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

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

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

                        COMMISSION FILE NUMBER: 000-28063

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

DELAWARE                                                     13-4006766
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(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)

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       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,                        Nasdaq SmallCap Market
par value $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. |_|

      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 30, 2003 was
$5,377,878. Solely for purposes of this calculation, shares beneficially owned
by directors and officers of the Registrant and persons owning 5% or more of the
Registrant's Class A common stock have been excluded, in that such persons may
be deemed to be affiliates of the Registrant. Such exclusion should not be
deemed a determination or admission by the Registrant that such individuals or
entities are, in fact, affiliates of the Registrant.

      The number of shares outstanding of the Registrant's capital stock as of
March 26, 2004 is as follows:

                                                    NUMBER OF SHARES OUTSTANDING
TITLE OF EACH CLASS                                 AT MARCH 26, 2004
-------------------                                 -----------------

Class A Common Stock, $0.001 par value              29,574,824


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                       DOCUMENTS INCORPORATED BY REFERENCE

      The following documents (or parts thereof) are incorporated by reference
into the following parts of this Form 10-K: Certain information required in Part
III of this Annual Report on Form 10-K is incorporated from the Registrant's
Proxy Statement for the 2004 Annual Meeting of Stockholders to be held in 2004.


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<TABLE>
<CAPTION>

                                DELTATHREE, INC.
                         2003 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS

                                                                                                                            PAGE
                                                                                                                            ----
                                     PART I
<S>           <C>                                                                                                            <C>
ITEM 1.        Business.....................................................................................................  4
ITEM 2.        Properties................................................................................................... 15
ITEM 3.        Legal Proceedings............................................................................................ 15
ITEM 4.        Submission of Matters to a Vote of Security Holders.......................................................... 15

                                     PART II
ITEM 5.        Market for Registrant's Common Equity and Related Stockholder Matters........................................ 17
ITEM 6.        Selected Financial Data...................................................................................... 19
ITEM 7.        Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 20
ITEM 7A.       Quantitative and Qualitative Disclosures About Market Risk................................................... 34
ITEM 8.        Financial Statements and Supplementary Data.................................................................. 35
ITEM 9.        Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................... 35
ITEM 9A        Controls and Procedures...................................................................................... 35

                                    PART III
ITEM 10.       Directors and Executive Officers of the Registrant........................................................... 36
ITEM 11.       Executive Compensation....................................................................................... 36
ITEM 12.       Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters............... 36
ITEM 13.       Certain Relationships and Related Transactions............................................................... 36
ITEM 14.       Principal Accounting Fees and Service........................................................................ 36

                                     PART IV
ITEM 15.       Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................................. 37

Index to Consolidated Financial Statement                                                                                    F-1
</TABLE>


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                                DELTATHREE, INC.
                         2003 ANNUAL REPORT ON FORM 10-K

      The statements in this annual report that are not descriptions of
historical facts may be forward-looking statements. Those statements involve
substantial risks and uncertainties. You can identify those statements by the
fact that they contain words such as "anticipate," "believe," "estimate,"
"expect," "intend," "project" or other terms of similar meaning. Those
statements reflect management's current beliefs, but are based on numerous
assumptions, which we cannot control and that may not develop as we expect.
Consequently, actual results may differ materially from those projected in the
forward--looking statements. Among the factors that could cause actual results
to differ materially are: uncertainty of financial estimates and projections,
the competitive environment for Internet telephony, our limited operating
history, changes of rates of all related telecommunications services, the level
and rate of customer acceptance of new products and services, legislation that
may affect the Internet telephony industry, rapid technological changes, and the
risks, uncertainties and other matters discussed below under "Risk Factors" and
elsewhere in this annual report and in our other periodic reports filed with the
U.S. Securities and Exchange Commission.


                                     PART I


ITEM 1. BUSINESS

GENERAL

      We are a provider of integrated Voice over Internet Protocol (VoIP)
telephony services. We were founded in 1996 to capitalize on the growth of the
Internet as a communications 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
Internet or a private network, similar to the way in which e-mail and other data
is transmitted. Our business currently includes: the provision of enhanced
Web-based and other communications services to individual consumers under our
iConnectHere brand name; the provision of enhanced Web-based and other
communications services to international resellers, under either their own brand
name, a white-label brand, and/or our iConnectHere brand name; the provision of
a total "Hosted Communications Solution" that enables resellers, corporate
customers and service providers to offer private label telecommunications to
their customer bases, and; the transmission of voice and data traffic for
communications carriers.

      We have built a privately-managed, global network using IP technology and
offer our customers a unique suite of IP telephony products, including:
PC-to-Phone, Phone-to-Phone, and Broadband Phone. We differentiate ourselves
from our competitors by providing a robust set of value-added services that
enables us to effectively address the challenges that have traditionally made
the provision of telecommunications services difficult. These operations
management tools include: account provisioning; e-commerce based payment
processing systems; billing and account management; and customer care. We are
able to provide our services at a cost to users that is generally lower than
that charged by traditional carriers because we minimize our network costs by
using efficient packet-switched technology and we generally avoid local access
charges and by-pass international settlement charges by routing international
long distance calls over our privately-managed network.

      Prior to 1999, our focus was to build a privately-managed, global network
utilizing IP technology, and our business primarily consisted of carrying and
transmitting traffic for communications carriers over our network. Beginning in
1999, we began to diversify our offerings by layering enhanced IP telephony
services over our network. These enhanced services were targeted at consumers
and were primarily accessible through our consumer Web site. During 2000, we
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. Our privately-managed IP network received the
Best Built Public Network Award for excellence in IP services/applications at
SUPERCOMM 2000. We were also recognized as the best IP telephony provider by
SmartMoney magazine and PC World Magazine during 2000. We were recognized for
our innovative Broadband Phone offering during 2001, receiving both the TMC Labs
Innovation Award, and the Communications SOLUTIONS(R) magazine Product of the
Year Award. In 2001, we continued to enhance our unique strengths through our


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pioneering work with the Session Initiation Protocol (SIP), an Internet
Engineering Task Force standard that has been embraced by industry leaders such
as Microsoft and the 3rd Generation Partnership Project (3GPP), which is a
global cooperation between six organizational partners who are recognized as the
world's major standardization bodies from the United States, Europe, China,
Japan and Korea. In 2001, we also announced the launch of our state-of-the-art
SIP (Session Initiation Protocol) infrastructure, and we became one of the first
service providers to have built an end-to-end SIP network. During 2002, our
continuing SIP efforts resulted in our launch of our SIP-based dialer, and in
2003 we continued to add new devices, new features and new calling plans to our
offerings. These efforts continue to position us as one of the leading providers
of VoIP services.


RECENT DEVELOPMENTS

      As disclosed in a Schedule 13D filing with the SEC, in connection with its
periodic review of its portfolio investments, Atarey Hasharon Chevra Lepituach
Vehashkaot Benadlan (1991) Ltd. ("Atarey") has since November 25, 2003 disposed
of an aggregate amount of 5,050,000 shares of our Class A common stock. All of
the sales of common stock executed after December 15, 2003 were undertaken in
accordance with a Rule 10b5-1 Sales Plan of Atarey and pursuant to an effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"). As of the date hereof, Atarey beneficially holds 14,908,752
shares of our common stock, representing approximately 50.8% of our issued and
outstanding shares of common stock.

THE INCREASING SIGNIFICANCE OF IP COMMUNICATIONS

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

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

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

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

      Frost & Sullivan, a market research firm, estimates that VoIP
communications services will grow to represent approximately 75% of worldwide
voice services and revenues from the VoIP marketplace will surpass $171 billion
by the end of 2007. Beyond cost savings, we believe that advanced IP
communications technologies will further the potential for the Internet to
become the preferred medium of communications and commerce.


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LIMITATIONS OF EXISTING IP COMMUNICATIONS SOLUTIONS

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

      In addition, many smaller service providers have begun to offer low-cost
Internet telephony services from PCs to telephones and from telephones to
telephones. Many of these service providers, however, offer their services only
in certain geographic areas and provide limited services. In addition, many of
these service providers rely solely on the public Internet for transmission,
rather than a privately-managed IP network. In using only the public Internet
rather than a privately-managed IP network for transmission, these service
providers have less control over the network management and monitoring functions
that are necessary to ensure quality of service.

OUR PRODUCTS AND SERVICES

      PRODUCTS.

      We have built a privately-managed, global network using IP technology and
offer our customers a unique suite of IP telephony products. Our enhanced IP
communication products (which represented 92.1% and 60.2% of our revenues in
2003 and 2002, respectively) include:

      PC-to-Phone. Our PC-to-Phone offering enables a user to conveniently and
inexpensively place a call to a standard telephone anywhere in the world
directly from a personal computer while remaining on-line. In order to use this
product, a user need only download our software from our Web site and have
access to the Internet. Once our software is downloaded, the user is able to
place a call from the user's personal computer and, while browsing the Web,
speak to a party who uses a standard telephone. Alternatively, users of
Microsoft's MSN Messenger software can access our PC-to-Phone product through
the "Make a phone call" function without the need to download any other
software.

      We are able to provide our PC-to-Phone offering at rates generally lower
than those charged for traditional circuit switched calls. We are able to charge
lower rates because our service utilizes packet-switched technology and because
it routes calls directly from the user's Internet connection onto our
privately-managed IP network and to the called destination, thus avoiding access
and settlement rates associated with traditional international and domestic long
distance telecommunications services. PC-to-phone is currently our most popular
product offering.

      Phone-to-Phone. Our Phone-to-Phone offering enables a user to
inexpensively place a call or send a fax from a standard telephone or a fax
machine to anywhere in the world. Phone-to-Phone calls originate and terminate
on the public switched telephone network (PSTN), but travel primarily over our
privately-managed IP network. Similar to our PC-to-Phone product, our
Phone-to-Phone product is generally less expensive than services of traditional
carriers. Users can access our Phone-to-Phone product by dialing a local or
toll-free access number and providing a PIN number. We currently offer toll-free
access numbers in Austria, Canada, Finland, France, Germany, Hong Kong, Italy,
Sweden, Switzerland, the United Kingdom and the United States. Users are charged
for toll and long distance calls on a per-minute basis. We and our private-label
partners receive payment for these calls by debiting pre-paid user accounts
opened on-line and through the sale of pre-paid calling cards.

      Broadband Phone. In early 2001, we successfully deployed the world's first
commercially available Broadband Phone offering. Our Broadband Phone product is
a complete phone replacement solution available to business and consumer
customers over the "last mile" through broadband connections via cable modem,
DSL or fixed wireless. Broadband Phone challenges the traditional PSTN and
circuit switched networks with a full VoIP solution. With our high call quality,
"always on" reliability and increased functionality provided by the high
bandwidth access line, we are able to offer potential partners and their
customers some of the most sophisticated VoIP solutions available in the market
through a highly scalable, low-cost and easily implemented product. Broadband


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Phone is designed to take advantage of how people communicate, building on the
current customer experience by allowing them to use their existing phone. In
addition to offering traditional telecommunications capabilities, Broadband
Phone enables a user to conveniently retrieve e-mail, voice mail and faxes, as
well as send e-mail, from a single source. For our potential partners, the
turnkey solution is delivered with our full back-end infrastructure, including
customer service for end users, customer service for service providers, pricing
information, billing and provisioning and fraud services. Additionally,
Broadband Phone is a technology-neutral solution, easily integrated (a variety
of devices are available to plug directly into a PC or IP network) so as to
allow broadband providers to begin delivering our voice solution rapidly.

      Carrier transmission services. In addition to our enhanced IP
communication products, in order to maximize the use of our available network
capacity, we offer carrier transmission services over our privately-managed IP
network to telecommunications carriers.

      SERVICES.

      We differentiate ourselves from our competitors by providing a robust set
of value-added services that enables us to effectively address the challenges
that have traditionally made the provision of telecommunications services
difficult. These operations management tools include the following:

o     account provisioning: we provide our customers with a dedicated Web page
      through which they can order additional services or accounts, generate and
      activate PINs and perform other customary implementation functions;

o     payment processing systems: we provide our customers with a fraud
      detection and prevention system to permit secure credit card transactions
      over the Web;

o     billing and account management: we provide our customers with real-time,
      Web-based access to billing records to check billing and usage information
      or to increase prepaid accounts; and

o     customer care: we have moved and consolidated traditional first tier
      customer care functions onto the Web for ease and flexibility and support
      this with second tier customer care via toll-free access.

      ICONNECTHERE

      We began marketing our on-line consumer offering under the iConnectHere
brand name in September 2000 in connection with the formal roll-out of our
Hosted Communications Solution. At that time, we also decided to eliminate our
free on-line service and to move away from a business model focused on consumers
with a high acquisition cost. We have positioned iConnectHere as a powerful
showcase and test facility for our current and future products and services.
iConnectHere demonstrates our products, services and hosting capabilities to
other business customers and service providers. Through iConnectHere, an account
holder can access PC-to-Phone, Phone-to-Phone, Broadband Phone and the full
range of our back-end infrastructure and support. Additionally, iConnectHere
permits us to collect usage information on our products and services and enables
us to provide our partners with key information and recommendations regarding
implementation of our products and services.

      Through iConnectHere, consumer users can:

o     sign up for any of our services, including PC-to-Phone, Phone-to-Phone,
      and Broadband Phone;

o     download our software;

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


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o     send a PC-to-phone call;

o     check real-time billing and usage information;

o     communicate by e-mail with a customer service representative;

o     view answers to frequently-asked questions.


ICONNECTHERE MARKETING, ADVERTISING AND PROMOTIONAL PROGRAMS

      We have developed and will continue to develop diversified marketing,
advertising and promotional programs to stimulate demand for our iConnectHere
services. Our marketing, advertising and promotional programs include:

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

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

      RESELLER PROGRAM. We offer individuals and businesses the opportunity to
become resellers of our services through our reseller program. Resellers are
able to purchase bulk iConnectHere account numbers at reseller specific rates
that they are then able to resell these accounts to private individuals under
the iConnectHere brand, their own brand, or as "white-label" product (i.e., no
brand name is indicated).

      MICROSOFT MESSENGER AFFILIATION. Through our relationship with Microsoft,
we provide PC-to-Phone service for Microsoft MSN Messenger users, to any phone
number in the world. Within the Microsoft MSN Messenger program, choosing us is
similar to choosing a long distance provider. With a click of the mouse,
consumers can select us (under our iConnectHere brand) when utilizing the voice
function bundled into the Microsoft software applications. When consumers choose
us, we provide the network call delivery and termination as well as all the
billing and customer relationship aspects of the service. By way of this
relationship, we gain exposure to millions of current Microsoft MSN Messenger
users.


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OUR HOSTED COMMUNICATIONS SOLUTION

      Our "Hosted Communications Solution" leverages our VoIP expertise and
delivers to our resellers, corporate customers and service providers a highly
customizable, private-label suite of VoIP products and services. Using our
award-winning infrastructure, we enable these enterprises to offer their
customers any combination of our basic products and services, accessible through
a single account. We believe that our Hosted Communications Solution brings our
customers the value-added services they need to leverage their strong customer
bases and generate new revenues. We have dedicated significant resources to this
area of our business and anticipate significant growth in the number of
businesses to which we provide our Hosted Communications Solution.

      With each new module that is added to our suite of VoIP products and
services, customers can realize new revenue streams from their existing customer
base and make their own offering even more powerful in attracting new customers.
The products and services delivered under our Hosted Communications Solution are
operative 24 hours a day, 7 days a week and are supported at all times by our
Network Operations Center ("NOC") and our customer care center.

FUTURE PRODUCTS--BROADBAND FOCUS

      The market for broadband access services is projected to grow
significantly over the next several years. Broadband access alone, however, is
not a complete solution. As infrastructure pipes become commodities, maintaining
margin and profitability on them is becoming increasingly difficult for service
providers. We believe that broadband market success will be determined by the
ability to layer high-margin enhanced services and applications over the
infrastructure. Market leaders will need innovative, value-added solutions to
maintain customers, reduce churn and grow their customer base.

      We have been developing a suite of next-generation Broadband Phone
products that we believe will encompass a rich sub-set of the voice-related
services broadband providers will seek to deploy in the near-term. These
products will build on our original Broadband Phone offering, and include a more
diverse set of devices (both hardware devices as well as "soft-phones") along
with additional value-added functionality and features that will appeal to a
wide potential customer-base.

OUR NETWORK

      In order to deliver unique VoIP services, we operate a privately-managed
IP telephony network. By managing our network, we have the ability to regulate
traffic volumes and to directly control the quality of service from each
originating point of presence ("POP") to the termination point via a variety of
termination options. In addition, our network allows us to avoid the significant
transmission delays associated with the Internet, which may impede delivery of
high quality, reliable services to our users. Since the protocols used by the
network are highly standard protocols, our IP network has a tight connection to
the public Internet, allowing us to use the Internet as a backup facility. This
unique situation, where our IP network is considered a high-quality extension of
the Internet, allows our customers to enjoy best-of-breed functionality: high
quality, low jitter and low connection delay, on the one hand, and global reach
and universal access, on the other hand.

      During 2001, in conjunction with our relationship with Microsoft and over
12 months of work, we rolled out our state of the art SIP (Session Initiation
Protocol) infrastructure. Our SIP network currently powers the majority of our
offerings, including our Microsoft relationship. The SIP protocol is one of the
most advanced VoIP protocols and unlike its predecessors, which were modeled
after traditional telephony protocols, SIP has the ability to scale with a
distributed architecture and at a lower cost. SIP's superior attributes also
include faster and more cost effective development and lower hardware
requirements, which allows us to incur lower capital expenditure costs. During
2004, we intend to continue to expand our offerings on this network. At the same
time, we continue to build our SIP expertise through relationships with other
SIP leaders such as Cisco and Microsoft.


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      BACKBONE

      Our network is built around a redundant, high availability backbone that
connects Los Angeles, New York and London. In each of these locations there are
multiple interconnections or peering arrangements with Internet backbone
providers. These points are strategically located to allow access from our
network to and from the Internet with the best performance. The backbone is
based on Cisco routing equipment utilizing Hot Standby Routing Protocol. In
order to achieve maximum redundancy, our network has several connections to the
public Internet. While operating as a private extension of the Internet, the
backbone has a high level of security designed to isolate it from security
threats found on the public Internet.

      ORIGINATION ACCESS

      Access to our network is possible through several points. Users may access
services through PSTN connections (toll free and local access). Carrier
transmission access is aggregated through our switch in New York or through any
one of our POPs directly. Call origination is possible from the PC-to-Phone
product, using our downloadable software client or using a Web browser,
Microsoft Messenger or Broadband Phone. These calls enter our network from the
Internet through our interconnect points with the Internet. We carefully manage
each originating port and utilize innovative capacity planning tools and
techniques to provide the best and most cost effective service to customers.

      TERMINATION

      Our network can terminate calls through any of our POPs and termination
providers' POPs. Termination decisions are based on a sophisticated Least Cost
Routing system which applies routing rules based on origination point, time of
day, termination cost and other factors. These rules are constantly updated to
ensure maximum economic and quality efficiency. Our network has termination
facilities that enable us to interconnect with multiple carriers. This allows us
to refile traffic to our own switch, giving us the ability to route calls to
virtually anywhere in the world. Each termination port is carefully managed with
innovative capacity planning tools and techniques to provide the best and most
cost effective service to customers, along with multiple termination options to
ensure the highest possible levels of redundancy.

      NETWORK SERVICES

      Our network supports several application building services on the network
level, including:

      PROGRAMMABLE INTERACTIVE VOICE RESPONSE (PIVR). Our network is capable of
playing a configurable voice prompt to enable it to provide applications such as
pre-paid calling cards. PIVR services are highly programmable and can be
customized to fulfill a variety of customer needs. The configuration of the PIVR
is controlled from a central location, enabling efficient management and faster
maintenance in the event of malfunctions.

      REAL TIME AAA. We are able to authenticate, authorize and account (AAA)
for inbound services through the network's real time radius protocol. Whether
services are pre-paid or post-paid, the network will disconnect the call when
the user's account balance runs out. These protocols interface with the billing
system to rate the calls correctly and allow access to permitted services only.
Authentication may be customized to utilize numbers, textual strings, credit
card numbers and more.

      REPORTING TOOLS. All network services are accounted for in real time,
generating Call Detail Records. These records are aggregated in real time to
both the billing systems, for rating, and to the data warehouse, which provides
access to the information by the marketing, financial, capacity planning and
operational groups through a client or Web interface using advanced OLAP cubes.


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      THE NETWORK OPERATIONS CENTER (NOC). Our NOC monitors and manages our
network from a central location, seven days a week, 24 hours a day. The NOC
monitors all aspects of our network, including the routers, databases, switches,
leased lines, Internet connections, gatekeepers and gateways, to ensure that
they are functioning at optimal levels. In the event of a failure of any of
these network components, NOC personnel are provided with a real time, systems
generated notification via an instant messaging system consisting of pagers,
cellular phones, screen pop-ups and e-mail, which identifies the malfunction so
that proper measures can be taken to restore service in a timely fashion. Our
NOC utilizes a combination of proprietary and leading industry technologies,
including Hewlett-Packard Open View software and Ericsson IPT management
console, as well as unique applications developed by us. The NOC serves all of
the different parts of our operations environment, including network nodes, Web
servers and specific applications.

    CUSTOMER CARE. Our services are supported by our on-line interactive
customer service and billing center, which enables an end user to set up an
account, receive an account number and a PIN, pay by credit card for services,
find answers to frequently asked questions and contact customer service
representatives. Once a user has established an account, the user can prepay for
additional usage by credit card as well as access real-time detailed information
such as call logs and transaction records. Through the on-line billing system, a
user can personalize the billing information to select the data most relevant to
them. This on-line interactive customer service and billing center is supported
by a human customer care contact center that provides voice and e-mail support
to the customers.

PROPRIETARY RIGHTS

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

      We have registered trademarks for "deltathree(TM)" and
"iConnectHere.com(TM)" in the United States. However, these trademarks may not
provide adequate protection against competitive technology and may not be held
valid and enforceable if challenged. We do not own any registered copyrights.

      To further safeguard our intellectual property, we have a policy that
requires our employees to execute confidentiality and technology ownership
agreements when they begin their relationships with us.

REGULATORY ENVIRONMENT


      REGULATION OF IP TELEPHONY

      The use of the Internet and private IP networks to provide telephone
service is a relatively recent market development. While the provision of voice
communication services over the Internet and private IP networks is currently
permitted under United States law, some foreign countries have laws or
regulations that may prohibit voice communications over the Internet or using
private IP networks. Increased regulation of the Internet may slow its growth,
particularly if many countries impose restrictive regulations. Increased
regulation of the Internet and/or IP telephony providers or the prohibition of
Internet and IP telephony in one or more countries, more aggressive enforcement
of existing regulations in such countries or our failure or the failure of our
network partners to comply with applicable regulations could materially
adversely affect our business, financial condition, operating results and future
prospects.

United States. Based on information users provide to us when they signed up to
use our services, we estimate that approximately 35% of our IP communications
services are provided to carriers or users in the United States. We believe
that, under United States law, based on specific regulatory classifications and
recent regulatory decisions, the IP communications services that we provide
constitute information services (as opposed to regulated telecommunications
services). As such, our services are not currently regulated by the Federal
Communications Commission (FCC) or state agencies charged with regulating
telecommunications carriers. Nevertheless, aspects of our operations may be
subject to state or federal regulation, including regulation governing universal
service funding, payment of access charges, disclosure of confidential
communications and tax issues. We cannot assure you that our services will not
be regulated in the future. Several efforts have been made or are currently
being considered in the United States to enact federal legislation that would
either regulate or exempt from regulation communications services provided over
the Internet.


                                       11
<PAGE>

      In addition, the FCC is currently considering reforms to universal service
funding and may consider whether to impose various types of charges, other
common carrier regulations and/or additional operational burdens upon some
providers of Internet and IP telephony. The FCC has stated that the development
of new technologies, such as IP telephony, may increase the strain on universal
service funding. In that regard, the FCC is currently reviewing whether to
extend universal service obligations to non-traditional providers such as
facilities-based providers of broadband Internet services.

      Several other carriers have asked the FCC to make definitive rulings
regarding the classification of their IP telephony services. In response to one
of those requests, the FCC determined that a particular free, peer-to-peer IP
application is an interstate information service. The FCC's ruling applies only
to that particular application and does not affect the regulatory classification
of the services we offer. In addition, the FCC has initiated a generic
proceeding to investigate the legal and regulatory framework for all IP-enabled
services, including IP telephony services. Thus, the regulatory classification
issue is now before the FCC. Any ruling by the FCC on the regulatory
considerations affecting Internet and IP telephony services will affect our
operations and revenues.

      If the FCC were to determine that certain services are subject to FCC
regulations as telecommunications services, the FCC might require providers of
Internet and IP telephony services to be subject to traditional common carrier
regulation, make universal service contributions and/or pay access charges. It
is also possible that the FCC may adopt a regulatory framework other than
traditional common carrier regulation, which would apply to Internet and IP
telephony providers.

      State regulatory authorities may also retain jurisdiction to regulate the
provision of, and impose charges on, intrastate Internet and IP telephony
services. Several state regulatory authorities have initiated proceedings to
examine the regulation of such. Many of the states that have looked at the
regulation of IP telephony services have deferred consideration of the issue
pending the outcome of the FCC's proceedings. Although, at least one state has
ordered that access charges apply to the termination of IP telephony calls
provided by a particular carrier and another state has ordered an IP telephony
provider to submit to state regulation. The latter decision later was overturned
in federal district court and is currently on appeal. In addition, several state
commissions have participated in the FCC's proceedings and have advocated
imposing traditional common carrier regulation on Internet and IP telephony
providers. Rulings by the state commissions on the regulatory considerations
affecting Internet and IP telephony services could affect our operations and
revenues.

International. The regulatory treatment of Internet and IP telephony outside of
the United States varies widely from country to country. A number of countries
that currently prohibit competition in the provision of voice telephony may also
prohibit Internet and IP telephony. Other countries permit, but regulate
Internet and IP telephony. Some countries will evaluate proposed Internet and IP
telephony service on a case-by-case basis and determine whether it should be
regulated as a voice service or as another telecommunications service. Finally,
in many countries Internet and IP telephony has not yet been addressed by
legislation or regulatory action.

      In 2003 the European Commission adopted directives for a new framework for
electronic communications regulation that, in part, attempt to harmonize the
regulations that apply to services regardless of the technology used by the
provider. Under the New Regulatory Framework, there is no distinction in
regulation made based upon technology between switched or packet-based networks.
As a result, some types of IP telephony services may be regulated like
traditional telephony services while others may remain free from regulation. We
cannot predict what future actions the European Commission and courts reviewing
the New Regulatory Framework may take regarding IP telephony and related
matters, or what impact, if any, such actions may have on our business.

      Based on the Commission's current position, we believe that most providers
of IP telephony should be subjected to no more than a general authorization or
declaration requirement by the European Union Member States. The Member States
of the European Union are: Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden and
the United Kingdom. However, since the Commission's findings on IP telephony are
not binding on the Member States, we cannot assure you that the services
provided over our network will not be deemed "voice telephony" subject to
heightened regulation by one or more EU Member States. For example, the United
Kingdom has opened a proceeding to review the regulation of Internet-based voice
services.


                                       12
<PAGE>

      As we make our services available in foreign countries, and as we
facilitate sales by our network partners to end users located in foreign
countries, such countries may claim that we are required to qualify to do
business in the particular foreign country. Such countries may also claim that
we are subject to regulation, including requirements to obtain authorization for
the provision of voice telephony or other telecommunications services, or for
the operation of telecommunications networks. It is also possible that such
countries may claim that we are prohibited in all cases from providing our
services or conducting our business as conducted in those countries.

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

      OTHER REGULATION AFFECTING THE INTERNET

 United States. Congress has recently adopted legislation that affects certain
aspects of the Internet, including on-line content, user privacy, national
security and taxation. For example, the extension of the Internet Tax Freedom
Act prohibited certain taxes on Internet uses through November 1, 2003. Congress
currently is considering whether to extend the Internet tax prohibition and
debating the effect of the Internet Tax Freedom Act on IP telephony services.
Congress did not temporarily extend the prohibition pending its decision. As a
result, some taxes may be able to be imposed on Internet uses until Congress
takes further action. We cannot predict whether substantial new taxes will be
imposed on our services. In addition, Congress, the FCC and other federal
entities are considering other legislative and regulatory proposals that would
further affect the Internet, including with regard to broadband networks used to
support high-speed Internet access services. Congress is, for example, currently
considering legislation on a wide range of issues including Internet spamming,
database privacy, gambling, pornography and child protection, Internet fraud and
privacy. Various states have adopted and are considering Internet-related
legislation.

 International. The European Union has also enacted several directives relating
to the Internet. The European Union has, for example, adopted a directive on
data protection that imposes restrictions on the processing of personal data.
Under the directive, personal data may not be collected, processed, used for
other purposes or transferred outside the European Union unless certain
specified conditions are met. In addition, persons whose personal data is
processed within the European Union are guaranteed a number of rights. The
directive may affect companies that collect or transmit information over the
Internet from individuals in the European Union Member States. In particular,
companies with establishments in the European Union may not be permitted to
transfer personal data to countries that do not maintain adequate levels of data
protection.

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


                                       13
<PAGE>

COMPETITION

      We compete primarily in the market for enhanced IP communications
services. This market is highly competitive and has numerous service providers.

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

o     quality of service;

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

o     responsive customer care services;

o     price.

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

 IP Telephony Providers. Many companies provide, or are planning to provide,
certain portions of the complete communications solution we offer, including,
iBasis, Inc., ITXC Corp., Net2Phone, and Vonage.

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

o     substantially greater financial, technical and marketing resources;

o     larger networks;

o     a broader portfolio of services;

o     stronger name recognition and customer loyalty;

o     well-established relationships with many of our target customers;

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


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

EMPLOYEES

      As of December 31, 2003, we employed 82 full-time and 21 part-time
employees, of which 86 were located in Israel, and 17 were located in New York.
We consider our relationship with our employees to be good. None of our
employees is covered by collective bargaining agreements.


                                       14
<PAGE>

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

ITEM 2. PROPERTIES

      We maintain our executive offices at 75 Broad Street, New York, New York
under a lease with an annual rent of approximately $650,000, increasing annually
to $815,000 during the final year of the lease. The lease term extends until
July 2010, with an option to extend the lease for an additional five years. In
October 2003 we entered into a sub-lease agreement with a third party to
sub-lease approximately 30% of the overall the New York office space. The annual
sub-lease income is approximately $148,000 for the first year , increasing
annually to $168,000 during the final year of the lease and extends until July
2010.

      We lease a 1,440 square meter office, which houses our research and
development facilities, at the Jerusalem Technology Park, Jerusalem, Israel at
an annual cost of $ 292,000. The lease term that expired in February 2003
contained an option to extend the lease for an additional five years. In June
2002 we signed an extension agreement for additional three years, commencing
February 2003, at an annual cost of $201,600, for 1,056 square meters, with the
remaining 384 square meters to be returned to the building owner.

ITEM 3. LEGAL PROCEEDINGS

      We, as well as certain of our former officers and directors, have been
named as defendants in a number of purported securities class actions in Federal
District Court for the Southern District of New York, arising out of our 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 our 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 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. In July 2002, omnibus motions to dismiss the complaints based on
common legal issues were filed on behalf of all issuers and underwriters. On
February 19, 2003, the Court issued an opinion granting in part and denying in
part those motions to dismiss. The complaint against the Company was not
dismissed as a matter of law. These cases remain at a preliminary stage and no
discovery proceedings have taken place. We believe that the claims asserted
against us in these cases are without merit and intend to defend ourselves
vigorously against them. A proposed settlement agreement between the plaintiffs
and issuer defendants is in the process of being negotiated and approved.

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

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

      We held our Annual Meeting of Stockholders (the "Meeting") on December 8,
2003. The following matters were submitted to our stockholders for their vote,
and the results of the votes taken at the Meeting were as follows:


                                       15
<PAGE>

(1)   Eight Directors were elected for a term of one year:
      (a)   Noam Bardin: 27,780,683 votes for; 21,616 votes against;
      (b)   Ilan Biran 27,780,683 votes for; 21,616 votes against;
      (c)   Ehud Erez: 27,746,843 votes for; 55,456 votes against;
      (d)   Amir Gera: 27,780,683 votes for; 21,616 votes against;
      (e)   Joshua Maor: 27,780,683 votes for; 21,616 votes against;
      (f)   Lior Samuelson: 27,780,683 votes for; 21,616 votes against; and
      (g)   Shimmy Zimels: 27,780,683 votes for; 21,616 votes against;

(2)   The appointment of Brightman Almagor & Co., a member firm of Deloitte &
      Touche Tohmatsu, as our independent auditors for the fiscal year ending
      December 31, 2003 was ratified by the following vote: 27,779,3195 votes
      for; 4,960 votes against; and 18,020 abstentions.


                                       16
<PAGE>

                                     PART II

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



Market Information

         Our common stock is currently listed on the Nasdaq SmallCap Market
under the symbol "DDDC". The listing of our common stock was transferred from
the Nasdaq National Market to the Nasdaq SmallCap Market effective on September
17, 2002. Our common stock had traded on the Nasdaq National Market under the
symbol "DDDC" since November 22, 1999. We currently meet all criteria for
continued inclusion in the Nasdaq SmallCap Market.

         The following table sets forth the per share range of high and low
closing sales prices of our common stock for the periods indicated:

                                                             HIGH        LOW
  YEAR ENDED DECEMBER 31, 2001                              -----       -----
       First quarter                                        $3.50       $1.03
       Second quarter                                        1.61        0.60
       Third quarter                                         0.98        0.26
       Fourth quarter                                        0.93        0.52
  YEAR ENDED DECEMBER 31, 2002
       First quarter                                         1.25        0.75
       Second quarter                                        1.08        0.60
       Third quarter                                         0.63        0.34
       Fourth quarter                                        0.90        0.37
  YEAR ENDED DECEMBER 31, 2003
       First quarter                                         0.68        0.48
       Second quarter                                        0.80        0.53
       Third quarter                                         1.95        0.62
       Fourth quarter                                        4.26        1.53
  YEAR ENDED DECEMBER 31, 2003
       First quarter (through March 26th, 2004)              3.43        2.17


      On March 26, 2004, the last reported sale price for our common stock on
the Nasdaq SmallCap Market was $2.26 per share. The market price for our stock
is highly volatile and fluctuates in response to a wide variety of factors.

Holders

      As of March 26, 2004, we had approximately 128 holders of record of our
common stock. This does not reflect persons or entities who hold their stock in
nominee or "street" name through various brokerage firms.

Dividend Policy

      We have never declared or paid any cash dividends on our capital stock. We
do not anticipate paying any cash dividends on our capital stock in the
foreseeable future. We currently intend to retain future earnings, if any, to
finance our operations and to expand our business. Any future determination to
pay cash dividends will be at the discretion of our board of directors and will
be dependent upon our financial condition, operating results, capital
requirements and other factors that our board of directors considers
appropriate.


                                       17
<PAGE>

Equity Compensation Plan Information

      The following table provides certain aggregate information with respect to
all of our equity compensation plans in effect as of December 31, 2003:

<TABLE>
<CAPTION>

Plan Category             Number of Securities to be   Weighted Average Exercise    Number of Securities
                          Issued Upon Exercise of      Price of Outstanding         Remaining Available for
                          Outstanding Options,         Options, Warrants and        Future Issuance Under
                          Warrants and Rights          Rights                       Equity Compensation Plans
                                                                                    (excluding securities
                                                                                    reflected in first column)
--------------------------------------------------------------------------------------------------------------
<S>                               <C>                            <C>                       <C>
Equity Compensation                2,753,130                      $2.55                      1,515,846
Plans Approved by
Security Holders (1)
--------------------------------------------------------------------------------------------------------------
Equity Compensation
Plans not Approved by
Security Holders                      N/A                          N/A                          N/A
--------------------------------------------------------------------------------------------------------------
Total                              2,753,130                      $2.55                      1,515,846
--------------------------------------------------------------------------------------------------------------

</TABLE>

(1)   These plans consist of our 1999 Stock Incentive Plan, 1999 Directors'
      Plan, and 1999 Employee Stock Purchase Plan.

Recent Sales of Unregistered Securities

      None.

Use of Proceeds

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

      Through December 31, 2003, we used approximately $36 million of the net
proceeds for sales, marketing and promotional activities, $21 million for
capital expenditures and $16 million for general corporate purposes. Pending use
of the remaining net proceeds, we have invested the remaining net proceeds in
interest-bearing, investment-grade instruments, certificates of deposit, or
direct or guaranteed obligations of the United States.


                                       18
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

         We derived the selected consolidated financial data presented below
from our consolidated financial statements and related notes included in this
annual report. You should read the selected consolidated financial data together
with our consolidated financial statements and related notes and the section of
this annual report entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Brightman Almagor & Co., a member firm of
Deloitte Touche, independent certified public accountants, audited our
historical financial statements since inception and as of and for the years
ended December 31, 1999, 2000, 2001, 2002 and 2003. Their report appears
elsewhere in this annual report.

<TABLE>
<CAPTION>

                                                                                YEAR ENDED DECEMBER 31,
                                                                              ---------------------------
                                                                   1999       2000       2001        2002        2003
                                                                   ----       ----       ----        ----        ----
                                                                                   (IN THOUSANDS, EXCEPT SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Revenues:
<S>                                                            <C>         <C>         <C>           <C>        <C>
  Affiliates ...............................................   $  7,431    $ 13,977    $  1,669          $-          $-
  Non-affiliates ...........................................      3,621      16,399      13,991      12,929      13,162
Total revenues .............................................     11,052      30,376      15,660      12,929      13,162
Costs and operating expenses:
  Cost of revenues .........................................     (9,723)    (24,932)    (13,486)     (8,934)     (8,393)
  Research and development expenses ........................     (1,233)     (6,625)     (5,648)     (3,435)     (2,326)
  Selling and marketing expenses ...........................     (7,403)    (20,548)     (7,800)     (3,910)     (3,325)
  General and administrative expenses (exclusive of non-cash     (2,754)     (6,694)     (6,982)     (2,158)     (2,062)
  compensation expense)
  Non-cash compensation expense ............................    (19,116)     (6,331)       (825)       (270)         --
  Depreciation and amortization ............................     (3,721)     (7,919)     (8,996)     (6,606)     (5,584)
   Write-down of fixed assets ..............................         --          --      (1,003)         --          --
   Expenses due to cancellation of supplier agreement ......         --          --      (3,628)         --          --
  Impairment of goodwill ...................................         --      (8,905)     (4,151)         --          --
Total costs and operating expenses .........................    (43,950)    (81,954)    (52,519)    (25,313)    (21,690)
Loss from operations .......................................    (32,898)    (51,578)    (36,859)    (12,384)     (8,528)
Interest income (expense), net .............................       (873)      3,632       1,677         448         245
Income taxes ...............................................         --        (311)       (552)       (141)        (57)
Net loss ...................................................   $(33,771)   $(48,257)   $(35,734)   $(12,077)   $ (8,340)
Net loss per share -  basic and diluted ....................   $  (1.65)   $  (1.67)   $  (1.23)   $  (0.42)   $  (0.29)
Weighted average shares outstanding  - basic and diluted ...     20,418      28,833      29,035      28,888      28,989


                                                                                    DECEMBER 31,
                                                                                    ------------
                                                                 1999       2000       2001        2002        2003
                                                                 ----       ----       ----        ----        ----
                                                                                  (IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents                                       $89,957     $20,857     $13,583      $5,681      $1,682
Short-term investments......................................     11,276      30,542      14,192      15,552      16,442
Working capital.............................................     82,942      43,538      23,374      17,675      14,820
Total assets................................................    126,832      86,169      45,869      32,197      23,643
Total stockholder's equity..................................    102,580      72,479      38,921      27,114      19,141

</TABLE>


                                       19
<PAGE>

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

      The following discussion of our financial condition and results of
operations should be read together with our consolidated financial statements
and the related notes thereto included in another part of this annual report.
This discussion contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this report the words
"anticipate," "believe," "estimate," "expect" and similar expressions as they
relate to our management or us are intended to identify such forward-looking
statements. Our actual results, performance or achievements could differ
materially from those expressed in, or implied by, these forward-looking
statements. Historical operating results are not necessarily indicative of the
trends in operating results for any future period.

OVERVIEW

      We are a provider of integrated Voice over Internet Protocol (VoIP)
telephony services and we were founded in 1996 to capitalize on the growth of
the Internet as a communications 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
Internet or a private network, similar to the way in which e-mail and other data
is transmitted. . Our business currently includes: the provision of enhanced
Web-based and other communications services to individual consumers under our
iConnectHere brand name; the provision of enhanced Web-based and other
communications services to international resellers, under either their own brand
name, a white-label brand, and/or our iConnectHere brand name; the provision of
a total "Hosted Communications Solution" that enables resellers, corporate
customers and service providers to offer private label telecommunications to
their customer bases, and; the transmission of voice and data traffic for
communications carriers.

      Prior to 1999, our focus was to build a privately-managed, global network
utilizing IP technology, and our business primarily consisted of carrying and
transmitting traffic for communications carriers over our network. Beginning in
1999, we began to diversify our offerings by layering enhanced IP telephony
services over our network. These enhanced services were targeted at consumers
and were primarily accessible through our consumer Web site. During 2000, we
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. Our privately-managed IP network received the
Best Built Public Network Award for excellence in IP services/applications at
SUPERCOMM 2000. We were also recognized as the best IP telephony provider by
SmartMoney magazine and PC World Magazine during 2000. We were recognized for
our innovative Broadband Phone offering during 2001, receiving both the TMC Labs
Innovation Award, and the Communications SOLUTIONS(R) magazine Product of the
Year Award. In 2001, we continued to enhance our unique strengths through our
pioneering work with the Session Initiation Protocol (SIP), an Internet
Engineering Task Force standard that has been embraced by industry leaders such
as Microsoft and the 3rd Generation Partnership Project (3GPP), which is a
global cooperation between six organizational partners who are recognized as the
world's major standardization bodies from the United States, Europe, China,
Japan and Korea. In 2001, we also announced the launch of our state-of-the-art
SIP (Session Initiation Protocol) infrastructure, and we became one of the first
service providers to have built an end-to-end SIP network. During 2002, our
continuing SIP efforts resulted in our launch of our SIP-based dialer, and in
2003 we continued to add new devices, new features and new calling plans to our
offerings. These efforts continue to position us as one of the leading providers
of VoIP services.

FACTORS AFFECTING FUTURE RESULTS

Industry and Economic Factors: Our operations and earnings are affected by
local, regional and global events or conditions that affect supply and demand
for telecommunications products and services. These events or conditions are
generally not predictable and include, among other things, general economic
growth rates and the occurrence of economic recessions; the development of new
supply sources; supply disruptions; technological advances, including advances
in telecommunications technology and advances in technology relating to
telecommunications usage; changes in demographics, including population growth
rates and consumer preferences; and the competitiveness of alternative
telecommunications sources or product substitutes. Currently, the economy in
general and the telecommunications industry in particular are suffering. A
number of the leading telecommunications companies have seen their market
capitalizations decrease dramatically and some have filed for bankruptcy
protection. As a result, raising capital has become extremely difficult, there
is extreme pressure on the pricing of telecommunications services and potential
customers and partners have sharply cut back on expenditures, all of which
impact us.


                                       20
<PAGE>

Competitive Factors: The telecommunications industry is highly competitive.
There is competition within the traditional telecommunications marketplaces
(landline and wireless) and also with other emergent "next generation"
telecommunications providers, including IP telecommunications providers in
supplying the overall telecommunications needs of businesses and individual
consumers. We compete with other telecommunications firms in the sale and
purchase of various products and services in many national and international
markets and employ all methods of competition which are lawful and appropriate
for such purposes. A key component of our competitive position, particularly
given the commodity-based nature of many of our products, is our ability to
manage operating expenses successfully, which requires continuous management
focus on reducing unit costs and improving efficiency.

Political Factors: Our operations and earnings have been, and may in the future
be, affected from time to time in varying degree by political instability and by
other political developments and laws and regulations, such as forced
divestiture of assets; restrictions on production, imports and exports; war or
other international conflicts; civil unrest and local security concerns that
threaten the safe operation of company facilities; price controls; tax increases
and retroactive tax claims; expropriation of property; cancellation of contract
rights; and telecommunications regulations. Both the likelihood of such
occurrences and their overall effect upon us vary greatly from country to
country and are not predictable.

Project Factors: In addition to the factors cited above, the advancement, cost
and results of particular projects depend on the outcome of negotiations with
potential partners, governments, suppliers, customers or others; changes in
operating conditions or costs; and the occurrence of unforeseen technical
difficulties.

Risk Factors: See "--Risk Factors" below for discussion of the impact of market
risks, financial risks and other uncertainties.

REVENUES

      Prior to June 28, 2001, our majority shareholder was RSL COM, a large
telecommunications provider, who was also our largest customer. As such, for
financial reporting purposes for fiscal year 2001 and prior years, revenues were
derived from affiliates and non-affiliates. Revenues from affiliates consist of
revenues received from RSL COM for the carrier transmission and calling card
services we provided to RSL COM, prior to Atarey's acquisition of RSL COM's
holdings of our stock. The majority of the services we provided to RSL COM were
resold by RSL COM to other communications companies, and the remainder were used
directly by RSL COM's customers. Carrier transmission services to RSL COM
accounted for 0% of our total revenues in both 2003 and 2002.

      Revenues from non-affiliates consist of revenues from end-users of our
enhanced IP communications services, including PC-to-Phone, Broadband Phone and
Phone-to-Phone, which are generated by our both our consumer offering,
iConnectHere, and our Hosted Communications Solution, and revenues from carriers
other than RSL COM for carrier transmission services. All revenues are
recognized as the services are performed. The provision of enhanced IP
communications services (primarily PC-to-Phone) through iConnectHere accounted
for 47.1% and 43.3% of our total revenues in 2003 and 2002, respectively, while
the provision of enhanced IP communications services through our reseller and
service provider sales efforts (including sales of our Hosted Communications
Solution) accounted for 45% and 16.9% of our total revenues in 2003 and 2002,
respectively. Carrier transmission services to non-affiliates accounted for 3.9%
and 10.9% of our total revenues in 2003 and 2002, respectively.

COSTS AND OPERATING EXPENSES

      Costs and operating expenses consist of cost of revenues, research and
development expenses, selling and marketing expenses, general and administrative
expense, depreciation and amortization of goodwill, non-cash stock compensation,
write-down of fixed assets, expenses due to cancellation of agreement with a
supplier and impairment of goodwill related expenses.


                                       21
<PAGE>

o     Cost of revenues consist primarily of access, termination and transmission
      costs paid to carriers that we incur when providing services and fixed
      costs associated with leased transmission lines. The term of our contracts
      for leased transmission lines is generally one year, or less, and either
      party can terminate with prior notice.

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

o     Selling and marketing expenses consist primarily of advertising and
      promotional expenses incurred to attract potential consumer users of
      iConnectHere and expenses associated with our direct sales force incurred
      to attract potential reseller, corporate, and service provider customers
      (including sales of our Hosted Communications Solution). We anticipate
      that as we add new paid users we will be able to spread these costs over a
      larger revenue base and accordingly improve our operating margins.

o     General and administrative expenses consist primarily of compensation and
      benefits for management, finance and administrative personnel, occupancy
      costs and legal and accounting fees, as well as the expenses associated
      with being a public company, including the costs of directors' and
      officers' insurance.

      We have not recorded any income tax benefit for net losses and credits
incurred for any period from inception to December 31, 2003. The utilization of
these losses and credits depends on our ability to generate taxable income in
the future. Because of the uncertainty of our generating taxable income, we have
recorded a full valuation allowance with respect to these deferred assets.

      We recognized $825,000 in non-cash compensation expense in 2001, $270,000
in 2002, and $0 in 2003.

CRITICAL ACCOUNTING POLICIES

      The Securities and Exchange Commission defines critical accounting
policies as those that are, in management's view, most important to the
portrayal of a company's financial condition and results of operations and most
demanding on their calls on judgment, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. We believe our most critical accounting policies
relate to:


     Revenue recognition and deferred revenue: We record revenue from Internet
     telephony services based on minutes (or fractions thereof) of customer
     usage. We record payments received in advance for prepaid services and
     services to be supplied under contractual agreements as deferred revenue
     until such related services are provided. We estimate the allowance for
     doubtful accounts by reviewing the status of significant past due
     receivables and analyzing historical bad debt trends and we then reduce
     accounts receivables by such allowance for doubtful accounts to expected
     net realizable value.



     Long-lived Assets: 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. Our long-lived assets are reviewed for
     impairment on a quarterly basis and whenever events or changes in
     circumstances occur indicating that the net carrying amount may not be
     recoverable. We review for impairment by comparing the carrying value of
     the long-lived asset to the estimated undiscounted future cash flows
     expected to result from the use of the long-lived assets (and their
     eventual disposition). If the sum of the expected undiscounted future cash
     flows is less than the carrying amount of assets, we would recognize an
     impairment loss. The impairment loss, if determined to be necessary, would
     be measured as the amount by which the carrying amount of the long-lived
     asset exceeds the fair value of the long-lived asset based on estimated
     future discounted cash flows.


                                       22
<PAGE>


RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                                                YEAR ENDED DECEMBER 31,
                                                                                         -----------------------------------
                                                                                           2001          2002         2003
                                                                                         ---------     ---------   ---------

Revenues:
<S>                                                                                           <C>            <C>         <C>
  Affiliates...........................................................................       10.7%          0.0%        0.0%
  Non-affiliates.......................................................................       89.3         100.0       100.0
                                                                                         ---------     ---------   ---------
 Total revenues.......................................................................       100.0         100.0       100.0
Costs and operating expenses:
  Cost of revenues.....................................................................       86.1          69.1        63.8
  Research and development expenses....................................................       36.1          26.6        17.7
  Selling and marketing expenses.......................................................       49.8          30.2        25.3
  General and administrative expenses (exclusive of non-cash compensation expense).....       44.6          16.7        15.7
  Non-cash compensation expense........................................................        5.3           2.1         0.0
  Depreciation and amortization........................................................       57.4          51.1        42.4
  Write down of fixed assets...........................................................        6.4           0.0         0.0
  Expenses due to cancellation of supplier agreement...................................       23.2           0.0         0.0
  Impairment of goodwill...............................................................       26.5           0.0         0.0
                                                                                         ---------     ---------   ---------
Total costs and operating expenses.....................................................      335.4         195.8       164.9
                                                                                         ---------     ---------   ---------
Loss from operations...................................................................     (235.4)        (95.8)      (64.9)
Interest income, net...................................................................       10.7           3.5         1.9
Income taxes...........................................................................       (3.5)         (1.1)       (0.4)
                                                                                         ---------     ---------   ---------
                                                                                            (228.2)%       (93.4)%     (63.4)%
                                                                                         =========     =========   =========
</TABLE>


                                       23
<PAGE>

COMPARISON OF 2003 AND 2002

REVENUES

      AFFILIATES. There were no revenues from affiliates in 2003 or in 2002.
This was due to the sale of all of our Class B Common Stock, representing
majority ownership of us, on June 29, 2001 by RSL Communications, Ltd. ("RSL
COM") and our disconnection from the RSL COM network. Since June 29, 2001, there
have been no further revenues from affiliates, and we do not anticipate
receiving revenues from affiliates in the future.

      NON-AFFILIATES. Revenues from non-affiliates increased approximately $0.3
million or 2.3% to approximately $13.2 million in 2003 from approximately $12.9
million in 2002. Revenues from enhanced IP communications services (including
our Hosted Communications Solution) increased by approximately $1.1 million or
9.6% to approximately $12.6 million in 2003 from approximately $11.5 million in
2002, due to a greater number of iConnecthere, reseller, corporate and service
provider customers, yielding a greater number of calls being placed by an
increasing user base.

      Revenues from carrier transmission services for telecommunications
carriers decreased by approximately $0.9 million or 64.3% to approximately $0.5
million in 2003 from approximately $1.4 million in 2002, due primarily to
decreased demand from a smaller customer base. One "Master Reseller" accounted
for approximately 19% of our sales in aggregate in 2003.

COSTS AND OPERATING EXPENSES

      COST OF REVENUES. Cost of revenues decreased by $0.5 million or 5.6% to
$8.4 million in 2003 from $8.9 million in 2002, due to both a decrease in the
amount of carrier traffic being terminated and lower pricing from suppliers.

      RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased by $1.1 million or 32.4% to $2.3 million in 2003 from $3.4 million in
2002, due to lower personnel costs associated with the development of new
services and enhancements to our existing services.

      SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased
by $0.6 million or 15.4% to $3.3 million in 2003 from $3.9 million in 2002, due
to a decrease in branding and promotional activities.

      GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased by $0.1 million or 4.5% to $2.1 million in 2003 from $2.2 million in
2002, primarily due to decreased personnel and occupancy costs, somewhat offset
by increased professional fees.

      NON-CASH COMPENSATION EXPENSES. There were no non-cash compensation
expenses in 2003 compared to approximately $270,000 in 2002, due to the
completed amortization of costs incurred during 1998 and 1999 related to the
grants of options and warrants below the then fair market value during those
periods.

      DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
$1.0 million or 15.2% to $5.6 million in 2003 from $6.6 million in 2002, due to
a lower relative level of capital expenditures in 2003, and certain assets have
been fully depreciated in 2002.

LOSS FROM OPERATIONS

      Loss from operations decreased by $3.9 million or 31.5% to $8.5 million in
2003 from $12.4 million in 2002, due primarily to the decrease in costs and
operating expenses, including selling and marketing expenses. We expect to
continue to incur losses for the foreseeable future.


                                       24
<PAGE>

INTEREST INCOME, NET

      Interest income decreased by $0.2 million or 50.0% to $0.2 million in 2003
from $0.4 million in 2002, due primarily to lower interest rates earned on a
reduced balance of remaining proceeds from our initial public offering.

INCOME TAXES, NET

      We paid net income taxes of $0.1 million in 2003 compared to $0.1 million
in 2002.

NET LOSS

      Net loss decreased $3.8 million or 31.4% to $8.3 million in 2003 from
$12.1 million in 2002, due to the foregoing factors.

COMPARISON OF 2002 AND 2001

REVENUES

      AFFILIATES. There were no revenues from affiliates in 2002, compared to
$1.7 million in 2001. The decrease in revenues from affiliates was due to the
sale of all of our Class B Common Stock, representing majority ownership of us,
on June 29, 2001 by RSL Communications, Ltd. ("RSL COM") and our disconnection
from the RSL COM network. After June 29, 2001, there were no further revenues
from affiliates, and we do not anticipate receiving revenues from affiliates in
the future.

      NON-AFFILIATES. Revenues from non-affiliates decreased approximately $1.1
million or 7.9% to approximately $12.9 million in 2002 from approximately $14.0
million in 2001. Revenues from enhanced IP communications services (including
sales of our Hosted Communications Solution) decreased by approximately $0.7
million or 5.7% to approximately $11.5 million in 2002 from approximately $12.2
million in 2001, due to a lesser number of new Hosted Communications Solution
partners, yielding lower up-front integration fees, and partially offset by a
greater number of PC-to-Phone and Phone-to-Phone calls being placed by an
increasing user base.

      Revenues from carrier transmission services, for telecommunications
carriers other than RSL COM, decreased by approximately $0.4 million or 22.2% to
approximately $1.4 million in 2002 from approximately $1.8 million in 2001, due
primarily to decreased demand from a smaller customer base. No customer (other
than RSL COM in 2001) accounted for greater than 10% of our revenues during
these periods.

COSTS AND OPERATING EXPENSES

      COST OF REVENUES. Cost of revenues decreased by $4.6 million or 34.1% to
$8.9 million in 2002 from $13.5 million in 2001, due primarily to a decrease in
the amount of traffic being terminated.

      RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased by $2.2 million or 39.3% to $3.4 million in 2002 from $5.6 million in
2001, due to lower personnel costs associated with the development of new
services and enhancements to our existing services.

      SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased
by $3.9 million or 50.0% to $3.9 million in 2002 from $7.8 million in 2001, due
to a significant decrease in branding and promotional activities.

      GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased by $4.8 million or 68.6% to $2.2 million in 2002 from $7.0 million in
2001, primarily due to decreased personnel and occupancy costs.

      NON-CASH COMPENSATION EXPENSES. Non-cash compensation expenses decreased
by $0.5 million or 62.5% to $0.3 million in 2002 from $0.8 million in 2001, due
to our impairment of goodwill during 2001. Consequently, there were no goodwill
related expenses during 2002.


                                       25
<PAGE>

      DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$2.4 million or 26.7% to $6.6 million in 2002 from $9.0 million in 2001, due to
our on-going purchase, and subsequent depreciation of fixed assets.

LOSS FROM OPERATIONS

      Loss from operations decreased by $24.5 million or 66.4% to $12.4 million
in 2002 from $36.9 million in 2001, due primarily to the decrease in costs and
operating expenses, including non-cash compensation expenses and selling and
marketing expenses. We expect to continue to incur losses for the foreseeable
future.

INTEREST INCOME, NET

      Interest income decreased by $1.3 million or 76.5% to $0.4 million in 2002
from $1.7 million in 2001, due primarily to lower interest rates earned on a
reduced balance of remaining proceeds from our initial public offering.

INCOME TAXES, NET

      We paid net income taxes of $0.1 million in 2002 compared to $0.6 million
in 2001.

NET LOSS

      Net loss decreased $23.6 million or 66.1% to $12.1 million in 2002 from
$35.7 million in 2001, due to the foregoing factors.

LIQUIDITY AND CAPITAL RESOURCES

      Since our inception in June 1996, we have incurred significant operating
and net losses due in large part to the start-up and development of our
operations. As of December 31, 2003, we had an accumulated deficit of
approximately $147.9 million. We anticipate that we will continue to incur
operating and net losses for the foreseeable future.

      As of December 31, 2003, we had cash and cash equivalents of approximately
$1.7 million, marketable securities and other short-term investments of
approximately $16.4 million and working capital of approximately $14.8 million.
We generated negative cash flow from operating activities of approximately $3.2
million during 2003 compared with negative cash flow from operating activities
of $6.2 million during 2002. Accounts receivable were approximately $0.4 million
and $0.7 million at December 31, 2003 and December 31, 2002, respectively. Net
cash used in investing activities decreased from $338,000 during 2002 to
$325,000 in 2003.

      Our capital expenditures decreased from approximately $403,000 in the year
ended December 31, 2002 compared to approximately $368,000 in the year ended
December 31, 2003, as we better utilized our existing domestic and international
network infrastructure.

      Short-term, we obtain our funding from our utilization of the remaining
proceeds from our initial public offering offset by positive or negative cash
flow from our operations. These proceeds are maintained as cash and cash
equivalents with an original maturity of three months or less. Based on current
trends in our operations, these funds will be sufficient to meet our working
capital requirements, including operating losses, and capital expenditure
requirements for at least the next fiscal year, assuming that our business plan
is implemented successfully, and that:


                                       26
<PAGE>

o     our recent revenue trends, which reflected an increase in our
      higher-margin (primarily PC-to-Phone) products and services continues to
      increase;
o     our expense trends remain at or near the rates of our fourth quarter 2003
      rates, which were significantly reduced compared to the previous the year
      through reductions in personnel, curtailment of discretionary
      expenditures, and reduced network rent and termination rates from our
      carriers; and
o     our net cash-burn rate, which was significantly reduced compared to the
      previous year due to the foregoing factors to approximately $0.4 million
      in the fourth quarter of 2003, continues to improve throughout 2004 and
      beyond.

      To the extent that these trends do not remain steady, or if in the
longer-term we are not able to successfully implement our business strategy we
may be required to raise additional funds for our ongoing operations. Additional
financing may not be available when needed or, if available, such financing may
not be on terms favorable to us, especially in light of current economic
conditions and the unfavorable market for telecommunications companies in
particular. If additional funds are raised through the issuance of equity
securities, our existing stockholders may experience significant dilution. In
addition, while the indentures governing outstanding indebtedness of RSL COM
were cancelled and no longer restrict our ability to incur indebtedness, we
cannot assure you that any third party will be willing or able to provide
additional capital on favorable terms or at all.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

      The following table sets forth our future contractual obligations and
commercial commitments in total, for each of the next five years and thereafter.


 CONTRACTUAL OBLIGATIONS              PAYMENTS DUE BY PERIOD (IN THOUSANDS)
                                   ---------------------------------------------
                                          LESS THAN  1-3    3-5      MORE THAN 5
                                   TOTAL  1 YEAR     YEARS  YEARS    YEARS
                                   -----  --------- -----   -----    -----------

Real Estate Leases                 5,812     921    1,832   1,679    1,380
Auto Leases                          145      82       63       -        -
Other Operating Leases               163     138       25       -        -
Capital Lease Obligations              -       -        -       -        -
Purchase Obligations                  51      51        -       -        -
Other Commercial Commitments           -       -        -       -        -
Other Long-Term Liabilities
Reflected on the Registrant's          -       -        -       -        -
Balance Sheet under GAAP
                            TOTAL  6,171   1,192    1,920   1,679    1,380


RISK FACTORS

      In addition to the other information included in this annual report, you
should consider the following risk factors. This annual report contains
forward-looking statements covered by the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
involve risks and uncertainties that may affect our business and prospects. Our
results may differ significantly from the results discussed in the
forward-looking statements as a result of certain factors that are listed below
or discussed elsewhere in this annual report and our other filings with the
Securities and Exchange Commission.

RISKS RELATED TO OUR COMPANY

WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOW AND WE ANTICIPATE THEY WILL
CONTINUE

                                       27
<PAGE>

      We have incurred significant losses since inception, and we expect to
continue to incur significant losses for the foreseeable future. We reported net
losses of approximately $8.3 million in 2003, approximately $12.1 million in
2002, and approximately $35.7 million in 2001. As of December 31, 2003, our
accumulated deficit was approximately $147.9 million. We generated negative cash
flow of approximately $4.0 million during 2003 and $7.9 million during 2002. As
a percentage of revenues, our net loss was 63.4% in 2003, 93.4% in 2002 and
228.2% in 2001. Our revenues may not grow or even continue at their current
level. As a result, while we believe we have sufficient funds to meet our
working capital requirements for at least the next fiscal year (see - Liquidity
and Capital Resources), we will need to increase our revenues significantly to
become profitable. In order to increase our revenues, we need to attract and
maintain customers to increase the fees we collect for our services. If our
revenues do not increase as much as we expect or if our expenses increase at a
greater pace than revenues, we may never be profitable or, if we become
profitable, we may not be able to sustain or increase profitability on a
quarterly or annual basis.

WE WILL NEED ADDITIONAL CAPITAL TO FINANCE OUR OPERATIONS IN THE FUTURE

      We intend to continue to enhance and expand our network in order to
maintain our competitive position and meet the increasing demands for service
quality, capacity and competitive pricing. Also, the introduction of new
products and/or service will require significant marketing and promotional
expenses that we often incur before we begin to receive the related revenue.
While we believe we have sufficient funds to meet our working capital
requirements for at least the next fiscal year (see - Liquidity and Capital
Resources), if our cash flow from operations is not sufficient to meet our
capital expenditure and working capital requirements, we will need to raise
additional capital to continue our operations. Especially in light of current
economic conditions and the unfavorable market for telecommunications companies
in particular, we may not be able to raise additional capital, and if we are
able to raise additional capital through the issuance of additional equity, our
current investors could experience dilution. If we are unable to obtain
additional capital, we may be required to reduce the scope of our business or
our anticipated growth, which would reduce our revenues.

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

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

o     to increase acceptance of our enhanced IP communications services
      (including our Hosted Communications Solution), thereby increasing the
      number of users of our IP telephony services;
o     to compete effectively;
o     to develop new products and keep pace with developing technology.

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

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

      Our business strategy is to expand our revenue sources to include the
provision of enhanced IP communications services to several different customer
groups. We can neither assure you that we will be able to accomplish this nor
that this strategy will be profitable. Currently, our revenues are primarily
generated by sales of enhanced IP communications services through our direct
consumer offering, iConnectHere, and our service provider and reseller sales
channel (including sales of our Hosted Communications Solution). Enhanced IP
communications services from these channels generated 92.1%, 60.2%, and 54.8% of
our total revenues in 2003, 2002 and 2001, respectively. The provision of
enhanced IP communications services has not been profitable to date and may not
be profitable in the future.


                                       28
<PAGE>

      In the future, we intend to generate increased revenues from enhanced IP
communications services, from multiple sources, many of which are unproven,
including the commercial sale of our Hosted Communications Solution. We expect
that our revenues for the foreseeable future will be dependent on, among other
factors:

o     sales of enhanced IP communications services, including sales of our
      Hosted Communications Solution;
o     acceptance and use of IP telephony;
o     expansion of service offerings;
o     traffic levels on our network;
o     the effect of competition, regulatory environment, international long
      distance rates and access and transmission costs on our prices;
o     continued improvement of our global network quality.

      We may not be able to sustain our current revenues or successfully
generate additional revenues from the sale of enhanced IP communications
services, including Hosted Communications Solutions or carrier transmission
services.

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

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

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

      If the market for IP communications, in general, and our services in
particular, does not grow at the rate we anticipate or at all, we will not be
able to increase our number of users or generate revenues we anticipate. To be
successful, IP communications requires validation as an effective, quality means
of communication and as a viable alternative to traditional telephone service.
Demand and market acceptance for recently introduced services are subject to a
high level of uncertainty. The Internet may not prove to be a viable alternative
to traditional telephone service for reasons including:

o     inconsistent quality or speed of service;
o     traffic congestion on the Internet;
o     potentially inadequate development of the necessary infrastructure;
o     lack of acceptable security technologies;
o     lack of timely development and commercialization of performance
      improvements;
o     unavailability of cost-effective, high-speed access to the Internet.

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


                                       29
<PAGE>

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

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

o     the rate at which we are able to attract users to purchase our enhanced IP
      communications services, including our Hosted Communications Solutions;
o     the amount and timing of expenses to enhance marketing and promotion
      efforts and to expand our infrastructure;
o     the timing of announcements or introductions of new or enhanced services
      by us.

      The factors outside our control include:

o     the timing of announcements or introductions of new or enhanced services
      by our competitors;
o     technical difficulties or network interruptions in the Internet or our
      privately-managed network;
o     general economic and competitive conditions specific to our industry.

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

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

OUR NETWORK MAY NOT BE ABLE TO ACCOMMODATE OUR CAPACITY NEEDS

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

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

      Our business depends on the efficient and uninterrupted operation of our
computer and communications systems as well as those that connect to our
network. We maintain communications systems in four facilities in New York, Los
Angeles, London and Jerusalem. Our systems and those that connect to our network
are subject to disruption from natural disasters or other sources of power loss,
communications failure, hardware or software malfunction, network failures and
other events both within and beyond our control. Any system interruptions that
cause our services to be unavailable, including significant or lengthy telephone
network failures or difficulties for users in communicating through our network
or portal, could damage our reputation and result in a loss of users.

OUR COMPUTER SYSTEMS AND OPERATIONS MAY BE VULNERABLE TO SECURITY BREACHES

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


                                       30
<PAGE>

THIRD PARTIES MIGHT INFRINGE UPON OUR PROPRIETARY TECHNOLOGY

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

OUR SERVICES MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS

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

OPERATING INTERNATIONALLY EXPOSES US TO ADDITIONAL AND UNPREDICTABLE RISKS

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

o     potentially weaker protection of intellectual property rights;
o     political instability;
o     unexpected changes in regulations and tariffs;
o     fluctuations in exchange rates;
o     varying tax consequences;
o     uncertain market acceptance and difficulties in marketing efforts due to
      language and cultural differences.

WE HAVE EXPERIENCED LOSSES AS A RESULT OF FRAUD

      We have experienced losses due to fraud. While in 2003, we experienced
losses from fraud of less than 1% of our revenues, callers have obtained our
services without rendering payment by unlawfully using our access numbers and
personal identification numbers. While we have implemented anti-fraud measures
in order to control losses relating to these practices, and these measures have
proven to be effective today, these measures may not in the future be sufficient
to effectively limit all of our exposure in the future from fraud and future
losses could rise significantly above current levels.

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

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


                                       31
<PAGE>

      We also compete in the growing market of discount telecommunications
services including calling cards, prepaid cards, call-back services, dial-around
or 10-10 calling and collect calling services. In addition, some Internet
service providers have begun to aggressively enhance their real time interactive
communications, focusing initially on instant messaging, although we expect them
to begin to provide PC-to-phone and/or broadband phone services.

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

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

DECREASING TELECOMMUNICATIONS RATES MAY DIMINISH OR ELIMINATE OUR COMPETITIVE
PRICING ADVANTAGE

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


                                       32
<PAGE>

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

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

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

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

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

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

RISKS RELATED TO OUR RELATIONSHIP WITH ATAREY

ATAREY CONTROLS ALL MATTERS SUBMITTED TO A STOCKHOLDER VOTE

         Atarey owns approximately 51% of the voting power and economic interest
in us. As long as Atarey continues to beneficially own shares of capital stock
representing more than 50% of the voting power of our outstanding capital stock,
Atarey will be able to exercise a controlling influence over decisions affecting
us, including:

o     composition of our board of directors and, through it, our direction and
      policies, including the appointment and removal of officers;
o     mergers or other business combinations;
o     acquisitions or dispositions of assets by us;
o     future issuances of capital stock or other securities by us;
o     incurrence of debt by us;
o     amendments, waivers and modifications to any agreements between us and
      Atarey;
o     payment of dividends on our capital stock;
o     approval of our business plans and general business development.

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

RISKS RELATED TO OUR COMMON STOCK

A THIRD PARTY MAY BE DETERRED FROM ACQUIRING OUR COMPANY


                                       33
<PAGE>

      Atarey's majority ownership could delay, deter or prevent a third party
from attempting to acquire control of us. This may have the effect of
discouraging a third party from making a tender offer or otherwise attempting to
obtain control of us, even though such a change in ownership would be
economically beneficial to us and our stockholders.

VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT OUR STOCKHOLDERS

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

o     variations in our actual or anticipated quarterly operating results or
      those of our competitors;
o     announcements by us or our competitors of technological innovations;
o     introduction of new products or services by us or our competitors;
o     changes in financial estimates by securities analysts;
o     conditions or trends in the Internet industry;
o     changes in the market valuations of other Internet companies;
o     announcements by us or our competitors of significant acquisitions;
o     our entry into strategic partnerships or joint ventures;
o     sales of our common stock by Atarey.

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

     Investors may not be able to resell their shares of our common stock
following periods of volatility because of the market's adverse reaction to such
volatility. In addition, the stock market in general, and the market for
telecommunications, Internet-related and technology companies in particular, has
been dramatically decreased and is extremely depressed.. We cannot assure you
that our common stock will trade at the same levels of other telecommunications
or Internet stocks or that telecommunications or Internet stocks in general will
sustain their current market prices.

THE LIQUIDITY OF OUR COMMON STOCK COULD BE ADVERSELY AFFECTED BY CHANGES IN OUR
NASDAQ LISTING.

      Our common stock is currently listed on the Nasdaq SmallCap Market. The
listing of our common stock was transferred from the Nasdaq National Market to
the Nasdaq SmallCap Market effective on September 17, 2002. We currently meet
all criteria for continued inclusion in the Nasdaq SmallCap Market. However,
based on the volatile nature of our stock price, we can make no assurances that
we will continue to do so. Failure to meet these criteria could result in our
delisting from the Nasdaq SmallCap Market. If our shares were to be delisted
from the Nasdaq SmallCap Market, our shares would continue to trade, if at all,
on the OTC Bulletin Board, upon application by the requisite market makers. This
would adversely impact our stock price, as well as the liquidity of the market
for our shares which, as a result, would adversely affect the ability of our
stockholders to purchase and sell their shares in an orderly manner, or at all.
Furthermore, a delisting of our shares could damage our general business
reputation and impair our ability to raise additional funds. Any of the
foregoing events could have a material adverse effect on our business, financial
condition and operating results.

WE DO NOT INTEND TO PAY DIVIDENDS

      We have never declared or paid any cash dividends on our common stock. We
intend to retain any future earnings to finance our operations and to expand our
business and, therefore, do not expect to pay any cash dividends in the
foreseeable future.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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


                                       34
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

         None.

ITEM 9A.  CONTROLS AND PROCEDURES

         (a) Evaluation of Disclosure Controls and Procedures. Our principal
         executive officer and principal financial officer, after evaluating the
         effectiveness of our disclosure controls and procedures (as defined in
         Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period
         covered by this Annual Report on Form 10-K, have concluded that, based
         on such evaluation, our disclosure controls and procedures were
         adequate and effective to ensure that material information relating to
         us, including our consolidated subsidiaries, was made known to them by
         others within those entities, particularly during the period in which
         this Annual Report on Form 10-K was being prepared.

                  (b) Changes in Internal Controls. There were no changes in our
         internal control over financial reporting, identified in connection
         with the evaluation of such internal control that occurred during the
         fourth quarter of our last fiscal year, that have materially affected,
         or are reasonably likely to materially affect, our internal control
         over financial reporting.


                                       35
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information required by this Item is incorporated herein by reference
to the sections entitled "Management" and "Principal Stockholders" in the proxy
statement for our 2004 Annual Meeting of Stockholders.

      On March 25, 2004, we adopted a Corporate Code of Conduct and Ethics
applicable to all employees and directors of deltathree, including our principal
executive officer, principal financial and accounting officer and controller. A
copy of the Code of Conduct and Ethics is attached as an exhibit to this Annual
Report. We intend to post on our website any amendments to, or waivers from, our
Code of Conduct and Ethics that apply to our principal executive officer,
principal financial and accounting officer and controller.


ITEM 11.  EXECUTIVE COMPENSATION

      The information required by this Item is incorporated herein by reference
to the section entitled "Executive Compensation" in the proxy statement for our
2004 Annual Meeting of Stockholders.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

      The information required by this Item is incorporated herein by reference
to the section entitled "Principal Stockholders" in the proxy statement for our
2004 Annual Meeting of Stockholders.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by this Item is incorporated herein by reference
to the section entitled "Related Party Transactions" in the proxy statement for
our 2004 Annual Meeting of Stockholders.

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

      The information required by this Item is incorporated herein by reference
to the section entitled "Principal Accounting Fees and Services" in the proxy
statement for our 2004 Annual Meeting of Stockholders.


                                       36
<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.
14.1           deltathree, Inc. Corporate Code of Conduct and Ethics
23.1           Consent of Brightman Almagor & Co.
31.1           Certification of the Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2           Certification of the Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32             Certifications 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>

----------
*     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.


                                       37
<PAGE>

      (b) Reports on Form 8-K.

      We furnished a report on Form 8-K dated November 6, 2003 reporting under
Item 12 our press release regarding our earnings for the quarter ended September
30, 2003.



                                       38
<PAGE>

<TABLE>
<CAPTION>

                                DELTATHREE, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

 Consolidated Balance Sheets as of  December 31, 2003 and 2002................................................ F-3

 Consolidated Statements of  Operations for the years ended December 31, 2003, 2002, and 2001................. F-4

 Statements of  Changes in Stockholders' Equity for the years ended December 31, 2003, 2002, and 2001......... F-5

 Consolidated Statements of  Cash Flows for the years ended December 31, 2003, 2002, and 2001................. F-6

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

</TABLE>


                                       F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


To the Stockholders of
Deltathree, Inc.

      We have audited the accompanying consolidated balance sheets of
Deltathree, Inc. ("the Company") as of December 31, 2003 and 2002 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,
2003. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 2003 and 2002, and the consolidated results of
its operations and its consolidated cash flows for each of the three years in
the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.

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

Tel Aviv, Israel
February 25, 2004


                                      F-2
<PAGE>

<TABLE>
<CAPTION>

                                DELTATHREE, INC.
                           CONSOLIDATED BALANCE SHEETS

                                                                                         DECEMBER 31,
                                                                                   2003                2002
                                                                                   ----                ----
                                                                                       ($ IN THOUSANDS)
ASSETS
CURRENT ASSETS:
<S>                                                                                 <C>                 <C>
 Cash and cash equivalents............................................              $1,682              $5,681
 Short-term investments...............................................              16,442              15,552
 Accounts receivable, net (Note 3) ...................................                 363                 652
 Prepaid expenses and other current assets (Note 4)...................                 684                 760
 Inventory............................................................                  60                   -
                                                                                 ---------           ---------
    Total current assets..............................................              19,231              22,645
                                                                                 ---------           ---------
PROPERTY AND EQUIPMENT:
 Telecommunications equipment.........................................              14,548              14,344
 Furniture, fixtures and other........................................                 534                 570
 Leasehold improvements...............................................               4,615               4,615
 Computers hardware & software........................................               7,091               6,891
                                                                                 ---------           ---------
                                                                                    26,788              26,420
 Less accumulated depreciation........................................             (22,481)            (16,968)
                                                                                 ---------           ---------
      Property and equipment, net.....................................               4,307               9,452
                                                                                 ---------           ---------
DEPOSITS..............................................................                 105                 100
                                                                                 ---------           ---------

     Total assets.....................................................             $23,643             $32,197
                                                                                 =========           =========
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
 Accounts payable.....................................................              $2,139              $2,306
 Deferred revenues ...................................................                 172                 334
 Other current liabilities (Note 5)...................................               2,100               2,330
                                                                                 ---------           ---------
    Total current liabilities.........................................               4,411               4,970
                                                                                 ---------           ---------
LONG-TERM LIABILITIES:
 Severance pay obligations (Note 6)...................................                  91                 113
                                                                                 ---------           ---------
    Total liabilities.................................................               4,502               5,083
                                                                                 ---------           ---------
COMMITMENTS AND CONTINGENCIES (NOTE 7)

STOCKHOLDERS' EQUITY (NOTE 8):
Share capital:........................................................
 Class A Common stock, - par value $0.001; authorized 75,000,000 shares;
   issued and outstanding: 29,490,796 at December 31, 2003;
   29,159,772  at December 31, 2002...................................                  29                  29
 Class B Common stock - par value $0.001; authorized 1,000;
    issued and outstanding: no shares at December 31, 2003 and 2002...                   -                   -
 Preferred stock, par value $0.001; authorized 25,000,000 shares;
   issued and outstanding: no shares at December 31, 2003 and 2002....                   -                   -
 Additional paid-in capital...........................................             167,168             166,801
 Accumulated deficit..................................................           (147,846)           (139,506)
Treasury stock at cost: 257,600 shares of Class A Common Stock as of
  December 31, 2003 and 2002..........................................               (210)               (210)
                                                                                 ---------           ---------
Total stockholder's equity............................................              19,141              27,114
                                                                                 ---------           ---------
Total liabilities and stockholder's equity............................             $23,643             $32,197
                                                                                 =========           =========

    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS

</TABLE>


                                      F-3
<PAGE>

<TABLE>
<CAPTION>

                                DELTATHREE, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                           Year ended December 31,
                                                                        2003        2002         2001
                                                                     ---------    --------    ---------
                                                                       ($ in thousands, except share data)

Revenues (Note 13):
<S>                                                                  <C>          <C>         <C>
  Affiliates...................................................      $       -    $      -    $   1,669
  Non-affiliates...............................................         13,162      12,929       13,991
                                                                     ---------    --------    ---------
Total revenues.................................................         13,162      12,929       15,660

Costs and operating expenses:
  Cost of revenues (exclusive of  $1,539, $1,703 and $1,579
     depreciation included in a separate line
     below, respectively)......................................          8,393       8,934       13,486
  Research and development expenses (Note 9)...................          2,326       3,435        5,648
  Selling and marketing expenses...............................          3,325       3,910        7,800
  General and administrative expenses (exclusive of
     non-cash compensation expense shown below)................          2,062       2,158        6,982
  Non-cash compensation expense................................              -         270          825
  Depreciation and amortization................................          5,584       6,606        8,996
  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
                                                                     ---------    --------    ---------

Total costs and operating expenses.............................         21,690      25,313       52,519
                                                                     ---------    --------    ---------

Loss from operations...........................................         (8,528)    (12,384)     (36,859)
Interest income, net...........................................            245         448        1,677
                                                                     ---------    --------    ---------
Loss before income taxes.......................................         (8,283)    (11,936)     (35,182)
Income taxes (Note 12).........................................             57         141          552
                                                                     ---------    --------    ---------
Net loss.......................................................      $  (8,340)   $(12,077)   $ (35,734)
                                                                     =========    ========    =========
Net loss per share - basic and diluted ........................      $   (0.29)   $  (0.42)   $   (1.23)
                                                                     =========    ========    =========
Weighted average number of shares outstanding -
 basic and diluted (number of shares)..........................     28,988,589  28,888,367   29,035,319
                                                                    ==========  ==========   ==========
</TABLE>



                                      F-4
<PAGE>

<TABLE>
<CAPTION>
                               CLASS A                CLASS B
                             COMMON STOCK          COMMON STOCK      ADDITIONAL                 TREASURY                  TOTAL
                        ---------------------  --------------------    PAID-IN     DEFERRED       STOCK    ACCUMULATED STOCKHOLDERS'
                          SHARES     AMOUNT      SHARES     AMOUNT     CAPITAL   COMPENSATION   (AT COST)    DEFICIT      EQUITY
                        ----------  ---------  ----------  --------  ----------  ------------   ---------  ----------- ------------
<S>                      <C>        <C>        <C>         <C>       <C>         <C>            <C>        <C>              <C>
Balance at
 January 1, 2001.......  9,465,099   $      9  19,569,459  $     20  $  166,733  $     (2,588)  $     --     $   (91,695) $  72,479
Exercise of
 employee options......    108,648                                           68                                                  68
Purchase of
 treasury stock........   (257,600)                                                                 (210)                      (210)
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
 employee options .....     16,566        --*                                --                                                  --
Amortization of
 deferred
 compensation expense..                                                                   270                                   270
Loss for the year......                                                                                          (12,077)   (12,077)
                        ----------  ---------  ----------  --------  ----------  ------------   --------     -----------  ---------
Balance at
 December 31, 2002..... 28,902,172         29          --        --     166,801            --       (210)       (139,506)    27,114
Exercise of
 employee options......    331,024        --*                               367                                                 367
Loss for the year......                                                                                           (8,340)    (8,340)
                        ----------  ---------  ----------  --------  ----------  ------------   --------     -----------  ---------
Balance at
 December 31, 2003..... 29,233,196  $      29          --  $     --  $  167,168   $        --   $   (210)    $  (147,846) $  19,141
                        ==========  =========  ==========  ========  ==========  ============   ========     ===========  =========
</TABLE>


* - Less than $ 1 thousand.


   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS


                                       F-5

<PAGE>

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


                                                                                   YEAR ENDED DECEMBER 31,
                                                                                  -------------------------
                                                                                 2003        2002        2001
                                                                                 ----        ----        ----
                                                                                         ($ IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                            <C>        <C>         <C>
Net loss ...................................................................   $(8,340)   $(12,077)   $(35,734)
  Adjustments to reconcile net loss to net cash used in operating activities
       Depreciation and amortization .......................................     5,584       6,606       8,996
       Write-down of fixed assets ..........................................        --          --       1,003
       Impairment of goodwill ..............................................        --          --       4,151
       Amortization of deferred compensation ...............................        --         270       2,318
       Capital loss (gain), net ............................................       (17)        (56)          1
       Increase (decrease) in liability for severance pay, net .............       (22)        (78)         22
       Provision for losses on accounts receivable .........................        65          81       1,104
  Changes in assets and liabilities:
       Decrease in accounts receivable .....................................       224         359       1,272
       Decrease in other current assets and due from affiliates ............        76         504         928
       Increase in inventory ...............................................       (60)         --          --
       Decrease in accounts payable ........................................      (269)       (975)     (3,053)
       Decrease in deferred revenues .......................................      (162)       (171)        254
       Increase in current liabilities and due to affiliates ...............      (230)       (667)     (3,965)
                                                                               -------     -------     -------
                                                                                 5,189       5,873      13,031
                                                                               -------     -------     -------
  Net cash used in operating activities ....................................    (3,151)     (6,204)    (22,703)
                                                                               -------     -------     -------

CASH FLOWS FROM INVESTING ACTIVITIES:
       Purchase of property and equipment ..................................      (368)       (403)     (1,558)
       Proceeds from sale of property and equipment ........................        48          62         467
       Increase (decrease) in deposits .....................................        (5)          3         (30)
                                                                               -------     -------     -------
  Net cash used in investing activities ....................................      (325)       (338)     (1,121)
                                                                               -------     -------     -------

CASH FLOWS FROM FINANCING ACTIVITIES:
       Decrease (increase) in short-term investments .......................      (890)     (1,360)     16,692
       Purchase of treasury stock ..........................................        --          --        (210)
       Proceeds from exercise of employee options ..........................       367          --          68
                                                                               -------     -------     -------
  Net cash provided by (used in) financing activities ......................      (523)     (1,360)     16,550
                                                                               -------     -------     -------

Decrease in cash and cash equivalents ......................................    (3,999)     (7,902)     (7,274)
Cash and cash equivalents at beginning of year .............................     5,681      13,583      20,857
                                                                               -------     -------     -------
CASH AND CASH EQUIVALENTS AT END OF YEAR ...................................   $ 1,682    $  5,681    $ 13,583
                                                                               -------     -------     -------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid for:
    Taxes ..................................................................   $    57     $    236    $    552

SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
  Acquisition of fixed assets on credit ....................................   $   102     $    194    $     --
  Cancellation of fixed assets in exchange of a payable ....................   $    --     $    136    $     --
</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.



NOTE 2 -        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------------------

      A.    BASIS OF PRESENTATION

      The financial  statements have been prepared in accordance with accounting
      principles generally accepted in the United States of America.

      B.    PRINCIPLES OF CONSOLIDATION

      The consolidated  financial statements include the accounts of the Company
      and its subsidiary. All significant intercompany accounts and transactions
      have been eliminated.

      C.    FINANCIAL STATEMENTS IN U.S. DOLLARS

      The reporting currency of the Company is the U.S. dollar  ("dollar").  The
      dollar is the  functional  currency  of the  Company  and its  subsidiary.
      Transactions and balances originally  denominated in dollars are presented
      at their  original  amounts.  Non-dollar  transactions  and  balances  are
      remeasured  into dollars in accordance  with the  principles  set forth in
      Statement of Financial  Accounting Standards ("SFAS") No. 52. All exchange
      gains  and  losses  from  translation  of  monetary  balance  sheet  items
      resulting from  transactions in non-dollar  currencies are recorded in the
      statement of operations as they arise.

      D.    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 revenues and expenses  during the  reporting  period.
      Actual results could differ from those estimates.

      E.    CASH AND CASH EQUIVALENTS

      Cash equivalents consist of short-term, highly liquid investments that are
      readily  convertible into cash with original maturities of three months or
      less.

      F.    SHORT-TERM INVESTMENTS

      Short-term  investments  consist primarily of high liquid debt instruments
      purchased  with an  original  maturity  at the date of purchase of greater
      than 90 days and investments in mutual funds.  Short-term  investments are
      stated at market value.

      G.    INVENTORY

      Inventory is stated at the lower of cost  (principally  on a standard cost
      basis which approximates FIFO) or market.

      H.    PROPERTY AND EQUIPMENT

      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.  Leasehold
      improvements  are  amortized  based on the  straight-line  method over the
      shorter  of the term of the lease,  or the  estimated  useful  life of the
      improvements.

                                       F-7
<PAGE>

                                DELTATHREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 -        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
------------------------------------------------------------------

      I.    LONG LIVED ASSETS

      The Company  complies with provisions of SFAS No. 144,  Accounting for the
      Impairment or Disposal of Long-Lived Assets.  This statement requires that
      long-lived assets and certain  identifiable  intangible assets be reviewed
      for impairment  whenever events or changes in circumstances  indicate that
      the carrying amount of an asset may not be recoverable.  Recoverability of
      assets to be held and used is measured  by a  comparison  of the  carrying
      amount of an asset to  undiscounted  future net cash flows  expected to be
      generated by the asset. If such assets are considered to be impaired,  the
      impairment  to be  recognized  is  measured  by the  amount  by which  the
      carrying amount of the assets exceeds the fair value of the assets.

      J.    REVENUE RECOGNITION AND DEFERRED REVENUE

      The Company recognizes  revenues 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.

      K.    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.

      L.    RESEARCH AND DEVELOPMENT EXPENSES

      Research and development expenses are expensed as incurred.

      M.    INCOME TAXES

      The company provides for income taxes using the liability approach defined
      by SFAS No. 109,  Accounting  for Income  Taxes.  Deferred  tax assets and
      liabilities are recognized for the expected tax  consequences  between the
      tax  bases of the  assets  and  liabilities  and their  reported  amounts.
      Valuation allowances are established when necessary to reduce deferred tax
      assets to the amount expected to be realized and are reversed at such time
      that realization is believed to be more likely than not.

      N.    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  Company  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.

      Had  compensation  cost for the Company's  option plans been determined on
      the basis of the fair  value at the  grant  dates in  accordance  with the
      provisions of SFAS No. 123 "Accounting for Stock-Based  Compensation,"  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:

                                       F-8
<PAGE>

                                DELTATHREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 -        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
------------------------------------------------------------------

      N.    STOCK-BASED COMPENSATION (CONT.)

<TABLE>
<CAPTION>

                                                                             YEAR ENDED DECEMBER 31,
                                                                             -----------------------
                                                                        2 0 0 3      2 0 0 2      2 0 0 1
                                                                        -------      -------      -------
                                                                                ($ IN THOUSANDS)
                                                                                ----------------
      Pro forma net loss:
        <S>                                                           <C>         <C>       <C>
          Net loss for the year, as reported .......................   $ (8,340)   $(12,077)   $(35,734)
          Deduct: stock-based compensation determined under APB 25..        --          270         825
          Add: stock-based compensation determined under SFAS 123...       (374)     (2,102)     (3,434)
                                                                       --------    --------    --------

          Pro forma net loss .......................................   $ (8,714)   $(13,909)   $(38,343)
                                                                       --------    --------    --------

      Net loss per share - basic and diluted:
          As reported ..............................................   $  (0.29)   $  (0.42)   $  (1.23)
          Pro forma ................................................   $  (0.30)   $  (0.48)   $  (1.35)
</TABLE>

      The  following  assumptions  were used for the years 2003,  2002 and 2001:
      dividend yield of 0.00% for all periods;  risk-free interest rate of 2.2%,
      4.8% and 6% respectively;  an expected life of 3-years for all periods;  a
      volatility rate of 140%, 150% and 70% respectively.

      Because  the  determination  of the  fair  value  of all  options  granted
      includes an expected  volatility factor 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.

      O.    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 222,553;  32,746;  and 168,212  incremental
      shares were excluded from the calculation of diluted net loss per ordinary
      share for 2003, 2002 and 2001 respectively.

      P.    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 balances at 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.

      Q.    FAIR VALUE OF FINANCIAL INSTRUMENTS

      The financial  instruments of the Company  consist mainly of cash and cash
      equivalents, short-term investments, current accounts receivable, accounts
      payable and long-term liabilities. In view of their nature, the fair value
      of the financial instruments included in working capital of the Company is
      usually identical or close to their carrying amounts.

                                       F-9
<PAGE>

                                DELTATHREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 -        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
------------------------------------------------------------------

      R.    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.

      S.    RECENTLY ISSUED ACCOUNTING STANDARDS

      In  January  2003,  the FASB  issued  Interpretation  No.  46 ("FIN  46"),
      "Consolidation  of Variable  Interest  Entities,  an interpretation of ARB
      51.."  The  primary  objectives  of  this  interpretation  are to  provide
      guidance on the  identification  of entities for which control is achieved
      through  means  other  than  through  voting  rights  ("variable  interest
      entities") and how to determine when and which  business  enterprise  (the
      "primary  beneficiary")  should  consolidate the variable interest entity.
      This new model for consolidation  applies to an entity in which either (i)
      the  equity  investors  (if  any)  do  not  have a  controlling  financial
      interest; or (ii) the equity investment at risk is insufficient to finance
      that  entity's  activities  without  receiving   additional   subordinated
      financial  support from other parties.  In addition,  FIN 46 requires that
      the  primary  beneficiary,  as  well  as  all  other  enterprises  with  a
      significant   variable  interest  in  a  variable  interest  entity,  make
      additional  disclosures.  Certain  disclosure  requirements of FIN 46 were
      effective  for  financial  statements  issued after  January 31, 2003.  In
      December   2003,  the  FASB  issued  FIN  46  (revised   December   2003),
      "Consolidation  of Variable  Interest  Entities"  ("FIN  46-R") to address
      certain FIN 46  implementation  issues.  The effective dates and impact of
      FIN 46 and FIN 46-R are as follows: (i) Special-purpose  entities ("SPEs")
      created  prior to February  1, 2003.  The  company  must apply  either the
      provisions of FIN 46 or early adopt the  provisions of FIN 46-R at the end
      of the first interim or annual  reporting period ending after December 15,
      2003.  (ii)  Non-SPEs  created  prior to February 1, 2003.  The company is
      required  to adopt  FIN 46-R at the end of the  first  interim  or  annual
      reporting  period  ending  after  March  15,  2004.  (iii)  All  entities,
      regardless of whether an SPE, that were created  subsequent to January 31,
      2003. The provisions of FIN 46 were  applicable for variable  interests in
      entities  obtained  after January 31, 2003. The adoption of the provisions
      applicable to SPEs and all other variable interests obtained after January
      31,  2003 did not have a  material  impact on the  company's  consolidated
      financial position, consolidated results of operations, or liquidity.

      In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on
      Derivative  Instruments and Hedging  Activities."  SFAS No. 149 amends and
      clarifies  accounting  for  derivative   instruments,   including  certain
      derivative  instruments  embedded  in  other  contracts,  and for  hedging
      activities  under SFAS No. 133. In particular,  this  Statement  clarifies
      under what  circumstances a contract with an initial net investment  meets
      the  characteristic  of a derivative.  It also clarifies when a derivative
      contains a financing  component  that  warrants  special  reporting in the
      statement of cash flows. SFAS No. 149 is generally effective for contracts
      entered into or modified after June 30, 2003 and did not have an impact on
      the Company's financial statements.

      In May  2003,  the FASB  issued  SFAS No.  150,  "Accounting  for  Certain
      Financial   Instruments  with  Characteristics  of  both  Liabilities  and
      Equity." SFAS No. 150 establishes  standards for how a company  classifies
      and measures certain financial  instruments with  characteristics  of both
      liabilities  and  equity.  It  requires  that an issuer  classify  certain
      financial   instruments   as  a   liability   (or  as  an  asset  in  some
      circumstances).  SFAS  No.  150 is  effective  for  financial  instruments
      entered into or modified after May 31, 2003, and otherwise is effective at
      the beginning of the first interim period  beginning  after June 15, 2003.
      The  adoption  of SFAS No.  150 did not have an  impact  on the  Company's
      financial statements.


NOTE 3 -        ACCOUNTS RECEIVABLE, NET
----------------------------------------

      Accounts  receivable are stated net of an allowance for doubtful  accounts
      of $ 40,000 and $ 81,000 at December 31, 2003 and 2002, respectively.

                                      F-10
<PAGE>




                                DELTATHREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4 -        PREPAID EXPENSES AND OTHER CURRENT ASSETS
---------------------------------------------------------

      Prepaid expenses and other current assets consist of the following:

                                                                  DECEMBER 31,
                                                                  ------------
                                                                 2003      2002
                                                                 ----      ----
                                                               ($ IN THOUSANDS)
      Government of Israel (VAT refund and other) ............ $    24   $   26
      Deposits with suppliers ................................     364      378
      Prepaid expenses .......................................     228      350
      Other ..................................................      68        6
                                                               -------   ------
         Total prepaid expenses and other current assets ..... $   684   $  760
                                                               -------   ------


NOTE 5 -        OTHER CURRENT LIABILITIES
-----------------------------------------

      Other current liabilities consist of the following:

                                                                  DECEMBER 31,
                                                                  ------------
                                                                 2003      2002
                                                                 ----      ----
                                                               ($ IN THOUSANDS)
      Accrued expenses ....................................... $ 1,017   $  977
      Employees and related expenses .........................     806    1,127
      Other ..................................................     277      226
                                                               -------   ------
        Total other current liabilities ...................... $ 2,100   $2,330
                                                               -------   ------


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  )income)  relating  to  employee  termination  benefits  were  $
      (8,375), $ 5,000 and $ 128,000 for the years ended December 31, 2003, 2002
      and 2001, respectively.

      The aggregate value of the insurance  policies as of December 31, 2003 and
      2002 was $409,000 and $408,000 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 $815,000  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.

      On October  2003 the company  entered  into a sub-lease  agreement  with a
      third  party to  sub-lease  approximately  30% of the overall the New York
      office space. The annual  sub-lease  income is approximately  $148,000 for
      the first year,  increasing  annually to $168,000 during the final year of
      the lease. The sub-lease extends until July 2010.

                                      F-11
<PAGE>

                                DELTATHREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7 -        COMMITMENTS AND CONTINGENCIES (CONT.)
-----------------------------------------------------

      A.    LEASE COMMITMENTS (CONT.)

      Rent  expense,  net was $ 695,067,  $ 681,545  and $ 667,261 for the years
      ended December 31, 2003, 2002 and 2001, respectively.

      In addition,  the Company  leases offices in Israel at an annual cost of $
      292,000.  The lease term that expired on February 2003 contained an option
      to extend the lease for up to an additional  five years.  In June 2002 the
      Company  signed an  extension  agreement  for an  additional  three years,
      commencing February 2003, at an annual cost of $202,000.

      B.    LEGAL PROCEEDINGS

      The Company, as well as certain of its former officers and directors, have
      been named as defendants in a number of purported securities class actions
      in Federal District Court for the Southern  District of New York,  arising
      out of our 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's  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  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.  In July 2002,  omnibus  motions  to  dismiss  the
      complaints  based on  common  legal  issues  were  filed on  behalf of all
      issuers  and  underwriters.  On February  19,  2003,  the Court  issued an
      opinion granting in part and denying in part those motions to dismiss. The
      complaint  against the Company was not dismissed as a matter of law. 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. A proposed  settlement  agreement  between the plaintiffs and issuer
      defendants is in the process of being negotiated and approved.


      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 8 -        STOCKHOLDERS' EQUITY
------------------------------------

      A. SHARE CAPITAL

      Following the Company's initial public offering,  effective December 1999,
      the Company's stock was listed on the NASDAQ  National  Market System.  On
      September  17,  2002  the  listing  of  the  Company's  common  stock  was
      transferred from the Nasdaq National Market to the Nasdaq SmallCap Market.


      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).. 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,

                                     F - 12
<PAGE>

                                DELTATHREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8 -         STOCKHOLDERS' EQUITY (CONT.)
---------------------------------------------

      B.    CNET TRANSACTION (CONT.)

      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, 2003,  options to purchase  2,753,130 shares of Class A
      were  outstanding  with exercise prices ranging between $ 0.004 and $15.00
      per share.

      A summary of the status of the Company's stock option plans as of December
      31,  2003,  2002 and 2001 and  changes  during  the years then  ended,  is
      presented below:

<TABLE>
<CAPTION>

                                      DECEMBER 31, 2003   DECEMBER 31, 2002    DECEMBER 31, 2001
                                     ------------------  ------------------   ------------------
                                               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 ............  3,449,520  $  2.87  2,591,205   $  4.24   1,626,843   $  8.72
Granted during the year ..........    344,500  $  1.75  1,335,348   $  0.98   1,978,416   $  3.68
Exercised during the year ........    331,024  $ 1.088     16,566   $ 0.004      50,961   $  0.00
Forfeited during the year ........    709,866  $  4.39    460,467   $  5.20     963,093   $  8.77
                                    ---------           ---------             ---------
Outstanding at end of year .......  2,753,130  $  2.55  3,449,520   $  2.87   2,591,205   $  4.24
                                    =========           =========             =========
Weighted average fair value of
options granted during the year ..  $    1.75           $    0.95             $    2.39
                                    =========           =========             =========
</TABLE>


                                      F-13
<PAGE>

                                DELTATHREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8 -        STOCKHOLDERS' EQUITY (CONT.)
--------------------------------------------

      C.    STOCK OPTIONS (CONT.)

      Additional  information  regarding options  outstanding as of December 31,
      2003 is as follows:

<TABLE>
<CAPTION>

                                        OPTIONS OPTIONS EXERCISABLE
                                        ---------------------------
                                              WEIGHTED AVERAGE
                                                 REMAINING       WEIGHTED         NUMBER OF        WEIGHTED
              RANGE OF            NUMBER OF     CONTRACTUAL      AVERAGE         EXERCISABLE       AVERAGE
           EXERCISE PRICES       OUTSTANDING    LIFE YEARS   EXERCISE PRICES      OPTIONS      EXERCISE PRICES
           ---------------      ------------    ----------   ---------------   ------------    ---------------
         <S>                   <C>                 <C>            <C>               <C>              <C>
          $0.00 --  $0.00           11,596          4.0          $  0.00            11,596          $  0.00
          $0.44 --  $0.44           51,500          8.5          $  0.44            16,162          $  0.44
          $0.74 --  $1.07          918,435          7.4          $  0.99           396,417          $  0.95
          $1.13 --  $1.38          847,684          7.0          $  1.33           847,684          $  1.33
          $1.75 --  $2.08          366,763          9.7          $  1.76            11,596          $  2.08
          $5.11 --  $5.11          357,152          5.2          $  5.11           357,152          $  5.11
          $10.25 - $15.00          200,000          4.6          $ 12.55           200,000          $ 12.55
                                 ---------                                       ---------
                                 2,753,130          7.1          $  2.55         1,840,607          $  3.19
                                 ---------                                       ---------
</TABLE>


NOTE 9 -        RESEARCH AND DEVELOPMENT EXPENSES
-------------------------------------------------

      Research and development expenses consist of the following:


                                               YEAR ENDED DECEMBER 31,
                                               -----------------------
                                               2003     2002     2001
                                               ----     ----     ----
                                                   ($ IN THOUSANDS)

Salaries and related expenses .............   $1,689   $2,462   $3,255
Consulting and advisory fees ..............       96       78      655
Travel ....................................       22       41      126
Other .....................................      519      854    1,612
                                               -----    -----    -----
    Total research and development expenses   $2,326   $3,435   $5,648
                                               -----    -----    -----


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 Note 1).


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.

                                      F-14
<PAGE>

                                DELTATHREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12 -       INCOME TAXES
----------------------------

      A.    PROVISION FOR INCOME TAXES

      No provision  for income  taxes was required for the years ended  December
      31, 2003, 2002 and 2001 due to net losses in these periods

      B.    TAX LOSS CARRYFORWARDS

      As of December 31, 2003, the Company had net operating loss  carryforwards
      generated  in the U.S.  and  Israel of  approximately  $127,574,000  and $
      6,583,000,   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.

      C.    IN ACCORDANCE  WITH SFAS NO. 109, THE COMPONENTS OF DEFERRED  INCOME
            TAXES ARE AS FOLLOWS:


                                                               DECEMBER 31,
                                                               ------------
                                                              2003       2002
                                                              ----       ----
                                                              ($ IN THOUSANDS)
      Net operating losses carryforwards...............     $ 48,297   $ 45,595
       Less valuation allowance .......................      (48,297)   (45,595)
                                                            --------   --------
         Net deferred tax assets ......................     $     --   $     --
                                                            --------   --------

      As of December 31, 2003,  and 2002, a valuation  allowance of $ 48,297,000
      and  $45,595,000  respectively,  is  provided  as the  realization  of the
      deferred tax assets are not assured.

      D.    LOSS BEFORE INCOME TAXES:

                                                     YEAR ENDED DECEMBER 31,
                                                     -----------------------
                                                 2003         2002        2001
                                                -------     -------     -------
                                                       (US$ IN THOUSANDS)
     Domestic................................. $  8,240     $  9,820   $ 26,330
      Foreign..................................      43        2,116      8,852
                                                --------    --------   --------
        Total.................................. $ 8,283     $ 11,936   $ 35,182
                                                --------    --------   --------

                                      F-15
<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,
                                                     -----------------------
                                                     2003      2002      2001
                                                     ----      ----      ----
                                                         ($ IN THOUSANDS)
      Revenues:
        United States ........................... $  4,602   $  5,077  $  9,123
        Europe ..................................      966        984     2,654
        South America ...........................      817        903        --
        Far East ................................      540      1,109     1,413
        Middle East .............................    4,040      3,041     1,457
        Other ...................................    2,197      1,815     1,013
                                                  --------   --------  --------
          Total revenues ........................ $ 13,162   $ 12,929  $ 15,660
                                                  --------   --------  --------

      Revenues from major customers exceeding 10% of revenues:
        Affiliates ..............................       --         --        11%
        Master Reseller - A .....................       19%        --        --


                                                                 DECEMBER 31,
                                                                 ------------
                                                                2003      2002
                                                                ----      ----
                                                               ($ IN THOUSANDS)
     Long-lived assets:
      United States ......................................   $  3,229   $  7,054
      Israel .............................................        653      1,554
      Europe .............................................        360        690
      Other ..............................................         65        154
                                                             --------   --------
        Total long-lived assets                              $  4,307   $  9,452
                                                             --------   --------

                                      F-16
<PAGE>

                                DELTATHREE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                   THREE MONTHS ENDED,
                                                                                   -------------------
                                                              MARCH 31        JUNE 30     SEPTEMBER 30     DECEMBER 31
                                                              --------        -------     ------------     -----------
                                                                       ($ IN THOUSANDS, EXCEPT PER SHARE DATA)
     2003
     ----
    <S>                                                       <C>            <C>            <C>            <C>
     Total revenues ....................................       $ 2,972        $ 2,985        $ 3,320        $ 3,885
     Costs and operating expenses:
       Cost of revenues ................................         1,862          1,955          2,010          2,566
       Research and development expenses ...............           663            555            562            546
       Selling and marketing expenses ..................           783            871            888            783
       General and administrative expenses (exclusive of
          non cash compensation expense shown below) ...           661            478            463            460
       Depreciation and amortization ...................         1,604          1,527          1,313          1,140
                                                            ----------     ----------     ----------      ---------
     Total costs and operating expenses ................         5,573          5,386          5,236          5,495
                                                            ----------     ----------     ----------      ---------
     Loss from operations ..............................        (2,601)        (2,401)        (1,916)        (1,610)
     Interest income, net ..............................           104             42             73             26
                                                            ----------     ----------     ----------      ---------
     Loss before income taxes ..........................        (2,497)        (2,359)        (1,843)        (1,584)
     Income taxes ......................................            18              4             24             11
                                                            ----------     ----------     ----------      ---------
     Net loss ..........................................      $ (2,515)       $(2,363)      $ (1,867)       $(1,595)
                                                            ----------     ----------     ----------      ---------
     Net loss per share - basic and diluted ............      $  (0.09)       $ (0.08)      $  (0.06)       $ (0.06)
                                                            ----------     ----------     ----------      ---------

     Weighted average number of shares outstanding -
          basic and diluted ............................    28,923,296     28,923,296     28,976,345     29,138,244
                                                            ----------     ----------     ----------     ----------

     2002
     ----
     Total revenues ....................................       $ 3,337        $ 3,154       $  3,214        $ 3,224
     Costs and operating expenses:
       Cost of revenues ................................         2,557          2,179          2,193          2,005
       Research and development expenses ...............           992            880            772            791
       Selling and marketing expenses ..................         1,051          1,168            808            883
       General and administrative expenses (exclusive of
          non cash compensation expense shown below) ...           610            511            623            414
       Non cash compensation expense ...................           162            108             --             --
       Depreciation and amortization ...................         1,635          1,643          1,675          1,653
                                                            ----------     ----------     ----------     ----------
     Total costs and operating expenses ................         7,007          6,489          6,071          5,746
                                                            ----------     ----------     ----------     ----------
     Loss from operations ..............................        (3,670)        (3,335)        (2,857)        (2,522)
     Interest income, net ..............................           129             52            194             73
                                                            ----------     ----------     ----------     ----------
     Loss before income taxes ..........................        (3,541)        (3,283)        (2,663)        (2,449)
     Income taxes ......................................            11             --             45             85
                                                            ----------     ----------     ----------     ----------
     Net loss ..........................................       $(3,552)       $(3,283)      $ (2,708)   $    (2,534)
                                                            ----------     ----------     ----------     ----------
     Net loss per share - basic and diluted ............       $ (0.12)       $ (0.11)      $  (0.09)   $     (0.09
                                                            ----------     ----------     ----------     ----------

     Weighted average number of shares outstanding -
     basic and diluted ............................         28,885,606     28,885,606     28,885,606     28,898,738

</TABLE>

                                      F-17
<PAGE>
                                   SIGNATURES

      Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, New York on the 26th day of March, 2004.

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

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

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

<TABLE>
<CAPTION>

              SIGNATURE                                          TITLE                              DATE
              ---------                                          -----                              ----
<S>                                                           <C>                              <C>
/s/ Shimmy Zimels                                  Chief Executive Officer, President          March 26, 2004
--------------------------------------                        and Director
Shimmy Zimels                                         (Principal Executive Officer)

/s/ Paul C. White                                  Chief Financial Officer (Principal          March 26, 2004
--------------------------------------             Accounting and Financial Officer)                 --
Paul C. White

/s/ Noam Bardin                                  Chairman of the Board of Directors            March 26, 2004
--------------------------------------
Noam Bardin

/s/ Ilan Biran                                                Director                         March 26, 2004
--------------------------------------
Ilan Biran

/s/ Ehud Erez                                                 Director                         March 26, 2004
--------------------------------------
Ehud Erez

/s/ Amir Gera                                                 Director                         March 26, 2004
--------------------------------------
Amir Gera


/s/ Joshua Maor                                               Director                         March 26, 2004
--------------------------------------
Joshua Maor

/s/ Lior Samuelson                                            Director                         March 26, 2004
--------------------------------------
Lior Samuelson

</TABLE>

                                      F-18