which includes severance payments and office space
reduction expenses, during the quarter ending October 31, 2002.


                                      F-28
<PAGE>

                                 Net2Phone, Inc.

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                For the Years Ended July 31, 2002, 2001 and 2000
                             (Dollars in Thousands)

<TABLE>
<CAPTION>

                                                                             Balance at
                                                                              Beginning    Charged to    Deductions     Balance at
                                                                              of Period     Expenses      Note (a)    End of Period
                                                                             ----------    ----------    ----------   -------------
<S>                                                                          <C>           <C>           <C>          <C>
Alowance For Uncollectible
Accounts Receivable:
Year 2002 ................................................................     $1,900        $2,067       $(3,653)        $  314
Year 2001 ................................................................         --         3,577        (1,677)         1,900
Year 2000 ................................................................         --            --            --              0
</TABLE>

---------------
(a) Amounts written off as uncollectible.


                                      F-29
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                                   Net2Phone, Inc.

                                   By:  /s/ STEPHEN M. GREENBERG

                                                 Stephen M. Greenberg
                                                 Chief Executive Officer
                               Power of Attorney

   Each person whose signature appears below hereby constitutes and appoints
Stephen M. Greenberg and Norman Klugman the true and lawful attorneys-in-fact
and agents of the undersigned, with full power of substitution, for and in the
name, place and stead of the undersigned, in any and all capacities, to sign
any and all amendments to this report, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, and hereby grants to such attorneys-in-fact and agents
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as
the undersigned might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

   Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on this 29 day of October, 2002.

<TABLE>
<CAPTION>

<S>                                             <C>                                                 <C>
/s/ HOWARD S. JONAS                             Chairman of the Board                               Dated:  October 29, 2002
____________________________________________
    Howard S. Jonas

/s/ STEPHEN M. GREENBERG                        Chief Executive Officer and Director (Principal     Dated:  October 29, 2002
____________________________________________    Executive Officer)
    Stephen M. Greenberg

/s/ NORMAN KLUGMAN                              Chief Financial Officer (Chief Accounting           Dated:  October 29, 2002
____________________________________________    Officer)
    Norman Klugman

/s/ JAMES R. MELLOR                             Director                                            Dated:  October 29, 2002
____________________________________________
    James R. Mellor

/s/ JAMES A. COURTER                            Director                                            Dated:  October 29, 2002
____________________________________________
    James A. Courter

/s/ MICHAEL FISCHBERGER                         Director                                            Dated:  October 29, 2002
____________________________________________
    Michael Fischberger

/s/ STEPHEN GOLDSMITH                           Director                                            Dated:  October 29, 2002
____________________________________________
    Stephen Goldsmith

/s/ ANTHONY G. WERNER                           Director                                            Dated:  October 29, 2002
____________________________________________
    Anthony G. Werner

/s/ DANIEL H. SCHULMAN                          Director                                            Dated:  October 29, 2002
____________________________________________
    Daniel H. Schulman

/s/ HARRY C. MCPHERSON, JR.                     Director                                            Dated:  October 29, 2002
____________________________________________
    Harry C. McPherson, Jr.
</TABLE>


                                       S-1

<PAGE>

<TABLE>
<CAPTION>

<S>                                             <C>                                                 <C>
/s/ JOYCE J. MASON                              Director                                            Dated:  October 29, 2002
____________________________________________
    Joyce Mason

/s/ STEPHEN R. BROWN                            Director                                            Dated:  October 29, 2002
____________________________________________
    Stephen R. Brown

/s/ JESSE P. KING                               Director                                            Dated:  October 29, 2002
____________________________________________
    Jesse P. King

/s/ MICHAEL WEISS                               Director                                            Dated:  October 29, 2002
____________________________________________
    Michael Weiss
</TABLE>


                                       S-2

<PAGE>
                                 Certifications


     I, Stephen M. Greenberg, certify that:

     1.   I have reviewed this annual report on Form 10-K of Net2Phone, Inc.;

     2.   Based on my knowledge, this annual report does not contain any
          untrue statement of a material fact or omit to state a material fact
          necessary in order to make the statements made, in light if the
          circumstances under which such statements were made, not misleading
          with respect to the period covered by this annual report; and

     3.   Based on my knowledge, the financial statements, and other financial
          information included in this annual report, fairly present in all
          material respects the financial condition, results of operation and
          cash flows of the registrant as of, and for, the periods presented
          in this annual report.

Dated: October 29, 2002


                                 /s/ Stephen M. Greenberg
                                 _____________________________________________
                                 Stephen M. Greenberg
                                 Chief Executive Officer


                                       S-3

<PAGE>
                                 Certifications


     I, Norman Klugman, certify that:

     1.   I have reviewed this annual report on Form 10-K of Net2Phone, Inc.;

     2.   Based on my knowledge, this annual report does not contain any
          untrue statement of a material fact or omit to state a material fact
          necessary in order to make the statements made, in light if the
          circumstances under which such statements were made, not misleading
          with respect to the period covered by this annual report; and

     3.   Based on my knowledge, the financial statements, and other financial
          information included in this annual report, fairly present in all
          material respects the financial condition, results of operation and
          cash flows of the registrant as of, and for, the periods presented
          in this annual report.

Dated: October 29, 2002


                                 /s/ Norman Klugman
                                 _____________________________________________
                                 Norman Klugman
                                 Chief Financial Officer


                                       S-4