SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

_________________

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2000

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

Commission file number 000-26763

NET2PHONE, INC.
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 22-3559037
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)

520 Broad Street, Newark, New Jersey 07102
(Address of Principal Executive Offices, including Zip Code)
Registrant's Telephone Number, Including Area Code: (973) 412-2800

___________________________

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

As of December 11, 2000, the registrant had outstanding 28,092,470 shares
of common stock, $.01 par value and 33,619,000 shares of Class A stock, $.01 par
value.

NET2PHONE, INC.

TABLE OF CONTENTS

Page No.
-------

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets as of October 31, 2000 and July 31, 2000.............................. 3

Condensed Consolidated Statements of Operations for the three months ended
October 31, 2000 and 1999................................................................................. 4

Condensed Consolidated Statement of Stockholders' Equity for the three months ended
October 31, 2000.......................................................................................... 5

Condensed Consolidated Statements of Cash Flows for the three months ended October 31, 2000 and 1999........ 6

Notes to Condensed Consolidated Financial Statements........................................................ 7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................................................... 11

Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................................. 12

PART II. OTHER INFORMATION

Item 1. Legal Proceedings...................................................................................... 13

Item 2. Changes in Securities and Use of Proceeds.............................................................. 13

Item 3. Defaults Upon Senior Securities........................................................................ 13

Item 4. Submission of Matters to a Vote of Security Holders.................................................... 13

Item 5. Other Information...................................................................................... 13

Item 6. Exhibits and Reports on Form 8-K....................................................................... 13

Signatures....................................................................................................... 15

PART I--FINANCIAL INFORMATION

Item 1. Financial Statements

NET2PHONE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

October 31, July 31,
----------- -------
2000 2000
---- ----
(unaudited) (note 1)

ASSETS:
Current assets:
Cash and cash equivalents................................................. $ 243,056,599 $ 57,874,228
Marketable securities - current.................................... 135,950,423 59,142,518
Trade accounts receivable........................................... 12,237,733 9,754,931
Prepaid contract deposits........................................... 19,876,286 13,443,704
Inventory........................................................... 6,061,574 3,216,783
Prepaid expenses.................................................... 8,227,980 7,020,970
Notes receivable.................................................... 7,700,000 3,450,000
Other current assets................................................ 2,668,288 2,119,802
------------- -------------
Total current assets....................................... 435,778,883 156,022,936
Property and equipment, net......................................... 66,786,260 59,867,154
Investments......................................................... 23,017,318 19,845,349
Marketable securities - long term................................... 100,661,047 132,277,504
Intangible assets, net.............................................. 39,528,624 42,123,045
Other assets........................................................ 37,022,790 1,592,445
------------- -------------
Total assets............................................... $ 702,794,924 $ 411,728,433
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable.......................................................... $ 10,050,616 $ 19,783,115
Accrued expenses.......................................................... 22,614,744 17,230,019
Deferred revenue.......................................................... 7,045,185 5,010,951
Current portion of long-term obligations.................................. 2,719,675 2,743,761
Due to IDT................................................................ 1,876,315 4,883,111
------------- -------------
Total current liabilities.................................. 44,306,535 49,650,957
Accrued expenses.................................................... 4,300,000 4,300,000
Long-term obligations............................................... 5,149,877 5,203,340
------------- -------------
Total liabilities.......................................... 53,756,412 59,154,297

Minority interests.......................................................... 22,868,700 --

Redeemable common stock, $.01 par value; 582,749 shares outstanding......... 20,687,590 20,687,590

Commitments and contingencies

Stockholders' equity (deficit):
Common stock, $.01 par value; 200,000,000 shares authorized;........ 269,596 216,051
26,959,634 and 21,605,133 (including redeemable shares)
issued and outstanding.........................................
Class A stock, $.01 par value, 37,924,250 shares authorized;........ 336,248 339,167
33,625,000 and 33,916,750 shares issued and outstanding.........
Additional paid-in capital.......................................... 876,461,296 555,364,405
Accumulated deficit................................................. (153,961,766) (148,789,291)
Accumulated other comprehensive loss................................ (49,926,511) (41,757,843)
Deferred compensation - stock options............................... (44,927,646) (30,246,300)
Loans to stockholders............................................... (5,181,753) (3,239,643)
Treasury stock, at cost, 922,500 and no shares...................... (17,587,242) 0
------------- -------------
Total stockholders' equity................................. 605,482,222 331,886,546
------------- -------------
Total liabilities and stockholders' equity................. $ 702,794,924 $ 411,728,433
============= =============

The accompanying notes are an integral part of these condensed consolidated
financial statements.

NET2PHONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

Three months ended
------------------
October 31,
-----------
2000 1999
---- ----

Revenue:
Service revenue............................................................ $ 26,940,727 $12,379,956
Product revenue............................................................ 3,868,343 756,962
------------ -----------
Total revenue...................................................... 30,809,070 13,136,918

Costs and expenses:
Direct cost of revenue:
Service cost of revenue................................................ 16,919,644 6,330,498
Product cost of revenue................................................ 1,791,623 503,613
------------ -----------
Total direct cost of revenue....................................... 18,711,267 6,834,111
Selling and marketing...................................................... 12,453,267 6,266,476
General and administrative................................................. 17,516,403 5,707,539
Depreciation and amortization.............................................. 5,653,628 850,031
Compensation charge from the issuance of stock options..................... 4,769,904 2,930,574
------------ -----------
Total costs and expenses........................................... 59,104,469 22,588,731

Loss from operations....................................................... (28,295,399) (9,451,813)

Interest income, net....................................................... 5,991,516 1,086,543

Other income............................................................... 16,938,120 --
------------ -----------
Loss before minority interests............................................. (5,365,763) (8,365,270)

Minority interests......................................................... 193,284 --
------------ -----------
Net loss available to common shareholders.................................. $ (5,172,479) $(8,365,270)
============ ===========

Net loss per common share - basic and diluted.............................. ($ .09) ($ .17)
============ ===========

Weighted average number of common shares used in the calculation of
basic and diluted net loss per common share................................ 59,890,221 47,846,755
============ ===========

The accompanying notes are an integral part of these condensed consolidated
financial statements.

Net2Phone, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
Three Months Ended October 31, 2000

Additional
Common Stock Class A Stock Paid-In Accumulated
--------------------- --------------------
Shares Amount Shares Amount Capital Deficit
------ ------ ------ ------ ------- -------

Balance at July 31, 2000 21,605,133 $ 216,051 33,916,750 $ 339,167 $ 555,364,405 $ (148,789,291)
Net loss for the period ended October 31, 2000 (5,172,475)
Foreign currency translation
Unrealized equity securities loss, net

Comprehensive loss
Issuance of common stock to AT&T 4,000,000 40,000 295,943,720
Repurchase of common stock
Conversion of Class A stock to common stock 291,750 2,919 (291,750) (2,919)
Exercise of stock options 1,062,751 10,626 5,701,921
Amortization of deferred compensation
Deferred compensation 19,451,250
--------------------- -----------------------------------------------------
Balance at October 31, 2000 26,959,634 $ 269,596 33,625,000 $ 336,248 $ 876,461,296 $ (153,961,766)
===================== =====================================================

Accumulated
Other
Comprehensive Deferred Loans to Treasury Stock
-----------------------
Loss Compensation Stockholders Shares Amount
---- ------------ ------------ ------ ------

Balance at July 31, 2000 $ (41,757,843) $(30,246,300) $(3,239,643) $ -
Net loss for the period ended October 31, 2000
Foreign currency translation (17,942)
Unrealized equity securities loss, net (8,150,726)

Comprehensive loss
Issuance of common stock to AT&T
Repurchase of common stock 922,500 (17,587,242)
Conversion of Class A stock to common stock
Exercise of stock options (1,942,110)
Amortization of deferred compensation 4,769,904
Deferred compensation (19,451,250)
-------------------------------------------------------------------------
Balance at October 31, 2000 $ (49,926,511) $(44,927,646) $(5,181,753) 922,500 $ (17,587,242)
=========================================================================

Total
Stockholders'

Equity
------

Balance at July 31, 2000 $ 331,886,546
Net loss for the period ended October 31, 2000 (5,172,475)
Foreign currency translation (17,942)
Unrealized equity securities loss, net (8,150,726)
-------------
Comprehensive loss (13,341,143)
Issuance of common stock to AT&T 295,983,720
Repurchase of common stock (17,587,242)
Conversion of Class A stock to common stock -
Exercise of stock options 3,770,437
Amortization of deferred compensation 4,769,904
Deferred compensation -
-------------
Balance at October 31, 2000 $ 605,482,222
=============

The accompanying notes are an integral part of these condensed consolidated
financial statements.

NET2PHONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

Three Months Ended
October 31,
2000 1999
---- ----

Operating activities:
Net loss........................................................................... ($5,172,479) ($8,365,270)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization...................................................... 5,653,628 850,031
Amortization of discount on marketable securities.................................. (93,969) --
Amortization of deferred compensation.............................................. 4,769,904 2,930,574
Minority interests................................................................. (193,823) --
Gain on derivative instrument...................................................... (16,938,120) --
Changes in assets and liabilities:
Accounts receivable............................................................. (2,496,790) (530,840)
Prepaid contract deposits....................................................... (6,432,582) (3,123,023)
Inventory....................................................................... (2,899,738) --
Prepaid expenses................................................................ (1,207,776) --
Other current assets............................................................ (664,083) (2,452,184)
Other assets.................................................................... 977,632 --
Accounts payable................................................................ (8,739,771) 2,422,382
Accrued expenses................................................................ 4,398,143 (755,379)
Deferred revenue................................................................ 2,034,234 (554,889)
------------ ------------
Net cash used in operating activities................................................ (27,005,590) (9,578,598)

Investing activities:
Purchases of property and equipment................................................ (9,805,668) (5,286,781)
Purchases of marketable securities................................................. (78,192,167) --
Proceeds from the sale of marketable securities.................................... 5,473,961 --
Purchase of Aplio S.A.............................................................. (151,124) --
Issuance of notes receivable....................................................... (4,250,000) --
Investments........................................................................ (3,171,969) --
------------ ------------
Net cash used in investing activities................................................ (90,096,967) (5,286,781)

Financing activities:
Proceeds from issuance of initial public offering, net............................. -- 85,221,484
Proceeds from sale of common stock................................................. 295,983,720 --
Proceeds from issuance of Series A preferred stock by.............................. 23,062,523 --
Adir Technologies, Inc
Proceeds from exercise of stock options............................................ 3,770,437 999,750
Repurchase of common stock......................................................... (17,587,242) --
Net repayments to IDT Corporation.................................................. (3,006,796) (6,976,941)
------------ ------------
Net cash provided by financing activities............................................ 302,222,642 79,244,293
------------ ------------
Effect of exchange rate on cash...................................................... 62,286 --
------------ ------------
Net increase in cash and cash equivalents............................................ 185,182,371 64,378,914
Cash and cash equivalents at beginning of period..................................... 57,874,228 20,379,048
------------ ------------
Cash and cash equivalents at end of period........................................... $243,056,599 $ 84,757,962
============ ============

Supplemental disclosure of cash flow information:
Cash payments made for interest...................................................... $ -- $ --
============ ============
Cash payments made for income taxes.................................................. $ -- $ --
============ ============

The accompanying notes are an integral part of these condensed consolidated
financial statements.

NET2PHONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of
Net2Phone, Inc. and Subsidiaries (collectively "the Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. The results for the interim periods presented are not
necessarily indicative of the results that may be expected for any future
period. The balance sheet at July 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the financial statements
and notes thereto included in Net2Phone's annual report on Form 10-K for the
year ended July 31, 2000.

2. Earnings Per Share

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

3. AT&T Transaction

4. Adir Technologies, Inc.

In the first quarter 2001, Adir Technologies, Inc., a subsidiary of
Net2Phone, designated 135,000 shares of its preferred stock as Series A and sold
13,277 of such shares to unrelated third parties in a private placement
transaction for aggreate gross proceeds of approximately $23,234,750. In
addition, Adir sold 18,525 shares of its common stock to Net2Phone and Adir
employees in exchange for promissory notes of approximately $3.2 million.

5. Financial Instruments

Effective August 1, 1999 the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires
that all derivative financial instruments, such as interest rate swap contracts
and foreign exchange contracts, be recognized in the financial statements and
measured at fair value regardless of the purpose or intent for holding them.
Changes in the fair value of derivative financial instruments are either
recognized periodically in income or stockholders' equity (as a component of
comprehensive income), depending on whether the derivative is being used to
hedge changes in fair value or cash flows. In the first quarter of fiscal 2001,
the Company recorded a gain of approximately $16.9 million as a result of
marking to market its derivative instruments.

The carrying value of the Company's financial instruments approximates fair
value, except for differences with respect to $23.0 million of certain equity
investments included in investments at October 31, 2000 which are reflected at
their carrying value because quoted market prices do not exist. The fair value
of financial instruments is generally determined by reference to market values
resulting from trading on a national securities exchange or in an over-the-
counter market. In cases where quoted market prices are not available, such as
for derivative financial instruments, fair value is based on estimates using
present value or other valuation techniques.

6. Aplio Acquisition

On July 7, 2000, the Company acquired all of the outstanding capital stock
of Aplio, S.A. ("Aplio") a company located in France with technolgy that enables
Voice Over Internet Protocol ("VoIP") devices. Consideration consisted of $2.9
million in cash at closing and 582,749 shares of the Company's common stock
which were valued at $35.50 per share, promissory notes aggregating $6.5
million, $1.1 million in acquisition related costs and $4.8 million in cash to
be paid within eighteen months of the closing of the transaction. In addition,
the Company is required to pay two contingent cash payments of $2,778,230 on
July 7, 2001 and July 7, 2002. These contingent payments are dependent on
certain individuals continuing their employment with the Company and will be
recorded as expense if and when they become due.

As collateral for the $4.8 million contingent payments, the Company has
placed 150,329 shares of its common stock in escrow.

The company may also be required to repurchase the shares of common stock
issued to the selling shareholders on or prior to January 31, 2002. Such shares
are included in redeemable common stock on the accompanying condensed
consolidated balance sheet.

The aggregate purchase price of $36.0 million plus the fair value of net
liabilities assumed of $2.7 million totaled approximately $38.7 million which
was preliminarily allocated as follows: approximately $17.5 million to goodwill,
$13.9 million to technology, $2.3 million to trademark, $4.5 million to patents
and $500,000 to workforce.

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

The pro forma consolidated results for the three months ended October 31,
1999, assuming the consummation of the acquisition as of August 1, 1999, are as
follows:

Three Months Ended
October 31, 1999
----------------

Total Revenue............................... $13,824,498
Net (loss).................................. (8,807,034)
Basic and diluted net loss per share........ (0.18)

7. Intangible Assets

Intangible assets and related amortization periods consist of the
following:

October 31, July 31,
---------- -------
2000 2000 Period (mos.)
---- ---- ------------------

Goodwill.................................... $17,636,566 $ -- 60
Technology.................................. 13,900,000 -- 35
Trademark................................... 7,300,000 5,000,000 36
Patent...................................... 4,500,000 -- 35
Workforce................................... 500,000 -- 34
----------- ----------
43,836,566 5,000,000
Accumulated amortization.................... (4,307,942) (311,594)
----------- ----------
Intangible assets, net...................... $39,528,624 $4,688,406
=========== ==========

The excess of the cost over the fair value of tangible net assets of
purchased businesses is recorded as intangible assets and is amortized on a
straight-line basis. Costs associated with obtaining the right to use trademarks
owned by third parties are capitalized and amortized on a straight-line basis
over the term of the trademark.

8. Marketable Securities

Marketable securities consist of equity securities, U.S. Government Agency
Obligations and commercial paper. Debt securities with original maturities of
greater than three months at the time or purchase are classified as marketable
securities and are carried at amortized cost and interest on these securities is
included in interest income as earned. The following is a summary of the
marketable securities at October 31, 2000:

Gross Gross
Carrying Unrealized Unrealized Fair
Amount Gains Losses Value
------

Short term:
Held-to-maturity securities
U.S. Government Agency Obligations $ 67,983,102 $ 898 $ (4,650) $ 67,979,350
Commercial paper............................ 67,967,320 10,288 (12,638) 67,964,970
------------ ------- -------- ------------
135,950,422 11,186 (17,288) 135,944,320
------------ ------- -------- ------------
Long term:
Held-to-maturity securities
U.S. Government Agency Obligations 7,780,455 501 (3,000) 7,777,956
Commercial paper............................ 6,945,757 25,243 -- 6,971,000
------------ ------- -------- ------------
14,726,212 $25,744 $ (3,000) $ 14,748,956
======= ======== ============
Available-for-sale securities
WebEx common stock.......................... 11,489,350
Yahoo! common stock......................... 47,547,862
Speechworks common stock.................... 26,897,624
------------
100,661,048
------------
$236,611,470
============

In March 2000, the Company acquired 806,452 shares of Yahoo! Inc. in
exchange for 2,777,778 shares of the Company's common stock at a then equivalent
market value of approximately $150,000,000. As of October 31, 2000 the market
value of the Yahoo! shares was $47,547,862. The unrealized depreciation of
approximately $102.5 million has been recorded as a component of other
comprehensive loss in the accompanying statement of stockholders' equity.

In January 2000, the Company purchased 240,000 shares of Series A Preferred
Stock at $3.00 per share in WebEx, a provider of online meetings on the Web. In
March 2000, the Company purchased 14,640 shares of Series D Preferred Stock at
$12.50 per share. WebEx completed its initial public offering in July 2000 and
as of October 31, 2000 the market value of the WebEx shares was $11,489,350. The
unrealized gain of approximately $10.6 million has been recorded as a component
of other comprehensive income in the accompanying statement of stockholders'
equity.

In August 2000, the Company purchased 321,027 shares of common stock at
$12.46 per share of Speechworks, International, Inc. ("Speechworks").
Speechworks completed its initial public offering in August 2000 and as of
October 31, 2000 the market value of Speechworks shares was $26,897,624. The
unrealized gain of $22.9 million has been recorded as a component of other
comprehensive income in the accompanying statement of stockholder's equity.

9. Investments

In February 2000, the Company acquired 1,696,667 shares of WebDialogs
Series D Convertible Preferred Stock at $5.893 per share. WebDialogs is an e-
commerce enabler that focuses on collaborative browsing applications. The
Company is accounting for this investment using the cost method.

In March 2000, the Company acquired 181,818 shares of eCal Corporation
Series G Preferred stock at $11.00 per share. eCal is a supplier of internet
calendar communications. This investment is being accounted for using the cost
method.

In April 2000, the Company acquired 38,352 shares of Webley Systems, Inc.
Series B Preferred stock at $195.56 per share. Webley is a unified
communications and messaging provider. This investment is being accounted for
using the cost method.

In August 2000, the Company acquired 994,299 shares of Predictive Networks,
Inc. ("Predictive") Series C Convertible Preferred stock at $3.0172 per share.
Predictive provides a content delivery and analysis operating system for
Internet service providers. This investment is being accounted for using the
cost method.

10. Long-term Obligations

At October 31, 2000, long-term obligations are comprised of the following:

Promissory notes payable to Aplio Shareholders (note 6).............. $ 6,537,450
Future payments to Aplio Shareholders (note 6)....................... 4,800,000
French government loan............................................... 832,102
-----------
12,169,552
Less: Current portion............................................... (2,719,675)
-----------
$ 9,449,877
===========

The promissory notes were issued in connection with the Aplio acquisition
(note 6) and bear interest at an annual rate of 6.53%. The Company is required
to pay $1,961,235 of the notes on March 31, 2001 and the remaining principal
balance of $4,576,215 plus all accrued and unpaid interest on January 31, 2002.

As of October 31, 2000, the Company had withdrawn the entire facility of
FF6,439,404 under its ANVAR Facility in France. The loan bears no interest and
the repayment schedule is as follows:

March 31, 2001.................. $ 258,440
March 31, 2002.................. 258,440
March 31, 2003.................. 315,222
---------
832,102
=========

11. Warrants

In connection with the Company's distribution and marketing agreement with
ICQ, the Company issued a warrant to America Online to purchase up to 3% of the
Company's outstanding capital stock on a fully-diluted basis. This warrant will
vest in 1% increments upon the achievement of each of three incremental
thresholds of revenue generated under the agreement during the first four years
the warrant is outstanding. The per share exercise price under the warrant will
be equal to the lesser of $12.00 per share or $450 million divided by the number
of the Company's fully-diluted shares on the initial exercise date.

The warrants are accounted for in accordance with the provisions of EITF
96-18, "Accounting for Equity Instruments that are Issued to Other than
Employees for Acquiring or in Conjunction with Selling, Goods or Services." Due
to the uncertainty of reaching the performance measures stipulated in the
warrant agreement, the Company has not recorded any expense relating to the
issuance of the warrant. Upon determination that the achievement of the revenue
thresholds is probable ("measurement date"), the Company will value the warrant
and expense it over the remaining period until the performance criteria is met.
The three thresholds of revenues are $10 million, $50 million and $75 million
and the term of the distribution and marketing agreement is four years. If the
three incremental thresholds had been met on October 31, 2000, the Company would
have expensed $34.3 million.

In November 1999, the warrant was amended to include the right to purchase
an additional .5% of the Company's outstanding capital stock on a fully diluted
basis at a per share exercise price of $60.46 per share upon the achievement of
$100 million of revenue.

12. Stock Repurchase Program

In October 2000, the Board of Directors authorized a new share buyback
program through which the Company may repurchase up to five million shares of
common stock in the open market. As of October 31, 2000, the Company had
repurchased 922,500 shares under this program.

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

The following discussion of the financial condition and results of
operations of Net2Phone should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and the Notes thereto included in the
Company's Annual Report on Form 10-K for the year ended July 31, 2000. This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These forward- looking
statements involve risks and uncertainties and actual results could differ
materially from those discussed in the forward-looking statements. All forward-
looking statements and risk factors included in this document are made as of the
date hereof, based on information available to Net2Phone as of the date thereof,
and Net2Phone assumes no obligation to update any forward-looking statement or
risk factors.

Three Months Ended October 31, 2000 Compared to Three Months Ended October 31,
1999

Results of Operations

Revenue. Our revenues are derived from per-minute charges we billed to our
customers on a pre-paid basis and from the sale of internet telephony equipment
and services to resellers, IDT and other carriers. Revenue increased 135% from
approximately $13.1 million for the three months ended October 31, 1999 to
approximately $30.8 million for the three months ended October 31, 2000. The
increase in revenue was primarily due to an increase in billed minutes of use
resulting from additional marketing of our products and services and the growth
of our product line of internet telephony devices.

Direct Cost of Revenue. Net2Phone's direct cost of revenue consists
primarily of network costs associated with carrying our customers' traffic on
our network and leased networks, routing their calls through a local telephone
company to reach their final destination and wholesale cost of internet
telephony devices. Direct cost of revenue increased by 174%, from approximately
$6.8 million for the three months ended October 31, 1999 to approximately $18.7
million for the three months ended October 31, 2000. As a percentage of total
revenue, these costs increased from approximately 52.0% for the three months
ended October 31, 1999 to approximately 60.7% for the three months ended October
31, 2000. This increase is primarily attributable to monthly recurring costs
from leased lines and other connectivity in anticipation of increased traffic
volumes from our various distribution relationships and are affected by price
declines and free minutes generated through some of our strategic partners.

Selling and Marketing. Selling and marketing expenses consist primarily of
expenses associated with acquiring customers, including commissions paid to our
sales personnel, advertising costs, travel, referral fees and amounts paid to
our strategic partners, some of which contain revenue-sharing arrangements.
Selling and marketing expenses increased approximately 99% from approximately
$6.3 million for the three months ended October 31, 1999 to approximately $12.5
million for the three months ended October 31, 2000. This increase primarily
reflects the increased marketing and advertising expenses associated with the
agreements established with our strategic partners.

General and Administrative. General and administrative expenses consist of
the salaries of our employees and associated benefits, and the cost of
insurance, entertainment, rent and utilities. General and administrative
expenses increased approximately 207% from approximately $5.7 million for the
three months ended October 31, 1999 to approximately $17.5 million for the three
months ended October 31, 2000. As a percentage of total revenue these costs
increased from approximately 43.4% for the three months ended October 31, 1999
to approximately 56.9% for the three months ended October 31, 2000. This
increase was primarily attributable to the additional organizational
infrastructure and increase in personnel as the Company continues to build its
operations, customer service, marketing and business development functions.

Depreciation and Amortization. Depreciation and amortization increased
approximately 565% from approximately $850,000 for the three months ended
October 31, 1999 to approximately $5.7 million for the three months ended
October 31, 2000. As a percentage of total revenues, these costs increased from
approximately 6.5% for the three months ended October 31, 1999 to approximately
18.4% for the three months ended October 31, 2000. Depreciation will continue to
increase as we increase capital expenditures for the deployment of network
equipment both domestically and internationally to manage increased call
volumes. Amortization includes amortization of intangible assets in connection
with our acquisition of Aplio which was completed in July 2000.

Compensation Charge from the Issuance of Stock Options. The non-cash
compensation charge from the issuance of stock options increased approximately
63% from $2.9 million for the three months ended October 31, 1999 to
approximately

$4.8 million for the three months ended October 31, 2000. As a percentage of
total revenue, these costs decreased from approximately 22.3% for the three
months ended October 31, 1999 to approximately 15.5% for the three months ended
October 31, 2000.

Loss from Operations. Loss from operations was approximately $9.5 million
for the three months ended October 31, 1999 as compared to loss from operations
of approximately $28.3 million for the three months ended October 31, 2000.
Excluding the non-cash compensation charge described above, our loss from
operations for the three months ended October 31, 2000 would have been $23.5
million.

Interest Income, net. Interest income consists primarily of interest earned
on cash and cash equivalents. Interest income increased approximately 451% from
$1.1 million for the three months ended October 31, 1999 to approximately $6.0
million for the three months ended October 31, 2000. The interest income
resulted from the investment of the proceeds of our offerings.

Other Income. Other income consists primarily of changes in the fair value
of derivative financial instruments. Other income of appoximately $16.9 million
resulted from gains on derivatives held during the quarter.

Liquidity and Capital Resources

As of October 31, 2000, the Company had cash, cash equivalents and
marketable securities of approximately $479.7 and working capital of
approximately $391.5 million. The Company generated negative cash flow from
operating activities of approximately $27.0 million during the three months
ended October 31, 2000, compared with negative cash flow from operating
activities of $9.6 million during the three months ended October 31, 1999. The
decrease in cash flow from operating activities is primarily due to the changes
in working capital as a result of the timing of receipts and disbursements.

Net cash used in investing activities increased from $5.2 million during
the three months ended October 31, 1999, to $90.1 million for the three months
ended October 31, 2000. The Company's capital expenditures increased from
approximately $5.3 million during the three months ended October 31, 1999 to
$9.8 million for the three months ended October 31, 2000, as the Company
expanded its domestic and international network infrastucture. In addition, the
net cash used for investments in marketable securities was approximately $78.2
million for the quarter ended October 31, 2000. In August 2000, the Company
purchased 321,027 shares of common stock of Speechworks, International, Inc. for
approximately $4.0 million and acquired 994,299 shares of Predictive Networks,
Inc. Series C Convertible preferred stock for approximately $3.0 million.

Net cash provided by financing activities increased from $79.2 million
during the three months ended October 31, 1999, to approximately $302.2 million
for the three months ended October 31, 2000. The Company received approximately
$296 million in net proceeds related to the sale of common stock to a subsidiary
of AT&T in August 2000 and received approximately $23.1 million in a private
placement of 135,000 shares of preferred stock for Adir Technologies, Inc., a
subsidiary of Net2Phone. During the three months ended October 31, 2000, the
Board of Directors authorized a new share buyback program through which the
Company may repurchase up to five million shares of common stock in the open
market. As of October 31, 2000, the Company had repurchased 922,500 shares under
this program, utilizing approximately $17.6 million in cash.

The Company believes that, based upon its present business plan, the
Company's existing cash resources will be sufficient to meet its currently
anticipated working capital and capital expenditure requirements for at least
twelve months.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

PART II--OTHER INFORMATION

Item 1. Legal Proceedings

On February 15, 2000, Multi-Tech Systems, Inc. filed suit against Net2Phone
and other companies in the United States Federal District Court in Minneapolis,
Minnesota. In its press release, Multi-Tech stated that "the defendant companies
are infringing because they are providing the end users with the software
necessary to simultaneously transmit voice and data on their computers in the
form of making a phone call over the Internet." Net2Phone intends to defend the
lawsuit vigorously. Net2Phone has filed an answer and the litigation is in the
early stages of discovery. Net2Phone believes that the Multi-Tech claims are
without merit. However, should a judge issue an injunction against Net2Phone
requiring that Net2Phone cease distributing its software or providing its
software-based services, such an injunction could have an adverse effect on
Net2Phone's business operations, financial condition, results of operations and
cash flows.

Item 2. Changes in Securities and Use of Proceeds

On August 11, 2000 AT&T purchased four million newly-issued Class A shares
of the Company at a price of $75 per share. In addition, AT&T purchased 14.9
million Class A shares from IDT for $75 per share, giving AT&T approximately a
39 percent voting stake and approximately a 32 percent economic stake in the
Company. Proceeds to Net2Phone, after deducting related expenses, were
approximately $296 million. Net2Phone expects to use the net proceeds for
developing and maintaining strategic relationships, advertising and promotion,
upgrading and expanding its network, international expansion, research and
development, potential acquisitions and general corporate purposes. Over the
past five months the Company has entered into and expanded upon its strategic
distribution relationships and invested considerably to build its consumer
brand. In addition, the Company has expanded its network to reach more points of
presence, both domestically and internationally and is in the process of
upgrading its fiber capacity.

Item 3. Defaults Upon Senior Securities

Not Applicable

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

Not Applicable

Item 5. Other Information

Not Applicable.

Item 6. Exhibits and Reports on Form 8-K

a) Exhibits.

Exhibit No. Description
- ----------- -----------

3.1* Certificate of Incorporation, as amended.
3.2* Bylaws.
3.3* Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant.
3.4* Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant.
4.1* Specimen Common Stock Certificate of the Registrant.
10.35** Subscription Agreement, dated August 11, 2000, by and between
Net2Phone, Inc. and AT&T Corp.
10.36** Registration Rights Agreement, dated August 11, 2000, by and
between Net2Phone, Inc. and AT&T Corp.
10.46#*** Voice over Internet Protocol Services Agreement, dated as of
July 24, 2000, by and between Yahoo! Inc. and the Registrant.

10.47#*** Stock Exchange Agreement, dated as of March 30, 2000, by and
between Yahoo! Inc. and the Registrant.
10.48*** Registration Rights
Agreement, dated as of March 30, 2000, by and between Yahoo!
Inc. and the Registrant.
10.49*** Form of Founder Stock Agreement for Adir Technologies, Inc.,
dated as of September 8, 2000.

10.50*** Form of Founder Stock Pledge Agreement for Adir Technologies,
Inc. dated as of September 8, 2000.
27. 1**** Financial Data Schedule.

- --------
* Incorporated by reference from our registration statement on Form S-1
(Registration No. 333-78713).
** Incorporated by reference from our Current Report on Form 8-K filed on
August 21, 2000.
*** Incorporated by reference from our Annual Report on Form 10-K/A filed on
December 11, 2000.
**** Filed herewith.
# Confidential treatment granted as to parts of this document.

b) Reports on Form 8-K.

On September 22, 2000 the Company filed Form 8-K/A amending the
Company's report on Form 8-K filed on July 23, 2000 ("Original Form 8-K") to
provide certain financial information required under Item 7 of the Original Form
8-K

On October 16, 2000 the Company filed a second Form 8-K/A further
amending the Company's Original Form 8-K to amend and restate the date stated in
the first paragraph of Item 2 as July 7, 2000 and to amend and restate the
financial statements required to be provided under Item 7.

During the quarter ended October, 2000, the Company filed a report on
Form 8-K dated August 21, 2000 reporting under Item 5 that the Company issued
4,000,000 newly issued shares of its Class A Common Stock to AT&T, Corp. for an
aggregate purchase price of $300,000,000.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

NET2PHONE, INC.

By:
December 14, 2000 /s/ Howard S.Balter
- ------------------- ----------------------------
Date Howard S.Balter
Chief Executive Officer

By:

/s/ Ilan M. Slasky
----------------------------
Ilan M. Slasky
Chief Financial Officer