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, 2002

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

Commission file number 000-26763

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

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

520 Broad Street, Newark, New Jersey 07102
(Address of Principal Executive Offices, including Zip Code)
Registrant's Telephone Number, Including Area Code: (973) 438-3111

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

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 14, 2002, the registrant had outstanding 33,841,044 shares of
common stock, $.01 par value and 29,005,500 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, 2002 and July 31, 2001..................... 3

Condensed Consolidated Statements of Operations for the three and six months ended
January 31, 2002 and 2001................................................................... 4

Condensed Consolidated Statement of Stockholders' Equity for the six months ended
January 31, 2002............................................................................ 5

Condensed Consolidated Statements of Cash Flows for the six months ended January 31, 2002
and 2001........................................................................................ 7

Notes to Condensed Consolidated Financial Statements............................................... 8

Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................................... 13

Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................... 18

PART II. OTHER INFORMATION

Item 1. Legal Proceedings............................................................................. 19

Item 2. Changes in Securities and Use of Proceeds..................................................... 19

Item 3. Defaults Upon Senior Securities............................................................... 19

Item 4. Submission of Matters to a Vote of Security Holders........................................... 19

Item 5. Other Information............................................................................. 19

Item 6. Exhibits and Reports on Form 8-K.............................................................. 19

Signatures.............................................................................................. 21

PART I--FINANCIAL INFORMATION

Item 1. Financial Statements

NET2PHONE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

January 31, July 31,
2002 2001
--------------- ---------------
(unaudited) (note 1)

ASSETS:
Current assets:
Cash and cash equivalents ........................................................... $ 110,932,275 $ 195,140,568
Marketable securities - current ..................................................... 27,747,305 58,827,928
Trade accounts receivable, net ...................................................... 5,335,310 8,348,954
Prepaid contract deposits ........................................................... 4,154,664 7,446,450
Inventory ........................................................................... 1,959,659 4,160,877
Prepaid expenses .................................................................... 2,715,058 4,178,798
Notes receivable .................................................................... 1,794,972 4,112,759
Other current assets ................................................................ 7,091,320 5,355,689
--------------- ---------------
Total current assets ........................................................... 161,730,563 287,572,023
Property and equipment, net ......................................................... 120,442,874 108,398,276
Investments ......................................................................... 8,576,731 8,591,164
Marketable securities - long term ................................................... 18,482,251 --
Intangible assets, net .............................................................. 20,378,787 6,544,859
Other assets ........................................................................ 1,072,211 296,762
--------------- ---------------
Total assets ................................................................... $ 330,683,417 $ 411,403,084
=============== ===============

LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable .................................................................... $ 9,167,397 $ 15,689,484
Accrued expenses .................................................................... 22,238,413 20,268,212
Deferred revenue .................................................................... 5,786,786 7,516,066
Capital lease obligation - short term ............................................... 3,043,367 --
Current portion of long-term obligations ............................................ 6,926,172 11,596,982
Due to IDT .......................................................................... 2,936,512 14,401,290
--------------- ---------------
Total current liabilities ...................................................... 50,098,647 69,472,034
Accrued expenses .................................................................... 2,046,374 366,667
Capital lease obligation - long term ................................................ 3,781,617 --
Long-term obligations ............................................................... 8,349,253 8,349,253
--------------- ---------------
Total liabilities .............................................................. 64,275,891 78,187,954

Minority interests ....................................................................... 49,183,679 45,482,342

Redeemable common stock, $.01 par value; 294,046 and 410,595 shares outstanding .......... 10,864,120 13,904,256
Commitments and contingencies
Stockholders' equity :
Common stock, $.01 par value; 200,000,000 shares authorized including
redeemable shares; 33,230,719 and 29,146,499 shares issued and
outstanding ................................................................. 332,307 291,465
Class A stock, $.01 par value, 37,924,250 shares authorized; ........................ 290,055 323,155
29,005,500 and 32,315,500 shares issued and outstanding
Additional paid-in capital .......................................................... 894,035,379 883,140,001
Accumulated deficit ................................................................. (611,152,044) (514,765,057)
Accumulated other comprehensive gain ................................................ 289,655 149,685
Deferred compensation - stock options ............................................... (29,627,515) (34,885,132)
Loans to stockholders ............................................................... (2,055,394) (3,512,998)
Treasury stock, at cost ............................................................. (45,752,716) (56,912,587)
--------------- ---------------
Total stockholders' equity .................................................... 206,359,727 273,828,532
--------------- ---------------
Total liabilities and stockholders' equity .................................... $ 330,683,417 $ 411,403,084
=============== ===============

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

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

Six months ended Three months ended
January 31, January 31,
------------------------------ ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------

Revenue:
Service revenue ............................................... $ 78,543,327 $ 60,837,261 $ 37,196,402 $ 33,896,534
Product revenue ............................................... 2,186,195 4,625,216 642,395 756,873
------------- ------------- ------------- -------------
Total revenue ....................................... 80,729,522 65,462,477 37,838,797 34,653,407
Costs and expenses:
Direct cost of revenue:
Service cost of revenue .................................. 42,444,692 42,116,004 19,588,283 25,196,3660
Product cost of revenue .................................. 1,929,484 2,430,163 707,157 638,540
------------- ------------- ------------- -------------
Total direct cost of revenue ........................ 44,374,176 44,546,167 20,295,440 25,834,900
Selling and marketing ......................................... 21,100,325 59,043,122 9,093,961 46,589,855
General and administrative .................................... 53,563,651 37,647,616 27,465,509 20,131,213
Depreciation and amortization ................................. 14,069,528 12,283,863 7,330,861 6,630,235
Restructuring, severance and other charges .................... 23,404,544 -- 17,493,865 --
Acquired in-process research and development .................. 13,850,000 -- -- --
Compensation charge from the issuance of stock options ........ 11,083,303 9,975,756 6,195,073 5,205,852
------------- ------------- ------------- -------------
Total costs and expenses ........................... 181,445,527 163,496,524 87,874,709 104,392,055

Loss from operations .......................................... (100,716,005) (98,034,047) (50,035,912) (69,738,648)

Interest income, net .......................................... 2,858,502 11,866,643 923,703 5,875,127

Other loss, net ............................................... (108,872) (95,918,235) (108,872) (112,856,355)
------------- ------------- ------------- -------------

Loss before minority interests ................................ (97,966,375) (182,085,639) (49,221,081) (176,719,876)

Minority interests ............................................ (10,297,433) (691,882) (2,907,225) (498,598)
------------- ------------- ------------- -------------

Net Loss ...................................................... (87,668,942) (181,393,757) (46,313,856) (176,221,278)

Redeemable common stock accretion ............................. (133,000) -- -- --
------------- ------------- ------------- -------------

Net loss available to common stockholders ..................... $ (87,801,942) $(181,393,757) $ (46,313,856) $(176,221,278)
============= ============= ============= =============

Net loss per common share - basic and diluted ................. $ (1.52) $ (3.05) $ (.80) $ (2.99)
============= ============= ============= =============

Weighted average number of common shares used in the
calculation of basic and diluted net loss per common share .... 57,736,395 59,402,304 57,799,232 58,914,387
============= ============= ============= =============

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

Net2Phone, Inc.
Condensed Consolidated Statement of Stockholders' Equity
Six months ended January 31, 2002

Common Stock Class A Stock
----------------------------------- -----------------------------------
Shares Amount Shares Amount
--------------- --------------- --------------- ---------------

Balance at July 31, 2001 29,146,499 $ 291,465 32,315,500 $ 323,155
Net loss for the six months ended January 31, 2002 -- -- -- --
Foreign currency translation -- -- -- --
Unrealized equity securities loss, net -- -- -- --

Comprehensive loss:
Repurchase of Common Stock -- -- -- --
Treasury share donation for charitable contribution
Conversion of Class A stock to common stock 3,310,000 33,100 (3,310,000) (33,100)
Exercise of stock options 774,220 7,742 -- --
Repricing of Options
Accretion of redeemable common stock -- -- -- --
Loan forgiveness -- -- -- --
Amortization of deferred compensation -- -- -- --
--------------- --------------- --------------- ---------------
Balance at January 31, 2002 33,230,719 $ 332,307 29,005,500 $ 290,055
=============== =============== =============== ===============

Accumulated
Additional Other
Paid-In Accumulated Comprehensive Deferred
Capital Deficit Income (Loss) Compensation
--------------- --------------- --------------- ---------------

Balance at July 31, 2001 $ 883,140,001 $ (514,765,057) $ 149,685 $ (34,885,132)
Net loss for the six months ended January 31, 2002 -- (87,668,942) -- --
Foreign currency translation -- -- (219,138) --
Unrealized equity securities loss, net -- -- 359,108 --

Comprehensive loss:
Repurchase of Common Stock -- -- -- --
Treasury share donation for charitable contribution (8,718,045)
Conversion of Class A stock to common stock -- -- -- --
Exercise of stock options 168,427 -- -- --
Repricing of Options 10,992,951 (5,825,686)
Accretion of redeemable common stock (266,000) -- -- --
Loan forgiveness -- -- -- --
Amortization of deferred compensation -- -- -- 11,083,303
--------------- --------------- --------------- ---------------
Balance at January 31, 2002 $ 894,035,379 $ (611,152,043) $ 289,655 $ (29,627,515)
=============== =============== =============== ===============

Treasury Stock Total
Loans to ----------------------------------- Stockholders'
Stockholders Shares Amount Equity
--------------- --------------- --------------- ---------------

Balance at July 31, 2001 $ (3,512,998) 4,361,600 $ (56,912,587) $ 273,828,532
Net loss for the six months ended January 31, 2002 -- -- -- (87,668,942)
Foreign currency translation -- -- -- (219,138)
Unrealized equity securities loss, net -- -- -- 359,108
---------------
Comprehensive loss: (87,528,972)
Repurchase of Common Stock -- 120,000 (510,173) (510,173)
Treasury share donation for charitable contribution (600,000) 11,670,044 2,951,999
Conversion of Class A stock to common stock -- -- -- 0
Exercise of stock options (599,400) -- -- (423,231)
Repricing of Options 5,167,265
Accretion of redeemable common stock -- -- -- (266,000)
Loan forgiveness 2,057,004 -- -- 2,057,004
Amortization of deferred compensation -- -- -- 11,083,303
--------------- --------------- --------------- ---------------
Balance at January 31, 2002 $ (2,055,394) 3,881,600 $ (45,752,716) $ 206,359,727
=============== =============== =============== ===============

See accompanying notes.

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

Six Months Ended
January 31,
2002 2001
--------------- ---------------

Operating activities:
Net loss ............................................................................ $ (87,668,942) $ (181,393,757)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ....................................................... 14,069,528 12,283,863
Amortization of discount on marketable securities ................................... (80,937) (298,213)
Amortization of deferred compensation ............................................... 11,083,303 9,975,756
Write-down of equity investment ..................................................... -- 95,661,634
Loss from equity investment ......................................................... 315,400 256,601
Write-off of acquired in-process research and development ........................... 13,850,000 --
Restructuring, severance and other non-cash charges ................................. 23,404,544 --
Write-down of inventory ............................................................. 317,151 --
Charitable contribution ............................................................. 2,951,999 --
Minority interests .................................................................. (10,297,433) (691,881)
Changes in assets and liabilities:
Accounts receivable .............................................................. 4,192,717 (5,665,885)
Inventory ........................................................................ (1,046,477) (3,648,649)
Prepaid expenses and other current assets ........................................ 240,489 (341,191)
Other assets ..................................................................... 26,640 961,632
Accounts payable ................................................................. (6,239,765) (8,531,386)
Accrued expenses ................................................................. (8,755,596) 10,923,510
Deferred revenue ................................................................. (2,559,659) 2,351,450
Net repayments to IDT Corporation ................................................ (11,940,902) 3,612,446
--------------- ---------------
Net cash used in operating activities .................................................... (58,137,940) (64,544,070)

Investing activities:
Purchases of property and equipment ................................................. (13,384,851) (37,436,406)
Proceeds from derivative instrument ................................................. -- 25,221,850
Purchases of marketable securities .................................................. (67,721,618) (111,108,479)
Proceeds from the sale of marketable securities ..................................... 80,444,625 118,521,624
Purchase of intangible assets ....................................................... (476,588) (1,561,956)
Acquisitions, net of cash acquired .................................................. (27,583,473) --
Payments of long term obligations ................................................... (6,563,380) (500,000)
Issuance of notes receivable ........................................................ (311,942) (4,750,000)
Investments ......................................................................... 14,433 (12,618,161)
--------------- ---------------
Net cash used in investing activities .................................................... (35,582,794) (24,231,528)

Financing activities:
Proceeds from sale of common stock .................................................. -- 295,983,720
Proceeds from the issuance of Series A preferred stock
by ADIR Technologies, Inc. ................................................... 13,998,770 23,061,987
Proceeds from exercise of stock options ............................................. 176,169 4,726,626
Payments of capital lease obligations ............................................... (627,052) --
Repurchase of common stock .......................................................... (510,173) (53,403,200)
Purchases of redeemable common stock ................................................ (3,306,136) (1,109,908)
--------------- ---------------
Net cash provided by financing activities ................................................ 9,731,578 269,259,225
--------------- ---------------
Effect of exchange rate on cash .......................................................... (219,137) (617,334)
--------------- ---------------

Net (decrease) increase in cash and cash equivalents ..................................... (84,208,293) 179,866,293
Cash and cash equivalents at beginning of period ......................................... 195,140,568 57,874,228
--------------- ---------------
Cash and cash equivalents at end of period ............................................... $ 110,932,275 $ 237,740,521
=============== ===============

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

Supplemental disclosure of non-cash investing activities:
Liabilities incurred to acquire fixed assets ............................................. $ 6,968,884 $ --
=============== ===============

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" or "Net2Phone")
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
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, 2001 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, 2001.

We have reclassified certain prior year amounts to conform to the
fiscal 2002 presentation.

2. Accounting Changes

Effective August 1, 2001, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 141 and SFAS No. 142. SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting. It also specifies the types of acquired
intangible assets that are required to be recognized and reported separate from
goodwill. SFAS No. 142 requires that goodwill and certain intangibles no longer
be amortized, but instead tested for impairment at least annually. There was no
impairment of goodwill upon adoption of SFAS No. 142. Amortization expense of
goodwill for the six months ended January 31, 2001 was approximately $1,883,000.

3. 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.

4. Netspeak Acquisition

On August 14, 2001, ADIR Technologies, Inc. ("ADIR"), a consolidated
subsidiary of the Company, acquired all of the issued and outstanding capital
stock of NetSpeak Corporation ("Netspeak"). Results of operations for Netspeak
have been included in the accompanying financial statements since August 14,
2001. The total aggregate consideration paid for the acquisition was $48
million.

The purchase price allocation was as follows:

Current assets ..................................... $ 23,375,400
Current liabilities................................. (3,567,200)
Property, plant and equipment ...................... 2,294,500
Other assets........................................ 802,100
Developed product technology........................ 2,140,000
In-process research and development................. 13,850,000
Goodwill............................................ 9,188,700
------------
$ 48,083,500
============

5. Intangible Assets

Intangible assets and related amortization periods consist of the
following:

January 31, 2002 July 31, 2001
----------------------------------- -----------------------------------
Period Gross Carrying Accumulated Gross Carrying Accumulated
(mos.) Amount Amortization Amount Amortization
--------------- --------------- --------------- ---------------

Goodwill ..................... N/A $ 13,561,842 $ (238,149) $ 2,163,447 $ (238,149)
Developed product technology . 36 2,140,000 (326,944) -- --
Customer Lists ............... 60 3,376,889 (518,844) 3,000,000 (200,000)
Technology ................... 35 1,000,000 (258,624) 1,000,000 (86,208)
Trademark .................... 36 1,083,690 (163,509) 983,991 (78,222)
Non-Compete Covenants ........ 24-30 800,000 (77,564) -- --
--------------- --------------- --------------- ---------------
$ 21,962,421 $ (1,583,634) $ 7,147,438 $ (602,579)
=============== =============== =============== ===============

Intangible assets (other than goodwill and intangible assets with
indefinite lives) are amortized on a straight-line basis. Goodwill and
intangible assets with indefinite lives are not amortized but are instead tested
for impairment at least annually.

During the first quarter of fiscal 2002, the Company recorded goodwill
of $9,188,700 and developed product technology of $2,140,000 related to the
Netspeak acquisition in August 2001. The developed product technology will be
amortized over approximately 3 years. No significant residual value is estimated
for these intangible assets.

Intangible assets amortization expense for the three and six months
ended January 31, 2002 was $440,029 and $903,942, respectively. Intangible
assets amortization expense for the three and six months ended January 31, 2001
was $2,642,285 and $2,852,439, respectively. Intangible assets amortization
expense is estimated to be $1.2 million for the remainder of fiscal 2002, $2.4
million in fiscal 2003, $2.2 million in fiscal 2004, $725,000 in fiscal 2005,
and approximately $494,000 in fiscal 2006.

6. 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, 2002:

Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- --------------- ---------------

Short term:
Held-to-maturity securities
Asset-backed securities ............................. $ 774,631 $ 1,191 $ 2,158 $ 770,355
U.S. Government Agency Obligations .................. 24,977,900 -- -- 24,981,209
Corporate notes ..................................... 1,994,773 18,347 -- 2,013,120
--------------- --------------- --------------- ---------------
$ 27,747,304 $ 19,538 $ 2,158 $ 27,764,684
=============== =============== =============== ===============
Long term:
Held-to-maturity securities
U.S. Government Agency Obligations .................. $ 17,226,503 $ 47,363 $ 4,941 $ 17,268,925
Asset-backed securities ............................. 1,255,748 1,929 1,272 1,256,405
--------------- --------------- --------------- ---------------
$ 18,482,251 $ 49,292 $ 6,213 $ 18,525,330
=============== =============== =============== ===============

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. During Fiscal 2001, the Company
recorded a $136 million loss relating to an other than temporary decline in the
market value of its Yahoo! shares, resulting in a new cost basis. In the second
quarter of fiscal 2002, all 806,452 shares were sold for gross proceeds of
approximately $14.8 million, resulting in a gain of approximately $637,000 that
is recorded in "Other loss, net" on the accompanying statements of operations.

In August 2000, the Company purchased 321,027 shares of common stock at
$12.46 per share of Speechworks, International, Inc. ("Speechworks") for a total
cost of approximately $4,000,000. In the second quarter of fiscal 2002, all
321,027 shares were sold for gross proceeds of approximately $3.1 million,
resulting in a loss of approximately $933,000 that is recorded in "Other loss,
net" on the accompanying statements of operations.

7. Long-term Obligations

At January 31, 2002, long-term obligations are comprised of the
following:

Promissory notes payable to Aplio Shareholders....... $ 4,546,076
Future payments to Aplio Shareholders................ 8,349,253
Safra Bank Loan...................................... 1,667,587
French government loan............................... 712,509
------------
15,275,425
Less: Current portion............................... (6,926,172)
------------
$ 8,349,253
============

The promissory notes were issued in connection with the Aplio
acquisition and bear interest at an annual rate of 6.53%. The Company was
required to pay the remaining principal balance of the promissory note of
$4,576,215 plus all accrued and unpaid interest on January 31, 2002. These
payments were made on February 1, 2002.

As a result of the separation agreement for Howard Balter, the
company's former Chief Executive Officer, the company assumed a demand note with
Safra Bank which was issued to Mr. Balter. The amount of the loan is $5 million
and is assumed over Mr. Balter's 15 month consulting period. The loan is due on
March 28, 2002.

The Company's long-term obligations of $8,349,253 are due April 30,
2003.

8. Leasing Arrangements

The Company leases certain facilities and equipment for use in its
operations under both capital and operating leases. The Company entered into
several new capital lease agreements during the first six months of the fiscal
year 2002.

Capital Lease amounts included in property and equipment are as
follows:

January 31, 2002
----------------
Capital Leases.................... $ 7,398,184
Accumulated amortization ......... (805,000)
-----------
Total: .......................... $ 6,593,184

The aggregate minimum rental commitments under noncancelable leases for
the periods shown at January 31, 2002, are as follows:

Fiscal Years Capital Leases Operating Leases
------------ --------------- ---------------

2002 (6 months ending 7/31/02) ........................................................... $ 2,133,633 $ 3,161,604
2003 ..................................................................................... 2,408,160 5,963,870
2004 ..................................................................................... 2,528,400 5,958,343
2005 ..................................................................................... 234,230 5,980,061
2006 ..................................................................................... -- 5,713,412
Thereafter: .............................................................................. -- 19,566,868
--------------- ---------------
Total minimum rental commitments: ........................................................ $ 7,304,423 $ 46,344,158
===============
Less amounts due for interest: ........................................................... (479,439)
---------------

Present value of minimum lease payments: ................................................. $ 6,824,984
===============

As of January 31, 2002, the total minimum sublease rentals to be
received in the future for operating subleases is approximately $2 million.

9. Charitable Contributions

On December 31, 2001, Net2Phone transferred 600,000 shares of its
common stock to the Net2Phone Charitable Foundation Philanthropic Fund
established under the auspices of the Jewish Community Foundation of MetroWest.
The fair value of the shares contributed was approximately $3 million and is
reflected as a general and administrative cost in the three months ended January
31, 2002. The shares will be transferred to the Net2Phone Charitable Foundation,
Inc., a New Jersey not-for profit corporation that, on February 13, 2002, was
determined by the Internal Revenue Service to be a 501(c)(3) organization. The
shares, which may not be publicly sold at this time without registration, or as
otherwise permitted under applicable securities laws, are to be used as
collateral to support non-interest loans of $1,000,000 each from Net2Phone and
IDT Corporation. These loans have not yet been advanced. They are expected to be
made sometime during the third quarter of fiscal 2002. The proceeds of the loans
are to be used to provide liquidity to the Foundation for purposes of its
matching charitable gifts made by employees of Net2Phone and Adir in accordance
with a matching gift program approved by the Board of Directors of Net2Phone in
March 2001. Certain executives of Net2Phone are also trustees and officers of
the foundation.

10. Option Repricing

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

The exercise price per share of the repriced options granted to
non-employee directors, certain key employees and one IDT executive will be
$3.50 per share, which represents approximately 47.4% of the shares subject to
all options outstanding under the Option Plan as of January 31, 2002. The
exercise price per share of the repriced options granted to certain other key
employees will be $5.00 per share, which represents approximately 21.7% of the
shares subject to all options outstanding under the Option Plan as of January
31, 2002. The exercise price granted to the remaining eligible option holders
will be $7.00 per share. In the second quarter of fiscal year 2002, the company
recorded approximately $1.7 million related to this repricing. The repriced
options are subject to variable accounting and therefore must be
marked-to-market each quarter. Based on Net2Phone's stock price at January 31,
2002, there will be future charges of approximately $6.1 million relating to
this repricing arrangement.

11. Legal Proceedings

Multi-Tech

On February 15, 2000, Multi-Tech Systems, Inc. filed suit against us
and other companies in the United States Federal District Court in Minneapolis,
Minnesota. Multi-Tech alleges that "the defendant companies are infringing
because they are providing the end users with the software necessary to
simultaneously transmit voice and data on their computers in the form of making
a phone call over the Internet." We have defended the lawsuit vigorously. We
have filed an answer and discovery has now been completed. Trial of this matter
is tentatively scheduled for August 1, 2002. In the interim, it is likely that
various motions will be filed to limit the scope of the plaintiff's claims or to
dismiss the action in its entirety. We believe that the Multi-Tech claims are
without merit. However, should a judge issue an injunction against us requiring
that we cease distributing any of our software or software-based services, such
an injunction could have a material adverse effect on our business operations,
financial condition, results of operations and cash flows.

Class-Actions

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

12. Restructuring, severance and Other Charges

In October 2001, Howard Balter resigned as the Company's Chief
Executive Officer. Pursuant to an agreement between Mr. Balter and the Company,
Mr. Balter has agreed to waive various rights under his employment agreement,
enter in a 30 month restrictive non-compete covenant and provide consulting
services for a 15 month period in exchange for settlement of various loans with
the Company and the guarantee of continued benefits for a similar period. In
addition, Mr. Balter's options were repriced at the conclusion of the first
three months of the consultancy period. As a result of this agreement, there was
a charge of approximately $8.5 million for the six months ended January 31, 2002
and $2.6 million for the three months ended January 31, 2002 which has been
included in restructuring, severance and other charges. There will be future
charges of approximately $3.9 million relating to this separation agreement.

In January 2002, Ilan Slasky tendered his resignation as the Company's
Chief Financial Officer to become effective upon his successor's assumption of
the responsibility. Pursuant to an agreement between Mr. Slasky and the Company,
Mr. Slasky has agreed to waive various rights under his employment agreement,
enter in a 2 year restrictive non-compete covenant and provide consulting
services for a 48 month period in exchange for settlement of various loans with
the Company and the guarantee of continued benefits for a similar period. In
addition, Mr. Slasky's options were repriced on January 31, 2002. As a result of
this agreement, there was a charge of approximately $2.4 million for the three
months ended January 31, 2002 which has been included in restructuring,
severance and other charges. There will be future charges of approximately $2.1
million relating to this separation agreement.

In November 2001, the Company announced plans to restructure its
operations, which include the elimination of various lines of development
business related to Voice Hosting products and current Enterprise products,
relocation of certain facilities, and a reduction in workforce by approximately
270 employees. As a result of this restructuring, there was a charge of $900,000
related to the write-down of certain Aplio assets and a litigation-related
reserve, $6.2 million related to terminated employees, $1.9 million related to
the reduction of operations at various locations, $2.2 million related to the
write-off of inventory and $1.3 million related to elimination of various
equipment and network build-outs.

13. Subsequent Events

On February 21, 2002, the Company announced plans to reduce its workforce
by approximately 28%. The Company plans to scale back unprofitable businesses,
including international wholesale services, and concentrate on consumer and
enterprise communications services. The Company anticipates that the actions
announced on February 21, 2002 will result in the Company incurring significant
restructuring and other charges during the quarter ending April 30, 2002, but
has not yet finalized the amount of such charges.

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 the Company 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, 2001. 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. For this
purpose, any statements contained in this Form 10-Q that are not statements of
historical fact may be deemed to be forward-looking statements. Factors which
may affect the Company's results include, but are not limited to, the Company's
ability to expand its customer base, the Company's ability to develop additional
and leverage its existing distribution channels for its products and solutions,
dependence on strategic and channel partners including their ability to
distribute the Company's products and meet or renew their financial commitments,
the Company's ability to address international markets, the effectiveness of the
Company's sales and marketing activities, the acceptance of the Company's
products in the marketplace, the timing and scope of deployments of the
Company's products by customers, fluctuations in customer sales cycles,
customers' ability to obtain additional funding, technical difficulties with
respect to the Company's products or products in development, the need for
ongoing product development in an environment of rapid technological change, the
emergence of new competitors in the marketplace, the Company's ability to
compete successfully against established competitors with greater resources, the
uncertainty of future governmental regulation, the Company's ability to manage
growth, obtain patent protection, and obtain additional funds, general economic
conditions and other risks discussed in this Report and in the Company's other
filings with the Securities and Exchange Commission. All forward-looking
statements and risk factors included in this document are made as of the date
hereof, based on information available to the Company as of the date thereof,
and the Company assumes no obligation to update any forward-looking statement or
risk factors.

Six Months Ended January 31, 2002 Compared to Six Months Ended January 31, 2001

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 23.3% from approximately $65.5 million for the six months ended
January 31, 2001 to approximately $80.7 million for the six months ended January
31, 2002. The increase in revenue was primarily due to an increase in billed
minutes of use resulting from additional marketing of our products and services
in prior quarters. Product revenue declined 52.7% from approximately $4.6
million for the six months ended January 31, 2001 to approximately $2.2 million
as a result of the company eliminating certain products in an effort to focus on
new product lines incorporating VOIP technology. We anticipate revenues from our
core services, i.e. International Reseller, Phone2Phone, PC2Phone and Carrier
Services, to increase moderately by the fourth quarter of fiscal 2002 from
second quarter results. At a consolidated level, revenues for the six months
that will end July 31, 2002 will likely decrease compared to the six months
ended January 31, 2002 due to the restructuring of our operations which was
announced in November 2001 and February 2002, which resulted in the curtailment
of various lines of business related to Voice Hosting products, Wholesale
International Termination and certain disposable calling card programs,
relocation of certain facilities, and a reduction in workforce.

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 costs of internet
telephony devices. Direct cost of revenue decreased by .4%, from approximately
$44.5 million for the six months ended January 31, 2001 to approximately $44.4
million for the six months ended January 31, 2002. As a percentage of total
revenue, these costs decreased from approximately 68.0% for the six months ended
January 31, 2001 to approximately 55.0% for the six months ended January 31,
2002 as a result of price negotiations for termination and other related network
costs. We expect that our direct costs as a percentage of revenue will
experience some degree of volatility and as a result of the dynamic nature of
our business and the telecommunications industry and anticipated lower revenue
sources driven by the restructuring of operations announced in November 2001 and
February 2002 and the composition of our revenue sources. Thus, our direct costs
may increase as a percentage of total revenue.

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, entertainment, referral fees and
amounts paid to our strategic partners, some of which contain revenue-sharing
arrangements. Selling and marketing expenses decreased approximately 64.3% from
approximately $59 million for the six months ended January 31, 2001 to
approximately $21.1 million for the six months ended January 31, 2002. We
anticipate selling and marketing expenses to continue to decrease through the
fourth quarter of fiscal 2002 due to continuing cost management initiatives and
elimination of certain expenses directly related to the restructurings of our
operations that were announced in November 2001and February 2002. The
restructuring includes the curtailment of various lines of business related to
Voice Hosting products, Wholesale International Termination and certain
disposable calling card programs, relocation of certain facilities, and a
reduction in workforce.

General and Administrative. General and administrative expenses consist
of the salaries of our employees and associated benefits, and the cost of
insurance, legal, rent, utilities and other costs. General and administrative
expenses increased approximately 42.3% from approximately $37.6 million for the
six months ended January 31, 2001 to approximately $53.6 million for the six
months ended January 31, 2002. As a percentage of total revenue these costs
increased from approximately 57.5% for the six months ended January 31, 2001 to
approximately 66.3% for the six months ended January 31, 2002. This increase was
primarily attributable to the costs associated with ramping up the
organizational infrastructure over prior periods. In addition, on December 31,
2001, Net2Phone transferred 600,000 shares of its common stock to the Net2Phone
Charitable Foundation Philanthropic Fund established under the auspices of the
Jewish Community Foundation of MetroWest. The fair value of the shares
contributed was approximately $3 million and is reflected as a general and
administrative cost in the second quarter ending January 31, 2002. We anticipate
general and administrative expenses, excluding restructuring and other charges,
to decrease by the fourth quarter of fiscal 2002 due to the restructurings of
our operations that were announced in November 2001and February 2002. The
restructuring includes the curtailment of various lines of business related to
Voice Hosting products, Wholesale International Termination and certain
disposable calling card programs, relocation of certain facilities, and a
reduction in workforce.

Depreciation and Amortization. Depreciation and amortization increased
approximately 14.5% from approximately $12.3 million for the six months ended
January 31, 2001 to approximately $14.1 million for the six months ended January
31, 2002. As a percentage of total revenues, these costs decreased from
approximately 18.8% for the six months ended January 31, 2001 to approximately
17.4% for the six months ended January 31, 2002. Depreciation will continue to
increase given capital expenditures for the deployment of network equipment,
both domestically and internationally, to manage increased call volumes.
Amortization includes certain trademark licenses and customer lists.
Amortization of goodwill and indefinite-lived intangible assets ceased effective
August 1, 2001.

Restructuring, severance and other charges. In October 2001, Howard
Balter resigned as the Company's Chief Executive Officer. Pursuant to an
agreement between Mr. Balter and the Company, Mr. Balter has agreed to waive
various rights under his employment agreement, enter in a 30 month restrictive
non-compete covenant and provide consulting services for a 15 month period in
exchange for settlement of various loans with the Company and the guarantee of
continued benefits for a similar period. In addition, Mr. Balter's options were
repriced at the conclusion of the first three months of the consultancy period.
As a result of this agreement, a charge of approximately $8.5 million for the
six months ended January 31, 2002 has been included in restructuring, severance
and other charges. There will be future charges of approximately $3.9 million
relating to this separation agreement.

Acquired in-process research and development. For the six months ended
January 31, 2002, other expense consists of in-process research and development
related to the Netspeak acquisition by ADIR Technologies, Inc. (ADIR").
Purchased in-process research and development ("IPR&D") represents the value
assigned in a purchase business combination to research and development projects
of the acquired business that had commenced but had not yet been completed at
the date of acquisition and which have no alternative future use. In accordance
with SFAS No. 2, "Accounting for Research and Development Costs," as clarified
by FASB Interpretation No. 4, amounts assigned to IPR&D meeting the above stated
criteria must be charged to expense as part of the allocation of the purchase
price of the business combination. Accordingly, charges totaling $13.9 million
were recorded during Fiscal 2002 as part of the allocation of the purchase price
related to the acquisition of Netspeak.

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

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

Compensation Charge from the Issuance of Stock Options. The non-cash
compensation charge from the issuance of stock options increased approximately
11.1% from $10.0 million for the six months ended January 31, 2001 to
approximately $11.1 million for the six months ended January 31, 2002. As a
percentage of total revenue, these costs decreased from approximately 15.2% for
the six months ended January 31, 2001 to approximately 13.7% for the six months
ended January 31, 2002. On December 18, 2001 the Board of Directors approved the
repricing of options outstanding under Net2Phone's 1999 Amended and Restated
Stock Option and Incentive Plan. In the second quarter of fiscal year 2002, the
company recorded approximately $1.7 million related to this repricing. The
repriced options are subject to variable accounting and therefore must be
marked-to-market each quarter. Based on Net2Phone's stock price at January 31,
2002, there will be future charges of approximately $6.1 million relating to
this repricing arrangement. We will continue to incur these charges over the
vesting period and with respect to repricings, until the options are exercised.

Loss from Operations. Loss from operations was approximately $98
million for the six months ended January 31, 2001 as compared to loss from
operations of approximately $100.7 million for the six months ended January 31,
2002. Excluding the non-cash compensation charge, acquired in-process research
and development and the restructuring and other charges described above, our
loss from operations for the six months ended January 31, 2002 would have been
$52.4 million compared to $88.1 million for the six months ended January 31,
2001. The decrease in the loss from operations is a result of the company's
growth in revenues, continuous cost management initiatives and elimination of
certain expenses directly related to the restructurings of our operations that
were announced in November 2001and February 2002.

Interest Income, net. Interest income consists primarily of interest
earned on cash and cash equivalents. Interest income decreased approximately
75.9% from $11.9 million for the six months ended January 31, 2001 to
approximately $2.9 million for the six months ended January 31, 2002. The
reduction primarily results from lower cash balances and rate reductions. We
anticipate reduced interest income from interest bearing accounts due to lower
interest rates and balances.

Other Loss, net. Other loss decreased from $95.9 million for the six
months ended January 31, 2001 to approximately $109,000 for the six months ended
January 31, 2002. In the second quarter of Fiscal 2001, the Company recorded a
loss of approximately $100 million relating to a write-down of the value of its
Yahoo! shares. In the second quarter of fiscal 2002, all 806,452 Yahoo! shares
were sold for gross proceeds of approximately $14.8 million, resulting in a gain
of approximately $637,000. In the second quarter of fiscal 2002, 321,027 shares
of "Speechworks" were sold for gross proceeds of approximately $3.1 million,
resulting in a loss of approximately $933,000.

Three Months Ended January 31, 2002 Compared to Three Months Ended
January 31, 2001

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 9.2% from approximately $34.7 million for the three months ended
January 31, 2001 to approximately $37.8 million for the three months ended
January 31, 2002. The increase in revenue was primarily due to an increase in
billed minutes of use resulting from additional marketing of our products and
services in prior quarters. Product revenue declined 15.1% from approximately
$756,873 for the three months ended January 31, 2001 to approximately $642,395
as a result of the company eliminating certain products in an effort to focus on
new product lines incorporating VOIP technology. We anticipate revenues from our
core services, i.e. International Reseller, Phone2Phone, PC2Phone and Carrier
Services, to increase moderately by the fourth quarter of fiscal 2002 from
second quarter results. At a consolidated level, revenues for the six months
that will end July 31, 2002 will likely decrease compared to the six months
ended January 31, 2002 due to the restructuring of our operations which was
announced in November 2001 and February 2002, which resulted in the curtailment
of various lines of business related to Voice Hosting products, Wholesale
International Termination and certain disposable calling card programs,
relocation of certain facilities, and a reduction in workforce.

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 costs of internet
telephony devices. Direct cost of revenue decreased by 21.4%, from approximately
$25.8 million for the three months ended January 31, 2001 to approximately $20.3
million for the three months ended January 31, 2002. As a percentage of total
revenue, these costs decreased from approximately 74.6% for the three months
ended January 31, 2001 to approximately 53.6% for the three months ended January
31, 2002 as a result of price negotiations for termination and other related
network costs. We expect that our direct costs as a percentage of revenue will
experience some degree of volatility and as a result of the dynamic nature of
our business and the telecommunications industry and anticipated lower revenue
sources driven by the restructuring of operations announced in November 2001 and
February 2002 and the composition of our revenue sources. Thus, our direct costs
may increase as a percentage of total revenue.

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, entertainment, referral fees and
amounts paid to our strategic partners, some of which contain revenue-sharing
arrangements. Selling and marketing expenses decreased approximately 80.5% from
approximately $46.6 million for the three months ended January 31, 2001 to
approximately $9.1 million for the three months ended January 31, 2002. We
anticipate selling and marketing expenses to continue to decrease through the
fourth quarter of fiscal 2002 due to continuing cost management initiatives and
elimination of certain expenses directly related to the restructurings of our
operations that were announced in November 2001 and February 2002. The
restructuring includes the curtailment of various lines of business related to
Voice Hosting products, Wholesale International Termination and certain
disposable calling card programs, relocation of certain facilities, and a
reduction in workforce.

General and Administrative. General and administrative expenses consist
of the salaries of our employees and associated benefits, and the cost of
insurance, legal, rent, utilities and other costs. General and administrative
expenses increased approximately 36.4% from approximately $20.1 million for the
three months ended January 31, 2001 to approximately $27.5 million for the three
months ended January 31, 2002. As a percentage of total revenue these costs
increased from approximately 58.1% for the three months ended January 31, 2001
to approximately 72.6% for the three months ended January 31, 2002. This
increase was primarily attributable to the costs associated with ramping up the
organizational infrastructure over prior periods. In addition, on December 31,
2001, Net2Phone transferred 600,000 shares of its common stock to the Net2Phone
Charitable Foundation Philanthropic Fund established under the auspices of the
Jewish Community Foundation of MetroWest. The fair value of the shares
contributed was approximately $3 million and is reflected as a general and
administrative cost in the second quarter ending January 31, 2002. We anticipate
general and administrative expenses, excluding restructuring and other charges,
to decrease by the fourth quarter of fiscal 2002 due to the restructurings of
our operations that were announced in November 2001and February 2002. The
restructuring includes the curtailment of various lines of business related to
Voice Hosting products, Wholesale International Termination and certain
disposable calling card programs, relocation of certain facilities, and a
reduction in workforce.

Depreciation and Amortization. Depreciation and amortization increased
approximately 10.6% from approximately $6.6 million for the three months ended
January 31, 2001 to approximately $7.3 million for the three months ended
January 31, 2002. As a percentage of total revenues, these costs increased from
approximately 19.1% for the three months ended January 31, 2001 to approximately
19.4% for the three months ended January 31, 2002. Depreciation will continue to
increase given capital expenditures for the deployment of network equipment,
both domestically and internationally, to manage increased call volumes.
Amortization includes certain trademark licenses and customer lists.
Amortization of goodwill and indefinite-lived intangible assets ceased effective
August 1, 2001.

Restructuring, severance and other charges. In October 2001, Howard
Balter resigned as the Company's Chief Executive Officer. Pursuant to an
agreement between Mr. Balter and the Company, Mr. Balter has agreed to waive
various rights under his employment agreement, enter in a 30 month restrictive
non-compete covenant and provide consulting services for a 15 month period in
exchange for settlement of various loans with the Company and the guarantee of
continued benefits for a similar period. In addition, Mr. Balter's options were
repriced at the conclusion of the first three months of the consultancy period.
As a result of this agreement, a charge of approximately $2.6 million for the
three months ended January 31, 2002 which has been included in restructuring,
severance and other charges. There will be future charges of approximately $3.9
million relating to this separation agreement.

Compensation Charge from the Issuance of Stock Options. The non-cash
compensation charge from the issuance of stock options increased approximately
19.0% from $5.2 million for the three months ended January 31, 2001 to
approximately $6.2 million for the three months ended January 31, 2002. As a
percentage of total revenue, these costs increased from approximately 15.0% for
the three months ended January 31, 2001 to approximately 16.4% for the three
months ended January 31, 2002. On December 18, 2001 the Board of Directors
approved the repricing of options outstanding under Net2Phone's 1999 Amended and
Restated Stock Option and Incentive Plan. The repriced options are subject to
variable accounting and therefore must be marked-to-market each quarter. the
company recorded approximately $1.7 million related to this repricing in the
second quarter of fiscal year 2002. Based on Net2Phone's stock price at January
31, 2002, there will be future charges of approximately $6.1 million relating to
this repricing arrangement. We will continue to incur these charges over the
vesting period and with respect to repricings, until the options are exercised.

Loss from Operations. Loss from operations was approximately $69.7
million for the three months ended January 31, 2001 as compared to loss from
operations of approximately $50.0 million for the three months ended January 31,
2002. Excluding the non-cash compensation charge, acquired in-process research
and development and the restructuring and other charges described above, our
loss from operations for the three months ended January 31, 2002 would have been
$26.3 million compared to $ 64.5 million for the three months ended January 31,
2001. The decrease in the loss from operations is a result of the company's
growth in revenues, continuous cost management initiatives and elimination of
certain expenses directly related to the restructurings of our operations that
were announced in November 2001and February 2002.

Interest Income, net. Interest income consists primarily of interest
earned on cash and cash equivalents. Interest income decreased approximately
84.3% from $5.9 million for the three months ended January 31, 2001 to
approximately $900,000 for the three months ended January 31, 2002. The
reduction primarily results from lower cash balances and rate reductions. We
anticipate reduced interest income from interest bearing accounts due to lower
interest rates and balances.

Other Loss, net. Other loss decreased from $113 million for the three
months ended January 31, 2001 to approximately $109,000 for the three months
ended January 31, 2002. In the second quarter of Fiscal 2001, the Company
recorded a loss of approximately $100 million relating to a write-down of the
value of its Yahoo! shares. In the second quarter of fiscal 2002, all 806,452
Yahoo! shares were sold for gross proceeds of approximately $14.8 million,
resulting in a gain of approximately $637,000. In the second quarter of fiscal
2002, 321,027 shares of "Speechworks" were sold for gross proceeds of
approximately $3.1 million, resulting in a loss of approximately $933,000.

Liquidity and Capital Resources

As of January 31, 2002, the Company had cash, cash equivalents and
marketable securities of approximately $157.2 million and working capital of
approximately $111.2 million. The Company generated negative cash flow from
operating activities of approximately $58.1 million during the six months ended
January 31, 2002, compared with negative cash flow from operating activities of
$64.5 million during the six months ended January 31, 2001. The increase 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 and a lower
operating loss, excluding restrucuturing and other non-cash charges. In
addition, during the six months ended January 31, 2002, the Company paid
approximately $24.5 million to IDT as payment for carrier services.

Net cash used in investing activities increased from $24.2 million
during the six months ended January 31, 2001, to $35.6 million for the six
months ended January 31, 2002. The Company's capital expenditures decreased from
approximately $37.4 million during the six months ended January 31, 2001 to
$13.4 million for the six months ended January 31, 2002, as the Company
completed the majority of the expansion of its domestic and international
network infrastucture. The net cash from the proceeds from the sale of
marketable securities decreased from approximately $118.5 million during the six
months ended January 31, 2001 to approximately $80.4 million for the six months
ended January 31, 2002. In addition, the net cash used for purchases of
marketable securities decreased from approximately $111.1 million during the six
months ended January 31, 2001 to $67.7 million for the six months ended January
31, 2002. Net cash used for the acquisition of Netspeak was approximately $27.6
million for the six months ended January 31, 2002.

Net cash provided by financing activities decreased from $269.3 million
during the six months ended January 31, 2001, to approximately $9.7 million for
the six months ended January 31, 2002. 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. During the six months ended January 31, 2002, the Company
received approximately $14.0 million in a private placement of shares of
preferred stock for Adir Technologies, Inc., a subsidiary of Net2Phone.

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

Contractual Obligations and Commercial Commitments

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

Payments Due by Period
-----------------------------------------------------------------------------------------------
Contractual Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years
--------------- --------------- --------------- --------------- ---------------

Long term obligations $ 15,275,425 $ 6,926,172 $ 8,349,253 $ -- $ --
Capital lease obligations 6,824,984 3,043,367 3,781,617 -- --
Operating leases 46,344,158 3,161,604 17,902,274 11,258,681 14,021,599
Capital and other long term
obligations 10,864,120 -- 10,864,120 -- --
--------------- --------------- --------------- --------------- ---------------
Total contractual cash
obligations $ 79,308,687 $ 13,131,143 $ 40,897,264 $ 11,258,681 $ 14,021,599
=============== =============== =============== =============== ===============

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

PART II--OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material developments in the litigation previously
reported in our Quarterly Report on Form 10-Q for its fiscal quarter ended
October 31, 2001 filed with the Securties and Exchange Commission on December
17, 2001.

Item 2. Changes in Securities and Use of Proceeds

Not Applicable

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

Norman Klugman assumed the office of Chief Financial Officer of
Net2Phone, Inc. effective March 4, 2002 replacing Ilan Slasky who had been
serving as interim Chief Financial Officer after tendering his resignation on
January 18, 2002.

Item 6. Exhibits and Reports on Form 8-K

a) Exhibits.

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

10.1* Separation Agreement dated as of November 26, 2001 by and
among Howard Balter, Net2Phone, Inc., IDT Corp. and Adir
Technologies, Inc.

10.2*** Separation Agreement dated as of January 22, 2002 by and among
Ilan Slasky, Net2Phone, Inc., IDT Corp. and Adir Technologies,
Inc.

10.3*** Offer of Employment Letter dated January 16, 2002 by and
between Net2Phone, Inc. and Norman Klugman.

99.3** Press release dated February 21, 2002.

- ----------------------
* Incorporated by reference from our Quarterly Report on Form 10-Q filed on
December 17, 2001.
** Incorporated by reference from our Current Report on Form 8-K filed on
February 26, 2002.
*** Filed herewith.

b) Reports on Form 8-K.

1. On November 2, 2001 we filed a Current Report on Form 8-K reporting
under Item 1, the acquisition of 50% of our outstanding capital stock
by NTOP Holdings, L.LC. and under Item 5, certain changes in our
management and in the size and members of our board of directors.

2. On November 15, 2001 we filed a Current Report on Form 8-K reporting
under Item 5, the 43% reduction in our workforce.

3. On December 21, 2001 we filed a Current Report on Form 8-K reporting
under Item 5, the offer to reprice certain issued and outstanding
options.

4. On February 26, 2002, we filed a Current Report on Form 8-K reporting
under Item 5, the reduction in our staff and realignment of certain of
our businesses.

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.

Date: March 18, 2002

NET2PHONE, INC.

By: /s/ Stephen M. Greenberg
-----------------------------------
Stephen M. Greenberg
Chief Executive Officer

By: /s/ Norman Klugman
-----------------------------------
Norman Klugman
Chief Financial Officer