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 April 30, 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 of (I.R.S. Employer
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 June 10, 2002, the registrant had outstanding 34,411,392 shares of
common stock, $.01 par value and 28,994,700 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 April 30, 2002 and July 31, 2001....................... 3

Condensed Consolidated Statements of Operations for the three and nine months ended
April 30, 2002 and 2001..................................................................... 4

Condensed Consolidated Statement of Stockholders' Equity for the nine months ended
April 30, 2002.............................................................................. 5

Condensed Consolidated Statements of Cash Flows for the nine months ended April 30, 2002
and 2001........................................................................................ 6

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

Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................................... 17

Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................... 25

PART II. OTHER INFORMATION

Item 1. Legal Proceedings............................................................................. 26

Item 2. Changes in Securities and Use of Proceeds..................................................... 26

Item 3. Defaults Upon Senior Securities............................................................... 26

Item 4. Submission of Matters to a Vote of Security Holders........................................... 27

Item 5. Other Information............................................................................. 27

Item 6. Exhibits and Reports on Form 8-K.............................................................. 27

Signatures.............................................................................................. 28

PART I--FINANCIAL INFORMATION

Item 1. Financial Statements

NET2PHONE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

April 30, July 31,
2002 2001
--------------- ---------------
(unaudited) (note 1)

ASSETS:
Current assets:
Cash and cash equivalents ................................................. $ 77,880,391 $ 195,140,568
Marketable securities - current ........................................... 25,657,033 58,827,928
Trade accounts receivable, net ............................................ 4,672,886 8,348,954
Prepaid contract deposits ................................................. 605,869 7,446,450
Inventory ................................................................. 2,337,658 4,160,877
Prepaid expenses .......................................................... 4,623,835 4,178,798
Notes receivable .......................................................... 5,220,185 4,112,759
Other current assets ...................................................... 6,792,429 5,355,689
--------------- ---------------
Total current assets ................................................. 127,790,286 287,572,023
Property and equipment, net ............................................... 33,814,500 108,398,276
Investments ............................................................... 1,409,994 8,591,164
Marketable securities - long term ......................................... 18,327,979 --
Intangible assets, net .................................................... 4,203,364 6,544,859
Other assets .............................................................. 1,118,816 296,762
--------------- ---------------
Total assets ......................................................... $ 186,664,939 $ 411,403,084
=============== ===============

LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable .......................................................... $ 6,994,075 $ 15,689,484
Accrued expenses .......................................................... 27,639,410 20,268,212
Deferred revenue .......................................................... 8,114,006 7,516,066
Capital lease obligation - short term ..................................... 2,874,081 --
Current portion of long-term obligations .................................. 7,873,842 11,596,982
Due to IDT ................................................................ 3,703,183 14,401,290
--------------- ---------------
Total current liabilities ............................................ 57,198,597 69,472,034
Accrued expenses .......................................................... 2,046,374 366,667
Capital lease obligation - long term ...................................... 3,229,255 --
Long-term obligations ..................................................... -- 8,349,253
--------------- ---------------
Total liabilities .................................................... 62,474,226 78,187,954

Minority interests ............................................................. 40,498,404 45,482,342
Redeemable common stock, $.01 par value; 294,046 and 410,595 shares outstanding 9,367,426 13,904,256
Stockholders' equity :
Common stock, $.01 par value; 200,000,000 shares authorized including
redeemable shares; 33,505,069 and 29,146,499 shares issued and
outstanding ....................................................... 335,051 291,465
Class A stock, $.01 par value, 37,924,250 shares authorized;
28,994,700 shares issued and outstanding ........................... 289,947 323,155
Additional paid-in capital ................................................ 893,356,788 883,140,001
Accumulated deficit ....................................................... (749,644,393) (514,765,057)
Accumulated other comprehensive gain ...................................... 289,655 149,685
Deferred compensation - stock options ..................................... (22,509,055) (34,885,132)
Loans to stockholders ..................................................... (2,040,394) (3,512,998)
Treasury stock, at cost ................................................... (45,752,716) (56,912,587)
--------------- ---------------
Total stockholders' equity .......................................... 74,324,883 273,828,532
--------------- ---------------
Total liabilities and stockholders' equity .......................... $ 186,664,939 $ 411,403,084
=============== ===============

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

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

Nine months ended Three months ended
April 30, April 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------

Revenue:
Service revenue ............................................ $108,195,890 $100,777,698 $ 29,652,563 $ 39,940,437
Product revenue ............................................ 3,097,136 5,299,233 910,941 674,017
------------ ------------ ------------ ------------
Total revenue .................................... 111,293,026 106,076,931 30,563,504 40,614,454
Costs and expenses:
Direct cost of revenue:
Service cost of revenue ............................... 58,675,638 75,973,876 16,230,946 33,857,872
Product cost of revenue ............................... 2,528,926 6,094,862 599,442 3,664,699
------------ ------------ ------------ ------------
Total direct cost of revenue (exclusive of items
shown below) ................................ 61,204,564 82,068,738 16,830,388 37,522,571
Selling and marketing ...................................... 27,527,800 73,872,149 6,427,474 14,829,027
General and administrative ................................. 72,533,795 59,302,479 18,970,144 21,654,863
Depreciation and amortization .............................. 21,115,733 17,366,783 7,046,205 5,082,920
Restructuring, severance, impairment and other charges ..... 137,840,530 66,500,044 114,435,986 66,500,044
Acquired in-process research and development ............... 13,850,000 -- -- --
Compensation charge from the issuance of stock options ..... 17,518,426 15,127,020 6,435,123 5,151,264
------------ ------------ ------------ ------------
Total costs and expenses ........................ 351,590,848 314,237,213 170,145,320 150,740,689

Loss from operations ....................................... (240,297,822) (208,160,282) (139,581,816) (110,126,235)

Interest income, net ....................................... 3,442,173 15,416,626 583,671 3,549,983

Other loss, net ............................................ (8,288,348) (108,505,284) (8,179,476) (12,587,049)
------------ ------------ ------------ ------------

Loss before minority interests ............................. (245,143,997) (301,248,940) (147,177,621) (119,163,301)

Minority interests ......................................... (18,982,709) (975,358) (8,685,276) (283,476)
------------ ------------ ------------ ------------

Net Loss ................................................... (226,161,288) (300,273,582) (138,492,345) (118,879,825)

Redeemable common stock accretion .......................... (133,000) (398,999) -- (398,999)
------------ ------------ ------------ ------------

Net loss available to common stockholders .................. ($226,294,288) ($300,672,581) ($138,492,345) ($119,278,824)
============ ============ ============ ============

Net loss per common share - basic and diluted .............. ($ 3.89) ($ 5.10) ($ 2.35) ($ 2.06)
============ ============ ============ ============

Weighted average number of common shares
used in the calculation of basic and diluted net
loss per common share .................................. 58,162,154 58,934,894 59,042,376 57,979,499
============ ============ ============ ============

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

Net2Phone, Inc.
Condensed Consolidated Statement of Stockholders' Equity
Nine months ended April 30, 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 nine months ended April 30, 2002 -- -- -- --
Foreign currency translation -- -- -- --

Comprehensive loss
Repurchase of Common Stock -- -- -- --
Treasury share donation for charitable contribution
Conversion of Class A stock to common stock 3,320,800 33,208 (3,320,800) (33,208)
Exercise of stock options 1,037,770 10,378 -- --
Repricing of Options
Accretion of redeemable common stock -- -- -- --
Loan forgiveness -- -- -- --
Amortization of deferred compensation -- -- -- --
--------------- --------------- --------------- ---------------
Balance at April 30, 2002 33,505,069 $ 335,051 28,994,700 $ 289,947
=============== =============== =============== ===============

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 nine months ended April 30, 2002 -- (226,161,288) -- --
Foreign currency translation -- -- 139,970 --

Comprehensive loss
Repurchase of Common Stock -- -- -- --
Treasury share donation for charitable contribution (8,718,048)
Conversion of Class A stock to common stock -- -- -- --
Exercise of stock options 273,172 -- -- --
Repricing of Options 10,209,615 (5,042,349)
Accretion of redeemable common stock (266,000) -- -- --
Loan forgiveness -- -- -- --
Amortization of deferred compensation -- -- -- 17,418,426
--------------- --------------- --------------- ---------------
Balance at April 30, 2002 $ 893,356,788 $ (749,644,393) $ 289,655 $ (22,509,055)
=============== =============== =============== ===============

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 nine months ended April 30, 2002 -- -- -- (226,161,288)
Foreign currency translation -- -- -- 139,970
---------------
Comprehensive loss (226,021,318)
Repurchase of Common Stock -- 120,000 (510,173) (510,173)
Treasury share donation for charitable contribution (600,000) 11,670,044 2,951,996
Conversion of Class A stock to common stock -- -- -- 0
Exercise of stock options (599,400) -- -- (315,851)
Repricing of Options 5,167,266
Accretion of redeemable common stock -- -- -- (266,000)
Loan forgiveness 2,072,004 -- -- 2,072,004
Amortization of deferred compensation -- -- -- 17,418,426
--------------- --------------- --------------- ---------------
Balance at April 30, 2002 $ (2,040,394) 3,881,600 $ (45,752,716) $ 74,324,883
=============== =============== =============== ===============

See accompanying notes.
5

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

Nine Months Ended
April 30,
2002 2001
--------------- ---------------

Operating activities:
Net loss .................................................................. ($ 226,161,288) ($ 300,273,582)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................. 21,115,733 17,366,783
Amortization of discount on marketable securities ......................... (59,512) (79,528)
Amortization of deferred compensation ..................................... 17,518,426 15,127,020
Loss on sale of assets .................................................... 1,921,031 --
Write-down of equity investment ........................................... 7,250,850 95,661,634
Write-off of acquired in-process research and development ................. 13,850,000 --
Impairment of assets ...................................................... 83,940,197 56,309,580
Impairment of goodwill .................................................... 11,543,232 --
Impairment of intangible assets ........................................... 4,226,870 --
Restructuring and other non-cash charges .................................. 38,130,231 --
Charitable contribution ................................................... 2,951,996 --
Allowance for doubtful accounts ........................................... 2,754,997 --
Minority interests ........................................................ (18,982,709) (975,358)
Changes in assets and liabilities:
Accounts receivable .................................................... 1,857,064 (4,159,418)
Inventory .............................................................. (1,107,325) (871,254)
Prepaid expenses and other current assets .............................. (347,751) 13,035,341
Other assets ........................................................... (2,059,166) 936,632
Accounts payable ....................................................... (8,647,615) 112,080
Accrued expenses ....................................................... (17,770,387) 5,055,025
Deferred revenue ....................................................... (259,263) 1,967,190
Net (repayments to) borrowings from IDT Corporation .................... (11,174,230) 10,321,667
--------------- ---------------
Net cash used in operating activities .......................................... (79,508,619) (90,466,188)

Investing activities:
Purchases of property and equipment ....................................... (15,974,222) (62,760,208)
Proceeds from derivative instrument ....................................... -- 25,221,850
Purchases of marketable securities ........................................ (71,219,580) (119,116,114)
Payments of acquisition related obligations ............................... (13,889,245) (2,224,040)
Proceeds from the sale of marketable securities ........................... 86,165,716 153,517,033
Purchase of intangible assets ............................................. (275,559) (5,589,159)
Acquisitions, net of cash acquired ........................................ (27,764,037) --
Issuance of notes receivable .............................................. (3,911,942) (6,927,482)
Investments ............................................................... -- (14,130,976)
--------------- ---------------
Net cash used in investing activities .......................................... (46,868,869) (32,009,096)

Financing activities:
Proceeds from sale of common stock ....................................... -- 295,983,721
Proceeds from the issuance of preferred stock
by ADIR Technologies, Inc. .......................................... 13,998,770 23,149,483
Payments of capital lease obligations ..................................... (1,348,700) --
Proceeds from exercise of stock options ................................... 283,550 5,221,186
Repurchase of common stock ................................................ (510,173) (54,624,233)
Purchases of redeemable common stock ...................................... (3,306,136) (1,109,108)
--------------- ---------------
Net cash provided by financing activities ...................................... 9,117,311 268,621,049
--------------- ---------------
Effect of exchange rate on cash ................................................ -- (404,971)
--------------- ---------------
Net (decrease) increase in cash and cash equivalents ........................... (117,260,177) 145,740,794
Cash and cash equivalents at beginning of period ............................... 195,140,568 57,874,228
--------------- ---------------
Cash and cash equivalents at end of period ..................................... $ 77,880,391 $ 203,615,022
=============== ===============
Supplemental disclosure of cash flow information:
Cash payments made for interest ................................................ $ 106,089 $ --
=============== ===============
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. Recent Accounting Pronouncements

In June 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 143, "Accounting for Asset Retirement Obligations." This standard
provides the accounting for the cost of legal obligations associated with the
retirement of long-lived assets. SFAS No. 143 requires that companies recognize
the fair value of a liability for asset retirement obligations in the period in
which the obligations are incurred and capitalize that amount as a part of the
book value of the long-lived asset. We are required to adopt SFAS No. 143
effective August 1, 2002. We do not expect the impact of the adoption of SFAS
No. 143 to have a material effect on our results of operations or financial
position.

In August 2001, the FASB issued SFAS No. 144. This standard supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and the provisions of APB Opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," with regard to reporting the effects of a disposal of a segment
of a business. SFAS No. 144 establishes a single accounting model for assets to
be disposed of by sale and addresses several SFAS No. 121 implementation issues.
We are required to adopt SFAS No. 144 effective August 1, 2002. We do not expect
the impact of the adoption of SFAS No. 144 to have a material effect on our
results of operations or financial position.

3. Goodwill and Other Intangible Assets

Effective August 1, 2001, the Company adopted SFAS No. 141 and SFAS No.
142. SFAS No. 141, "Business Combinations," 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, "Goodwill and Other Intangible Assets," no longer permits the
amortization of goodwill and indefinite-lived intangible assets. Instead, these
assets must be tested for impairment at least annually. The impairment test uses
a fair value approach rather than the undiscounted cash flows approach
previously required by SFAS No. 121. The goodwill impairment test under SFAS No.
142 requires a two-step approach, which is performed at the reporting unit
level, as defined in SFAS No. 142. Step one identifies potential impairments by
comparing the fair value of the reporting unit to its carrying amount. Step two,
which is only performed if there is a potential impairment, compares the
carrying amount of the reporting unit's goodwill to its implied value, as
defined in SFAS No. 142. If the carrying amount of the reporting unit's goodwill
exceeds the implied fair value of that goodwill, an impairment loss is
recognized for an amount equal to that excess. Upon adopting SFAS No. 142, the
Company reassessed the useful lives of its intangible assets and determined them
to be appropriate. The adoption of SFAS No. 142 on August 1, 2001 did not have
any impact on the Company.

The following tables present the pro forma impact of SFAS No. 142 on
reported net loss and loss per share had the standard been in effect on August
1, 2000:

Nine months ended Three months ended
April 30, April 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------

Reported net loss ....... ($226,161,288) ($300,273,582) ($138,492,345) ($118,879,825)
Goodwill amortization ... -- 1,978,222 -- 95,222
------------- ------------- ------------- -------------
Pro forma net loss ...... ($226,161,288) ($298,295,360) ($138,492,345) ($118,784,603)
============= ============= ============= =============

Nine months ended Three months ended
April 30, April 30,
----------------- ------------------
2002 2001 2002 2001
------ ------ ------ ------

Basic and diluted loss per share ........... ($3.89) ($5.10) ($2.35) ($2.05)
Goodwill amortization ...................... -- .03 -- --
------ ------ ------ ------
Pro forma loss per share
- basic and diluted ............. ($3.89) ($5.07) ($2.35) ($2.05)

The changes in the carrying amount of goodwill, net of accumulated
amortization for the nine months ended April 30, 2002, are as follows:

Goodwill, net
-------------------
Balance at August 1, 2001 $ 1,824,060
Goodwill acquired during year 11,543,232
Impairment loss (see footnote 14) (11,543,232)
-------------------
Balance at April 30, 2002 $ 1,824,060
===================

The major components and average useful lives of our other acquired
intangible assets follows:

April 30, 2002 July 31, 2001
----------------------------------- -----------------------------------
Period Gross Carrying Accumulated Gross Carrying Accumulated
(mos.) Amount Amortization Amount Amortization
--------------- --------------- --------------- --------------- ---------------

Developed product technology ... 36 $ -- $ -- $ -- $ --
Customer Lists ................. 60 630,000 -- 3,000,000 (200,000)
Technology ..................... 35 160,000 -- 1,000,000 (86,208)
Trademark ...................... 36 1,172,809 (220,946) 983,991 (78,222)
Non-Compete Covenants .......... 24-30 800,000 (162,558) -- --
--------------- --------------- --------------- ---------------
$ 2,762,809 $ (383,504) $ 4,983,991 $ (364,430)
=============== =============== =============== ===============

Intangible assets (other than goodwill and intangible assets with
indefinite lives) are amortized on a straight-line basis. Intangible assets
amortization expense for the three and nine months ended April 30, 2002 was
$490,823 and $1,394,315, respectively. Intangible assets amortization expense
for the three and nine months ended April 30, 2001 was $122,631 and $5,484,867,
respectively. Intangible assets amortization expense is estimated to be $260,000
for the remainder of fiscal 2002, $1,000,000 in fiscal 2003, $760,000 in fiscal
2004, $230,000 in fiscal 2005, and approximately $110,000 in fiscal 2006.

During the first quarter of fiscal 2002, the Company recorded goodwill of
$9.2 million and developed product technology of $2.1 million related to the
NetSpeak acquisition in August 2001 (see footnote 5). Developed product
technology was being amortized over 3 years.

During the second quarter of fiscal 2002, the Company recorded goodwill of
approximately $2.3 million relating to shares of ADIR repurchased from the
Company's Chief Executive Officer and Chief Financial Officer in connection with
their separation agreements as discussed in more detail in footnote 14,
Restructuring, severance, impairment and other charges.

See footnote 14 for information regarding impairment charges recorded in
the third quarter of Fiscal 2002 on goodwill and identifiable intangible assets.

4. 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.

5. NetSpeak Acquisition

On August 14, 2001, 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 primary reason for
the acquisition of NetSpeak was the belief that its route server and associated
software would allow ADIR to offer a broader product base to its customers.
NetSpeak was a strategic partner of Cisco Systems and Cisco was an important
investor in and a strategic partner of ADIR. ADIR bid against at least one other
party for NetSpeak and the purchase price finally agreed to was determined based
upon the assets being received and the future revenue projections.

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

See footnotes 13 and 14 for additional information regarding litigation
with Cisco relating to ADIR and its impact on goodwill and intangible assets
recorded in connection with the NetSpeak acquisition.

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 the second quarter of fiscal 2002. 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.

6. Related Party Transaction

In April 2002, the Company loaned the sum of $3.6 million to the Company's
Chief Executive Officer ("CEO"). The loan bears interest at a market rate and
principal and interest are due on April 9, 2005 ("Maturity Date"). The loan is
non-recourse to the CEO and is secured by options to purchase 300,000 shares of
the Company's common stock granted to the CEO in April 2002.

Under certain circumstances, the Board of Directors may request the CEO to
exercise sufficient options and sell sufficient stock to pay the unpaid balance
of the loan. In addition, the Board may request that the CEO not sell the stock
which will result in the unpaid loan and interest balance being reduced based
upon a formula set forth in the loan agreement. On the Maturity Date, the CEO
will have to return to the Company all or a portion of the unexercised options
and/or shares of unsold stock and his unpaid loan and accrued interest balance
will be reduced based upon a formula set forth in the loan agreement.

Due to the uncertainty surrounding the number of options the CEO will
ultimately receive, the Company will account for the options using a variable
accounting model until the options are exercised or returned to the Company.
Furthermore, due to the non-recourse nature of the loan, the Company will record
compensation expense for the $3.6 million principal amount of the note over the
CEO's employment period. However, total compensation expense will be calculated
at each reporting date as the greater of the compensation expense resulting from
(i) variable accounting treatment of the options, or (ii) amortizing the $3.6
million loan balance over the employment period.

During the third quarter of Fiscal 2002, the Company recorded compensation
expense of $100,000 relating to this agreement.

7. 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 April 30, 2002:

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

Short term:
Held-to-maturity securities
Asset-backed securities ...................... $ 657,033 $ 1,558 $ -- $ 658,591
U.S. Government Agency Obligations ........... 25,000,000 -- -- 25,000,000
--------------- --------------- --------------- ---------------
$ 25,657,033 $ 1,558 $ -- $ 25,658,591
=============== =============== =============== ===============
Long term:
Held-to-maturity securities
Corporate notes .............................. 1,241,859 $ 2,760 $ 790 $ 1,243,829
U.S. Government Agency Obligations ........... $ 17,086,120 102,490 215 17,188,395
--------------- --------------- --------------- ---------------
$ 18,327,979 $ 105,250 $ 1,005 $ 18,432,224
=============== =============== =============== ===============

The following is a summary of the marketable securities at July 31, 2001:

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

Short term:
Held-to-maturity securities
U.S. Government Agency Obligations ..... $ 23,000,000 $ -- $ -- $ 23,000,000
Corporate notes ........................ 17,974,587 135,013 -- 18,109,600
--------------- --------------- --------------- ---------------
40,974,587 135,013 -- 41,109,600
--------------- --------------- --------------- ---------------
Available-for-sale securities
Yahoo! common stock .................... 14,209,684
Speechworks common stock ............... 3,643,657
---------------
17,853,341
---------------
$ 58,827,928
===============

8. Investments

As a result of the Company's plan to restructure its operations and
eliminate various lines of development announced in the third quarter of Fiscal
2002, the Company wrote-off the value of several of its cost method investments
which were no longer deemed to be strategic to its business. In addition, an
other-than-temporary impairment charge was recorded with respect to one of the
Company's cost method investments that it continues to believe is strategic to
its business. The charge was recorded to reduce the carrying value of the
investment to fair value determined based on a recent third-party financing
completed by the investee. These charges totaled $6.9 million and are reflected
in Other loss, net in the statements of operations.

9. 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 nine months of the fiscal
year 2002.

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

April 30, 2002
--------------
Capital Leases............................. $ 7,574,762
Accumulated amortization .................. (839,156)
-----------
Total: ................................... $ 6,735,606

The aggregate minimum rental commitments under noncancelable leases for
the periods shown at April 30, 2002, are as follows:

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

2002 (3 months ending 7/31/02) ................................................. $ 1,133,017 $ 1,592,007
2003 ........................................................................... 2,467,019 5,963,870
2004 ........................................................................... 2,587,259 5,958,343
2005 ........................................................................... 278,375 5,980,061
2006 ........................................................................... -- 5,713,412
Thereafter: .................................................................... -- 19,566,868
--------------- ---------------

Total minimum rental commitments: .............................................. $ 6,465,670 $ 44,774,561
=============== ===============

Less amounts due for interest: ................................................. (362,334)
---------------

Present value of minimum lease payments: ....................................... $ 6,103,336
===============

As of April 30, 2002, the total minimum sublease rentals to be received in
the future for operating subleases is approximately $2 million.

10. Other Comprehensive Gain (Loss)

The Company's comprehensive gain (loss) consists of the following:

Nine Months Ended April 30, Three Months Ended April 30,
----------------------------------- -----------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------

Net income (loss) ...................... $ (226,161,288) $ (300,273,582) $ (138,492,345) $ (118,879,825)

Foreign currency
translation adjustments ............... 139,970 (445,399) -- 204,400

Unrealized gain (losses)
in the fair market value
of marketable securities .............. -- 28,298,323 -- (23,424,258)
--------------- --------------- --------------- ---------------

Comprehensive gain (loss) .............. $ (226,021,318) $ (272,420,658) $ (138,492,345) $ (142,099,683)
=============== =============== =============== ===============

11. 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 nine-months ended April 30, 2002. The
shares were 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 bearing loans of $1,000,000 each from Net2Phone and IDT
Corporation. The $1,000,000 IDT loan was made on May 24, 2002. The $1,000,000
Net2Phone loan has not yet been made. The proceeds of the loans are to be used
to provide liquidity to the Foundation for purposes of matching charitable gifts
contributed by employees of Net2Phone and ADIR in accordance with a matching
charitable 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.

12. 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 April 30, 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 April 30, 2002.
The exercise price granted to the remaining eligible option holders will be
$7.00 per share. For the three and nine month periods ending April 30, 2002, the
company recorded non-cash compensation charges of approximately $2.0 million and
$3.7 million, respectively, related to this repricing. The repriced options are
subject to variable accounting treatment and therefore must be marked-to-market
each quarter. Based on Net2Phone's stock price at April 30, 2002, there will be
future charges of approximately $2.6 million relating to this repricing
arrangement.

All of the Company's non-cash compensation is attributable to general and
administrative expenses.

13. Legal Proceedings

Multi-Tech

On February 15, 2000, Multi-Tech Systems, Inc. filed suit against Net2Phone
and other companies in the United States Federal District Court in Minneapolis,
Minnesota. 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. On April 25, 2002, a
hearing was held by the trial court at which time argument was presented by both
sides with respect to permissible scope of the claims asserted by the plaintiff.
A decision on the motion is expected within approximately 60 days. Thereafter, a
trial date will likely be fixed by the court with respect to the claims
remaining after the court's ruling on the motion. 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.

Cisco Systems

On March 19, 2002, Net2Phone and its ADIR subsidiary filed suit in the
United States District Court for the District of New Jersey against Cisco
Systems and a Cisco executive who had been a member of the ADIR board seeking
damages arising mainly out of Cisco's alleged improper conduct in connection
with representations and commitments it made to Net2Phone and ADIR (1)
concerning "partnering" relationships with Cisco to develop jointly and market
Net2Phone and ADIR's VoIP software alongside Cisco's hardware and (2) to induce
ADIR to acquire NetSpeak, Inc. The complaint alleges various causes of action
including fraud, breach of contract, and misappropriation of confidential and
proprietary information, unfair competition and breaches of fiduciary duties.
The discovery stage of the litigation has now commenced and the defendants have
filed a motion to dismiss certain counts of the complaint which is scheduled to
be heard on July 22, 2002.

14. Restructuring, Severance, Impairment and Other Charges

The following table summarizes the charges included in Restructuring,
severance, impairment and other charges in the statements of operations:

Nine Months Ended Nine Months Ended Three Months Ended Three Months Ended
April 30, 2002 April 30, 2001 April 30, 2002 April 30, 2001
--------------- --------------- --------------- ---------------

Impairment of long-lived assets ........ $ 83,940,197 $ -- $ 83,940,197 $ --
Impairment of goodwill ................. 11,543,232 -- 11,543,232 --
Impairment of intangible assets ........ 4,226,870 -- 4,226,870 --
CEO & CFO separation agreements ........ 11,653,154 -- 797,863 --
Workforce reductions ................... 11,884,263 -- 5,720,301 --
Exit costs ............................. 11,481,629 52,917,984 8,207,523 52,917,984
Other asset impairments ................ 3,111,185 13,582,060 -- 13,582,060
--------------- --------------- --------------- ---------------
Total ............................. $ 137,840,530 $ 66,500,044 $ 114,435,986 $ 66,500,044
=============== =============== =============== ===============

Impairment of Long-lived Assets

When an indicator of impairment of the Company's long-lived assets exists,
the Company reviews the recorded value of such assets to determine if the future
cash flows to be derived from these assets will be sufficient to recover the
remaining recorded asset values. The Company considered the resignation of the
Chief Executive and Chief Financial Officers and the plan to restructure its
operations and eliminate various lines of development to be its primary
indicators of potential impairment. An impairment charge of $83.9 million was
recognized during the third quarter of fiscal 2002 when it was determined that
the future undiscounted cash flows of the Company's long-lived assets were
estimated to be insufficient to recover their related carrying values. As such,
the carrying values of these assets were written down to the Company's estimated
fair value. Fair value was estimated using the present value of expected future
cash flows.

Impairment of Goodwill and Intangible Assets

During the third quarter of fiscal 2002, ADIR reduced its workforce
significantly because much of its business plans and activities focused on
developing software for Cisco equipment and an impasse was reached with Cisco
refusing to honor commitments provided to Net2Phone during ADIR's formation as
discussed in footnote 13. For these reasons, the goodwill for the software sales
reporting unit was tested for impairment and, as a result, a goodwill impairment
loss of $11.5 million was recognized. The fair value used to measure the
impairment was estimated using the present value of expected future cash flows.

Also during the third quarter of fiscal 2002, as a result of the plan to
restructure its operations and eliminate various lines of development, an
impairment review of our long-lived assets and identifiable intangible assets
was conducted as of April 30, 2002, in accordance with SFAS No. 121. As a result
of this analysis, the Company recorded impairment charges of approximately $2.0
million related to customer lists, $500,000 related to technology and $1.7
million related to developed product technology assets. The impairment charge
was calculated as the amount by which the carrying amount of the assets exceeded
their fair values. Fair value was estimated using the present value of expected
future cash flows.

Separation Agreements

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
agreed to waive various rights under his employment agreement, entered into a 30
month restrictive non-compete covenant and will 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. Mr. Balter waived all rights to assert any claims
against Net2Phone and ADIR relating to his employment agreement with Net2Phone.
The aggregate principal amount of Mr. Balter's borrowing from Net2Phone and ADIR
was $4,361,235. In addition, Net2Phone had guaranteed the repayment of a bank
loan to Mr. Balter in the principal sum of $5,000,000. Net2Phone agreed to repay
the bank loan and to forgive $2 million of the other indebtedness after the
completion of the first three months of his consulting arrangement and the
balance after the completion of the entire consulting period. As a result of
this agreement, there was a charge of approximately $9.1 million for the nine
months ended April 30, 2002 and $640,000 for the three months ended April 30,
2002. There will be future charges of approximately $3.0 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 agreed to waive various rights under his employment agreement,
entered into a 2 year restrictive non-compete covenant and will provide
consulting services for a 4 year 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. Mr.
Slasky waived all of his rights under his employment agreement with Net2Phone.
The aggregate principal sum of Mr. Slasky's borrowings from Net2Phone was
$1,498,438. Net2Phone agreed to forgive the loans in four equal installments
upon the completion of each of the four years of his consulting arrangement. As
a result of this agreement, there was a charge of approximately $2.6 million for
the nine months ended April 30, 2002 and $150,000 for the three months ended
April 30, 2002. There will be future charges of approximately $2 million
relating to this separation agreement. In connection with the termination of his
employment, Mr. Slasky sold 500 shares of ADIR stock to IDT Corporation. IDT
then transferred the ADIR shares to the Company for 273,798 shares of Net2Phone
common stock valued at $1,423,750 or $5.20 per share, the closing price of the
stock on January 24, 2002. Under certain circumstances, Net2Phone is required to
guarantee to IDT that the shares still owned by it on January 31, 2007 will have
a market value of at least $5.20 per share on that date.

November Restructuring

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 specific 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. As of April 30, 2002, all of the $6.2 million of involuntary
termination benefits have been paid and charged against the liability. All 270
employees to be terminated under the plan were terminated in November when the
plan was announced.

February Restructuring

On February 15, 2002, ADIR announced a reduction of workforce by 60
employees. ADIR reduced its workforce since much of its business plans and
activities focused on developing software for Cisco equipment and an impasse was
reached with Cisco refusing to honor commitments provided to Net2Phone during
ADIR's formation. ADIR recorded a charge of approximately $1.4 million related
to the terminated employees. As of April 30, 2002, approximately $340,000 of
involuntary termination benefits have been paid and charged against the
liability. As a result of unresolved negotiations with Cisco, ADIR communicated
an additional reduction of workforce by 30 employees in May 2002. In connection
with the significant workforce reductions, ADIR has exited a facility and
recorded a charge of $4.2 million relating to the loss on this lease commitment.
ADIR will record an additional liability in the fourth quarter related to the
May 2002 workforce reduction of approximately $900,000.

On February 21, 2002, the Company announced plans to reduce its workforce by 85
employees or approximately 28%. The Company underwent a significant
restructuring process, identifying business lines that required lower capital
expenditures and provided a greater return on investment with higher margins. As
such, the Company significantly reduced its workforce and scaled back certain
unprofitable businesses, including its disposable calling card business and its
wholesale termination business. By reducing its workforce and eliminating some
associated allocated costs, the Company was able to retain the profitable
calling cards and terminating routes. The Company recorded a severance charge of
approximately $3.5 million relating to the workforce reduction. As of April 30,
2002, approximately $1.7 million of involuntary termination benefits have been
paid and charged against the liability. In addition, the Company recorded a
charge of $4.7 million related to the elimination of specific connectivity and
network related costs and $640,000 related to the abandonment of certain leases.

April Restructuring

On April 30, 2002, the Company communicated plans to further reduce its
workforce by 20 employees. The Company scaled back on its technical development
team, which had been working on projects related to the restructured businesses.
The Company recorded severance of approximately $900,000 related to this
additional workforce reduction. As of April 30, 2002, none of the termination
benefits have been paid.

Third Quarter Fiscal 2001 Charges

In the third quarter of Fiscal 2001, the Company decided to discontinue the
operations of its Aplio subsidiary. In connection with the decision, the Company
wrote-off substantially all of Aplio's intangible and fixed assets as their
values would not be recoverable. The impairment charge amounted to $53.0
million. Also in the third quarter of Fiscal 2001, the Company recorded reserves
totaling $13.5 related to advertising agreements and the write-off of software
which were required based on the Company's view of its current business plan as
no future benefits were expected from these assets and commitments.

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.

Nine Months Ended April 30, 2002 Compared to Nine Months Ended April 30, 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 4.9% from approximately $106.1 million for the nine months ended April
30, 2001 to approximately $111.3 million for the nine months ended April 30,
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 41.6% from approximately $5.3 million for the
nine months ended April 30, 2001 to approximately $3.1 million as a result of
the company eliminating certain products, such as the YAP Phone, in an effort to
focus on new product lines incorporating VoIP technology, such as YAP Jacks or
Linksys Routers.

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 25.4%, from approximately
$82.1 million for the nine months ended April 30, 2001 to approximately $61.2
million for the nine months ended April 30, 2002. As a percentage of total
revenue, these costs decreased from approximately 77.4% for the nine months
ended April 30, 2001 to approximately 55.0% for the nine months ended April 30,
2002 as a result of aggressive price negotiations for termination costs and
other reductions in related network costs.

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 based upon revenue-sharing
arrangements. Selling and marketing expenses decreased approximately 62.7% from
approximately $73.9 million for the nine months ended April 30, 2001 to
approximately $27.5 million for the nine months ended April 30, 2002. Included
in the prior year period is a one-time non-recurring termination charge of
approximately $31 million related to marketing and advertising expenses
associated with agreements established with our strategic partners. 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, also contributed to the decrease. 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 services. General and administrative
expenses increased approximately 22.3% from approximately $59.3 million for the
nine months ended April 30, 2001 to approximately $72.5 million for the nine
months ended April 30, 2002. As a percentage of total revenue these costs
increased from approximately 55.9% for the nine months ended April 30, 2001 to
approximately 65.2% for the nine months ended April 30, 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 nine-months ended April 30, 2002. We anticipate
general and administrative expenses, excluding Restructuring, severance,
impairment and other charges, to decrease by the fourth quarter of fiscal 2002
due to the restructurings of our operations that were announced in November 2001
and February 2002.

Depreciation and Amortization. Depreciation and amortization increased
approximately 21.6% from approximately $17.4 million for the nine months ended
April 30, 2001 to approximately $21.1 million for the nine months ended April
30, 2002. As a percentage of total revenues, these costs increased from
approximately 16.4% for the nine months ended April 30, 2001 to approximately
19.0% for the nine months ended April 30, 2002. Depreciation and amortization
increased as the Company completed the majority of the expansion of its domestic
and international network infrastructure. Depreciation and amortization will
decline in future periods as a result of the impairment charge for long-lived
assets during the quarter as noted below. Amortization of goodwill and
indefinite-lived intangible assets ceased effective August 1, 2001.

Restructuring, severance, impairment and other charges.

The following table summarizes the charges included in restructuring,
severance, impairment and other charges in the statements of operations:

Nine Months Nine Months
Ended Ended
April 30, 2002 April 30, 2001
--------------- ---------------
Impairment of long-lived assets $ 83,940,197 $ --
Impairment of goodwill 11,543,232 --
Impairment of intangible assets 4,226,870 --
CEO & CFO separation agreements 11,653,154 --
Workforce reductions 11,884,263 --
Exit costs 11,481,629 52,917,984
Other asset impairments 3,111,185 13,582,060
--------------- ---------------
Total $ 137,840,530 $ 66,500,044
=============== ===============

Impairment of Long-lived Assets

Impairment of Goodwill and Intangible Assets

During the third quarter of fiscal 2002, ADIR reduced its workforce
significantly because much of its business plans and activities focused on
developing software for Cisco equipment and an impasse was reached with Cisco
refusing to honor commitments provided to Net2Phone during ADIR's formation. For
these reasons, the goodwill for the software sales reporting unit was tested for
impairment and, as a result, a goodwill impairment loss of $11.5 million was
recognized. The fair value used to measure the impairment was estimated using
the present value of expected future cash flows.

Separation Agreements

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
agreed to waive various rights under his employment agreement, entered into a 30
month restrictive non-compete covenant and will 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. Mr. Balter waived all rights to assert any claims
against Net2Phone and ADIR relating to his employment agreement with Net2Phone.
The aggregate principal amount of Mr. Balter's borrowing from Net2Phone and ADIR
was $4,361,235. In addition, Net2Phone had guaranteed the repayment of a bank
loan to Mr. Balter in the principal sum of $5,000,000. Net2Phone agreed to repay
the bank loan and to forgive $2 million of the other indebtedness after the
completion of the first three months of his consulting arrangement and the
balance after the completion of the entire consulting period. As a result of
this agreement, there was a charge of approximately $9.1 million for the nine
months ended April 30, 2002. There will be future charges of approximately $3.0
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 agreed to waive various rights under his employment agreement,
entered into a 2 year restrictive non-compete covenant and will provide
consulting services for a 4 year 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. Mr.
Slasky waived all of his rights under his employment agreement with Net2Phone.
The aggregate principal sum of Mr. Slasky's borrowings from Net2Phone was
$1,498,438. Net2Phone agreed to forgive the loans in four equal installments
upon the completion of each of the four years of his consulting arrangement. As
a result of this agreement, there was a charge of approximately $2.6 million for
the nine months ended April 30, 2002. There will be future charges of
approximately $2 million relating to this separation agreement. In connection
with the termination of his employment, Mr. Slasky sold 500 shares of ADIR stock
to IDT Corporation. IDT then transferred the ADIR shares to the Company for
273,798 shares of Net2Phone common stock valued at $1,423,750 or $5.20 per
share, the closing price of the stock on January 24, 2002. Under certain
circumstances, Net2Phone is required to guarantee to IDT that the shares still
owned by it on January 31, 2007 will have a market value of at least $5.20 per
share on that date.

November Restructuring

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 specific 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. As of April 30, 2002, all of the $6.2 million
of involuntary termination benefits have been paid and charged against the
liability. All 270 employees to be terminated under the plan were terminated in
November when the plan was announced.

February Restructuring

On February 15, 2002, ADIR announced a reduction of workforce by 60
employees. ADIR reduced its workforce since much of its business plans and
activities focused on developing software for Cisco equipment and an impasse was
reached with Cisco refusing to honor commitments provided to Net2Phone during
ADIR's formation. ADIR recorded a charge of approximately $1.4 million related
to the terminated employees. As of April 30, 2002, approximately $336,000 of
involuntary termination benefits have been paid and charged against the
liability. As a result of unresolved negotiations with Cisco, ADIR communicated
an additional reduction of workforce by 30 employees in May 2002. In connection
with the significant workforce reductions, ADIR has exited a facility and
recorded a charge of $4.2 million relating to the loss on this lease commitment.
ADIR will record an additional liability in the fourth quarter related to the
May 2002 workforce reduction of approximately $900,000.

On February 21, 2002, the Company announced plans to reduce its workforce
by 85 employees or approximately 28%. The Company underwent a significant
restructuring process, identifying business lines that required lower capital
expenditures and provided a greater return on investment with higher margins. As
such, the Company significantly reduced its workforce and scaled back certain
unprofitable businesses, including its disposable calling card business and its
wholesale termination business. By reducing its workforce and eliminating some
associated allocated costs, the Company was able to retain the profitable
calling cards and terminating routes. The Company recorded severance of
approximately $3.5 million relating to the workforce reduction. As of April 30,
2002, approximately $1.7 million of involuntary termination benefits have been
paid and charged against the liability. In addition, the Company recorded a
charge of $4.7 million related to the elimination of specific connectivity and
network related costs and $640,000 related to the relocation of certain
facilities.

April Restructuring

Third Quarter Fiscal 2001 Charges

Acquired in-process research and development. For the nine months ended
April 30, 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
15.8% from $15.1 million for the nine months ended April 30, 2001 to
approximately $17.5 million for the nine months ended April 30, 2002. As a
percentage of total revenue, these costs increased from approximately 14.3% for
the nine months ended April 30, 2001 to approximately 15.7% for the nine months
ended April 30, 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. During the nine months ended April 30, 2002,
the company recorded approximately $3.7 million related to this repricing. The
repriced options are subject to variable accounting treatment and therefore must
be marked-to-market each quarter. Based on Net2Phone's stock price at April 30,
2002, there will be future charges of approximately $2.6 million relating to
this repricing arrangement. The company 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 $208.2 million
for the nine months ended April 30, 2001 as compared to loss from operations of
approximately $240.3 million for the nine months ended April 30, 2002. Excluding
the non-cash compensation charge, acquired in-process research and development
and the Restructuring, severance, impairment and other charges described above,
our loss from operations for the nine months ended April 30, 2002 would have
been $71.1 million compared to $126.5 million for the nine months ended April
30, 2001. The reduction in the loss from operations (excluding the non-cash
compensation charge, acquired in-process research and development and the
Restructuring, severance, impairment and other charges described above) 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 2001 and
February 2002.

Interest Income, net. Interest income consists primarily of interest earned
on cash and cash equivalents. Interest income decreased approximately 77.7% from
$15.4 million for the nine months ended April 30, 2001 to approximately $3.4
million for the nine months ended April 30, 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
cash balances.

Other Loss, net. Other loss, net decreased from $108.5 million for the nine
months ended April 30, 2001 to approximately $8.3 million for the nine months
ended April 30, 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. During the third quarter
of Fiscal 2002, the Company recorded a loss relating to an other-than-temporary
decline in value for several of its costs method investments, resulting in a
charge to other expense of approximately $6.9 million and a loss relating to the
sale of equipment of approximately $1.4 million.

Three Months Ended April 30, 2002 Compared to Three Months Ended April 30, 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
decreased 24.7% from approximately $40.6 million for the three months ended
April 30, 2001 to approximately $30.6 million for the three months ended April
30, 2002. The decrease in revenue was primarily due to lower revenue sources
driven by the restructuring of operations announced in November 2001 and
February 2002. Product revenue increased 35.2% from approximately $674,017 for
the three months ended April 30, 2001 to approximately $910,941 as a result of
the company's focus on new product lines incorporating VoIP technology, such as
YAP Jacks or Linksys Routers.

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 55.1%, from approximately
$37.5 million for the three months ended April 30, 2001 to approximately $16.8
million for the three months ended April 30, 2002. As a percentage of total
revenue, these costs decreased from approximately 92.4% for the three months
ended April 30, 2001 to approximately 55.1% for the three months ended April 30,
2002 as a result of aggressive price negotiations for termination costs and
other reductions in related network costs.

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 services. General and administrative
expenses decreased approximately 12.4% from approximately $21.7 million for the
three months ended April 30, 2001 to approximately $19.0 million for the three
months ended April 30, 2002. This decrease is a result of 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. As a percentage of total revenue general and administrative
expenses increased from approximately 53.3% for the three months ended April 30,
2001 to approximately 62.1% for the three months ended April 30, 2002. This
increase is attributable to the decline in revenues due to lower revenue sources
driven by the restructuring of operations announced in November 2001 and
February 2002. We anticipate general and administrative expenses, excluding
Restructuring, severance, impairment and other charges, will continue to
decrease in the fourth quarter of fiscal 2002 due 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.

Depreciation and Amortization. Depreciation and amortization increased
approximately 38.6% from approximately $5.1 million for the three months ended
April 30, 2001 to approximately $7 million for the three months ended April 30,
2002. As a percentage of total revenues, these costs increased from
approximately 12.5% for the three months ended April 30, 2001 to approximately
23.1% for the three months ended April 30, 2002. Depreciation and amortization
increased as the Company completed the majority of the expansion of its domestic
and international network infrastructure. Depreciation will most likely decline
as a result of the impairment charge for long-lived assets during the quarter as
noted below. Amortization of goodwill and indefinite-lived intangible assets
ceased effective August 1, 2001.

Restructuring, severance, impairment and other charges.

The following table summarizes the charges included in Restructuring,
severance, impairment and other charges in the statements of operations:

Three Months Ended Three Months Ended
April 30, 2002 April 30, 2001
--------------- ---------------
Impairment of long-lived assets $ 83,940,197 $ --
Impairment of goodwill 11,543,232 --
Impairment of intangible assets 4,226,870 --
CEO & CFO separation agreements 797,863 --
Workforce reductions 5,720,301 --
Exit costs 8,207,523 52,917,984
Other asset impairments -- 13,582,060
--------------- ---------------
Total $ 114,435,986 $ 66,500,044
=============== ===============

Impairment of Long-lived Assets

Impairment of Goodwill and Intangible Assets

During the third quarter of fiscal 2002, ADIR reduced its workforce
significantly because much of its business plans and activities focused on
developing software for Cisco equipment and an impasse was reached with Cisco
refusing to honor commitments provided to Net2Phone during ADIR's formation. For
these reasons, the goodwill for the software sales reporting unit was tested for
impairment and, as a result, a goodwill impairment loss of $11.5 million was
recognized. The fair value used to measure the impairment was estimated using
the present value of expected future cash flows.

Separation Agreements

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
agreed to waive various rights under his employment agreement, entered into a 30
month restrictive non-compete covenant and will 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. Mr. Balter waived all rights to assert any claims
against Net2Phone and ADIR relating to his employment agreement with Net2Phone.
The aggregate principal amount of Mr. Balter's borrowing from Net2Phone and ADIR
was $4,361,235. In addition, Net2Phone had guaranteed the repayment of a bank
loan to Mr. Balter in the principal sum of $5,000,000. Net2Phone agreed to repay
the bank loan and to forgive $2 million of the other indebtedness after the
completion of the first three months of his consulting arrangement and the
balance after the completion of the entire consulting period. As a result of
this agreement, there was a charge of approximately $640,000 for the three
months ended April 30, 2002. There will be future charges of approximately $3.0
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 agreed to waive various rights under his employment agreement,
entered into a 2 year restrictive non-compete covenant and will provide
consulting services for a 4 year 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. Mr.
Slasky waived all of his rights under his employment agreement with Net2Phone.
The aggregate principal sum of Mr. Slasky's borrowings from Net2Phone was
$1,498,438. Net2Phone agreed to forgive the loans in four equal installments
upon the completion of each of the four years of his consulting arrangement. As
a result of this agreement, there was a charge of approximately $150,000 for the
three months ended April 30, 2002. There will be future charges of approximately
$2 million relating to this separation agreement. In connection with the
termination of his employment, Mr. Slasky sold 500 shares of ADIR stock to IDT
Corporation. IDT then transferred the ADIR shares to the Company for 273,798
shares of Net2Phone common stock valued at $1,423,750 or $5.20 per share, the
closing price of the stock on January 24, 2002. Under certain circumstances,
Net2Phone is required to guarantee to IDT that the shares still owned by it on
January 31, 2007 will have a market value of at least $5.20 per share on that
date.

February Restructuring

On February 15, 2002, ADIR announced a reduction of workforce by 60
employees. ADIR reduced its workforce since much of its business plans and
activities focused on developing software for Cisco equipment and an impasse was
reached with Cisco refusing to honor commitments provided to Net2Phone during
ADIR's formation. ADIR recorded a charge of approximately $1.4 million related
to the terminated employees. As of April 30, 2002, approximately $336,000 of
involuntary termination benefits have been paid and charged against the
liability. As a result of unresolved negotiations with Cisco, ADIR communicated
an additional reduction of workforce by 30 employees in May 2002. In connection
with the significant workforce reductions, ADIR has exited a facility and
recorded a charge of $4.2 million relating to the loss on this lease commitment.
ADIR will record an additional liability in the fourth quarter related to the
May 2002 workforce reduction of approximately $900,000.

On February 21, 2002, the Company announced plans to reduce its workforce
by 85 employees or approximately 28%. The Company underwent a significant
restructuring process, identifying business lines that required lower capital
expenditures and provided a greater return on investment with higher margins. As
such, the Company significantly reduced its workforce and scaled back certain
unprofitable businesses, including its disposable calling card business and its
wholesale termination business. By reducing its workforce and eliminating some
associated allocated costs, the Company was able to retain the profitable
calling cards and terminating routes. The Company recorded severance of
approximately $3.5 million relating to the workforce reduction. As of April 30,
2002, approximately $1.7 million of involuntary termination benefits have been
paid and charged against the liability. In addition, the Company recorded a
charge of $4.7 million related to the elimination of specific connectivity and
network related costs and $640,000 related to the relocation of certain
facilities.

April Restructuring

Third Quarter Fiscal 2001 Charges

Compensation Charge from the Issuance of Stock Options. The non-cash
compensation charge from the issuance of stock options increased approximately
24.9% from $5.2 million for the three months ended April 30, 2001 to
approximately $6.4 million for the three months ended April 30, 2002. As a
percentage of total revenue, these costs increased from approximately 12.7% for
the three months ended April 30, 2001 to approximately 21.1 % for the three
months ended April 30, 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 treatment and therefore must be marked-to-market each
quarter. The company recorded approximately $2.0 million related to this
repricing in the second quarter of fiscal year 2002. Based on Net2Phone's stock
price at April 30, 2002, there will be future charges of approximately $2.6
million relating to this repricing arrangement. The company 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 $110.1 million
for the three months ended April 30, 2001 as compared to loss from operations of
approximately $139.6 million for the three months ended April 30, 2002.
Excluding the non-cash compensation charge, acquired in-process research and
development and the Restructuring, severance, impairment and other charges
described above, our loss from operations for the three months ended April 30,
2002 would have been $18.7 million compared to $38.5 million for the three
months ended April 30, 2001. The decrease in the loss from operations (excluding
the non-cash compensation charge, acquired in-process research and development
and the Restructuring, severance, impairment and other charges described above)
is a result of the company's continuous 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.

Interest Income, net. Interest income consists primarily of interest earned
on cash and cash equivalents. Interest income decreased approximately 83.6% from
$3.5 million for the three months ended April 30, 2001 to approximately $580,000
for the three months ended April 30, 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 cash balances.

Other Loss, net. Other loss, net decreased from approximately $12.6 million
for the three months ended April 30, 2001 to approximately $8.2 million for the
three months ended April 30, 2002. The Company recorded a loss relating to an
other-than-temporary decline in value for several of its costs method
investments, resulting in a charge to other expense of approximately $12.6
million in the third quarter of fiscal 2001 and $6.9 million during the third
quarter of fiscal 2002. The Company also recorded a loss relating to the sale of
equipment of approximately $1.4 million during the third quarter of fiscal 2002.

Liquidity and Capital Resources

As of April 30, 2002, the Company had cash, cash equivalents and marketable
securities of approximately $121.9 million and working capital of approximately
$70.6 million. The Company generated negative cash flow from operating
activities of approximately $79.5 million during the nine months ended April 30,
2002, compared with negative cash flow from operating activities of $90.5
million during the nine months ended April 30, 2001. The decrease in negative
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
significantly reduced operating costs, excluding Restrucuturing, severance,
impairment and other charges.

Net cash used in investing activities increased from $32 million during the
nine months ended April 30, 2001, to $46.9 million for the nine months ended
April 30, 2002. The Company's capital expenditures decreased from $62.8 million
during the nine months ended April 30, 2001 to $16.0 million for the nine months
ended April 30, 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 $153.5 million
during the nine months ended April 30, 2001 to $86.2 million for the nine months
ended April 30, 2002. In addition, the net cash used for purchases of marketable
securities decreased from $119.1 million during the nine months ended April 30,
2001 to $71.2 million for the nine months ended April 30, 2002. Net cash used
for the acquisition of NetSpeak was $27.8 million for the nine months ended
April 30, 2002.

Net cash provided by financing activities decreased from $268.6 million
during the nine months ended April 30, 2001, to $9.1 million for the nine months
ended April 30, 2002. The Company received $296 million in net proceeds related
to the sale of common stock to a subsidiary of AT&T in August 2000. During the
nine months ended April 30, 2002, the Company received $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
--------------- --------------- --------------- --------------- ---------------

Capital lease obligations $ 6,103,336 $ 2,874,081 $ 3,229,255 $ -- $ --
Operating leases 44,774,561 6,064,909 11,934,356 5,780,074 20,995,222
Other long term obligations 17,241,268 17,241,268 -- -- --
--------------- --------------- --------------- --------------- ---------------
Total contractual obligations $ 68,119,165 $ 26,180,258 $ 15,163,611 $ 5,780,074 $ 20,995,222
=============== =============== =============== =============== ===============

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Net2Phone's exposure to interest rate risk is immaterial. Net2Phone does
not hold any equity instruments as of April 30, 2002 and as a result does not
have any exposure to market risk for changes in equity prices.

PART II--OTHER INFORMATION

Item 1. Legal Proceedings

Multi-Tech

On February 15, 2000, Multi-Tech Systems, Inc. filed suit against Net2Phone
and other companies in the United States Federal District Court in Minneapolis,
Minnesota. 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. On April 25, 2002, a
hearing was held by the trial court at which time argument was presented by both
sides with respect to permissible scope of the claims asserted by the plaintiff.
A decision on the motion is expected within approximately 60 days. Thereafter, a
trial date will likely be fixed by the Court with respect to the claims
remaining after the court's ruling on the motion. 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

Cisco Systems

On March 19, 2002, Net2Phone and its ADIR Technologies, Inc. subsidiary
filed suit in the United States District Court for the District of New Jersey
against Cisco Systems and a Cisco executive who had been a member of the ADIR
board seeking damages arising mainly out of Cisco's improper conduct in
connection with representations and commitments it made to Net2Phone and ADIR
(1) concerning "partnering" relationships with Cisco to develop jointly and
market Net2Phone and ADIR's VoIP software alongside Cisco's hardware and (2) to
induce ADIR to acquire NetSpeak, Inc. The complaint alleged various causes of
action including fraud, breach of contract, and misappropriation of confidential
and proprietary information, unfair competition and breaches of fiduciary
duties. The discovery stage of the litigation has now commenced and the
defendants have filed a motion to dismiss certain counts of the complaint. That
motion is scheduled to be heard on July 22, 2002.

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

Not Applicable

Item 6. Exhibits and Reports on Form 8-K

a) Exhibits.

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

99.2 * Press release dated March 19, 2002.

- ----------------------
* Incorporated by reference from our Current Report on Form 8-K filed on
March 20, 2002.

b) Reports on Form 8-K.

1. On March 20, 2002 we filed a Current Report on Form 8-K reporting
under Item 5, the filing of a lawsuit against Cisco Systems, Inc.
by our subsidiary, ADIR Technologies, Inc and us.

2. On April 15, 2002 we filed a Current Report on Form 8-K reporting
under Item 6, the resignation of Gary Rieschel from our board of
directors.

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: June 14, 2002

NET2PHONE, INC.

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

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