SECURITIES AND EXCHANGE COMMISSION 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 January 31, 2001

[_] 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 (I.R.S. Employer Identification No.)
Incorporation or Organization)

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 March 13, 2001, the registrant had outstanding 25,299,626 shares of
common stock, $.01 par value and 36,721,500 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 January 31, 2001 and July 31, 2000 ....................... 3

Condensed Consolidated Statements of Operations for the six months and three months ended
January 31, 2001 and 2000 .......................................................................... 4

Condensed Consolidated Statement of Stockholders' Equity for the six months ended
January 31, 2001..................................................................................... 5

Condensed Consolidated Statements of Cash Flows for the six months ended January 31, 2001
and 2000 ........................................................................................... 6

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

Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations .............................................................................................. 12

Item 3. Quantitative and Qualitative Disclosures About Market Risk ...................................... 15

PART II. OTHER INFORMATION

Item 1. Legal Proceedings ............................................................................... 16

Item 2. Changes in Securities and Use of Proceeds ....................................................... 16

Item 3. Defaults Upon Senior Securities ................................................................. 16

Item 4. Submission of Matters to a Vote of Security Holders ............................................. 16

Item 5. Other Information ............................................................................... 16

Item 6. Exhibits and Reports on Form 8-K ................................................................ 16

Signatures ................................................................................................ 18

PART I--FINANCIAL INFORMATION

Item 1. Financial Statements

NET2PHONE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

January 31, July 31,
------------- -------------
2001 2000
------------- -------------
(unaudited) (note 1)

ASSETS:
Current assets:
Cash and cash equivalents ............................................................ $ 237,740,521 $ 57,874,228
Marketable securities - current........................................................ 67,876,353 59,142,518
Trade accounts receivable ............................................................ 15,425,274 9,754,931
Prepaid contract deposits ............................................................ 13,289,321 13,443,704
Inventory ............................................................................ 6,877,335 3,216,783
Prepaid expenses ..................................................................... 5,749,828 7,020,970
Notes receivable ..................................................................... 4,200,000 3,450,000
Other current assets ................................................................. 3.893.209 2,119,802
------------- -------------
Total current assets .............................................................. 355,051,841 156,022,936
Property and equipment, net .......................................................... 90,494,794 59,867,154
Investments .......................................................................... 36,206,909 19,845,349
Marketable securities - long term...................................................... 47,835,980 132,277,504
Intangible assets, net ............................................................... 38,815,752 42,123,045
Other assets........................................................................... 114,060 1,592,445
------------- -------------
Total assets ...................................................................... $ 568,519,336 $ 411,728,433
============= =============

LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable ..................................................................... $ 10,511,600 $ 19,783,115
Accrued expenses ..................................................................... 29,603,208 17,230,019
Deferred revenue ..................................................................... 7,362,401 5,010,951
Current portion of long-term obligations ............................................. 11,120,989 2,743,761
Due to IDT ........................................................................... 8,495,556 4,883,111
------------- -------------
Total current liabilities ......................................................... 67,093,754 49,650,957
Accrued expenses ..................................................................... -- 4,300,000
Long-term obligations ................................................................ 629,322 5,203,340
------------- -------------
Total liabilities ................................................................. 67,723,076 59,154,297

Minority interests ..................................................................... 22,370,104 --
Redeemable common stock, $.01 par value; 551,484 and 582,749 shares outstanding.......... 19,577,682 20,687,590
Commitments and contingencies
Stockholders' equity :
Common stock, $.01 par value; 200,000,000 shares authorized (including 244,841 216,051
redeemable shares;) 24,484,122 and 21,605,133 shares issued and outstanding.........
Class A stock, $.01 par value, 37,924,250 shares authorized;......................... 367,215 339,167
36,721,500 and 33,916,750 shares issued and outstanding.............................
Additional paid-in capital ......................................................... 879,249,650 555,364,405
Accumulated deficit.................................................................. (330,183,048) (148,789,291)
Accumulated other comprehensive gain (loss).......................................... 9,314,939 (41,757,843)
Deferred compensation - stock options .............................................. (40,246,794) (30,246,300)
Loans to stockholders .............................................................. (6,495,129) (3,239,643)
Treasury stock, at cost, 3,809,400 and no shares ................................... (53,403,200) --
------------- -------------
Total stockholders' equity .................................................... 458,848,474 331,886,546
------------- -------------
Total liabilities and stockholders' equity .................................... $ 568,519,336 $ 411,728,433
============= =============

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

NET2PHONE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Six months ended Three months ended
------------------------------- -------------------------------
January 31, January 31,
------------------------------- -------------------------------
2001 2000 2001 2000
-------------- ------------- -------------- -------------
(unaudited) (unaudited) (unaudited) (unaudited)

Revenue:
Service revenue .................................... $ 60,837,261 $ 26,926,116 $ 33,896,534 $ 14,546,160
Product revenue .................................... 4,625,216 1,682,613 756,873 925,651
-------------- ------------- -------------- -------------
Total revenue................................... 65,462,477 28,608,729 34,653,407 15,471,811
Costs and expenses:
Direct cost of revenue:
Service cost of revenue .......................... 42,116,004 14,017,346 25,196,360 7,686,848
Product cost of revenue .......................... 2,430,163 1,208,820 638,540 705,208
-------------- ------------- -------------- -------------
Total direct cost of revenue ......... 44,546,167 15,226,166 25,834,900 8,392,056
Selling and marketing .............................. 59,043,122 15,495,697 46,589,855 9,229,220
General and administrative ......................... 37,647,616 13,718,498 20,131,213 8,010,959
Depreciation and amortization ...................... 12,283,863 1,976,366 6,630,235 1,126,335
Compensation charge from the issuance of
Stock options ..................................... 9,975,756 7,341,432 5,205,852 4,410,858
-------------- ------------- -------------- -------------
Total costs and expenses ..................... 163,496,524 53,758,159 104,392,055 31,169,428

Loss from operations ............................... (98,034,047) (25,149,430) (69,738,648) (15,697,617)

Interest income, net ............................... 11,866,643 3,641,736 5,875,127 2,555,193

Other expense, net................................... (95,918,235) -- (112,856,355) --
-------------- ------------- -------------- -------------

Loss before minority interests ..................... (182,085,639) (21,507,694) (176,719,876) (13,142,424)

Minority interests ................................. (691,882) -- (498,598) --
-------------- ------------- -------------- -------------

Net Loss available to common shareholders............ $ (181,393,757) $ (21,507,694) $ (176,221,278) $ (13,142,424)
============== ============= ============== =============

Net loss per common share - basic and diluted ...... $ (3.05) $ (.44) $ (2.99) $ (.26)
============== ============= ============== =============

Weighted average number of common shares used in
the calculation of basic and diluted net
loss per common share............................... 59,402,304 49,277,807 58,914,387 50,701,248
============== ============= ============== =============

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

Net2Phone, Inc.
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
Six Months Ended January 31, 2001

Common Stock Class A Stock Additional
-------------------- -------------------- 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 six months ending
January 31, 2001 - - - - - (181,393,757)
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 1,195,250 11,952 (1,195,250) (11,952) - -
Exercise of stock options 1,683,739 16,838 - - 7,965,275 -
Amortization of deferred compensation - - - - - -
Deferred compensation - - - - 19,976,250 -
---------- --------- ---------- --------- -------------- --------------
Balance at January 31, 2001 24,484,122 $ 244,841 36,721,500 $ 367,215 $ 879,249,650 $ (330,183,048)
========== ========= ========== ========= ============== ==============

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

Balance at July 31, 2000 $ (41,757,843) $(30,246,300) $(3,239,643) $ - $ 331,886,546
Net loss for the six months ending
January 31, 2001 - - - - - (181,393,757)
Foreign currency translation (649,799) - - - - (649,799)
Unrealized equity securities loss, net 51,722,581 - - - - 51,722,581
-------------
Comprehensive loss - - - - - (130,320,975)
Issuance of Common Stock to AT&T - - - - - 295,983,720
Repurchase of Common Stock - - - 3,809,400 (53,403,200) (53,403,200)
Conversion of Class A stock to common stock - - - - - -
Exercise of stock options - - (3,255,486) - - 4,726,627
Amortization of deferred compensation - 9,975,756 - - - 9,975,756
Deferred compensation - (19,976,250) - - - -
----------- ------------ ----------- ----------- ------------- -------------
Balance at January 31, 2001 $ 9,314,939 $(40,246,794) $(6,495,129) 3,809,400 $ (53,403,200) $ 458,848,474
=========== ============ =========== =========== ============= =============

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

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

Six Months Ended
January 31,

2001 2000
-------------- -------------

Operating activities:
Net loss........................................................................... ($181,393,757) ($21,507,694)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization...................................................... 12,283,863 1,976,366
Amortization of discount on marketable securities.................................. (298,213) --
Amortization of deferred compensation.............................................. 9,975,756 7,341,432
Write-down of Marketable Securities................................................ 95,661,634 --
Loss from equity investment........................................................ 256,601 --
Minority interests................................................................. (691,881) --
Changes in assets and liabilities:
Accounts receivable............................................................. (5,665,885) (3,594,098)
Prepaid contract deposits....................................................... 154,383 (12,604,507)
Inventory....................................................................... (3,648,649) --
Prepaid expenses................................................................ 2,650,074 --
Other current assets............................................................ (3,145,648) (5,671,609)
Other assets.................................................................... 961,632 19,995
Accounts payable................................................................ (8,531,386) (186,459)
Accrued expenses................................................................ 10,923,510 23,520
Deferred revenue................................................................ 2,351,450 2,895,729
Net (repayments) advances from IDT Corporation.................................. 3,612,446 (5,392,339)
-------------- -------------
Net cash used in operating activities................................................ (64,544,070) (36,699,664)

Investing activities:
Purchases of property, plant & equipment........................................... (37,436,406) (12,932,815)
Cash held in escrow................................................................ -- (10,000,000)
Proceeds from derivative instrument................................................ 25,221,850 --
Purchases of marketable securities................................................. (111,108,479) --
Payments of long-term obligations.................................................. (500,000) --
Proceeds from the sale of marketable securities.................................... 118,521,624 --
Purchase of trademark.............................................................. (1,561,956) --
Issuance of notes receivable....................................................... (4,750,000) --
Investments........................................................................ (12,618,161) (870,000)
-------------- -------------
Net cash used in investing activities................................................ (24,231,528) (23,802,815)

Financing activities:
Proceeds from issuance of initial public offering, net............................. -- 85,221,484
Proceeds from issuance of common stock in secondary offering, net.................. -- 177,854,738
Proceeds from the sale of common stock............................................. 295,983,720 --
Proceeds from the issuance of Series A preferred stock --
by ADIR Technologies, Inc................................................. 23,061,987
Proceeds from the exercise of stock options........................................ 4,726,626 3,679,561
Purchase of redeemable common stock................................................ (1,109,908) --
Proceeds from repayment of loans to stockholders .................................. -- 617,249
Repurchase of common stock......................................................... (53,403,200) --
-------------- -------------
Net cash provided by financing activities............................................ 269,259,225 267,373,032
-------------- -------------
Effect of exchange rate on cash...................................................... (617,334) --
-------------- -------------
Net increase in cash and cash equivalents............................................ 179,866,293 206,870,553
Cash and cash equivalents at beginning of period..................................... 57,874,228 20,379,048
-------------- -------------
Cash and cash equivalents at end of period........................................... $ 237,740,521 $ 227,249,601
============== =============
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 of Fiscal 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 aggregate gross proceeds of approximately $23,234,750. In
addition, ADIR has sold 19,025 shares of its common stock in Fiscal 2001 to
Net2Phone and ADIR employees in exchange for promissory notes of approximately
$3.3 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. For the six months ended January 31,
2001, the Company recorded a gain of approximately $5.2 million relating to its
derivative instruments.

The carrying value of the Company's financial instruments approximates fair
value, except for differences with respect to $28.3 million of certain equity
investments included in investments at January 31, 2001 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 a portion of 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 six months ended January 31,
2000, assuming the consummation of the acquisition as of August 1, 1999, are as
follows:

Six Months Ended
January 31, 2000
----------------------

Total Revenue............................................................... $ 29,660,882
Net (loss).................................................................. (22,497,176)
Basic and diluted net loss per share........................................ (.46)

7. Intangible Assets

Intangible assets and related amortization periods consist of the
following:

January 31, July 31,
-------------------- ------------------
2001 2000 Period (mos.)
---- ---- -------------

Goodwill................................................... $ 19,610,030 $ 17,485,441 60
Technology................................................. 13,900,000 13,900,000 35
Trademark.................................................. 7,580,105 7,300,000 36
Patent..................................................... 4,500,000 4,500,000 35
Workforce.................................................. 500,000 500,000 34
----------- -----------
46,090,135 43,685,441
Accumulated amortization................................... (7,274,383) (1,562,396)
----------- -----------
Intangible assets, net..................................... $ 38,815,752 $ 42,123,045
=========== ===========

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 January 31, 2001:

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

Short term:
Held-to-maturity securities
U.S. Government Agency Obligations.............. $ 11,997,497 $ 20,500 $ -- $ 12,017,997
Commercial paper................................ 7,966,321 -- -- 7,966,321
Corporate notes................................. 2,998,540 -- -- 2,998,540
------------ -------- ------------ ------------
22,962,358 20,500 -- 22,982,858
-------- ------------ ------------
Available-for-sale securities
WebEx common stock.............................. 4,647,182
Yahoo! common stock............................. 30,093,466
Speechworks common stock........................ 10,173,347
------------
67,876,353
------------
Long term:
Held-to-maturity securities
U.S. Government Agency Obligations 3,000,000 1,500 -- 3,001,500
Corporate notes................................. 44,835,980 249,918 -- 45,085,898
------------ -------- --------------- ------------
47,835,980 $ 251,418 $ -- $ 48,087,398
======== =============== ============
$ 115,712,333
============

In March 2000, the Company acquired 860,452 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. In the second quarter of Fiscal
2001, the Company recorded a loss relating to an other than temporary decline in
the market value of its Yahoo! shares. This loss of approximately $100 million
has been recorded as other expense in the accompanying condensed consolidated
statement of operations.

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 January 31, 2001 the market value of the WebEx shares was $4,647,182. The
unrealized gain of approximately $3.7 million has been recorded as a component
of other comprehensive income in the accompanying statement of stockholder's
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
January 31, 2001 the market value of Speechworks shares was $10,173,347. The
unrealized gain of $6.2 million has been recorded as a component of other
comprehensive income in the accompanying statement of stockholder's equity.

9. Investments

The Company has invested in minority holdings of several technology
companies. Such investments are recorded at cost and amounted to approximately
$28 million at January 31, 2001.

In December 2000, the Company acquired 2,859,569 shares at $1.3988 and
1,573,096 shares at $1.907 of Alonet S.A. ("Alonet") common stock and converted
loans of $4 million into common stock of Alonet. At January 31, 2001, the
Company has accounted for its investment under the equity method of accounting.

10. Long-term Obligations

At January 31, 2001, 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)............................. 4,300,000
French government loan..................................................... 912,861
------------
11,750,311
Less: Current portion...................................................... (11,120,989)
------------
$ 629,322
============

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 January 31, 2001, 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................................................... $283,539
March 31, 2002................................................... 283,539
March 31, 2003................................................... 345,783
--------
$912,861
========

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 January 31, 2001, the Company would
have expensed $24.0 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 January 31, 2001, the Company had
repurchased 3,809,400 shares under this program.

13. Legal Proceedings

Multi-Tech
- ----------

The Company is currently involved in patent litigation in federal court in
Minnesota. Multi-Tech Systems, Inc. of Minneapolis, Minnesota filed suit
against the Company, along with several other defendants, alleging infringement
of the claims of four U.S. Patents. The Company filed an answer and the
litigation is in the early stages of discovery. The Company believes the claims
are without merit and is vigorously defending the case. The Company's ability to
favorably resolve this matter depends, in part, on the Company's ability to find
prior art that invalidates the patents in suit. Since the search for prior art
has not yet been completed, a meaningful probability of success on the merits
cannot be provided at this time. However, should a judge issue an injunction
against the Company requiring that the Company cease distributing its software
or providing its software-based services, such an injunction could have a
material adverse effect on the Company's business operations, financial
condition, results of operations and cash flow.

Aplio S.A.
- ----------

In connection with the acquisition of Aplio, S.A in July 2000 by the
Company, a dispute has arisen with the selling shareholders regarding the
issuance of stock options and the exercise price for the options and therefore
the parties have agreed to submit the matter to mediation and, thereafter, to
binding arbitration if the matter is not settled. The Company is confidant that
if the matter is not settled, it will prevail in arbitration proceedings,
however no assurance can be given as to the ultimate outcome of the arbitration

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.

Six Months Ended January 31, 2001 Compared to Six Months Ended January 31, 2000

Results of Operations

Revenue. Our revenues are primarily 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 128.8% from approximately $28.6 million for the six months ended
January 31, 2000 to approximately $65.5 million for the six months ended January
31, 2001. The increase in revenue was primarily due to an increase in billed
minutes of use resulting from additional marketing of our products, services and
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 192.6%, from
approximately $15.2 million for the six months ended January 31, 2000 to
approximately $44.5 million for the six months ended January 31, 2001. As a
percentage of total revenue, these costs increased from approximately 53.2% for
the six months ended January 31, 2000 to approximately 68.0% for the six months
ended January 31, 2001. This increase is primarily attributable to the cost of
free minutes generated through some of our strategic partners and monthly
recurring costs for leased lines and other connectivity in anticipation of
increased traffic volumes from our various distribution relationships. The
Company has restructured certain contracts and are in the process of
renegotiating other strategic relationships to limit or eliminate Net2Phone's
subsidization of minutes to their customer bases.

Selling and Marketing. Selling and marketing expenses consist primarily of
expenses associated with acquiring customers, including commissions paid to our
sales personnel, advertising costs, referral fees and amounts paid to our
strategic partners, some of which contain revenue-sharing arrangements. Selling
and marketing expenses increased approximately 281% from approximately $15.5
million for the six months ended January 31, 2000 to approximately $59.1 million
for the six months ended January 31, 2001. The Company incurred a one-time non-
recurring termination charge of approximately $31 million related to marketing
and advertising expenses associated with agreements established with one of 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, travel, entertainment, legal, rent, utilities and other costs.
General and administrative expenses increased approximately 174.4% from
approximately $13.7 million for the six months ended January 31, 2000 to
approximately $37.6 million for the six months ended January 31, 2001. As a
percentage of total revenue these costs increased from approximately 48.0% for
the six months ended January 31, 2000 to approximately 57.5% for the six months
ended January 31, 2001. This increase is primarily attributable to the costs
associated with adding organizational infrastructure and the increase in
personnel as the Company continues to build its operations, product development,
customer service, marketing and business development functions and reflects the
impact of the acquisitions completed in the period.

Depreciation and Amortization. Depreciation and amortization increased
approximately 521.5% from approximately $2.0 million for the six months ended
January 31, 2000 to approximately $12.3 million for the six months ended January
31, 2001. As a percentage of total revenues, these costs increased from
approximately 6.9% for the six months ended January 31, 2000 to approximately
18.8% for the six months ended January 31, 2001. Depreciation will continue to
increase as we increase capital expenditures for the deployment of network and
equipment, both domestically and internationally, to manage increased call
volumes. Amortization includes certain trademark licenses and the amortization
of intangible assets in

connection with our acquisition of Aplio in July 2000, the acquisition of iKena
in December 2000 and the investment in Alonet in December 2000.

Compensation Charge from the Issuance of Stock Options. The non-cash
compensation charge from the issuance of stock options increased approximately
35.9% from $7.3 million for the six months ended January 31, 2000 to
approximately $10.0 million for the six months ended January 31, 2001. As a
percentage of total revenue, these costs decreased from approximately 25.7% for
the six months ended January 31, 2000 to approximately 15.2% for the six months
ended January 31, 2001. We expect to continue to expense non-cash compensation
over the vesting period related to some of the options issued.

Loss from Operations. Loss from operations was approximately $25.1 million
for the six months ended January 31, 2000 as compared to loss from operations of
approximately $98.0 million for the six months ended January 31, 2001. Excluding
the non-cash compensation charge and the one-time non-recurring termination cost
described above, our loss from operations for the six months ended January 31,
2001 would have been $57.1 million.

Interest Income, net. Interest income consists primarily of interest earned
on cash and cash equivalents. Interest income increased approximately 226% from
$3.6 million for the six months ended January 31, 2000 to approximately $11.9
million for the six months ended January 31, 2001. The interest income resulted
from the investment of the proceeds of sales of stock.

Other Expense, net. In the second quarter of Fiscal 2001, the Company
recorded a loss relating to a permanent write-down of its Yahoo! shares. This
loss of approximately $100 million has been recorded as other expense in the
accompanying condensed consolidated statement of operations. Offsetting the loss
relating to a permanent write-down is a gain relating to changes in the fair
value of derivative financial instruments.

Three Months Ended January 31, 2001 Compared to Three Months Ended January 31,
2000

Results of Operations

Revenue. Our revenues are primarily 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 124% from approximately $15.5 million for the three months ended
January 31, 2000 to approximately $34.7 million for the three months ended
January 31, 2001. The increase in revenue was primarily due to an increase in
billed minutes of use resulting from additional marketing of our products,
services and 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 208%, from approximately
$8.4 million for the three months ended January 31, 2000 to approximately $25.8
million for the three months ended January 31, 2001. As a percentage of total
revenue, these costs increased from approximately 54.2% for the three months
ended January 31, 2000 to approximately 74.6% for the three months ended January
31, 2001. This increase is primarily attributable to the cost of free minutes
generated through some of our strategic partners and monthly recurring costs for
leased lines and other connectivity in anticipation of increased traffic volumes
from our various distribution relationships. We have restructured certain
contracts and are in the process of renegotiating other strategic relationships
to limit or eliminate Net2Phone's subsidization of minutes to their customer
bases.

Selling and Marketing. Selling and marketing expenses consist primarily of
expenses associated with acquiring customers, including commissions paid to our
sales personnel, advertising costs, referral fees and amounts paid to our
strategic partners, some of which contain revenue-sharing arrangements. Selling
and marketing expenses increased approximately 405% from approximately $9.2
million for the three months ended January 31, 2000 to approximately $46.6
million for the three months ended January 31, 2001. The Company incurred a one-
time non-recurring termination charge of approximately $31 million related to
marketing and advertising expenses associated with agreements established with
one of our strategic partners. We have renegotiated certain of the strategic
agreements to eliminate or lower the fees paid to acquire customers.

General and Administrative. General and administrative expenses consist of
the salaries of our employees and associated benefits, and the cost of
insurance, travel, entertainment, legal, rent, utilities and other costs.
General and administrative expenses increased approximately 151% from
approximately $8.0 million for the three months ended January 31, 2000 to
approximately $20.1 million for the three months ended January 31, 2001. As a
percentage of total revenue these costs increased from approximately 51.8% for
the three months ended January 31, 2000 to approximately 58.1% for the three
months ended January 31, 2001. This increase was primarily attributable to the
costs associated with adding organizational

infrastructure and increase in personnel as the Company continues to build its
operations, product development, customer service, marketing and business
development functions and reflects the impact of the acquisitions completed in
the period.

Depreciation and Amortization. Depreciation and amortization increased
approximately 489% from approximately $1.1 million for the three months ended
January 31, 2000 to approximately $6.6 million for the three months ended
January 31, 2001. As a percentage of total revenues, these costs increased from
approximately 7.3% for the three months ended January 31, 2000 to approximately
19.1% for the three months ended January 31, 2001. Depreciation will continue to
increase as we increase capital expenditures for the deployment of network and
equipment, both domestically and internationally, to manage increased call
volumes. Amortization includes certain trademark licenses and amortization of
intangible assets in connection with our acquisition of Aplio in July 2000, the
acquisition of iKena in December 2000 and the investment in Alonet in December
2000.

Compensation Charge from the Issuance of Stock Options. The non-cash
compensation charge from the issuance of stock options increased approximately
18% from $4.4 million for the three months ended January 31, 2000 to
approximately $5.2 million for the three months ended January 31, 2001. As a
percentage of total revenue, these costs decreased from approximately 28.5% for
the three months ended January 31, 2000 to approximately 15.0% for the three
months ended January 31, 2001. We expect to continue to expense non-cash
compensation over the vesting period related to some of the options issued.

Loss from Operations. Loss from operations was approximately $15.7 million
for the three months ended January 31, 2000 as compared to loss from operations
of approximately $69.7 million for the three months ended January 31, 2001.
Excluding the non-cash compensation charge and the one-time non-recurring
termination cost described above, our loss from operations for the three months
ended January 31, 2001 would have been $33.5 million.

Interest Income, net. Interest income consists primarily of interest
earned on cash and cash equivalents. Interest income increased approximately
130% from $2.6 million for the three months ended January 31, 2000 to
approximately $5.9 million for the three months ended January 31, 2001. The
interest income resulted from the investment of the proceeds of sales of our
stock.

Liquidity and Capital Resources

As of January 31, 2001, the Company had cash, cash equivalents and
marketable securities of approximately $353.5 and working capital of
approximately $288.0 million. The Company generated negative cash flow from
operating activities of approximately $64.5 million during the six months ended
January 31, 2001, compared with negative cash flow from operating activities of
$36.7 million during the six months ended January 31,2000. 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 $23.8 million during
the six months ended January 31, 2000, to $24.2 million for the six months ended
January 31, 2001. The Company's capital expenditures increased from
approximately $12.9 million during the six months ended January 31, 2000 to
$37.4 million for the six months ended January 31, 2001, as the Company expanded
its domestic and international network infrastucture. In addition, the net
cash from the proceeds from the sale of marketable securities was approximately
$7.4 million for the six months ended January 31, 2001. 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. In November 2000, the Company purchased 2,729,730 shares of HeyAnita,
Inc. Series B preferred stock for approximately $2.0 million. In December 2000,
the Company purchased 591,576 shares of LocatioNet Systems 2000 Ltd. common
stock for approximately $1.0 million and acquired 54,000 shares of Millicom
Italia common stock for approximately $2.0 million. In December 2000, the
Company acquired 4,432,665 shares of Alonet S.A. common stock for approximately
$3 million in cash and converted loans of $4 million due from Alonet S.A.

Net cash provided by financing activities increased from $267.3 million
during the six months ended January 31, 2000, to approximately $269.3 million
for the six months ended January 31, 2001. 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 six months ended January 31, 2001, 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 January 31, 2001, the Company had repurchased 3,809,400 shares
under this program, utilizing approximately $53.4 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

Multi-Tech
- ----------

The Company is currently involved in patent litigation in federal court in
Minnesota. Multi-Tech Systems, Inc. of Minneapolis, Minnesota filed suit against
the Company, along with several other defendants, alleging infringement of the
claims of four U.S. Patents. The Company filed an answer and the litigation is
in the early stages of discovery. The Company believes the claims are without
merit and is vigorously defending the case. The Company's ability to favorably
resolve this matter depends, in part, on the Company's ability to find prior art
that invalidates the patents in suit. Since the search for prior art has not yet
been completed, a meaningful probability of success on the merits cannot be
provided at this time. However, should a judge issue an injunction against the
Company requiring that the Company cease distributing its software or providing
its software-based services, such an injunction could have a material adverse
effect on the Company's business operations, financial condition, results of
operations and cash flow.

Aplio S.A.
- ----------

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

Our Annual Meeting of Stockholders (the "Meeting") was held on December 8,
2000. The following matters were submitted to our stockholders for their vote,
and the results of the vote taken at the Meeting were as follows:

1. Three of our Class I Directors were elected for a term of three years.

(a) Stephen M. Greenberg 86,484,455 votes for; 4,626,786 votes against;
(b) James R. Mellor 86,484,455 votes for; 4,626,786 votes against; and
(c) Anthony G. Werner 86,484,455 votes for; 4,626,786 votes against.

2. Amendment to our 1999 Amended and Restated Stock Option and Incentive
Plan (the "Plan") were ratified. The amendment to the Plan increased the number
of shares reserved for issuance thereunder by 2,000,000 shares to an aggregate
of 16,940,000 shares.

Class A Common Stock: 33,303,800 votes for; 0 votes against 2,250,000 abstentions; and
Common Stock 9,140,901 votes for; 1,600,088 votes against 21,256 abstentions.

3. The appointment of Ernst & Young LLP as our independent auditors for
the fiscal year ending July 31, 2001 was ratified.

Class A Common Stock: 33,303,800 votes for; 0 votes against 0 abstentions; and
Common Stock 19,520,791 votes for; 467,862 votes against 21,256 abstentions.

Item 5. Other Information

Board of Directors
- ------------------

On March 2000, Richard R. Roscitt, our Class II director resigned from the
Board of Directors. On March 2000, the Board of Directors appointed David Nagel
to serve as a Director until the next annual meeting of shareholders or until
his earlier resignation or removal in accordance with our By-laws.

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.
# Confidential treatment granted as to parts of this document.

b) Reports on Form 8-K.

Not Applicable.

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:
MARCH 19, 2001 /s/ Howard S.Balter
- -------------- --------------------------------
Date Howard S.Balter
Chief Executive Officer

By:

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