<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   -----------
                                   FORM 10-K/A
                         (Amendment No. 2 to Form 10-K)

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

                   For the Fiscal Year Ended December 31, 2002

                        Commission File Number: 000-28063

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

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

75 Broad Street, 31st Floor
New York, New York 10004                                     10004
------------------------                                     -----
(Address of principal executive offices)                     (Zip code)
                                                              -----------
                                 -------------

       Registrant's telephone number, including area code: (212) 500-4850

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

         None.

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

                                             Name of Each Exchange on Which the
Title of Each Class                          Securities are Registered
-------------------                          -------------------------
Class A Common Stock, par value              Nasdaq SmallCap Market
$0.001 per share

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

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

         The aggregate market value of the Class A common stock held by
non-affiliates of the Registrant based upon the closing price of the Class A
common stock as reported by The Nasdaq Stock Market on June 28, 2002 was
$5,692,191. Solely for purposes of this calculation, shares beneficially owned
by directors and officers of the Registrant and persons owning 5% or more of the
Registrant's Class A common stock have been excluded, in that such persons may
be deemed to be affiliates of the Registrant. Such exclusion should not be
deemed a determination or admission by the Registrant that such individuals or
entities are, in fact, affiliates of the Registrant.

         The number of shares outstanding of the Registrant's capital stock as
of April 21, 2003 is as follows:

Title of Each Class                          Number of Shares Outstanding
                                             at April 21, 2003
Class A Common Stock, $0.001 par value       29,180,896



<PAGE>


                                EXPLANATORY NOTE

         deltathree, Inc. (the "Company") hereby amends Item 15 of its Annual
Report on Form 10-K for the year ended December 31, 2002 (the "Original Filing")
filed with the Securities and Exchange Commission on March 31, 2002, as amended
on April 1, 2003. Item 15 of Part IV is hereby amended by deleting Item 15 in
its entirety and replacing it with the Item 15 set forth herein. Any Item in the
Original Filing not expressly changed hereby shall be as set forth in the
Original Filing. This report speaks as of the original filing date and, except
as indicated, has not been updated to reflect events occurring subsequent to the
original filing date.


<PAGE>




                                     PART IV

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

         (a)(1)  Financial Statements.

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

         (a)(2) Financial Statement Schedules.

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

         (a)(3)  Exhibits.

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

<TABLE>
<CAPTION>
Exhibit
Number         Description
------         -----------
<S>            <C>
3.1.1*         Form of Restated Certificate of Incorporation of deltathree, Inc.
3.1.2***       Form of Amendment to Restated Certificate of Incorporation of deltathree, Inc.
3.2*           Form of Amended and Restated By-laws of deltathree, Inc.
4.1*           Specimen Certificate of Common Stock.
4.2*           Specimen Certificate of Class B Common Stock.
10.1*          Form of deltathree, Inc. 1999 Stock Incentive Plan.
10.2*          Form of deltathree, Inc. 1999 Employee Stock Purchase Plan.
10.3*          Form of deltathree, Inc. 1999 Performance Incentive Plan.
10.4*          Form of deltathree, Inc. 1999 Directors' Plan.
10.5*          Employment Agreement, effective as of April 1, 1999, between Noam Bardin and deltathree, Inc.
10.6**         Amendment No. 1 to Employment Agreement, effective as of June 1, 2000, between Noam Bardin and deltathree, Inc.
10.7*          Employment Agreement, effective as of April 1, 1999, between Shimmy Zimels and deltathree, Inc.
10.8**         Amendment No. 1 to Employment Agreement, effective as of June 1, 2000, between Shimmy Zimels and deltathree, Inc.
10.9**         Employment Agreement, effective as of August 28, 2000, between Paul White and deltathree, Inc.
10.10#         Amendment No. 2 to Employment Agreement, effective as of March 25, 2002, between Shimmy Zimels and deltathree, Inc.
10.11#         Amendment No. 3 to Employment Agreement, effective as of September 1, 2002, between Shimmy Zimels and deltathree,
               Inc.
10.12#         Amendment No. 1 to Employment Agreement, effective as of  September 1, 2002, between Paul C. White and deltathree,
               Inc.
23.1           Consent of Brightman Almagor & Co.
31.1           Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2           Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32             Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002.
</TABLE>
----------
* Incorporated by reference to the Company's registration statement on Form S-1
(Registration No. 333-86503). ** Incorporated by reference to the Company's
quarterly report on Form 10-Q filed on November 14, 2000. *** Incorporated by
reference to the Company's annual report on Form 10-K/A filed on April 30, 2001.
# Incorporated by reference to the Company's quarterly report on Form 10-Q filed
on November 14, 2002.

         (b) Reports on Form 8-K.

                  None.


<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 Amendment No. 2 to its
Annual Report on Form 10-K/A to be signed on its behalf by the undersigned,
thereunto duly authorized, in New York, New York on December 1, 2003.

                                         DELTATHREE, INC.


                                      By: /s/ Paul C. White
                                         -------------------------------------
                                         Paul C. White, Chief Financial Officer




<PAGE>


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                DELTATHREE, INC.




                                                                           Page
                                                                           ----

Independent Auditors' Report                                                F-2

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

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

Statements of Changes in Stockholders' Equity  for the years ended          F-5
 December 31, 2002, 2001 and 2000

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

Notes to Consolidated Financial Statements                                  F-7


                                      F-1
<PAGE>



                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and stockholders of Deltathree, Inc.

We have audited the accompanying consolidated balance sheets of Deltathree, Inc.
("the Company") and subsidiary as of December 31, 2002 and 2001 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company and
subsidiary as of December 31, 2002 and 2001, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.



Brightman Almagor & Co.
Certified Public Accountants
A member of Deloitte Touche Tohmatsu





Tel Aviv, Israel
March, 10, 2003


                                      F-2
<PAGE>

                                DELTATHREE, INC.
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                  December 31,
                                                               2002          2001
                                                              -------       -------
                                                                ($ in thousands)
ASSETS
Current assets:
<S>                                                           <C>          <C>
 Cash and cash equivalents ................................   $   5,681    $  13,583
 Short-term investments ...................................      15,552       14,192
 Accounts receivable, net (Note 3) ........................         652        1,092
 Prepaid expenses and other current assets (Note 4) .......         760        1,264
                                                              ---------    ---------
    Total current assets ..................................      22,645       30,131
                                                              ---------    ---------
Property and equipment:
 Telecommunications equipment .............................      14,344       14,068
 Furniture, fixtures and other ............................         570          591
 Leasehold improvements ...................................       4,615        4,631
 Computers hardware & software ............................       6,891        6,751
                                                              ---------    ---------
                                                                 26,420       26,041
 Less accumulated depreciation ............................     (16,968)     (10,406)
                                                              ---------    ---------
      Property and equipment, net .........................       9,452       15,635
                                                              ---------    ---------
Deposits ..................................................         100          103
                                                              ---------    ---------
     Total assets .........................................   $  32,197    $  45,869
                                                              =========    =========

LIABILITIES AND STOCKHOLDER'S EQUITY

Current liabilities:
 Accounts payable .........................................   $   2,306    $   3,417
 Deferred revenues ........................................         334          505
 Other current liabilities (Note 5) .......................       2,330        2,835
                                                              ---------    ---------
    Total current liabilities .............................       4,970        6,757
                                                              ---------    ---------
Long-term liabilities:
 Severance pay obligations (Note 6) .......................         113          191
                                                              ---------    ---------
    Total liabilities .....................................       5,083        6,948
                                                              ---------    ---------
Commitments and contingencies (Note 7)

Stockholder's equity: (Note 8)
Share capital:
 Class A Common stock, - par value
$0.001; authorized 200,000,000 shares;
   issued and outstanding: 29,143,206
at December 31, 2001;
   9,465,099 at December 31, 2000 ........................          29           29
 Class B Common stock - par value $0.001; authorized
    200,000,000; issued and outstanding: 19,569,459 at
    December 31, 2000; ....................................        --           --
 Preferred stock, par value $0.001;
authorized 25,000,000 shares;
   issued and outstanding: no shares at ...................        --           --
December 31, 2001 and 2000
 Additional paid-in capital ...............................     166,801      166,801
 Deferred compensation ....................................        --           (270)
 Accumulated deficit ......................................    (139,506)    (127,429)
                                                              ---------    ---------
                                                                 27,324       39,131
Treasury stock at cost: 257,600 shares
of Class A Common Stock as of
  December 31, 2001 and 2000...............................        (210)        (210)
                                                              ---------    ---------
Total stockholder's equity ................................      27,114       38,921
                                                              ---------    ---------
Total liabilities and stockholder's equity.................   $  32,197    $  45,869
                                                              =========    =========

</TABLE>


    The accompanying notes are an integral part of these financial statements


                                      F-3
<PAGE>



                                DELTATHREE, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                             Year ended December 31,
                                                                             -----------------------
                                                                      2 0 0 2           2 0 0 1          2 0 0 0
                                                                      -------           -------          -------
                                                                         (US$ in thousands, except share and
                                                                                    per share data)

Revenues: (Note 13)
<S>                                                                 <C>             <C>             <C>
  Affiliates ....................................................   $       --      $      1,669    $     13,977
  Non-affiliates ................................................         12,929          13,991          16,399
                                                                    ------------      ----------      ----------

Total revenues ..................................................         12,929          15,660          30,376

Costs and operating expenses:
 Cost  of revenues,  (exclusive of $18,934 an  13,486   24,932
depreciation include in a separate line below, respectively)
 Research and development expenses, (Note 9) ....................          3,435           5,648           6,625
 Selling and marketing expenses .................................          3,910           7,800          20,548
 General and administrative expenses (exclusive of
  non-cash compensation expense shown below) ....................          2,158           6,982           6,694
 Non-cash compensation expense ..................................            270             825           6,331
 Depreciation and amortization ..................................          6,606           8,996           7,919
 Write-down of fixed assets (Note 10) ...........................           --             1,003            --
 Expenses due to cancellation of agreement with
 a supplier (including non-cash compensation of $1,493) (Note 8b)           --             3,628            --
 Impairment of goodwill (Note 11) ...............................           --             4,151           8,905

Total costs and operating expenses ..............................         25,313          52,519          81,954
                                                                    ------------      ----------      ----------


Loss from operations ............................................        (12,384)        (36,859)        (51,578)

Interest income, net ............................................            448           1,677           3,632
                                                                    ------------      ----------      ----------

Loss before income taxes ........................................        (11,936)        (35,182)        (47,946)

Income taxes (Note 12) ..........................................            141             552             311
                                                                    ------------      ----------      ----------

Net loss ........................................................   $    (12,077)       ($35,734)      ($ 48,257)
                                                                    ============      ==========      ==========

Net loss per share -
 basic and diluted (in US$) .....................................   $      (0.42)        ( $1.23)        ($ 1.67)
                                                                    ============      ==========      ==========

Weighted average number of shares outstanding -
 basic and diluted (number of shares) ...........................     28,888,367      29,035,319      28,832,708
                                                                    ============      ==========      ==========

</TABLE>

    The accompanying notes are an integral part of these financial statements

                                      F-4
<PAGE>





                                DELTATHREE, INC.
                  STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
                      (US$ in thousands, except share data)

<TABLE>
                                DELTATHREE, INC
                 STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
                      ($ in thousands, except share data)
<S>                   <C>       <C>        <C>          <C>       <C>       <C>         <C>       <C>        <C>

                                                                                                            Total
                                                                                                            Stock-
                                                        Addit                                               holders
                          Class A          Class B      ional     Receivable   Deferred  Treasury  Accum-   Equity
                          Common           Common       Paid-in   For Capital  Compen-   Stock    ulated   (defic-
                          Stock            Stock        Capital   Deficit      sation   (at cost) deficit   iency)
                    Shares     Amount  Shares    Amount
                    ---------  ------ ---------- ------  --------  -----------  --------  --------  --------  --------
Balance at          8,918,132   $9   19,569,459   $20   157,891   $ (1,232)    (10,670)  $     -  $(43,43)  $102,580
January 1, 2000

Issuance of common
stock in purchase of
subsidiary            227,738                             10,500

Issuance expenses                                           (272)                                               (272)
Cancellation of                                           (2,751)                 2,751                            -
options

Exercise of           319,229                              1,365        232                                    1,597
employee options
Offset
receivable against
debt  to Yahoo! for
services rendered of                                                  1,000                                    1,000
Amortization of
deferred
  compensation                                                                    5,331                        5,331
expense
Loss for the year                                                                                  (48,257)  (48,257)
                    ---------  ------ ---------- ------  -------  -----------  --------  --------  --------  --------
Balance at          9,465,099     9   19,569,459    20   166,733          -      (2,588)       -   (91,695    72,479
December 31, 2000

Exercise of
employee options      108,648                                 68

Purchase of          (257,600)                                                              (210)               (210)
treasury stock
Cancellation of
class B shares      19,569,459   20  (19,569,459)  (20)
Amortization of
deferred compensation
expense                                                                           2,318                        2,318
Loss for the year                                                                                  (35,734)  (35,734)
                    ---------  ------  ----------  ------  -------  -----------  --------  --------  --------  --------
Balance at
December 31, 2001   28,885,606   29             -     -  166,801           -       (270)    (210) (127,429)   38,921
Exercise of             16,566   -*                            -                                                   -
employee options
Amortization of
deferred
  compensation                                                                      270                           270
expense
Loss for the year                                                                                   (12,077)   (12,077)
                    ---------  ------  ----------  ------  -------  -----------  --------  --------  --------  --------
Balance at          28,902,172      29          -   $  - 166,801      $    -       (270)      (210)(139,506)    27,144
December 31, 2002   ========== ======  ==========  ===== =========  ===========  ========  ======= ==========  ========

* - Less than $ 1 thousand.

                                      F-5
    The accompanying notes are an integral part of these financial statements

</TABLE>


<PAGE>





                                DELTATHREE, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                           Year ended December 31,
                                                                           -----------------------
                                                                   2 0 0 2          2 0 0 1           2 0 0 0
                                                                   -------          -------           -------
                                                                               (US$ in thousands)

Cash flows from operating activities:
<S>                                                               <C>              <C>              <C>
Net loss                                                          $ (12,077)       ( $35,734)       ( $ 48,257)
Adjustments to reconcile net loss to net cash used
  in operating activities:
Depreciation and amortization                                         6,606            8,996             7,919
Write-down of fixed assets                                               --            1,003                --
Impairment of goodwill                                                   --            4,151             8,905
Amortization of deferred compensation                                   270            2,318             6,331
Capital loss (gain), net                                                (56)               1                11
Increase (decrease) in liability for severance pay, net                 (78)             (22)              (39)
Provision for losses on accounts receivable                              81            1,104               199
Changes in assets and liabilities:
Decrease (increase) in accounts receivable                              359            1,272            (2,541)
Decrease (increase) in other current assets and
  due from affiliates                                                   504              928              (168)
Increase (decrease) in accounts payable                                (975)          (3,053)           (2,656)
Decrease in deferred revenues                                          (171)            (254)             (287)
Increase (decrease) in current liabilities and due to affiliates       (667)          (3,965)            1,860
                                                                  ------------     ----------       -----------
                                                                      5,873           13,028            24,846

                                                                  ------------     ----------       -----------
Net cash used in operating activities                                (6,204)         (22,703)          (23,411)
                                                                  ------------     ----------       -----------

Cash flows from investing activities:
Purchase of property and equipment                                     (403)          (1,558)          (13,585)
Proceeds from sale of property and equipment                             62              467                54
Proceeds from sale of investment                                         --               --               150
Increase (decrease) in deposits                                           3              (30)             (385)

                                                                  ------------     ----------       -----------
Net cash used in investing activities                                  (338)          (1,121)          (12,996)
                                                                  ------------     ----------       -----------

Cash flows from financing activities:
Decrease (increase) in short-term investments                        (1,360)         (16,692)          (19,266)
Repayment) of short-term debt from affiliates                            --               --           (14,752)
Expenses relating to share issuance in 1999                              --               --              (272)
Purchase of treasury stock                                               --             (210)               --
Proceeds from exercise of employee options                               --               68             1,597

                                                                  ------------     ----------       -----------
Net cash provided by (used in) financing activities                  (1,360)         (16,550)          (32,693)
                                                                  ------------     ----------       -----------

Increase (decrease) in cash and cash equivalents                     (7,902)          (7,274)          (69,100)
Cash and cash equivalents at beginning of year                       13,583           20,857            89,957

                                                                  ------------     ----------       -----------
Cash and cash equivalents at end of year                          $   5,681        $  13,583        $   20,857
                                                                  ============     ==========       ===========
Supplemental disclosures of
cash flow information:
Cash paid for:
  Interest                                                        $      --        $      --        $    1,332
  Taxes                                                           $     236        $     552        $      311
Supplemental schedule of
non cash investing and financing activities:
  Acquisition of fixed assets on credit                           $     194        $      --                --
  Assets purchased in exchange for a receivable                   $      --        $      --        $    2,500
  Assets purchased in exchange for shares (See Note 13)           $      --        $      --        $   10,500

</TABLE>

    The accompanying notes are an integral part of these financial statements

                                      F-6

<PAGE>



                                DELTATHREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1     -  The Company

              Deltathree, Inc. (the "Company"), a Delaware corporation, is a
              global provider of integrated Voice over Internet Protocol (VoIP)
              telephony services. The Company was founded in 1996 to capitalize
              on the growth of the Internet as a communication tool by
              commercially offering Internet Protocol (IP) telephony services.
              IP telephony is the real time transmission of voice communications
              in the form of digitized "packets" of information over the public
              Internet or a private network, similar to the way in which e-mail
              and other data is transmitted. The Company's business currently
              includes the transmission of voice and data traffic for
              communications carriers, the provision of enhanced Web-based and
              other communications services to individual consumers and the
              provision of a total "Hosted Communication Solution" that enables
              corporate customers and service providers to offer private label
              telecommunications to their customer bases

              Prior to 1999, the Company's business primarily consisted of
              carrying and transmitting traffic for communications carriers over
              its network. Beginning in 1999, the Company began to diversify its
              offering by layering enhanced IP telephony services over its
              privately managed network. These enhanced services were targeted
              at consumers and were primarily accessible through a
              consumer-oriented Web site. During 2000, the Company began
              offering services on a co-branded or private-label basis to
              service providers and other businesses to assist them in
              diversifying their product offerings to their customer bases.

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

              Prior to its November 1999 initial public offering, the Company
              was a wholly owned subsidiary of RSL Communications Ltd, a
              multinational telecommunications company. RSL Communications Ltd.
              and its subsidiaries and affiliates (excluding the Company) are
              collectively referred to herein as "RSL COM" or "affiliates."
              Approximately 0%, 11% and 46 % of the Company's revenues for the
              year ended December 31, 2002, 2001 and 2000, respectively, were
              derived from transactions with RSL COM.

              Since the Company's initial public offering in November 1999, RSL
              COM owned 100% of the outstanding Class B common stock (which
              carried ten votes per share), which represented approximately
              95.5% of the combined voting power of all the Company's
              outstanding capital stock and approximately 67.4% of the economic
              interest in the Company. In March 2001, RSL COM commenced
              insolvency proceedings in Bermuda. On June 28, 2001, RSL COM,
              entered into a share purchase agreement with Atarey Hasharon
              Chevra Lepituach Vehashkaot Benadlan (1991) Ltd., an Israeli
              company ("Atarey") to sell to Atarey all of the Class B Common
              Stock of the Company owned by RSL COM. On June 29, 2001, the sale
              was consummated, and all of RSL COM's shares of Class B Common
              Stock, were automatically converted into shares of Class A Common
              Stock, which carry one vote per share. As a result of the sales
              transaction, Atarey became the majority stockholder of the
              Company, owning approximately 72% of the outstanding Class A
              Common Stock of the Company. Simultaneously with the completion of
              the transaction on June 29, 2001, all of the contracts and
              inter-company agreements by and between RSL COM (and all of its
              subsidiaries) and the Company were terminated. At the same time,
              the Company severed its reliance on RSL COM as its primary
              pan-European wholesale telecommunications carrier, and shifted to
              other service providers.


Note 2     -  Summary of significant accounting policies

              a. Principles of consolidation and basis of presentation

                     The consolidated financial statements include the accounts
                     of Deltathree, Inc. and its subsidiary. All significant
                     intercompany accounts and transactions have been eliminated
                     in consolidation.

              b. Use of estimates

                     The preparation of financial statements in conformity with
                     generally accepted accounting principles requires
                     management to make estimates and assumptions, primarily for
                     allowances for doubtful accounts receivable and the useful
                     lives of fixed assets and intangible assets, that affect
                     the reported amounts of assets and liabilities and
                     disclosure of contingent assets and liabilities at the date
                     of the financial statements, and the reported amounts of

                                      F-7
<PAGE>

                                DELTATHREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2     -  Summary of significant accounting policies (Cont.)
------     -  --------------------------------------------------

                     revenues and expenses during the reporting period. Actual
                     results could differ from those estimates.
 Note 2-      Summary of significant accounting policies (Cont.)

              c. Cash and cash equivalents

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

              d. Revenue recognition and deferred revenue

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

              e. Cost of revenues

                     Cost of revenues is comprised primarily of access,
                     transmission and termination costs based on actual minutes
                     in addition to monthly circuit lease costs.
              f. Research and development expenses

                     Research and development expenses are expensed as incurred.

              g.     Advertising expenses

                     Advertising expenses are expensed as incurred. For the
                     years ended December 31, 2002, 2001 and 2000, advertising
                     expenses were approximately $ 20,000, $ 7,000 and $
                     170,000, respectively.

              h. Allowance for doubtful accounts

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

              i. Property and equipment and related depreciation

                     Property and equipment are stated at cost. Depreciation is
                     calculated using the straight-line method over the
                     estimated useful lives of the depreciable assets, which
                     range from two to five years. Improvements are capitalized,
                     while repair and maintenance costs are charged to
                     operations as incurred.

              j. Impairment of long-lived assets

                     On January 1, 2002, the Company adopted SFAS No. 144,
                     "Accounting for the Impairment or Disposal of Long-Lived
                     Assets," (SFAS 144) which requires that long-lived assets,
                     to be held and used by an entity, be reviewed for
                     impairment and, if necessary, written down to the estimated
                     fair values, whenever events or changes in circumstances
                     indicate that the carrying amount of the assets may not be
                     recoverable through undiscounted future cash flows. The
                     adoption of SFAS 144 did not have a material effect on the
                     Company's consolidated financial position or results of
                     operations.
                     At each reporting date, or more frequently, as
                     circumstances dictate, the Company assesses the
                     recoverability of its long-lived assets by comparing the
                     undiscounted cash flows associated with such assets against
                     their respective carrying values. An impairment charge, if
                     any, is recorded based on the carrying value over the fair
                     value of the assets.

                                      F-8

<PAGE>



                                DELTATHREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2     -  Summary of significant accounting policies (Cont.)
------     -  --------------------------------------------------

              k.     Income taxes

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

              l. Net loss per share

                     Basic and diluted net loss per share have been computed in
                     accordance with SFAS No. 128, "Earnings Per Share", using
                     the weighted average number of common stock outstanding.
                     Diluted earnings per share give effect to all potential
                     dilutive issuances of ordinary shares that were outstanding
                     during the period. A total of - 75,000, 168,212 and 832,600
                     incremental shares were excluded from the calculation of
                     diluted net loss per ordinary share for 2002, 2001 and 2000
                     respectively.

              m. Concentration of credit risk

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

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

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

              n. Fair value of financial instruments

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

              o.     Derivatives

                     The Company adopted Statement of Financial Accounting
                     Standard (SFAS) No. 133, "Accounting for Derivative
                     Instruments and Hedging Activities," as amended, at the
                     beginning of fiscal year 2001. The standard requires the
                     Company to recognize all derivatives on the balance sheet
                     at fair value. Derivatives that are not hedges must be
                     adjusted to fair value through the statement of operations.
                     If the derivative is a hedge, depending on the nature of
                     the hedge, changes in the fair value of derivatives will
                     either be offset against the change in fair value of the
                     hedged assets, liabilities or firm commitments through
                     earnings, or recognized in other comprehensive income
                     (loss) until the hedged item is recognized in earnings. The
                     ineffective portion of a derivative's change in fair value
                     will be immediately recognized in earnings. The Company use
                     of derivatives is immaterial.

                                      F-9

<PAGE>




                                DELTATHREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2     -  Summary of significant accounting policies (Cont.)
------     -  --------------------------------------------------

              p. Effects of recently issued accounting standards

                     In April 2002, the FASB issued SFAS No. 145, "Rescission of
                     FASB Statements SFAS Nos. 4, 44, and 64, Amendment of FASB
                     Statement No. 13 and Technical Corrections." SFAS No. 145
                     will impact how companies account for sale-leaseback
                     transactions and how gains or losses on debt
                     extinguishments are presented in financial statements. SFAS
                     No. 145 is effective for fiscal years beginning after May
                     15, 2002, early application is encouraged. The application
                     of the requirements of SFAS No. 145 will not have a
                     material impact on the Company's financial position or
                     results of operations.

                     In July 2002, the FASB issued SFAS No.146, "Accounting for
                     Costs Associated with Exit or Disposal Activities." SFAS
                     No. 146 requires that a liability for costs associated with
                     an exit or disposal activity be recognized and measured
                     initially at fair value only when the liability is
                     incurred. SFAS No. 146 is effective for exit or disposal
                     activities that are initiated after December 31, 2002. The
                     application of the requirements of SFAS No. 146 will not
                     have a material impact on the Company's financial position
                     or results of operations.

                     In November 2002, the FASB issued Interpretation No. 45
                     (FIN 45), "Guarantor's Accounting and Disclosure
                     Requirements for Guarantees, Including Indirect Guarantees
                     of Indebtedness of Others", which clarifies disclosure and
                     recognition/measurement requirements related to certain
                     guarantees. The disclosure requirements are effective for
                     financial statements issued after December 15, 2002 and the
                     recognition/measurement requirements are effective on a
                     prospective basis for guarantees issued or modified after
                     December 31, 2002. The application of the requirements of
                     FIN 45 will not have a material impact on the Company's
                     financial position or results of operations.

                     In December 2002, the FASB issued SFAS No. 148, "Accounting
                     for Stock Based Compensation--Transition and Disclosure--as
                     Amendment to FAS 123." SFAS 148 provides two additional
                     transition methods for entities that adopt the preferable
                     method of accounting for stock based compensation. Further,
                     the statement requires disclosure of comparable information
                     for all companies regardless of whether, when, or how an
                     entity adopts the preferable, fair value based method of
                     accounting. These disclosures are now required for interim
                     periods in addition to the traditional annual disclosure.
                     The amendments to SFAS No. 123, which provides for
                     additional transition methods, are effective for periods
                     beginning after December 15, 2002, although earlier
                     application is permitted. The amendments to the disclosure
                     requirements are required for financial reports containing
                     condensed financial statements for interim periods
                     beginning after December 15, 2002.

              q.     Stock-based compensation

                     The Company accounts for employee stock-based compensation
                     in accordance with Accounting Principles Board Opinion No.
                     25, "Accounting for Stock Issued to Employees" and in
                     accordance with FASB Interpretation No. 44. Pursuant to
                     these accounting pronouncements, the Group records
                     compensation for stock options granted to employees over
                     the vesting period of the options based on the difference,
                     if any, between the exercise price of the options and the
                     market price of the underlying shares at that date.
                     Deferred compensation is amortized to compensation expense
                     over the vesting period of the options. See below a pro
                     forma disclosure required in accordance with SFAS No. 123,
                     "Accounting for Stock-Based Compensation", as amended by
                     SFAS No. 148.


                                      F-10
<PAGE>



                                DELTATHREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2     -  Summary of significant accounting policies (Cont.)
------     -  --------------------------------------------------

p.       Effects of recently issued accounting standards (Cont.)

                     If compensation cost for the Company's stock options and
                     restricted units had been determined based on fair value at
                     the grant date in accordance with SFAS No. 123 provisions
                     as amended by SFAS No. 148, the Company's pro forma net
                     loss and pro forma basic and diluted net loss per share
                     would have been as follows:

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                              ------------
                                                                               2 0 0 2          2 0 0 1           2 0 0 0
                                                                               -------          -------           -------
                                                                                           (US$ in thousands)
                     Net loss:
<S>                                                                             <C>               <C>             <C>
                     As reported                                                $ (12,077)        $ (35,734)      $  (48,257)
                     Pro forma                                                  $ (13,909)        $ (38,343)      $  (34,357)

                     Net loss per share - basic and diluted:
                     As reported                                                $   (0.42)        $   (1.23)       $   (1.67)
                     Pro forma                                                  $   (0.48)        $   (1.35)       $   (1.75)
</TABLE>

                     For the purpose of presenting pro forma information
                     required under SFAS 123, the fair value option grant has
                     been estimated on the date of grant using the minimum value
                     method for grants through the period of November 22, 1999
                     (the date of the Company's initial public offering) and the
                     Black-Scholes option pricing model for grants made after
                     the Company became a public entity. The following
                     assumptions were used for the years 2002, 2001 and 2000:
                     dividend yield of 0.00% for all periods; risk-free interest
                     rate of 4.8%, 6% and 6% respectively; an expected life of
                     3-years for all periods; a volatility rate of 150%, 70% and
                     70% respectively.

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

q.       Reclassifications

                     Certain previously reported amounts have been reclassified
to conform with the 2001 presentation.

Note 3     -  Accounts receivable, net

              Accounts receivable are stated net of an allowance for doubtful
              accounts of $81,000 and 1,356,000 at December 31, 2002 and 2001,
              respectively.


Note 4     -  Prepaid expenses and other current assets

              Prepaid expenses and other current assets consist of the
following:

                                                      December 31,
                                                   -----------------
                                                   2 0 0 2   2 0 0 1
                                                   -------   -------
                                                   (US$ in thousands)


Government of Israel (VAT refund and other) .....   $   26   $   57
Deposits with suppliers .........................      378      380
Prepaid expenses ................................      350      714
Other ...........................................        6      113
                                                   -------  ---------
  Total prepaid expenses and other current assets   $  760   $1,264
                                                   =======  =========

                                      F-11
<PAGE>
                                DELTATHREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 5     -  Other current liabilities

              Other current liabilities consist of the following:

                                                    December 31,
                                                 -----------------
                                                 2 0 0 2   2 0 0 1
                                                 -------   -------
                                                 (US$ in thousands)

              Accrued expenses ................   $  977   $1,143
              Employees and related expenses ..    1,127    1,582
              Other ...........................      226      110
                                                  ------   ------
              Total other current liabilities     $2,330   $2,835
                                                  ======   ======


Note 6     -  Severance pay obligations

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

              Expenses relating to employee termination benefits were $ 5,000, $
              128,000 and $ 101,000 for the years ended December 31, 2002, 2001
              and 2000, respectively.

              The aggregate value of the insurance policies as of December 31,
              2002 and 2001 was $408,000 and $366,000 respectively.



Note 7     -  Commitments and contingencies



              a.     Lease commitments

                     The Company leases offices in New York City for the
                     headquarters of its United States operation with an initial
                     cost of approximately $650,000, increasing annually to
                     $870,000 during the final year of the lease. The lease
                     extends until July 2010 with an option to extend the lease
                     for an additional five years.

                     In addition, the Company leases offices in Israel at an
                     annual cost of $ 292,000. The lease term extends until
                     February 2003, with an option to extend the lease for an
                     additional five years. In June 2002 the Company signed an
                     extension agreement for additional three years, commencing
                     February 2003, at an annual cost of $185,000.


                                      F-12
<PAGE>

                                DELTATHREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7-       Commitments and contingencies (Cont.)



              b.     Legal proceedings

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

                     The Company, as well as certain of its former officers and
                     directors, has been named as a defendant in a number of
                     purported securities class actions in Federal District
                     Court for the Southern District of New York, arising out of
                     the Company's initial public offering in November 1999 (the
                     "IPO"). Various underwriters of the IPO also are named as
                     defendants in the actions. The complaints allege, among
                     other things, that the registration statement and
                     prospectus filed with the Securities and Exchange
                     Commission for purposes of the IPO were false and
                     misleading because they failed to disclose that the
                     underwriters allegedly (i) solicited and received
                     commissions from certain investors in exchange for
                     allocating to them shares of the Company stock in
                     connection with the IPO and (ii) entered into agreements
                     with their customers to allocate such stock to those
                     customers in exchange for the customers agreeing to
                     purchase additional Company shares in the aftermarket at
                     predetermined prices. On August 8, 2001, the court ordered
                     that these actions, along with hundreds of IPO allocation
                     cases against other issuers, be transferred to Judge
                     Scheindlin for coordinated pre-trial proceedings. At a
                     status conference held on September 7, 2001, Judge
                     Scheindlin adjourned all defendants' time to respond to the
                     complaints until further order of the Court. These cases
                     remain at a preliminary stage and no discovery proceedings
                     have taken place. The Company believes that the claims
                     asserted against it in these cases are without merit and
                     intends to defend vigorously against them.

              c. Other marketing and cooperation agreements

                     The Company has entered into marketing and cooperation
                     agreements with various other companies that maintain sites
                     on the Web. Pursuant to certain of these agreements, the
                     Company is obligated to pay commissions based on revenues
                     derived from such Web links.
Note 7-       Commitments and contingencies (Cont.)

                     On February 12, 2003 the Company announced that four
                     lawsuits had been filed against the Company, their officers
                     and directors, and their majority stockholder, Atarey
                     Hasharon Chevra Lepituach Vehashkaot Benadlan (1991) Ltd.
                     ("Atarey"), in connection with the proposal by Atarey to
                     purchase all of the Company's outstanding shares of common
                     stock not held by Atarey and its affiliates. On February 6,
                     2003, the Company issued a press release in connection with
                     the proposed transaction. The lawsuits purport to be class
                     actions on behalf of the Company's public stockholders. The
                     plaintiffs in these actions have asserted a variety of
                     claims, including allegations that Atarey's proposed tender
                     offer price for the Company's publicly held shares is
                     unfair and grossly inadequate; and that the Company's
                     officers and directors have breached their fiduciary duties
                     to the public stockholders. Each of the lawsuits has been
                     filed in the Delaware Court of Chancery in and for New
                     Castle County. The Company does not believe that these
                     lawsuits state valid claims against the Company or any of
                     the Company's officers or directors.



                                      F-13

<PAGE>

                                DELTATHREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 8     -  Stockholders' equity

              a.     Share capital

                     Following the Company's initial public offering, effective
                     December 1999, the Company's Class A common stock is listed
                     on the NASDAQ National Market System. . Holders of the
                     Class A common stock are entitled to one vote per share.


                     The Company also issued Class B shares to RSL COM, (which
                     carried ten votes per share). Each share of Class B common
                     stock was convertible into one share of Class A common
                     stock at any time. In June 2001 Atarey acquired the
                     controlling interest in the Company. As part of the
                     transaction all Class B shares were converted to Class A
                     shares (see Note 1).


              b.     CNET transaction

                     On October 20, 1999, the Company issued to CNET
                     Investments, Inc. ("CNET") 1,085,943 shares of common stock
                     and a warrant to purchase 466,028 shares of Class A common
                     stock at an exercise price of $ 19.31 per share, or
                     approximately $ 11.0 million in the aggregate, which was
                     received in cash by the Company upon the issuance of the
                     shares. The Company recorded approximately $ 2.7 million of
                     deferred compensation expense in 1999 related to the
                     issuance of the shares representing the difference between
                     each of the purchase price of the Class A common stock as
                     compared to the initial public offering price of the Class
                     A common stock and the issuance of the warrant (using the
                     Black-Scholes option pricing model for determining the fair
                     value of the warrant). Amortization of the deferred
                     compensation for the year ended December 31, 2000 amounted
                     to $ 1,062,000. On July 6, 2001, CNET entered into a share
                     purchase agreement with Atarey (the "CNET Purchase
                     Agreement"). Under the CNET Purchase Agreement, among other
                     things, Atarey purchased all of the shares owned by CNET in
                     accordance with the "tag-along" rights granted to CNET
                     pursuant to their purchase. In addition, the Company
                     entered into a binding development and promotion agreement
                     with CNET in September 1999, which was amended effective
                     July 1, 2000, whereby CNET provided various promotions to
                     the Company to assist it in promoting its PC-to-Phone
                     product and related services. In consideration for these
                     services, the Company was obligated to pay CNET a total of
                     $11,000,000.

                     In May 2001 the agreement with CNET was terminated. The
                     Company incurred a one-time expense of approximately
                     $3,628,000 resulting from the cancellation of the
                     agreement. Expenses included a payment to terminate the
                     contract of $1,750,000, the acceleration of the
                     amortization of compensation charges deferred in previous
                     years of $1,493,000 and other related expenses.

              c.     Stock Options

                     In November 1999, the Company adopted the 1999 Stock
                     Incentive Plan ("the Plan"). Under the Plan, 4,000,000
                     shares of Class A were reserved for issuance upon exercise
                     of awards to be granted. In addition, the Company's
                     compensation committee may grant both incentive and
                     non-incentive stock options for shares of Class A common
                     stock of the Company. The options generally have a term of
                     seven years and become exercisable in three equal
                     installments commencing on the first anniversary of the
                     date of the grant. The purchase price per share payable
                     upon exercise of an option is no less than the fair market
                     value of the share at the date of grant. As of December 31,
                     2002, options to purchase 3,449,520 shares of Class A were
                     outstanding with exercise prices ranging between $ 0.004
                     and $15.00 per share.


                                      F-14
<PAGE>

                                DELTATHREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 8     -  Stockholders' equity (contd.)

       d.     A summary of the status of the Company's stock option plans as of
              December 31, 2002 and 2001 and changes during the years then
              ended, is presented below:

<TABLE>
<CAPTION>
                                         December 31, 2002            December 31, 2001             December 31, 2000
                                         -----------------            -----------------             -----------------
                                                     Weighted                     Weighted                      Weighted
                                                     average                       average                       average
                                                     Exercise                     Exercise                      Exercise
                                       Shares         price          Shares         price         Shares          price

<S>                                    <C>                 <C>       <C>         <C>            <C>               <C>
Options outstanding at
    beginning of year                  2,591,205           4.24      1,626,843   8.72           1,952,537         $  7.54
Granted during the year                1,335,348           0.98      1,978,416   3.68             475,000            7.85
Exercised during the year                 16,566          0.004         50,961   0.004            319,229            4.10
Forfeited during the year                460,467           5.20        963,093   8.77             481,465            6.54
                                      -----------    -----------    ----------- ---------     -------------  --------------
Outstanding at end of year             3,449,520           2.87      2,591,205   4.24           1,626,843         $  8.72
                                      ===========    ===========    ==========  =========     =============  ==============
Weighted average fair value
 of options granted during the
    year                                $  0.95                      $   2.39                     $  4.00
</TABLE>


              e.     Employee Stock Purchase Plan

                     During 1999, the Board of Directors approved an Employee
                     Stock Purchase Plan (the "ESPP"), effective beginning
                     November 23, 1999. Under the ESPP, the maximum number of
                     shares to be made available under the ESPP is 5% of the
                     number of outstanding shares.

                     All full-time employees who have been employed by the
                     Company for at least one calendar quarter are eligible to
                     participate in the ESPP. Employee stock purchases are made
                     through payroll deductions. Under the terms of the ESPP,
                     employees may not deduct an amount that exceeds $25,000 in
                     total value of stock in any one year. The purchase price of
                     the stock will be the lower of 85% of the fair market value
                     on the first trading day of the offering period or the last
                     trading day of the purchase period. The ESPP shall
                     terminate upon the first to occur of (i) December 31, 2009
                     or (ii) the date on which the ESPP is terminated by the
                     Board of Directors. During 2002, there were no purchases of
                     shares under the ESPP.

Note 9     -  Research and development expenses

                     Research and development expenses consist of the following:
<TABLE>
<CAPTION>

                                                                                      Year ended December 31,
                                                                                      -----------------------
                                                                             2 0 0 2          2 0 0 1          2 0 0 0
                                                                             -------          -------          -------
                                                                                       (US$ in thousands)
<S>                                                                          <C>             <C>               <C>
                     Salaries and related expenses                           $ 2,462         $ 3,255           $ 5,388
                     Consulting and advisory fees                                 78             655                 -
                     Travel                                                       41             126               344
                     Other                                                       854           1,612               893

                       Total research and development expenses               $ 3,435         $ 5,648           $ 6,625

</TABLE>


                                      F-16

<PAGE>

                                DELTATHREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 10    -  Write-down of fixed assets

              In 2001 the Company incurred a one-time expense of approximately
              $1,003,000 from the write down of equipment that was purchased in
              previous periods to support contracts and inter-company agreements
              between RSL COM and the Company that were cancelled at the time of
              RSL COM's sale of their majority ownership interest in the Company
              to Atarey in accordance with FAS 121 (See Note1).

Note 11    -  Impairment of goodwill

              During 2001, the telecommunications industries experienced
              significant and rapid contraction, which was accompanied by a
              decrease in revenues. In the fourth quarter of fiscal 2001 the
              Company assessed the value and future benefit of its goodwill
              pursuant to Accounting Principles Board Opinion No. 17, Intangible
              Assets ("APB 17") and consequently made a full write-off of the
              goodwill in the amount of $4,151,000.

              In February 2000, the Company issued 227,738 shares of Class A
              common stock, at an average market price of $46 per share,
              amounting to $ 10,500,000 in the aggregate to acquire all the
              outstanding shares of YourDay.com, Inc.
              In November 2000, the Company decided to deemphasize its consumer
              business, and communications portal, and focus on generating
              revenues primarily through sales of its Hosted Communications
              Solution. As a result, the Yourday.com technology was not
              incorporated into the Company's offerings. Accordingly, the
              Company recorded a full write-off of the Yourday.com technology in
              the amount of $ 8,905,000.

Note 12    -  Income taxes

              a. Tax loss carryforwards

              As of December 31, 2002, the Company had net operating loss
              carryforwards generated in the U.S. and Israel of approximately
              $119,143,000 and $ 7,511,000, respectively. The Company's U.S. net
              operating loss carryforwards will expire at various dates
              beginning in 2011 if not utilized. In addition, a portion of those
              net operating loss carryforwards could be subject to limitation
              due to changes in ownership of the Company. The Company's net
              operating losses generated in Israel may be carried forward
              indefinitely.

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

<TABLE>
<CAPTION>
                                                                     December 31,
                                                                     ------------
                                                                2 0 0 2        2 0 0 1
                                                               ---------      -------
                                                                   (US$ in thousands)



<S>                                                            <C>            <C>
              Net operating losses carryforwards               $   45,595     $  41,245
              Less valuation allowance                            (45,595)      (41,245)
                                                               ----------     ---------

              Net deferred tax assets                          $       --     $      --
                                                               ==========     =========
</TABLE>

              As of December 31, 2002 and 2001 a valuation allowance of
              $45,595,000 and $41,245,000 respectively, is provided as the
              realization of the deferred tax assets are not assured.

c.       Loss before income taxes:
<TABLE>
<CAPTION>
                                                 Year ended December 31,
                                                 -----------------------
                                        2 0 0 2          2 0 0 1       2 0 0 0
                                        -------          -------       -------
                                                    (US$ in thousands)

<S>                                    <C>              <C>             <C>
                  Domestic             $ 9,820          $ 26,330        $45,087
                  Foreign                2,116             8,852          2,859
                                        11,936            35,182        $47,946
                                       =======          ========        =======
</TABLE>

                                      F-17
<PAGE>


                                DELTATHREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 13    -  Segment reporting, geographical information and major customers
-------       ---------------------------------------------------------------

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

              The following table summarizes the Company's revenues and
              long-lived assets by country. Revenue is attributed to geographic
              region based on the location of the customers. Long-lived assets
              are attributed to geographic region based on the country in which
              the assets are located.


                                            Year ended December 31,
                                         ----------------------------
                                         2 0 0 2    2 0 0 1   2 0 0 0
                                         -------    -------   -------
                                             (US$ in thousands)


        United States ................   $ 5,077   $ 9,123   $20,862
        Europe .......................       984     2,654     5,289
        Argentina ....................       903      --        --
        Far east .....................     1,109     1,413     3,162
        Middle East ..................     3,041     1,457       585
        Other ........................     1,815     1,013       478
                                         -------   -------   -------
        Total revenues ...............   $12,929   $15,660   $30,376
        Revenues from major customers:
                                         -------   -------   -------
        Affiliates ...................   $  --     $ 1,669   $13,977
                                         =======   =======   =======

                                       December 31,
                                    -----------------
                                    2 0 0 2   2 0 0 1
                                    -------   -------
                                    (US$ in thousands)

        Long-lived assets:
        United States ...........   $ 7,054   $11,864
        Israel ..................     1,554     1,797
        Europe ..................       690     1,426
        Other ...................       154       548
                                    -------   -------
          Total long-lived assets   $ 9,452   $15,635
                                    =======   =======


                                      F-18