NET2PHONE INC, S-1/A, 1999-07-19

NET2PHONE INC
S-1/A, 1999-07-19
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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As filed with the Securities and Exchange Commission on July 19, 1999
Registration No. 333-78713

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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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Net2Phone, Inc.
(Exact name of registrant as specified in its charter)

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Delaware 4813 22-3559037
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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171 Main Street
Hackensack, New Jersey 07601
(201) 907-5304
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

Howard S. Balter
Chief Executive Officer
Net2Phone, Inc.
171 Main Street
Hackensack, New Jersey 07601
(201) 907-5304
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

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Copies to:
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<S> <C>
Ira A. Greenstein, Esq. Alexander D. Lynch, Esq.
Morrison & Foerster LLP Kenneth R. McVay, Esq.
1290 Avenue of the Americas Brobeck, Phleger & Harrison LLP
New York, New York 10104 1633 Broadway, 47th Floor
(212) 468-8000 New York, New York 10019
(212) 581-1600
</TABLE>

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Approximate date of commencement of the proposed sale to the public:
As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]

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CALCULATION OF REGISTRATION FEE

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Title of Each Class of Securities Proposed Maximum Aggregate Amount of
to be Registered Offering Price(1) Registration Fee(1)(2)
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Common Stock, $.01 par value.. $70,380,000 $19,566
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.

(2) $18,415 of this amount has been previously paid.

We hereby amend the registration statement on such date or dates as may be
necessary to delay its effective date until we shall file a further amendment
which specifically states that the registration statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933
or until the registration statement shall become effective on such date as the
Securities and Exchange Commission, acting pursuant to said Section 8(a), may
determine.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED JULY 19, 1999

PROSPECTUS

5,100,000 Shares
[LOGO OF NET2PHONE]

Common Stock

This is an initial public offering of common stock by Net2Phone, Inc.
Net2Phone is selling 5,100,000 shares of common stock. The estimated initial
public offering price is between $10.00 and $12.00 per share.

--------

At the request of Net2Phone, the underwriters intend to reserve up to 750,000
shares of common stock to be sold in this offering to America Online, Inc., up
to 300,000 shares of common stock to be sold in this offering to National
Broadcasting Company, Inc., and up to 200,000 shares of common stock to be sold
in this offering to GE Capital Equity Investments, Inc., each at the initial
offering price. Any reserved shares not sold to America Online, NBC or GE
Capital will be offered to the general public on the same basis as the other
shares offered hereby.

We have applied for listing of Net2Phone's common stock on the Nasdaq
National Market under the symbol NTOP.

--------

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Per Share Total
<S> <C> <C>
Initial public offering price................................... $ $
Underwriting discounts and commissions.......................... $ $
Proceeds to Net2Phone, before expenses.......................... $ $
</TABLE>

Net2Phone has granted the underwriters an option for a period of 30 days to
purchase up to 765,000 additional shares of our common stock.

--------

Investing in the common stock involves a high degree of risk.
See "Risk Factors" beginning on page 5.

--------

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.

Hambrecht & Quist BT Alex. Brown

--------

Bear, Stearns & Co. Inc.

, 1999
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TABLE OF CONTENTS

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Page
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Prospectus Summary................................................... 1
Risk Factors......................................................... 5
Forward-Looking Statements........................................... 13
Use of Proceeds...................................................... 14
Dividend Policy...................................................... 14
Capitalization....................................................... 15
Dilution............................................................. 16
Selected Financial Data.............................................. 17
Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... 18
Business............................................................. 27
Management........................................................... 44
Principal Stockholders............................................... 53
Certain Transactions................................................. 55
Description of Capital Stock......................................... 62
Shares Eligible for Future Sale...................................... 65
Underwriting......................................................... 67
Legal Matters........................................................ 70
Experts.............................................................. 70
Where You Can Find More Information.................................. 70
Index to Financial Statements ....................................... F-1
</TABLE>

We maintain Web sites at www.Net2Phone.com and www.EZSurf.com. Information
contained on our Web sites does not constitute part of this prospectus.

"Net2Phone" and "Net2Fax" are our registered marks. Applications to register
the service marks "Phone2Phone," "Click2Talk," "N2P," "Net2Phone Pro" and
"Fax2Fax" have been filed with the United States Patent and Trademark Office.
This prospectus also includes references to registered service marks and
trademarks of other entities.
<PAGE>

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including "Risk Factors" and the financial statements,
before making an investment decision.

Net2Phone

Net2Phone is a leading provider of services enabling users to make high
quality, low-cost telephone calls over the Internet. These services are
commonly referred to as Internet telephony. Our Internet telephony services
enable our customers to call individuals and businesses worldwide using their
personal computers or traditional telephones. According to Frost & Sullivan, a
leading market research firm, we were the largest provider of Internet calls in
the world in 1997 with a 30% market share.

In August 1996, we introduced our first service, "PC2Phone." We believe that
PC2Phone was the first commercial telephone service to connect calls between
personal computers and telephones over the Internet. In September 1997, we
introduced "Phone2Phone," a service that enables international and domestic
calls to be made over the Internet using traditional telephones. Our customers
often pay substantially less for long-distance calls they make using our
services than they would for calls made over traditional long distance
networks, such as those owned by AT&T, Sprint and MCI.

We are using our expertise in Internet telephony to integrate live voice
capabilities into the Web. We have developed simple, easy to use PC2Phone
software that operates on a personal computer and allows individuals and
businesses to:

. speak with sales or customer service representatives of online retailers
and other Web-based businesses while visiting their Web sites;

. speak with individuals or businesses listed on various online
directories, such as Yahoo! People Search; and

. call almost any telephone number in the world.

We promote our services through relationships with international resellers
and leading Internet companies. For example, our PC2Phone software will be
embedded on an exclusive basis into future versions of Netscape's Internet
browser, including Netscape Navigator and Netscape Communicator, for the term
of our agreement. Netscape will also include a Net2Phone icon on the Netscape
Navigator Personal Toolbar and integrate our services into Netscape Netcenter,
allowing Netscape users to access our services from anywhere on the Web. In
addition, we have entered into an agreement with ICQ, a subsidiary of America
Online, to provide Internet telephony services to users of ICQ's instant
messenging service. ICQ will embed our Internet telephony software into ICQ's
Instant Messenger software on an exclusive basis, allowing ICQ users to make
PC-to-phone and PC-to-PC calls and to receive phone-to-PC calls. We will also
co-brand a pre-paid Phone2Phone calling card with ICQ, allowing users to place
calls from the United States and 19 other countries to virtually anywhere in
the world.

Our strategy for building on our leadership position in our market and making
live voice communication a common feature on the Internet includes the
following key elements:

. marketing our services widely;

. pursuing multiple sources of revenue;

. enhancing brand recognition;

. making our software readily available worldwide; and

. expanding and enhancing our products and services.

Upon completion of this offering, IDT will own approximately 57.7% of our
outstanding capital stock. IDT owns Class A stock that has twice the voting
power of our common stock. As a result, IDT will control 65.0% of our vote.

Our principal executive offices are located at 171 Main Street, Hackensack,
New Jersey 07601, and our telephone number at that address is (201) 907-5304.

1
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The Offering

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Common stock offered by Net2Phone............ 5,100,000 shares
Capital stock to be outstanding after this
offering.................................... 47,097,619 shares
Common stock................................ 10,485,429 shares
Class A stock............................... 36,612,190 shares
Use of proceeds.............................. $7.0 million of the net
proceeds from this offering
will be used to repay a portion
of a note outstanding to IDT
Corporation. $3.5 million will
be used to pay ICQ, Inc., a
subsidiary of America Online,
Inc., in connection with our
distribution and marketing
agreement. $1.5 million will be
used to pay to NBC for the
purchase of television
advertising. We have not made
any other specific allocations
with respect to the proceeds.
We expect to use the balance of
the proceeds: for developing
and maintaining strategic
Internet relationships; for
advertising and promotion; for
research and development; for
upgrading and expanding our
network; and for general
corporate purposes, including
working capital.
Nasdaq National Market symbol................ NTOP
</TABLE>

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

This information excludes:

. 920,000 shares subject to outstanding options granted to Jonathan Fram,
our President, as of July 16, 1999, of which 460,000 shares were granted
at an exercise price of $3.33 per share and the remaining 460,000 shares
were granted at the lower of our initial public offering price or $11.00
per share;

. an additional 3,666,366 shares subject to outstanding options as of July
16, 1999 at a weighted average exercise price of $3.33 per share; and

. 5,110,378 shares reserved for issuance under our 1999 Stock Incentive
Plan, as of July 16, 1999, approximately 2,111,000 of which we expect to
grant prior to the closing of this offering.

Unless otherwise noted, the information in this prospectus:

. reflects a 10,320-for-one stock split on our common stock, which took
place in April 1999;

. reflects a three-for-one stock split on our common stock and Class A
stock, which took place in June 1999;

. assumes 4,683,237 shares of common stock outstanding in July 1999;

. assumes 27,621,982 shares of Class A stock outstanding in July 1999;

. assumes the exercise of warrants to purchase 272,400 shares of our
common stock at a price of $3.33 per share prior to the closing of this
offering for proceeds of $907,092;

. gives effect to the conversion of 429,792 shares of Class A stock to
common stock upon the transfer of these shares from IDT to Clifford M.
Sobel, our Chairman, at the closing of this offering; and

. gives effect to the conversion of all 3,140,000 outstanding shares of
our Series A convertible preferred stock into 9,420,000 shares of Class
A stock at the closing of this offering.

2
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Each share of Class A stock entitles the holder to two votes, while holders
of our common stock are entitled to only one vote. Each share of Class A stock
is convertible into one share of common stock, and automatically converts into
common stock upon transfer.

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

Our fiscal year ends on July 31 of each calendar year. All references to
fiscal years in this prospectus refer to the fiscal years ending in the
indicated calendar years. For example, "fiscal 1998" refers to the fiscal year
ended July 31, 1998.

3
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The table below sets forth summary financial information for the periods
indicated. This information is not necessarily indicative of the results of
operations or financial position which would have resulted had we operated as
an independent entity during the periods indicated. It is important that you
read this information together with the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and the notes thereto included elsewhere in this
prospectus.
Summary Financial Information

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<CAPTION>
Period from Year Ended Nine Months Ended
January 2, 1996 July 31, April 30,
(inception) to ------------------------ -----------------------
July 31, 1996 1997 1998 1998 1999
--------------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Revenue............... $ -- $ 2,652,303 $12,005,972 $7,954,374 $22,203,257
Loss from operations.. (507,758) (1,697,647) (3,544,689) (673,922) (2,905,966)
Net loss.............. $(507,758) $(1,697,647) $(3,544,689) $ (673,922) $(2,905,966)
Net loss per share--
basic and diluted.... $ (0.02) $ (0.06) $ (0.12) $ (0.02) $ (0.09)
Shares used in
calculation of basic
and diluted loss per
share................ 27,864,000 27,864,000 30,186,000 29,928,000 30,960,000
</TABLE>

The pro forma balance sheet data summarized below gives effect to:

. the sale of 3,140,000 shares of Series A convertible preferred stock,
which are convertible into 9,420,000 shares of our Class A common stock,
and warrants to purchase 180,000 shares of our common stock in May 1999
for net proceeds of $29.9 million;
. the conversion of all outstanding shares of our Series A convertible
preferred stock into shares of our Class A stock at the closing of this
offering;
. the issuance of warrants to purchase 92,400 shares of our common stock
granted to the placement agent in May 1999 in connection with the sale
of our Series A convertible preferred stock;
. the repayment of $8.0 million of the amounts owed to IDT in May 1999;
and
. the exercise of options to purchase 1,345,219 shares of common stock in
May 1999 in exchange for $3.1 million in promissory notes and $1.3
million in cash.

The pro forma as adjusted balance sheet summarized below reflects:

. the sale of 5,100,000 shares of common stock in this offering;
. the application of $7.0 million of the estimated net proceeds from this
offering to pay a portion of the amounts due to IDT;

. the application of $3.5 million of the estimated net proceeds from this
offering to pay ICQ in connection with our distribution and marketing
agreement;

. the application of $1.5 million of the estimated net proceeds from this
offering to pay NBC for television advertising; and

. the exercise of warrants to purchase 272,400 shares of common stock
prior to the closing of this offering for proceeds of $907,092.

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April 30, 1999
--------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
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Balance Sheet Data:
Cash and cash equivalents.............. $ 1,782,194 $25,016,264 $64,316,356
Working capital........................ (17,255,452) 13,978,618 61,978,710
Total assets........................... 19,818,328 43,052,398 87,552,490
Due to IDT............................. 22,000,000 14,000,000 7,000,000
Total stockholders' (deficit) equity... (3,926,122) 27,307,948 78,808,040
</TABLE>

4
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RISK FACTORS

You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occur, our
business, financial condition or results of operations could be materially
adversely affected. In that event, the trading price of our shares could
decline, and you may lose part or all of your investment.

Risks Related to Our Financial Condition and Our Business

Our limited operating history makes evaluating our business difficult.

IDT formed us as a subsidiary in October 1997. Prior to that, we conducted
business as a division of IDT. Therefore, we have only a limited operating
history with which you may evaluate our business. You must consider the
numerous risks and uncertainties an early stage company like ours faces in the
new and rapidly evolving market for Internet-related services. These risks
include our ability to:

. increase awareness of our brand and continue to build user loyalty;

. maintain our current, and develop new, strategic relationships;

. respond effectively to competitive pressures; and

. continue to develop and upgrade our network and technology.

If we are unsuccessful in addressing these risks, sales of our products and
services, as well as our ability to maintain or increase our customer base,
will be substantially diminished.

We have never been profitable and expect our losses to continue for the
foreseeable future.

We have never been profitable on an annual basis. We had an accumulated
deficit of approximately $8.7 million as of April 30, 1999. We expect to
continue to incur operating losses for the forseeable future. Our operating and
marketing expenses have continuously increased since inception and we expect
them to continue to increase significantly during the next several years.
Accordingly, we will need to generate significant revenue to achieve
profitability. We may not be able to do so. Even if we do achieve
profitability, we cannot assure you that we will be able to sustain or increase
profitability on a quarterly or annual basis in the future.

Further, it is probable that we will have to recognize significant
additional charges relating to non-cash compensation in connection with options
that we granted in May 1999 and that we expect to grant prior to the closing of
this offering. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

We intend to pursue new streams of revenue which we have not attempted to
generate before and which may not be profitable.

In the future, we intend to pursue revenue from new Web-based opportunities,
such as banner and audio advertising, as well as from sponsorship opportunities
on our user interface and our EZSurf.com Internet shopping directory. We also
intend to explore the availability of revenue-sharing opportunities. We have
not attempted to generate this type of revenue before. We intend to devote
significant capital and resources to create these new revenue streams and we
cannot ensure that these investments will be profitable.

We may have difficulties managing our expanding operations, which may reduce
our chances of achieving profitability.

Our future performance will depend, in part, on our ability to manage our
growth effectively. To that end, we will have to undertake the following tasks,
among others:

. develop our operating, administrative, and financial and accounting
systems and controls;

5
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. improve coordination among our engineering, accounting, finance,
marketing and operations personnel;

. enhance our management information systems capabilities; and

. hire and train additional qualified personnel.

If we cannot accomplish these tasks, we will diminish our chances of achieving
profitability.

If we fail to establish and maintain strategic relationships our ability to
increase our sales would suffer.

We currently have strategic relationships with ICQ, Netscape, Compaq,
Yahoo!, Excite and others. We depend on these relationships to:

. distribute our products to potential customers;

. increase usage of our services;

. build brand awareness; and

. cooperatively market our products and services.

We believe that our success depends, in part, on our ability to develop and
maintain strategic relationships with leading Internet companies and computer
hardware and software companies, as well as key marketing distribution
partners. If any of our strategic relationships are discontinued, sales of our
products and services and our ability to maintain or increase our customer base
may be substantially diminished.

If we hire a reseller who fails to market our products and services effectively
or who provides poor customer service, our reputation will suffer and we
could lose customers.

If we hire a reseller who fails to market our products and services
effectively, we could lose market share. Additionally, if a reseller provides
poor customer service, we could lose brand equity. Therefore, we must maintain
and hire additional resellers throughout the world that are capable of
providing high-quality sales and service efforts. If we lose a reseller in a
key market, or if a current or future reseller fails to adequately provide
customer support, our reputation will suffer and sales of our products and
services and our customer base will be substantially diminished.

Competition could reduce our market share and decrease our revenue.

The market for our services has been extremely competitive. Many companies
offer products and services like ours, and many of these companies have a
substantial presence in this market. Current product offerings include VocalTec
Communications' Internet Phone, QuarterDeck's WebPhone and Microsoft's
NetMeeting.

In addition, a number of large telecommunications providers and equipment
manufacturers, such as Alcatel, Cisco, Lucent, Northern Telecom and Dialogic
(which has entered into an agreement to be acquired by Intel), have announced
that they intend to offer similar products. We expect these products to allow
live voice communications over the Internet between parties using a personal
computer and a telephone and between two parties using telephones. Cisco
Systems has also taken further steps by recently acquiring companies that
produce devices that help Internet service providers carry voice over the
Internet while maintaining traditional phone usage and infrastructure. Other
competitors of ours, such as ICG Communications, IPVoice.com, ITXC, RSL
Communications (through its Delta Three subsidiary) and VIP Calling, route
voice traffic worldwide over the Internet. In addition, major long distance
providers, such as AT&T, Deutsche Telekom, MCI WorldCom and Qwest
Communications, as well as other major companies such as Motorola and Intel,
have all entered or plan to enter the market for carrying voice over the
Internet. These companies are larger than we are and have substantially greater
financial, distribution and marketing resources than we do. We may not be able
to compete successfully in this market.

6
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Pricing pressures may lessen our competitive pricing advantage.

Our success is based on our ability to provide discounted domestic and
international long distance services by taking advantage of cost savings
achieved by carrying voice traffic over the Internet, as compared to carrying
calls over long distance networks, such as those owned by AT&T, Sprint and MCI.
In recent years, the price of long distance calls has fallen. In response, we
have lowered the price of our service offerings. The price of long distance
calls may decline to a point where we no longer have a price advantage over
these traditional long distance services. We would then have to rely on factors
other than price to differentiate our product and service offerings, which we
may not be able to do.

We may not be able to hire and retain the personnel we need to sustain our
business.

We depend on the continued services of our executive officers and other key
personnel. We have an employment agreement with only one of our executive
officers, Clifford M. Sobel, our Chairman and President. We need to attract and
retain other highly-skilled technical and managerial personnel for whom there
is intense competition. If we are unable to attract and retain qualified
technical and managerial personnel, we may never achieve profitability.

If our customers do not perceive our service to be effective or of high
quality, our brand and name recognition would suffer.

We believe that establishing and maintaining a brand and name recognition is
critical for attracting and expanding our targeted client base. We also believe
that the importance of reputation and name recognition will increase as
competition in our market increases. Promotion and enhancement of our name will
depend on the effectiveness of our marketing and advertising efforts and on our
success in continuing to provide high-quality products and services, neither of
which can be assured. If our customers do not perceive our service to be
effective or of high quality, our brand and name recognition would suffer.

We depend on our international operations, which subject us to unpredictable
regulatory and political situations.

As of April 30, 1999, approximately 65% of our customers were based outside
of the United States, generating approximately 58% of our revenues during the
nine months ended on that date. A significant component of our strategy is to
continue to expand internationally. We cannot assure you that we will be
successful in expanding into additional international markets. In addition to
the uncertainty regarding our ability to generate revenue from foreign
operations and expand our international presence, there are certain risks
inherent in doing business on an international basis, including:

. changing regulatory requirements;

. increased bad debt and subscription fraud;

. legal uncertainty regarding liability, tariffs and other trade barriers;

. political instability; and

. potentially adverse tax consequences.

We cannot assure you that one or more of these factors will not materially
adversely affect the growth of our business or our customer base.

All of the telephone calls made by our customers are connected through local
telephone companies and, at least in part, through leased networks that may
become unavailable.

We are not a local telephone company or a registered local exchange carrier.
Our network covers only portions of the United States. Accordingly, we must
route parts of some domestic and all international calls made by our customers
over leased transmission facilities. Further, because our network does not
extend

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to homes or businesses, we must route calls through a local telephone company
to reach our network and, ultimately, to reach their final destinations.

In many of the foreign jurisdictions in which we conduct or plan to conduct
business, the primary provider of significant intra-national transmission
facilities is the national telephone company. Accordingly, we may have to lease
transmission capacity at artificially high rates from a monopolistic provider
and consequently we may not be able to generate a profit on those calls. In
addition, national telephone companies may not be required by law to lease
necessary transmission lines to us or, if applicable law requires national
telephone companies to lease transmission facilities to us, we may encounter
delays in negotiating leases and interconnection agreements and commencing
operations. Additionally, disputes may result with respect to pricing terms and
billing.

In the United States, the providers of local telephone service are generally
the incumbent local telephone companies, including the regional Bell operating
companies. The permitted pricing of local transmission facilities that we lease
in the United States is subject to uncertainties. The Federal Communications
Commission has issued an order requiring incumbent local telephone companies to
price those facilities at total element long-run incremental cost, and the
United States Supreme Court recently upheld the FCC's jurisdiction to set a
pricing standard for local transmission facilities provided to competitors.
However, the incumbent local telephone companies can be expected to bring
further legal challenges to the FCC's total element long-run incremental cost
standard and, if they succeed, the result may be to increase the cost of
incumbent local transmission facilities obtained by us.

Our success depends on our ability to handle a large number of simultaneous
calls, which our systems may not be able to accommodate.

We expect the volume of simultaneous calls to increase significantly as we
expand our operations. Our network hardware and software may not be able to
accommodate this additional volume. If we fail to maintain an appropriate level
of operating performance, or if our service is disrupted, our reputation could
be hurt and we could lose customers.

Because we are unable to predict the volume of usage and our capacity needs, we
may be forced to enter into disadvantageous contracts that would reduce our
operating margins.

In order to ensure that we are able to handle additional usage, we have
agreed to pay IDT a one-time fee of approximately $6.0 million for a 20-year
right to use part of a new high capacity network that is under construction.
This network has been pledged by IDT to its lenders under a credit facility. We
may have to enter into additional long-term agreements for leased capacity. To
the extent that we overestimate our call volume, we may be obligated to pay for
more transmission capacity than we actually use, resulting in costs without
corresponding revenue. Conversely, if we underestimate our capacity needs, we
may be required to obtain additional transmission capacity through more
expensive means that may not be available.

We may not be able to obtain sufficient funds to grow our business.

We intend to continue to grow our business. Due to our limited operating
history and the nature of our industry, our future capital needs are difficult
to predict. Therefore, we may require additional capital after this offering to
fund any of the following:

. unanticipated opportunities;

. strategic alliances;

. potential acquisitions;

. changing business conditions; and

. unanticipated competitive pressures.

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Obtaining additional financing will be subject to a number of factors,
including market conditions, our operating performance and investor sentiment.
These factors may make the timing, amount, terms and conditions of additional
financings unattractive to us. If we are unable to raise additional capital,
our growth could be impeded.

Any damage to or failure of our systems or operations could result in
reductions in, or terminations of, our services.

Our success depends on our ability to provide efficient and uninterrupted,
high-quality services. Our systems and operations are vulnerable to damage or
interruption from natural disasters, power loss, telecommunication failures,
physical or electronic break-ins, sabotage, intentional acts of vandalism and
similar events that may be or may not be beyond our control. The occurrence of
any or all of these events could hurt our reputation and cause us to lose
customers.

Unauthorized use of our intellectual property by third parties may damage our
brand.

We regard our copyrights, service marks, trademarks, trade secrets and other
intellectual property as critical to our success. We rely on trademark and
copyright law, trade secret protection and confidentiality agreements with our
employees, customers, partners and others to protect our intellectual property
rights. Despite our precautions, it may be possible for third parties to obtain
and use our intellectual property without authorization. Furthermore, the
validity, enforceability and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving. The laws of some
foreign countries are uncertain or do not protect intellectual property rights
to the same extent as do the laws of the United States. The unauthorized use of
our intellectual property by third parties may damage our brand.

Defending against intellectual property infringement claims could be expensive
and could disrupt our business.

We cannot be certain that our products do not or will not infringe upon
valid patents, trademarks, copyrights or other intellectual property rights
held by third parties. We may be subject to legal proceedings and claims from
time to time relating to the intellectual property of others in the ordinary
course of our business. We may incur substantial expenses in defending against
these third-party infringement claims, regardless of their merit. Successful
infringement claims against us may result in substantial monetary liability or
may materially disrupt the conduct of our business. See "Business--Intellectual
Property."

Year 2000 problems may disrupt our operations.

Many computer systems and software products are coded to understand only
dates that have two digits for the relevant year. These systems and products
need upgrading to accept four digit entries in order to distinguish 21st
century dates from 20th century dates. Without upgrading, many computer
applications could fail or create erroneous results beginning in the year 2000.
The "Year 2000" problems of companies on the Internet generally could affect
our systems or operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Systems Costs" for a
more complete description of the Year 2000 risks that we face and the steps we
have taken to reduce those risks.

9
<PAGE>

Risks Related to Our Relationship with IDT

We have contracted with IDT for various services and for the use of its
telecommunications network, which contracts we may not be able to renew when
they expire.

In May 1999, we entered into agreements with IDT under which IDT will
continue to provide administrative and telecommunication services to us. When
these agreements expire, we will need to extend them, engage other entities to
perform these services or perform these services ourselves. In addition, after
the initial term, these agreements are terminable by either party upon prior
written notice. We cannot assure you that IDT will not terminate these
agreements or continue to provide these services after the initial term of the
agreements. As a result, we may have to purchase these services from third
parties or devote resources to handle these functions internally, which may
cost us more than we paid IDT for the same services. In addition, IDT has
provided us in the past with working capital to fund our operations, and IDT is
not under any obligation, under these agreements or otherwise, to do so in the
future.

We may experience conflicts of interest with IDT, which may not be resolved in
our favor.

Two members of our board of directors are officers and directors of IDT. One
of these directors, Howard S. Jonas, is the Chairman and Chief Executive
Officer of IDT and IDT's controlling shareholder. Additionally, one of our
directors, James R. Mellor, was a director of IDT until June 1999. Clifford M.
Sobel, our Chairman, has an option to transfer his interest in us to IDT in
exchange for an option to purchase 875,000 shares of IDT common stock at a
purchase price of $6.50 per share. See "Certain Transactions." In addition,
certain of our executive officers, directors and employees hold shares of IDT
common stock and options to acquire shares of IDT common stock. These
individuals may have conflicts of interest with respect to certain decisions
involving business opportunities and similar matters that may arise in the
ordinary course of our business or the business of IDT. If conflicts arise with
IDT, we expect to resolve those conflicts on a case-by-case basis, and in the
manner required by applicable law and customary business practices, subject to
our agreement with IDT to resolve disputes involving $5.0 million or less
through mandatory, binding arbitration. Conflicts, if any, could be resolved in
a manner adverse to us and our stockholders, which could harm our business.

Through its ownership of our stock, IDT effectively controls our company and
may exert influence contrary to the interests of other stockholders.

Immediately following this offering, IDT will own approximately 57.7% of our
outstanding capital stock. Because IDT owns Class A stock, which entitles the
holder to two votes per share, IDT will control 65.0% of our voting power.
Therefore, IDT will have the power to determine the election of our directors,
the appointment of new management and the approval of any other action
requiring the approval of our stockholders, including any amendments to our
certificate of incorporation and mergers or sales of our company or of all of
our assets. In addition, without the consent of IDT, we could be prevented from
entering into certain transactions that could be beneficial to us. Third
parties could be discouraged from making a tender offer or bid to acquire us
because of IDT's stockholdings and voting rights. IDT's ownership will increase
further if Clifford M. Sobel exercises his option to transfer his shares of our
stock to IDT in exchange for an option to purchase shares of IDT. See
"Principal Stockholders."

IDT has pledged its shares of our stock to secure a credit facility, which
shares may be transferred to a third party that would effectively control us
if IDT defaults on its obligations.

The shares owned by IDT are pledged as collateral to secure an IDT credit
facility. The lenders under the credit facility have agreed to permit IDT to
transfer our shares free and clear of any liens as and when IDT seeks to
transfer shares of our stock. Such transferability will cease if IDT's
ownership of our capital stock drops below 50% of the number of shares which it
owns 72 hours after the consummation of this offering. If IDT defaults in its
obligations under the credit facility, then a third party could acquire the
voting

10
<PAGE>

rights with respect to the pledged stock and become party to our intercompany
agreements. We cannot assume that a third party would maintain good relations
with us or maintain or renew our agreements with IDT.

Risks Related to Our Industry

If the Internet does not continue to grow as a medium for voice communications,
our business will suffer.

The technology that allows voice communications over the Internet is still
in its early stages of development. Historically, the sound quality of Internet
calls was poor. As the industry has grown, sound quality has improved, but the
technology requires further refinement. Additionally, the Internet's capacity
constraints may impede the acceptance of Internet telephony. Callers could
experience delays, errors in transmissions or other interruptions in service.
Making telephone calls over the Internet must also be accepted as an
alternative to traditional telephone service. Because the Internet telephony
market is new and evolving, predicting the size of this market and its growth
rate is difficult. If our market fails to develop, then we will be unable to
grow our customer base and our opportunity for profitability will be harmed.

Our business will not grow without increased use of the Internet.

The use of the Internet as a commercial marketplace is at an early stage of
development. Demand and market acceptance for recently introduced products and
services over the Internet are still uncertain. We cannot predict whether
customers will be willing to shift their traditional activities online. The
Internet may not prove to be a viable commercial marketplace for a number of
reasons, including:

. concerns about security;

. Internet congestion;

. inconsistent service; and

. lack of cost-effective, high-speed access.

If the use of the Internet as a commercial marketplace does not continue to
grow, we may not be able to grow our customer base, which may prevent us from
achieving profitability.

Governmental regulations regarding the Internet may be passed, which could
impede our business.

To date, governmental regulations have not materially restricted use of the
Internet in our market. However, the legal and regulatory environment that
pertains to the Internet is uncertain and may change. New regulations could
increase our costs of doing business and prevent us from delivering our
products and services over the Internet. The growth of the Internet may also be
significantly slowed. This could delay growth in demand for our products and
services and limit the growth of our revenue.

In addition to new regulations being adopted, existing laws may be applied
to the Internet. See "Business--Regulation." New and existing laws may cover
issues that include:

. sales and other taxes;

. access charges;

. user privacy;

. pricing controls;

. characteristics and quality of products and services;

. consumer protection;

. contributions to the universal service fund, an FCC-administered fund
for the support of local telephone service in rural and high cost areas;

. cross-border commerce;

. copyright, trademark and patent infringement; and

. other claims based on the nature and content of Internet materials.

11
<PAGE>

In September 1998, two regional Bell operating companies advised Internet
telephony providers that these companies would impose access charges on
Internet telephony traffic. One of these operating companies also petitioned
the FCC for a declaratory ruling that providers of interstate Internet
telephony must pay federal access charges, and has petitioned the public
utilities commissions of Nebraska and Colorado for similar rulings concerning
payment of access charges for intrastate Internet telephone calls. The outcome
of these proceedings is uncertain. If these states decide that access charges
may be levied against Internet telephony providers, we would have to pay money
for access in those states. If additional state utility commissions make
similar rulings, we may not be able to operate profitably in any state that
assesses access charges against us.

Our risk management practices may not be sufficient to protect us from
unauthorized transactions or thefts of services.

We may be the victim of fraud or theft of service. From time to time,
callers have obtained our services without rendering payment by unlawfully
using our access numbers and personal identification numbers. We attempt to
manage these theft and fraud risks through our internal controls and our
monitoring and blocking systems.

Risks Related to this Offering

Our stock price is likely to be highly volatile and could drop unexpectedly.

Following this offering, the price for our common stock could be highly
volatile and subject to wide fluctuations in response to the following factors:

. quarterly variations in our operating results;

. announcements of technical innovations, new products or services by us
or our competitors;

. investor perception of us, the Internet telephony market or the Internet
in general;

. changes in financial estimates by securities analysts; and

. general economic and market conditions.

The stocks of many Internet-related companies have experienced significant
fluctuations in trading price and volume. Often these fluctuations have been
unrelated to operating performance. Declines in the market price of our common
stock could also materially adversely affect employee morale and retention, our
access to capital and other aspects of our business.

If our stock price is volatile, we may become subject to securities litigation,
which is expensive and could divert our resources.

In the past, following periods of market volatility in the price of a
company's securities, security holders have instituted class action litigation.
Many companies in our industry have been subject to this type of litigation. If
the market value of our stock experiences adverse fluctuations, and we become
involved in this type of litigation, regardless of the outcome, we could incur
substantial legal costs and our management's attention could be diverted,
causing our business to suffer.

The sale of a substantial number of shares of our common stock after this
offering may affect our stock price.

The market price of our common stock could decline as a result of sales of
substantial amounts of common stock in the public market after the closing of
this offering or the perception that substantial sales could occur. These sales
also might make it difficult for us to sell equity securities in the future at
a time and at a price that we deem appropriate.

12
<PAGE>

We may use the proceeds from this offering in ways with which you may not
agree.

We have significant flexibility in applying the proceeds we receive in this
offering. Other than the repayment of $7.0 million on an outstanding note to
IDT, the payment of $3.5 million to ICQ in connection with our distribution and
marketing agreement and the payment of $1.5 million to NBC for television
advertising, the proceeds are not required to be allocated to any specific
investment or transaction. Therefore, you cannot determine the value or
propriety of our use of proceeds. If we do not apply the funds we receive
effectively, our accumulated deficit will increase and we may lose significant
business opportunities. See "Use of Proceeds" for a more detailed description
of how we intend to apply the proceeds from this offering.

Our certificate of incorporation, our bylaws and Delaware law make it difficult
for a third party to acquire us, despite the possible benefit to our
stockholders.

Provisions of our certificate of incorporation, our bylaws and Delaware law
could make it more difficult for a third party to acquire us, even if doing so
would be beneficial to our stockholders. For example, our certificate of
incorporation provides for a classified board of directors, meaning that only
approximately one-third of our directors will be subject to re-election at each
annual stockholder meeting. Moreover, our certificate of incorporation creates
a class of stock with super-voting rights. The holders of Class A stock are
entitled to two votes per share while the holders of common stock are entitled
to one vote per share. Except as otherwise required by law or as described
below, the holders of Class A stock and common stock will vote together as a
single class on all matters presented to the stockholders for their vote or
approval, including the election of directors. The holders of Class A stock may
have the ability to elect all of our directors and to effect or prevent certain
corporate transactions. These provisions could discourage takeover attempts and
could materially adversely affect the price of our stock.

FORWARD-LOOKING STATEMENTS

This prospectus contains "forward-looking statements." These forward-looking
statements include, without limitation, statements about our market
opportunity, strategies, competition, expected activities and expenditures as
we pursue our business plan, and the adequacy of our available cash resources.
Our actual results could differ materially from those expressed or implied by
these forward-looking statements as a result of various factors, including the
risk factors described above and elsewhere in this prospectus.

13
<PAGE>

USE OF PROCEEDS

Net2Phone will receive net proceeds of approximately $50.6 million from the
sale of 5,100,000 shares of common stock (and an additional approximately $7.8
million from the sale of 765,000 shares if the underwriters over-allotment
option is exercised in full) at an assumed initial public offering price of
$11.00 per share after deducting underwriting commissions and discounts of $3.5
million (and an additional approximately $589,000 if the underwriters' over-
allotment option is exercised in full) and estimated expenses of $2.0 million.

$7.0 million of the net proceeds from this offering will be used to repay a
portion of the $14.0 million note outstanding to IDT. $3.5 million will be used
to pay ICQ, a subsidiary of America Online, in connection with our distribution
and marketing agreement. $1.5 million will be used to prepay NBC for television
advertising. As of the date of this prospectus, we have not made any other
specific allocations with respect to the proceeds. Therefore, we cannot specify
with certainty the particular uses for the net proceeds to be received upon
consummation of this offering. Accordingly, our management will have
significant flexibility in applying the net proceeds from this offering.

We expect to use the balance of the net proceeds of this offering for:

. developing and maintaining strategic Internet relationships;

. advertising and promotion;

. research and development;

. upgrading and expanding our network; and

. general corporate purposes, including working capital.

Pending any use, the net proceeds of this offering will be invested in
short-term, interest-bearing securities.

DIVIDEND POLICY

We have not paid any dividends in the past and do not intend to pay cash
dividends on our capital stock for the foreseeable future. Instead, we intend
to retain all earnings for use in the operation and expansion of our business.

14
<PAGE>

CAPITALIZATION
The following table sets forth:
. our actual capitalization as of April 30, 1999;
. our pro forma capitalization to give effect to:
. the conversion of IDT's 27,864,000 shares of our common stock into
27,864,000 shares of Class A stock in May 1999,
. the sale of 3,140,000 shares of Series A convertible preferred
stock, which are convertible into 9,420,000 shares of our Class A
common stock, and warrants to purchase 180,000 shares of our common
stock in May 1999 for net proceeds of $29.9 million,
. the conversion of all outstanding shares of our Series A convertible
preferred stock into shares of our Class A stock at the closing of
this offering,
. the issuance of warrants to purchase 92,400 shares of our common
stock granted to the placement agent in May 1999 in connection with
the sale of our Series A convertible preferred stock,
. the repayment of $8.0 million of the amounts owed to IDT in May
1999,

. the conversion of 242,018 shares of Class A stock to common stock
upon the transfer of these shares from IDT to Clifford M. Sobel in
May 1999, and
. the exercise of stock options to purchase 1,375,219 shares of common
stock in May 1999 in exchange for $3.1 million in promissory notes
and $1.3 million in cash; and
. the pro forma as adjusted balance sheet summarized below reflects:

. the sale of 5,100,000 shares of common stock in this offering,
. the application of $7.0 million of the estimated net proceeds from
this offering to pay a portion of the amounts due to IDT,

. the conversion of 429,792 shares of Class A stock to common stock
upon the transfer of those shares from IDT to Clifford M. Sobel at
the closing of this offering, and

. the exercise of warrants prior to the closing of this offering to
purchase 272,400 shares of common stock for proceeds of $907,000.

The information set forth in the table below excludes 920,000 shares of
common stock issuable upon exercise of options granted to Jonathan Fram, our
President, of which 460,000 shares were granted at an exercise price of $3.33
per share and the remaining 460,000 shares were granted at the lower of our
initial public offering price or $11.00 per share. This information also
excludes an additional 3,666,366 shares of common stock issuable upon exercise
of options to purchase our common stock at a weighted average exercise price of
$3.33 per share. This information also excludes the effect of non-cash
compensation in connection with options to purchase approximately 5,040,000
shares of our common stock that were granted in May 1999, options to purchase
920,000 shares of common stock granted to Mr. Fram and options to purchase
2,111,000 additional shares of our common stock that are expected to be granted
prior to the closing of this offering. See "Management--1999 Stock Incentive
Plan" and "Certain Transactions--Relationship with Other Investors."
<TABLE>
<CAPTION>
April 30, 1999
-------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- -----------
<S> <C> <C> <C>
Due to IDT.............................. $22,000,000 $14,000,000 $ 7,000,000
Redeemable convertible preferred stock,
Series A, $.01 par value; 3,150,000
shares authorized, no shares issued and
outstanding............................ -- -- --
Stockholders' (deficit) equity:
Preferred stock, $.01 par value;
6,850,000 shares authorized, no shares
issued and outstanding................. -- -- --
Common stock, $.01 par value;
200,000,000 shares authorized;
30,960,000 (actual) 4,683,237 (pro
forma) and 10,485,429 (pro forma as
adjusted) shares issued and
outstanding............................ 309,600 46,832 104,854
Class A stock, $.01 par value;
37,042,089 shares authorized; none
(actual) 37,041,982 (pro forma) and
36,612,190 (pro forma as adjusted)
shares issued and outstanding.......... -- 370,420 366,122
Additional paid-in capital.............. 4,420,338 38,696,746 90,143,144
Loans to stockholders................... -- (3,149,990) (3,149,990)
Accumulated deficit..................... (8,656,060) (8,656,060) (8,656,060)
----------- ----------- -----------
Total stockholders' (deficit) equity.... (3,926,122) 27,307,948 78,808,040
----------- ----------- -----------
Total capitalization.................... $18,073,878 $41,307,948 $85,808,040
=========== =========== ===========
</TABLE>

15
<PAGE>

DILUTION

The net tangible book value of Net2Phone common stock and Class A stock as
of April 30, 1999, as adjusted to give effect to a private placement of
3,140,000 shares of Series A convertible preferred stock in May 1999, the
conversion of those shares into Class A stock and the exercise of stock options
to purchase 1,345,219 shares of common stock, was $22.3 million, or $0.53 per
share of common stock and Class A stock. Net tangible book value per share
represents the amount of our total tangible assets less our total liabilities,
divided by the total number of shares of common stock and Class A stock
outstanding.

After giving effect to this offering and the receipt of an assumed $50.6
million of net proceeds from this offering (based on an assumed initial public
offering price of $11.00 per share), the issuance of 3,140,000 shares of Series
A convertible preferred stock in May 1999, the conversion of the Series A
convertible preferred stock into 9,420,000 shares of Class A stock and the
exercise of warrants to purchase 272,400 shares of common stock, the pro forma
net tangible book value of the common stock and Class A stock as of April 30,
1999 would have been $73.8 million, or $1.54 per share. This amount represents
an immediate increase in net tangible book value of $1.01 per share to the
existing stockholders and an immediate dilution in net tangible book value of
$9.46 per share to purchasers of common stock in this offering. Dilution is
determined by subtracting pro forma net tangible book value per share after
this offering from the amount of cash paid by a new investor for a share of
common stock. The following table illustrates such dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $11.00
Net tangible book value per share at April 30, 1999 .......... $0.53
Increase per share attributable to new investors.............. 1.01
-----
Pro forma net tangible book value per share after this
offering........................................................ 1.54
------
Dilution per share to new investors............................. $ 9.46
======
</TABLE>

The following table sets forth, as of April 30, 1999, on the pro forma basis
described above, the number of shares of capital stock purchased from us, the
total consideration paid to us and the average price per share paid by existing
stockholders and by new investors who purchase shares of common stock in this
offering, before deducting the estimated underwriting discounts and commissions
and offering expenses.

<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 41,725,219 89.2% $ 88,742,182 61.3% $ 2.13
New investors.......... 5,100,000 10.8% 56,100,000 38.7% 11.00
---------- ----- ------------ -----
Total.............. 46,825,219 100.0% $144,842,182 100.0%
========== ===== ============ =====
</TABLE>

16
<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with our
financial statements and related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this prospectus. The statement of operations data for the period from
January 2, 1996 (inception) to July 31, 1996, fiscal 1997 and fiscal 1998 and
the balance sheet data as of July 31, 1997 and 1998 are derived from our
financial statements that have been audited by Ernst & Young LLP, independent
auditors, which are included elsewhere in this prospectus. The statement of
operations data for the nine months ended April 30, 1998 and 1999 and the
balance sheet data as of April 30, 1999 have been derived from our unaudited
financial statements that have been prepared on the same basis as the audited
financial statements and, in the opinion of management, include all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the financial data for the periods presented. The financial
data for the interim periods is not necessarily indicative of results that may
be expected for any other interim period or for the year as a whole.

<TABLE>
<CAPTION>
Period from Year Ended Nine Months Ended
January 2, 1996 July 31, April 30,
(inception) ------------------------ -------------------------
to July 31, 1996 1997 1998 1998 1999
---------------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
PC2Phone.............. $ -- $ 2,170,442 $ 7,962,821 $ 5,085,176 $13,774,837
Phone2Phone........... -- 272 2,030,516 1,018,835 6,503,697
Other................. -- 481,589 2,012,635 1,850,363 1,924,723
---------- ----------- ----------- ------------ -----------
Total revenue....... -- 2,652,303 12,005,972 7,954,374 22,203,257
---------- ----------- ----------- ------------ -----------
Cost and expenses:
Direct cost of
revenue, excluding
depreciation......... -- 1,553,443 6,848,759 3,589,301 11,848,089
Sales and marketing... 34,468 76,724 2,887,766 1,363,060 4,746,316
General and
administrative....... 465,015 2,599,283 5,087,628 3,254,287 7,298,106
Depreciation.......... 8,275 120,500 726,508 421,648 1,216,712
---------- ----------- ----------- ------------ -----------
Total costs and
expenses........... 507,758 4,349,950 15,550,661 8,628,296 25,109,223
---------- ----------- ----------- ------------ -----------
Loss from operations
and net loss.......... $(507,758) $(1,697,647) $(3,544,689) $ (673,922) $(2,905,966)
========== =========== =========== ============ ===========
Net loss per share--
basic and diluted..... $ (0.02) $ (0.06) $ (0.12) $ (0.02) $ (0.09)
========== =========== =========== ============ ===========
Shares used in
calculation of basic
and diluted net loss
per share............. 27,864,000 27,864,000 30,186,000 29,928,000 30,960,000

<CAPTION>
July 31, April 30,
-------------------------------------- -----------
1996 1997 1998 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............... $ -- $ -- $ 10,074 $ 1,782,194
Working capital......................... (681,532) (3,104,830) (11,149,553) (17,255,452)
Total assets............................ 174,674 916,025 6,975,108 19,818,328
Due to IDT.............................. 681,532 2,960,429 11,814,988 22,000,000
Total stockholders' (deficit)........... (507,758) (2,205,305) (5,649,994) (3,926,122)
</TABLE>

17
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our financial
statements and notes thereto. The historical financial information included in
this prospectus does not necessarily reflect what our financial condition and
results of operations would have been had we been operated as an independent
entity during the periods presented.

Overview

We began our operations in January 1996, launched our first Net2Phone
product in August 1996, and were established as a separate subsidiary of IDT in
October 1997. During the period ended July 31, 1996, we incurred approximately
$500,000 in start-up costs, primarily for research and development. We have
incurred net operating losses since inception and expect to incur additional
losses for the foreseeable future, primarily as a result of increased sales and
marketing efforts. As of April 30, 1999, we had accumulated net losses of
approximately $8.7 million.

We will recognize significant charges relating to non-cash executive
compensation expense in the current fiscal quarter ending July 31, 1999 and on
an ongoing basis. In connection with 5,040,000 options granted with an exercise
price of $3.33 per share on May 17, 1999, including options granted to IDT
employees, we will recognize approximately $41 million of non-cash charges over
the vesting period of these options. We will recognize a charge of $13 million
in the current quarter, $10 million during fiscal 2000, $10 million during
fiscal 2001 and $8 million during fiscal 2002. We also plan to grant options to
purchase approximately 2,111,000 shares of our common stock to our employees,
consultants and others prior to the closing of this offering which will have an
exercise price equal to the initial offering price, and which will result in
additional non-cash compensation charges.

In addition, in connection with the 460,000 options granted to our President
with an exercise price of $3.33 per share, we will recognize approximately $3.6
million of non-cash charges over the vesting period of these options. We will
recognize a charge of $1.2 million during the current quarter, $800,000 during
fiscal 2000, $800,000 during fiscal 2001 and $800,000 during fiscal 2002. In
connection with the remaining 460,000 options granted to our President with an
exercise price equal to the lower of our initial offering price or $11.00 per
share, we will recognize a compensation charge if our initial offering price is
more than $11.00 per share. The non-cash compensation charge will be equal to
the excess of our initial offering price over $11.00 multiplied by the 460,000
shares and will be amortized over the three-year vesting period of the options.

In connection with our distribution and marketing agreement with ICQ, we
issued a warrant to America Online to purchase up to 3% of our outstanding
capital stock on a fully-diluted basis. This warrant will vest in 1% increments
upon the achievement of each of three incremental thresholds of revenue
generated under the agreement during the first four years that the warrant is
outstanding. The per share exercise price under the warrant will be equal to
the lesser of 80% of the price per share in this offering, or $450 million
divided by the number of our fully-diluted shares on the initial exercise date.
If one or more of the revenue thresholds set forth in the warrant are achieved,
we will recognize additional non-cash charges in an amount equal to the value
of the warrant, as determined at the time that these thresholds are met.

Sources of Revenue

For the first nine months of fiscal 1999, approximately 62% of our revenue
has been derived from per-minute charges we billed to our customers on a
prepaid basis to use our PC2Phone service, and approximately 29% of our revenue
has been derived from per-minute charges we billed to our customers and our
international resellers on a prepaid basis to use our Phone2Phone service. The
remainder of our revenue has been derived from the sale of Internet telephony
equipment for Net2Phone Pro, a product that integrates our software into
hardware for the personal computer, and for services we provide to IDT and

18
<PAGE>

other carriers. In the future, in order to diversify and further enhance our
revenue sources, we plan to introduce a variety of value-added services and
Internet commerce solutions. In addition, we plan to sell Web-based advertising
to further leverage our customer reach. To date, these additional products and
services have provided no revenue and we do not anticipate material revenue
from these additional products and services through at least December 1999.

Approximately 91% of our revenue is generated from per-minute charges we
charge our customers on a prepaid basis to use our PC2Phone and Phone2Phone
services. As of April 30, 1999, we served over 250,000 active customers who
spent an average of approximately 60 minutes per month placing calls over the
Internet. We recognize revenue as our customers utilize the balances in their
prepaid accounts by placing calls. As such, we have deferred revenue for all
unutilized balances in our customers' accounts. The remaining 9% of our
revenue, which is derived from equipment sales and from services provided to
IDT and other carriers, is recognized upon installation of the equipment and
performance of the services.

Cost Structure

Our costs and expenses include:

. direct cost of revenue, excluding depreciation;
. sales and marketing;
. general and administrative; and
. depreciation.

Direct Cost of Revenue

Direct cost of revenue consists primarily of network costs associated with
carrying our customers' traffic on our network and leased networks, and routing
their calls through a local telephone company to reach their final destination.
These costs exclude depreciation and include:

. amounts paid to other carriers to terminate traffic on a per-minute
basis;
. the cost of leased routers and access servers;
. telecommunications costs, including the cost of local telephone lines to
carry subscriber calls to our network;
. the costs associated with leased lines connecting our network directly
to the Internet or to our operations centers and connecting our
operations centers to the Internet; and
. Internet backbone costs, which are the amounts we pay to Internet
service providers for capacity.

We expect our direct cost of revenue to increase in absolute terms over time
to support our growing customer base. While some of these costs are fixed,
other costs vary on a per minute basis. Therefore, there may be some volatility
in our direct cost of revenue as a percentage of revenue, particularly as we
expand our network. We try to terminate calls on our own network whenever
possible. When we cannot terminate calls on our network, we terminate calls on
the network of other suppliers, primarily IDT. We expect to continue to utilize
this process. We also expect the percentage of our traffic that we terminate
with IDT will decline in the future as we expand our own network.

Sales and Marketing. Sales and marketing includes the expenses associated
with acquiring customers, including commissions paid to our sales personnel,
advertising costs, referral fees and amounts paid to our strategic partners in
connection with revenue-sharing arrangements. We expect sales and marketing
expenses to increase over time as we aggressively market our products and
services. Historically, sales and marketing expenses have been a relatively
variable cost and are expected to increase both in terms of absolute dollars
and as a percentage of revenue as our revenue grows. We expect to spend
significant capital to build brand recognition. Most of our sales and marketing
expenses will go toward securing significant and strategic relationships with a
variety of Internet companies. We have strategic alliances with ICQ, Netscape,
Snap.com, Yahoo!, ZDNet, and InfoSpace.com, and intend to continue to pursue
relationships with other companies.

General and Administrative. General and administrative expenses consist of
the salaries of our employees and associated benefits, and the cost of
insurance, travel, entertainment, rent and utilities. A large portion of our
general and administrative expenses include operations and customer support.
These include

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<PAGE>

the expenses associated with customer service and technical support, and
consist primarily of the salaries and employment costs of the employees
responsible for those efforts. We expect operations and customer support
expenses to increase over time to support new and existing customers. We expect
general and administrative costs to increase to support our growth,
particularly as we establish a larger organization to implement our business
plan. We include our research and development costs, comprised primarily of
payroll expenses for our technical team of engineers and developers, in general
and administrative expenses. We plan to incur additional costs for research and
development, though they are not expected to increase as a percentage of
revenue. Over time, we expect these relatively fixed general and administrative
expenses to decrease as a percentage of revenue.

Depreciation. Depreciation primarily relates to our hardware infrastructure.
We depreciate our network equipment over its estimated five-year useful life
using the straight-line method. We plan to acquire a domestic high capacity
network to provide additional capacity to handle the expected increase in
customer traffic as our business grows. In addition, we will be adding more
network hardware as traffic volumes justify. We expect depreciation to increase
in absolute terms as we expand our network to support new and acquired
customers, but to decrease as a percentage of total revenue. We have also
entered into a strategic agreement with Netscape, part of which includes the
purchase of software and trademark licenses. We expect to amortize the costs
relating to the software and trademark licenses acquired from Netscape over the
two-year term of the agreement.

Dependence on IDT. Historically, we have been dependent on IDT for working
capital, its telecommunications network and for various services. In connection
with establishing ourselves as an independent operating entity, we recently
contracted with IDT for telecommunications services and administrative support.
We believe that the terms of our agreements with IDT are no less favorable than
those we would have obtained from unaffiliated third parties.

Results of Operations

The following table sets forth certain items in our statement of operations
as a percentage of total revenue for the periods indicated:

<TABLE>
<CAPTION>
Percentage of Revenue
-----------------------------------------------
Period from
January 2,
1996 Year Ended Nine Months Ended
(inception) July 31, April 30,
to July 31, ------------- -------------------
1996 1997 1998 1998 1999
----------- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue:
PC2Phone................. -- 81.8% 66.3% 63.9% 62.0%
Phone2Phone.............. -- -- 16.9 12.8 29.3
Other.................... -- 18.2 16.8 23.3 8.7
----- ----- ----- -------- --------
Total revenue........ -- 100.0 100.0 100.0 100.0
----- ----- ----- -------- --------
Cost and expenses:
Direct cost of revenue,
excluding depreciation.. -- 58.6 57.0 45.1 53.4
Sales and marketing...... -- 2.9 24.1 17.1 21.4
General and
administrative........... -- 98.0 42.4 40.9 32.8
Depreciation............. -- 4.5 6.1 5.3 5.5
----- ----- ----- -------- --------
Total costs and
expenses............ -- 164.0 129.6 108.4 113.1
----- ----- ----- -------- --------
Loss from operations and net
loss...................... -- (64.0)% (29.6)% (8.4)% (13.1)%
===== ===== ===== ======== ========
</TABLE>

Comparison of Nine Months Ended April 30, 1998 and 1999

Revenue. Revenue increased approximately 178% from approximately $8.0
million for the nine months ended April 30, 1998 to approximately $22.2 million
for the nine months ended April 30, 1999. Of total revenue for the nine months
ended April 30, 1999, PC2Phone generated approximately $13.8 million

20
<PAGE>

and Phone2Phone generated approximately $6.5 million. The increase in revenue
was primarily due to an increase in minutes of use resulting from additional
marketing of our products and services. Specifically, revenue from PC2Phone
services increased approximately 171% from approximately $5.1 million for the
nine months ended April 30, 1998 to approximately $13.8 million in revenue for
the corresponding nine-month period in fiscal 1999. Revenue from Phone2Phone
increased approximately 550% from approximately $1.0 million for the nine
months ended April 30, 1998 to approximately $6.5 million for the nine months
ended April 30, 1999. We anticipate that revenue from PC2Phone and Phone2Phone
will increase in absolute terms as our products become more widely distributed.
However, as a percentage of revenue, we expect revenue from these products to
decline over the next several years as we begin to market additional products
and services and pursue additional sources of revenue.

In addition, we recognized revenue from certain amounts charged to IDT and
other carriers and from equipment sales, as shown above in the category
"Other." From these transactions, including monitoring IDT's network operations
center for Internet customers, we recognized revenue of approximately $329,000
and $680,000 for the nine months ended April 30, 1998 and 1999, respectively.
We also realized revenue from the sale of equipment, totaling approximately
$1.5 million for the nine months ended April 30, 1998 as compared to equipment
sales of approximately $446,000 for the nine months ended April 30, 1999.
Equipment sales for the nine months ended April 30, 1999 were derived from our
Net2Phone Pro product, while equipment sales for the nine months ended April
30, 1998 represented Internet telephony servers sold, on a one-time
non-recurring basis, to an international Phone2Phone reseller for deployment
abroad. Revenue from equipment sales, particularly revenue from sales of
Internet telephony servers, reflect sales that we believe to be non-recurring
and do not represent any trend.

Direct Cost of Revenue, Excluding Depreciation. Total cost of revenue,
excluding depreciation increased by 228% from $3.6 million for the nine months
ended April 30, 1998 to approximately $11.8 million for the nine months ended
April 30, 1999. As a percentage of total revenue, these costs increased from
approximately 45.1% for the nine months ended April 30, 1998 to approximately
53.4% for the nine months ended April 30, 1999. This increase is primarily
attributable to the fact that we sold approximately $1.5 million of equipment
in the nine months ended April 30, 1998 as compared to approximately $446,000
in the nine months ended April 30, 1999. Such equipment sales have a low cost
of sales associated with them. Over time, we expect direct cost of revenue to
decline on a per-minute basis as international competition among carriers
intensifies, resulting in lower prices from our suppliers, and as we leverage
our position as a large provider of services and expand our own network. As a
percentage of revenue, we expect direct cost of revenue to increase as a result
of a decline in per-minute charges to customers. We expect to continue to
utilize IDT's international and domestic networks at the current fair market
value rates for termination. We also expect to incur additional costs in
connection with the growth of our business, especially in connection with
increasing our own network capacity to handle increased traffic volumes.

Sales and Marketing. Sales and marketing expenses increased approximately
236% from approximately $1.4 million for the nine months ended April 30, 1998
to approximately $4.7 million for the nine months ended April 30, 1999. As a
percentage of total revenue, these costs increased from approximately 17.1% for
the nine months ended April 30, 1998 to approximately 21.4% for the nine months
ended April 30, 1999. This increase primarily reflects the increased marketing
and advertising expenses associated with the agreements established with
Yahoo!, Excite and other strategic partners. We expect to continue to increase
significantly our advertising and marketing expenditures to further build brand
recognition, and to enhance the distribution of our products and services.

General and Administrative. General and administrative expenses increased
approximately 121% from approximately $3.3 million for the nine months ended
April 30, 1998 to approximately $7.3 million for the nine months ended April
30, 1999. As a percentage of total revenue, these costs decreased from
approximately 40.9% for the nine months ended April 30, 1998 to approximately
32.8% for the nine months ended April 30, 1999. This decrease primarily
reflects the efficiencies we have begun to realize from leveraging our sales
and support infrastructure. We believe that general and administrative expenses
will continue to decline as a percentage of total revenue as a result of
greater economies of scale and further efficiencies. In absolute terms, we
expect these expenses to continue to increase as we incur additional costs in
product development and costs associated with hiring additional personnel and
adding new office space.

21
<PAGE>

Moreover, in absolute terms, our research and development expenses will
increase as we hire the additional engineers necessary to continue the
development of new products and services. However, these research and
development expenses are not expected to significantly increase as a percentage
of our total revenue.

Depreciation. Depreciation increased from approximately $422,000 for the
nine months ended April 30, 1998 to approximately $1.2 million for the nine
months ended April 30, 1999. This increase is primarily attributable to the
increase in capital expenditures for the deployment of network equipment both
domestically and internationally to manage increased call volumes. Depreciation
will continue to increase as we build out our network and amortize intangibles
such as our licenses and trademark rights acquired under agreements with
strategic partners, including Netscape.

Loss from Operations. Loss from operations was approximately $674,000 for
the nine months ended April 30, 1998 as compared to loss from operations of
approximately $2.9 million for the nine months ended April 30, 1999. This
change is due to the substantial increase in both sales and marketing expenses
as well as general and administrative expenses we incurred as we expanded our
corporate infrastructure and human resources. We anticipate continued and
increasing losses as we pursue our growth strategy.

Comparison of Fiscal Years Ended July 31, 1997 and 1998

Revenue. Revenue increased approximately 344% from approximately $2.7
million for fiscal 1997 to approximately $12.0 million for fiscal 1998. The
increase in revenue was primarily due to an increase in minutes of use
resulting from increased marketing of our Internet telephony products and
services.

Of total revenue for the year ended July 31, 1998, PC2Phone generated
approximately $8.0 million in revenue and Phone2Phone generated approximately
$2.0 million. The increase in revenue was primarily due to an increase in
minutes of use due to the marketing of our Internet telephony products and
services. Specifically, revenue from PC2Phone services increased approximately
264% from approximately $2.2 million in revenue for fiscal 1997 to
approximately $8.0 million in revenue for fiscal 1998. We realized significant
revenue for the first time from our Phone2Phone services for fiscal 1998, as
well as recorded revenue of approximately $1.5 million from the sale of
equipment. In addition, we recognized revenue from amounts charged to IDT
including monitoring the network operations center for IDT's Internet
customers, of approximately $297,000 and $453,000, respectively, for fiscal
1997 and 1998. We do not expect to realize significant revenue from the sale of
equipment in the future.

Direct Cost of Revenue, Excluding Depreciation. Total cost of revenue,
excluding depreciation increased by approximately 325% from approximately $1.6
million for fiscal 1997 to approximately $6.8 million for fiscal 1998. As a
percentage of total revenue, these costs decreased from approximately 58.6% for
fiscal 1997 to approximately 57.0% for fiscal 1998. This decrease is primarily
attributable to the impact of the higher margin equipment sold in the first
half of fiscal 1998. Since we do not expect to realize significant revenue from
the sale of equipment in the future, our direct costs will reflect our ability
to terminate our traffic worldwide cost-effectively through our own network
relationships or via those of IDT, our primary supplier. As a percentage of
revenue we anticipate direct costs to remain approximately the same as our
network expansion efforts mitigate potential pricing pressures.

Sales and Marketing. Sales and marketing expenses increased by a factor of
37 from approximately $77,000 for fiscal 1997 to approximately $2.9 million for
fiscal 1998. As a percentage of total revenue, these costs increased from
approximately 2.9% for fiscal 1997 to approximately 24.1% for fiscal 1998. This
increase primarily reflects the increased marketing and advertising expenses
associated with the agreements established with Yahoo!, Excite and other
strategic partners. We expect to continue to increase significantly our
advertising and marketing expenditures to further build brand recognition, and
to enhance the distribution of our products and services.

General and Administrative. General and administrative expenses increased
approximately 96% from approximately $2.6 million for fiscal 1997 to
approximately $5.1 million for fiscal 1998. As a percentage of total revenue,
these costs decreased from approximately 98.0% for fiscal 1997 to approximately
42.4% for fiscal 1998. This decrease primarily reflects the efficiencies we
have begun to realize from leveraging our sales and support infrastructure. We
expect to continue to see further efficiencies and greater economies of

22
<PAGE>

scale, so that general and administrative expenses will continue to decline as
a percentage of total revenue. In absolute terms, we expect these expenses to
continue to increase as we incur additional costs associated with developing
new products, hiring of additional personnel and adding new office space.

Depreciation. Depreciation increased from approximately $121,000 for fiscal
1997 to approximately $727,000 for fiscal 1998. This increase is primarily
attributable to the increase in capital expenditures for the deployment of
communications equipment both domestically and internationally to manage
increased customer volume.

Loss from Operations. Loss from operations was approximately $1.7 million
for fiscal 1997 as compared to approximately $3.5 million for fiscal 1998. The
increased losses reflect the substantial increase in marketing and general and
administrative costs we incurred as we expanded our corporate infrastructure
and resources to gain additional market share for our products and services.

Period from January 2, 1996 (inception) to July 31, 1996

During the period from January 2, 1996 (inception) to July 31, 1996, we did
not generate any revenue. During this period, we incurred approximately
$500,000 in start-up costs, primarily for research and development, as we
prepared to introduce our products and services.

Quarterly Results of Operations

The following table sets forth certain quarterly financial data for the
seven quarters ended April 30, 1999. This quarterly information is unaudited,
has been prepared on the same basis as the annual financial statements, and, in
our opinion, reflects all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the information for periods
presented. Operating results for any quarter are not necessarily indicative of
results for any future period.

<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------------------------
Oct. 31, Jan. 31, April 30, July 31, Oct. 31, Jan. 31, April 30,
1997 1998 1998 1998 1998 1999 1999
---------- ---------- ----------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
PC2Phone............... $1,371,598 $1,693,812 $ 2,019,766 $ 2,877,645 $ 3,776,777 $4,809,644 $5,188,416
Phone2Phone............ 70,939 148,572 799,324 1,011,681 1,287,415 2,280,366 2,935,916
Other.................. 825,000 905,000 120,363 162,272 599,227 412,456 913,040
---------- ---------- ----------- ----------- ----------- ---------- ----------
Total revenue........ 2,267,537 2,747,384 2,939,453 4,051,598 5,663,419 7,502,466 9,037,372
Cost and expenses:
Direct cost of
revenue, excluding
depreciation.......... 602,389 1,070,051 1,916,861 3,259,458 3,353,247 3,970,504 4,524,338
Sales and marketing.... 133,963 316,141 912,956 1,524,706 1,299,903 1,691,810 1,754,603
General and
administrative........ 730,893 1,073,165 1,450,229 1,833,341 1,900,234 2,286,770 3,111,102
Depreciation........... 68,169 123,844 229,635 304,860 338,469 400,584 477,659
---------- ---------- ----------- ----------- ----------- ---------- ----------
Total costs and
expenses............ 1,535,414 2,583,201 4,509,681 6,922,365 6,891,853 8,349,668 9,867,702
---------- ---------- ----------- ----------- ----------- ---------- ----------
Income (loss) from
operations and net
income (loss).......... $ 732,123 $ 164,183 $(1,570,228) $(2,870,767) $(1,228,434) $ (847,202) $ (830,330)
========== ========== =========== =========== =========== ========== ==========
<CAPTION>
As a Percentage of Revenue
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
PC2Phone............... 60.5% 61.7% 68.7% 71.0% 66.7% 64.1% 57.4%
Phone2Phone............ 3.1 5.4 27.2 25.0 22.7 30.4 32.5
Other.................. 36.4 32.9 4.1 4.0 10.6 5.5 10.1
---------- ---------- ----------- ----------- ----------- ---------- ----------
Total revenue........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost and expenses:
Direct cost of
revenue, excluding
depreciation.......... 26.6 38.9 65.2 80.4 59.2 52.9 50.1
Sales and marketing.... 5.9 11.5 31.1 37.6 23.0 22.6 19.4
General and
administrative........ 32.2 39.1 49.3 45.2 33.6 30.5 34.4
Depreciation........... 3.0 4.5 7.8 7.5 6.0 5.3 5.3
---------- ---------- ----------- ----------- ----------- ---------- ----------
Total costs and
expenses............ 67.7 94.0 153.4 170.7 121.8 111.3 109.2
---------- ---------- ----------- ----------- ----------- ---------- ----------
Income (loss) from
operations and net
income (loss).......... 32.3% 6.0% (53.4)% (70.7)% (21.8)% (11.3)% (9.2)%
========== ========== =========== =========== =========== ========== ==========
</TABLE>

23
<PAGE>

We have experienced growth in revenue in each quarter since inception,
reflecting greater acceptance and usage of our products and services by our
expanded customer base. We expect our revenue to grow over time as minutes of
use increase. However, we may experience declines in average revenue per minute
due to competitive pressures, promotions and marketing initiatives, increased
commissions paid to our international resellers and increased amounts paid to
our strategic partners under existing and future revenue-sharing arrangements.

Since we derive revenue from more than one source, we have experienced
volatility in our direct costs of revenue. Specifically, our direct cost of
revenue in the first two quarters of fiscal 1998 were low as a percentage of
total revenue due to sales of equipment in these quarters. Since these sales
were on a non-recurring basis, we realized a significant, albeit temporary,
reduced direct cost of revenue for these two quarters.

In the second half of fiscal 1998, we increased our advertising expenditures
as we began marketing our Phone2Phone service. Revenue from our Phone2Phone
service grew from approximately 5% of total revenue in the first half of the
year to approximately 26% of total revenue in the latter half. We experienced
start-up costs for Phone2Phone that increased our direct cost of revenue for
those two quarters. However, we have been able to reduce direct cost of revenue
for our Phone2Phone product as we expanded our network in the first three
quarters of fiscal 1999, which resulted in lower direct cost of revenue. In the
most recent quarter, direct cost of revenue as a percentage of revenue
accounted for approximately 50% as compared to approximately 80% in the quarter
ended July 31, 1998. Our increased sales and marketing expenses reflect the
relationships we have with various online strategic partners with whom we
advertise our PC2Phone and Phone2Phone services. We expect to continue to
increase significantly our advertising and marketing expenditures to further
build brand recognition of our products and services.

As a result of our limited operating history and the emerging nature of the
markets in which we compete, we are unable to accurately forecast our revenue
and direct cost of revenue as they may be impacted by a variety of factors.
These factors include the level of use of the Internet as a communications
medium, seasonal trends, capacity constraints, the amount and timing of our
capital expenditures, introduction of new services by us or our competitors,
price competition, technical difficulties or system downtime, and the
development of regulatory restrictions.

Liquidity and Capital Resources

Since inception in January 1996, we have financed our operations through
advances from IDT. During the nine months ended April 30, 1999 we also received
capital contributions from IDT of approximately $4.6 million. As of April 30,
1999, we had approximately $1.8 million in cash and cash equivalents. In May
1999 we raised net proceeds of approximately $29.9 million from the sale of
Series A convertible preferred stock and warrants. Our operating activities
generated negative cash flow of approximately $409,000 in the nine months ended
April 30, 1998 compared to negative cash flow of approximately $4.0 million in
the nine months ended April 30, 1999.

Cash used in investing activities was approximately $4.2 million and
approximately $9.0 million for the nine months ended April 30, 1998 and 1999,
respectively. Our use of cash in investing activities was principally for the
purchase of telecommunications and Internet equipment and for the purchase of a
trademark in the 1999 period.

In May 1999, we received $29.9 million in net proceeds from the sale of our
Series A convertible preferred stock and warrants. We applied a portion of the
net proceeds from this sale to repay $8.0 million of the $22.0 million of
advances from IDT that were outstanding as of April 30, 1999. The remaining
$14.0 million due to IDT was converted into a promissory note in May 1999.

24
<PAGE>

Our principal commitments following the closing of this offering are
expected to consist of:

. the repayment of $7.0 million with respect to the $14.0 million note due
to IDT;

. the payment of $3.5 million to ICQ in connection with our distribution
and marketing agreement;

. the payment of $1.5 million to NBC for television advertising;

. repayment of the remaining balance on the $14.0 million note to IDT
described above, which is payable in 60 monthly installments of
principal and interest at a rate of 9% per annum, commencing in June
1999;

. the acquisition of a new network with expanded capacity from IDT in
exchange for a $6.0 million note, payable in 60 monthly installments of
principal and interest at a rate of 9% per annum;

. other costs relating to network equipment and expansion; and

. payments to Internet companies in connection with marketing our products
and services, which as of April 30, 1999, were approximately $15
million.

Our future capital requirements will depend on numerous factors, including
market acceptance of our services, brand promotions, the amount of resources we
devote to the development of our current and future products, and the expansion
of our sales force and marketing our services. We may experience a substantial
increase in our capital expenditures and lease arrangements consistent with the
growth in our operations and staffing. Additionally, we will evaluate possible
investments in businesses, products and technologies. We believe that our
current cash balances, expected cash flow from our operations and the proceeds
of this offering will be sufficient to meet our working capital and capital
expenditure needs for at least the next 12 months. However, there can be no
assurance that we will have sufficient capital to finance potential
acquisitions or other growth oriented activities, and may issue additional
equity securities, incur debt or obtain other financing.

Year 2000 Systems Costs

Computer systems, software packages, and microprocessor-dependent equipment
may cease to function or generate erroneous data on or after January 1, 2000.
The problem affects those systems or products that are programmed to accept a
two-digit code in date code fields. For example, computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices or engage in similar normal
business activities. To correctly identify the Year 2000, and therefore be
"Year 2000 compliant," a four-digit date code field is required.

In connection with IDT's review of its own operations and the operations of
its subsidiaries, we have conducted a comprehensive review of the computer
hardware and software that we use in order to ensure that our computer-related
applications are Year 2000 compliant. Our cost of addressing the Year 2000
issue is not expected to be material to our operations or financial position.
However, the consequences of an incomplete or untimely resolution of the Year
2000 issue could be expected to have a material adverse effect upon our
financial results. In the absence of such a resolution, our ability to route
traffic in a cost effective manner, to deliver our services, to properly obtain
payment for these services, and/or to maintain accurate records of our business
and operations, could be substantially impaired until this issue is remedied.
We may become liable for substantial damages in the event that, as a result of
the Year 2000 issue, we fail to deliver any services that we have contracted to
provide. Also, our name and reputation may be harmed if our services are
disrupted due to Year 2000 problems.

Our plan to ensure Year 2000 compliance consisted of the following phases:

. conducting a comprehensive inventory of internal systems;

. assessing and prioritizing any required remediation;

25
<PAGE>

. repairing or, if appropriate, replacing any non-compliant systems;

. testing all remediated systems for Year 2000 compliance; and

. developing contingency plans that may be employed in the event that any
systems used by us is unexpectedly affected by a previously
unanticipated Year 2000 problem.

We have substantially completed each of these phases, and believe that our
internal systems are Year 2000 compliant.

We are conducting an external review of our customers and suppliers, and any
other third parties with whom we do business, to determine their vulnerability
to Year 2000 problems and any potential impact on us. These parties include our
equipment and systems providers. In particular, we may experience problems to
the extent that telecommunications carriers whose networks connect with ours
are not Year 2000 compliant. Our ability to determine the ability of these
third parties to address issues relating to the Year 2000 problem is limited.
To the extent that a limited number of carriers experience disruptions in
service due to the Year 2000 issue, we believe that we will be able to obtain
service from alternate carriers. However, our ability to provide certain
services to customers in selected geographic locations may be limited. There
can be no assurance that such problems will not have a material adverse effect
on our business, reputation or operating results.

We are also in the process of developing contingency plans with regard to
potential or unforeseen Year 2000 problems. We believe that, in the event that
one or more of our systems, or the systems of third parties with which we do
business, is impaired due to unanticipated Year 2000 issues, our contingency
plans will enable us to temporarily conduct operations on a temporarily
modified basis until the impaired system or systems is remediated.

There can be no assurances that our suppliers and customers will achieve
full year 2000 compliance before the end of 1999 or that we will develop or
implement effective contingency plans on a timely basis. A failure of our
computer systems or the failure of our suppliers or customers to effectively
upgrade their software and systems for transition to the Year 2000 could have a
material adverse effect on our business, financial conditions and results of
operations.

Most of our internal systems were developed after developers became aware of
Year 2000 problems. To date, we have not incurred material expenses in
connection with the remediation of Year 2000 related issues. We do not expect
to incur significant costs in connection with Year 2000 related issues.
However, our actual costs may be significant if we discover that any major
portion of our internal systems requires unforeseen remediation. We expense
costs associated with Year 2000 remediation when they are incurred.

Effects of Inflation

Due to relatively low levels of inflation over the last several years,
inflation has not had a material effect on our results of operations.

Impact of Recently Issued Accounting Standards

SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, was issued in June 1997. We will be required to adopt this new
statement for fiscal 1999. This statement requires use of the "management
approach" model for segment reporting. The management approach model is based
on the way a company's management organizes segments within the company for
making operating decisions and assessing performance. Reportable segments are
based on products and services, geography, legal structure, management
structure or any other manner in which management disaggregates a company. We
do not anticipate that the adoption of this statement will have significant
impact on our financial statements.

26
<PAGE>

BUSINESS

Overview

Net2Phone is a leading provider of services enabling users to make high-
quality, low-cost telephone calls over the Internet. This service is commonly
referred to as Internet telephony. Our Internet telephony services enable our
customers to call individuals and businesses worldwide using their personal
computers or traditional telephones. We are leveraging our Internet telephony
expertise to integrate real-time voice communication capabilities into the Web.
We currently offer Web-based Internet telephony services, which enable
customers to make calls and send faxes over the Internet using their personal
computers, and basic Internet telephony services, which enable customers to
make calls using traditional telephones and fax machines.

We have developed a sophisticated PC2Phone software application that enables
the use of our Web-based Internet telephony services. We distribute this
software free of charge through the Internet and through agreements to include
our software with products sold by our strategic partners. In January 1999,
Netscape agreed to embed our PC2Phone software on an exclusive basis into all
versions of Netscape's Internet browser released during the term of our
agreement, including Netscape Navigator and Netscape Communicator. Netscape
also agreed to include a Net2Phone icon on the Netscape Navigator Personal
Toolbar. In addition, we have entered into an agreement with ICQ, a subsidiary
of America Online, to provide Internet telephony services to users of ICQ's
instant messenging service. ICQ will embed our Internet telephony software into
ICQ's Instant Messenger software on an exclusive basis, allowing ICQ users to
make PC-to-phone and PC-to-PC calls and to receive phone-to-PC calls. We will
also co-brand a pre-paid Phone2Phone calling card with ICQ, allowing users to
place calls from the United States and 19 other countries to virtually anywhere
in the world.

We also have entered into strategic marketing and distribution relationships
with leading Internet companies, including Excite, InfoSpace.com, Snap.com,
Yahoo! and ZDNet. We have also entered into arrangements with leading computer
equipment and software companies, such as IBM, Compaq, Packard Bell-NEC Europe
and Creative Labs to include our software with their products. We promote our
services through direct sales and marketing and through international resellers
who buy minutes of use from us in bulk, and resell them to customers in their
respective countries. Our software is currently available in eight languages
(English, Spanish, Japanese, French, Dutch, Portuguese, Italian and German). We
intend to make our software available in additional languages as we expand our
international customer base and distribution channels.

As of April 30, 1999, we served over 250,000 active customers who made an
average of approximately 60 minutes of calls per month and handled over 20
million minutes of use per month. Our net loss increased from approximately
$500,000 in fiscal 1996 and $1.7 million in fiscal 1997 to $3.5 million in
fiscal 1998. Our total assets increased from $916,000 at July 31, 1997 to $7.0
million at July 31, 1998. Our revenue has grown substantially, increasing from
approximately $2.7 million in fiscal 1997 to approximately $12.0 million in
fiscal 1998. Our revenue for the nine months ended April 30, 1999 was
approximately $22.2 million.

Industry Background

The Internet is experiencing unprecedented growth as a global medium for
communications and commerce. International Data Corporation estimates that the
number of Internet users worldwide will grow from approximately 142 million at
the end of 1998 to 399 million by the end of 2002. These users are increasingly
using the Internet as a communications medium. A recent study by E-Marketer, a
market research firm, estimated that 9.4 billion e-mail messages are delivered
daily. Instant text communication through online "chat" rooms is also gaining
widespread acceptance.

Online commerce is also becoming widely accepted as a means of doing
business. According to International Data Corporation, Internet users worldwide
purchased more than $50 billion of goods and services in 1998. International
Data Corporation projects that commerce over the Internet will to grow to
approximately $1.3 trillion in 2003.

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Emergence of Internet Telephony

TeleGeography, a market research firm, estimates that the international long
distance market will grow to $79 billion in 2001, with consumers and businesses
making an estimated 143 billion minutes of international long distance calls.
Despite the large size of this market and the number of minutes of calls made,
traditional international long distance calls are still relatively expensive
for the consumer. The primary reason for this expense is tariffs set by foreign
governments and carriers that are passed on to consumers in the form of higher
long distance rates.

Internet telephony has emerged as a low cost alternative to traditional long
distance calls. International Data Corporation projects that the Internet
telephony market will grow rapidly to over $23.4 billion in 2003, from
approximately $1.1 billion in 1998.

Internet telephone calls are less expensive than traditional international
long distance calls primarily because these calls are carried over the Internet
or our network and therefore bypass a significant portion of international long
distance tariffs. The technology by which Internet phone calls are made is also
more cost-effective than the technology by which traditional long distance
calls are made.

We use a technology called "packet-switching" to break voice and fax calls
into discrete data packets, route them over the Internet or our network and
reassemble them into their original form for delivery to the recipient.
Traditional international long distance calls, in contrast, are made using a
technology called "circuit switching" which carries these calls over
international voice telephone networks. These networks are typically owned by
governments or carriers who charge a tariff for their use. Circuit switching
requires a dedicated connection between the caller and the recipient that must
remain open for the duration of the call. As a result, circuit-switching
technology is inherently less efficient than packet-switching technology which
allows data packets representing multiple conversations to be carried over the
same line. This greater efficiency creates network cost savings that can be
passed on to the consumer in the form of lower long distance rates.

Integration of Voice into the Web

We believe that Internet telephony offers significant benefits to consumers
and businesses over and above international long distance cost savings. The
technologies that enable Internet telephony can be applied to integrate live
voice capabilities into the Web. We believe that this integration can further
enhance the potential for the Internet to become the preferred medium for both
communications and commerce. For example, the integration of voice into the Web
would supplement existing text-based modes of Internet communication such as e-
mail and online chat by adding a live, secure, low-cost or free voice
alternative. We believe that this will be attractive both to consumers and
businesses.

In addition, voice-enabling the Web would give Internet shoppers the ability
to speak directly with customer service representatives of online retailers in
order to ask questions and alleviate concerns about online security. This may
increase the probability that a sale is made and may give online retailers a
key competitive advantage by providing them with opportunities to sell higher
margin and additional products to these customers. Voice-enabling a commercial
Web site may also give online retailers the ability to provide more responsive
customer support and service.

Integrating live voice capabilities into the Web would also enable Internet
companies to offer enhanced communications services, such as providing Internet
users with a central source for retrieving voicemail, e-mail, faxes and pages.
We believe this would allow these companies to attract more users to their
sites and to increase the amount of time these users spend on their sites. This
increased usage will allow these Internet companies to attract advertisers and
secure higher advertising rates, thereby increasing revenue.

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Limitations of Existing Internet Telephony Solutions

The growth of Internet telephony has been limited to date due to poor sound
quality attributable to technological issues such as delays in packet
transmission and network capacity limitations. However, recent improvements in
packet-switching technology, new software algorithms and improved hardware have
substantially reduced delays in packet transmissions. In addition, the use of
private networks to transmit calls as an alternative to the public Internet is
helping to alleviate network capacity constraints. Finally, the emergence of
new, lower cost Internet access technologies, such as high-speed modems, are
addressing local Internet access issues.

Several large long distance carriers, including AT&T and Sprint, have
announced Internet telephony service offerings. However, many of these service
offerings have not been deployed on a large scale. Many also require users to
purchase other telecommunications services or allow only domestic calling.
Smaller Internet telephony service providers also offer low-cost Internet
telephony services from personal computers to telephones and from telephones to
telephones. These services, however, are available only in limited geographic
areas and require payment by credit card which may preclude many international
customers from signing up for these services. We also believe that existing
Internet telephony service providers rely upon technologies and systems that
lack large-scale billing, network management and monitoring systems, and
customer service capabilities required for the integration of voice
communication into the Web.

In addition, many companies currently provide Internet telephony software
and services that allow Internet telephone calls to be made between personal
computers. However, most of these companies require both the initiator and the
recipient of the call to have the same software installed on their personal
computers and to be online at the same time.

The Net2Phone Solution

We deliver high-quality Internet telephony services and voice-enabling Web
applications to consumers and businesses. Our solution provides the following
benefits to our customers:

. Low Cost. Our PC2Phone software is distributed free of charge, and our
services allow our customers to make telephone calls often at a fraction
of the cost of traditional long distance service. Because international
long distance calls routed over the Internet bypass the international
settlement process, we are able to charge lower rates than traditional
long distance carriers.

. High Voice Quality. We offer high voice quality through our proprietary
packet-switching technologies, which reduce packet loss and delay, route
packets efficiently and perform quality enhancing functions, such as
echo cancellation. We intend to continue to enhance the voice quality of
our services as our customer base and business grow.

. Ease of Use and Access. Our services are designed to be convenient and
easy to access from anywhere in the world. To make a call using our Web-
based services, a customer need only install our free software on a
sound-enabled personal computer, register and be connected to the
Internet. No additional telephone lines or special equipment are
required. Our Phone2Phone service is also easy to use and requires a
customer only to register and dial a toll-free or local access number
from any telephone or fax machine.

. Voice-Enabled Online Retailing. Our services enable users anywhere in
the world to speak with sales or customer service representatives of
online retailers and other Web-based businesses while visiting their Web
sites. This provides customers an opportunity to ask questions of and to
provide credit card information directly to a customer service
representative if they are concerned about Internet security, thereby
increasing the likelihood of consummating an online sale. In addition,
our services allow our customers outside of the United States and Canada
to access telephone numbers that might otherwise be inaccessible to them
through their local carriers. For example, users of our services in
other countries may call United States or Canadian toll-free numbers
(i.e., telephone numbers with 800, 877 or 888 prefixes), which are not
otherwise available to them, at no

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<PAGE>

charge. The ability to communicate with international customers in this
manner provides United States and Canadian-based online retailers and
other Web-based businesses with cost effective access to an expansive
international customer base.

. Reliable Service. Our network is reliable because of its technologically
advanced design. This design allows us to expand our network and add
capacity by adding switches to the existing network. Our system also
provides seamless service and high-quality voice transmission through
our ability to reroute packets if problems arise. We believe that our
ability to provide reliable service is essential to voice-enable the
Web.

. Ease of Payment and Online Account Access. Once registered, our
customers are able to make unlimited toll-free calls. In addition, they
can make toll calls by opening a prepaid account using credit cards,
wire transfers or checks payable in United States dollars. Acceptance of
payment in multiple forms enables international customers who may not
necessarily have credit cards to use our services. Our customers can
access their accounts via the Internet in order to view their call
history and account balances, and to increase their prepaid amounts.

. Customer Support. We offer live customer support 24 hours a day, seven
days a week in multiple languages. Our customer support center can be
accessed from anywhere in the world at no charge either by calling our
toll-free number, where available, or by using our Web-based Internet
telephony service. Our integrated customer billing software and call
management system provide our customer support staff with immediate
access to user accounts, calling patterns and billing history to help us
provide better, more responsive customer support.

Strategy

Our mission is to become the premier Web-based communications enabler. We
intend to leverage our leadership position in the Internet telephony market to
make our communications services readily available worldwide on the Internet
and to develop and market online commerce and related products. Our strategy
includes the following key elements:

. Drive Usage through Resellers and Strategic Partners. We promote our
services through direct sales and marketing and through relationships
with international resellers and leading Internet hardware, software and
content companies. We intend to build on these relationships and to add
more partners and resellers to drive usage of our Internet telephony
services. We also intend to partner with large telecommunications
companies to enable them to offer our Internet telephony services under
their brand.

. Pursue Multiple Sources of Revenue. In addition to our minutes-based
revenue, we intend to pursue new Web-based revenue opportunities from
banner and audio advertising, as well as sponsorship opportunities on
our PC2Phone software user interface and our EZSurf.com Web site. We
also intend to explore the availability of revenue-sharing opportunities
with online retailers.

. Enhance Brand Recognition. We have established strong brand identity in
the Internet telephony market in large part due to the high-quality of
our services and our marketing efforts. We have entered into advertising
relationships with leading Web companies such as Netscape, Yahoo! and
Excite in order to promote our services. We intend to continue to
implement aggressive advertising and sales campaigns to increase brand
awareness. In addition, we intend to enhance our brand recognition by
cooperatively marketing our Internet telephony services with leading
computer hardware and software companies and Internet services
providers.

. Make Our Software Readily Available Worldwide. We have entered into
strategic distribution relationships with leading computer equipment and
software companies to expand the availability of our software. For
example, our software will be embedded into future versions of
Netscape's Internet browser and a Net2Phone icon will be prominently
positioned next to AOL's Instant Messenger icon on the Netscape
Navigator Personal Tool Bar. In addition, customized versions of our
software will be embedded in ICQ's Instant Messenger software and
distributed by ICQ. Our software is included with IBM's Internet
services and may be pre-loaded on computers sold by Compaq
internationally.

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We intend to build upon these relationships and enter into new
distribution relationships with other leading companies in order to
enhance the distribution of our software worldwide.

. Expand and Enhance Products and Services. We have committed significant
resources to expand our network, enhance our existing product and
service offerings and to develop and market additional products and
services in order to continue to provide customers with high-quality
Internet telephony services. For example, we plan to introduce new
products and services, including:

. PC2PC, which will allow high-quality Internet telephony from one
personal computer to another,

. Phone2PC, which will allow calls from a traditional telephone to a
personal computer,

. voice-enabled chat, which will allow two participants in an online
chat room discussion to establish direct voice communication with
each other while maintaining anonymity,

. unified messaging services, which we anticipate will include voice,
fax and electronic messaging with multiple points of access,
including the Web and conventional telephones,

. online commerce applications, which will provide customer service
representatives of online retailers with real-time access to a
caller's profile and enable them to "push" specific content onto a
caller's personal computer screen in order to better assist the
caller in answering their inquiries,

. customer payment applications, which will allow customers to pay for
online commerce transactions by debiting their Net2Phone account,
and

. video conferencing between two or more personal computer users over
the Internet.

Strategic Relationships

We have entered into strategic distribution, integration and advertising
relationships with leading Internet and computer hardware and software
companies. These relationships typically include arrangements under which we
share with our strategic partners a portion of the revenue they bring to us. We
believe that these relationships are important because they provide incentive
to our partners and allow us to leverage the strong brand names and
distribution channels of these companies to market our products and services.
Our strategic partners include:

Netscape

Netscape has agreed to embed our PC2Phone software on an exclusive basis in
future versions of Netscape's Internet browser released during the term of our
agreement, including Netscape Navigator and Netscape Communicator. Netscape
also has agreed to:

. place a Net2Phone icon on the Netscape Navigator Personal Toolbar
immediately to the right of the AOL Instant Messenger icon, which will
allow Netscape users to use our Web-based Internet telephony services
from anywhere on the Web simply by clicking on our icon;

. integrate our services into, and prominently display our services on,
Netscape Netcenter, including Netscape's Address Book Contacts section
and Voice Communications section, which will allow Netscape users to
make calls using our services simply by clicking on a displayed
telephone number; and

. include the software for our Web-based Internet telephony services in
Netscape's suite of online plug-in software and Netscape Smart Update
programs (both domestically and when available internationally) for
downloading by Netscape users from centralized locations on Netscape's
Web site.

We also have the right to place a specified amount of banner and other
advertisements on Web pages of our choice on Netscape's domestic and
international Web site. The two-year term of our exclusive agreement with
Netscape commences with the beta release of the next version of Netscape's
Internet browser, which we believe will occur later this year.

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ICQ

In July 1999, we entered into an exclusive, four-year distribution and
marketing agreement with ICQ, a subsidiary of America Online. Under this
agreement, ICQ has agreed to:

. co-brand and promote our phone-to-phone Internet telephony services in
the United States and in 19 other countries;

. embed customized versions of our software on an exclusive basis into
ICQ's Instant Messenger software to allow ICQ customers to make PC-to-
phone and PC-to-PC calls and to receive phone-to-PC calls;

. share revenue from advertisements and sponsorships sold by ICQ on our
software that is embedded in ICQ's Instant Messenger software; and

. promote our services on some of ICQ's Web sites.

All of the Internet telephony services that ICQ promotes under our agreement
will be co-branded under both of our labels. We believe the phone-to-phone
services will be launched in the United States later this year and
internationally by early 2000. We believe that the PC-based Internet telephony
services will be launched in mid-2000.

Yahoo!, Excite and InfoSpace.com

In 1998 we signed an agreement with Yahoo!, which was recently renewed
through 2000. Our Web-based Internet telephony service is integrated into
Yahoo!'s People Search online telephone directory. As a result of this
integration, an Internet user who performs a search on Yahoo! People Search can
simply click on a displayed telephone number to initiate a call to that number.
Under this agreement, we also have the right to have our banner advertising
appear when an Internet user performs a word- or category-search for "Internet
Telephony" or related phrases on Yahoo! Additionally, we have contracted with
Yahoo! to integrate our PC2Phone service into Yahoo!'s Yellow Pages and White
Pages online directories.

Our Web-based Internet telephony software is also integrated into Excite's
Web sites in its International Network, which includes the United Kingdom,
Germany, France, Japan, Italy, Australia, Sweden and the Netherlands. As a
result, an Internet user in any of these countries will be able to click on any
telephone number that appears on any page on these sites to initiate a call to
that number using our PC2Phone service. In addition, our services will be
prominently featured within the Excite International Network via advertising
and promotion on various channels, including each member's homepage, business,
technology/computer and travel channels, as well as the localized versions of
My Excite, What's New/What's Cool and Mail Excite. We are negotiating with
Excite to have our services integrated into Excite's United States Web sites as
well.

In addition, our Web-based Internet telephony software is integrated into
InfoSpace.com's network of white and yellow page directory services. This
network of sites includes all the white and yellow page listings in Netscape's
Netcenter Web site, the Microsoft Network, the GO Network and Xoom.com.

Other Strategic Relationships

We also have entered into other important strategic relationships with other
leading Internet and computer hardware and software companies, including:

. Compaq. Our software is featured as a download from a special Compaq Web
site accessible directly from the Compaq-branded keyboard, may be pre-
installed on Compaq-branded computers distributed internationally and
may be included with their other products.

. Snap.com. Promotions for our services and a link to our Web site will be
prominently displayed on the Snap.com Web site, and we are their
preferred provider of PC-to-phone services.

. ZDNet. We are the preferred provider of Internet telephony services for
ZDNet and our Web-based Internet telephony service will be integrated
throughout the ZDNet Web site.

. Quicknet Technologies. Our PC2Phone software is integrated into
Quicknet's telephone handset product called Internet PhoneJACK.

. Bigfoot International, WorldPages/Web YP and Internet 800 Directory. Our
PC2Phone service is integrated into these three popular online
directories, which allow Internet users to call any listed telephone
number simply by clicking on the displayed number.

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Products and Services

Current Products and Services

Our services enable our customers to make low-cost, high-quality phone calls
over the Internet using their personal computers or traditional telephones. Our
principal current product and service offerings are described in the table
below.

Product/Service Description Benefits
- --------------------------------------------------------------------------------
Basic Internet
Telephony Services:

. Phone2Phone . Enables customers to . International long
make calls over distance rates are
. Fax2Fax traditional telephones typically 50% to
and fax machines routed 70% lower than the
. Net2Phone Pro over the Internet. rate charged by
Customers must dial a traditional long
local or domestic toll- distance carriers
free access number to for calls
access the Net2Phone originating in the
network. United States, and
up to 95% lower for
. Customers are charged calls originating
for toll and long outside the United
distance calls on a States.
per-minute basis. There . Users do not need
is no charge for to purchase
calling United States expensive hardware
and Canadian toll-free or software.
numbers.
. High voice quality.
. Available in the United . Faxes are
States and in many transmitted without
international delay and users
locations. receive immediate
delivery
. We market Phone2Phone confirmations.
under the brand
"Net2Phone Direct."

- --------------------------------------------------------------------------------
Web-based Internet
Telephony Services:

. PC2Phone . Enables customers to . Services are
make calls and send available to any
. Click2Talk faxes over the Internet Internet user with
using their personal a sound-equipped
. PC2Fax computers. Customers personal computer.
must install our . International long
software on their distance rates are
personal computers, typically 50% to
register with us and be 70% lower than the
online in order to make rates charged by
calls. When browsing traditional long
Web sites that have a distance carriers
Click2Talk icon, for calls
customers may initiate originating in the
calls to a company United States, and
whose site they are up to 95% lower for
browsing simply by calls originating
clicking on the outside the United
Click2Talk icon. States.
. Customers are charged . United States and
for toll and long Canadian toll-free
distance calls on a numbers can be
per-minute basis. There accessed from
is no charge for outside the United
calling United States States and Canada.
and Canadian toll-free
numbers. . Facilitates online
commerce by
providing live
voice contact
between online
retailers and
Internet shoppers.
. Customers do not
require multiple
telephone lines and
need not log off
the Internet to
initiate a call.

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

EZSurf.com . A Web-based shopping . Enables voice
directory powered by communications with
our Web-based Internet over 300 Web sites.
telephony services from . Educates users by
which Internet users providing them with
can initiate calls to essential
listed online retailers information
by clicking on an icon required to buy
on the Web site. products online.
. Lists useful
information for key
online retailers,
including payment and
shipping options and
return policies.

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Sales, Marketing and Distribution

We distribute our software through the Internet, strategic partnerships and
international resellers. In addition, our software will be embedded into future
versions of Netscape's browser, which, according to International Data
Corporation, was used by 41.5% of all consumer Internet users in mid-1998.
Additionally, our software will be distributed into future versions of ICQ's
Instant Messenger software. Customers can also download our software at no
charge from our Web site and other Web sites, including Yahoo!'s People Search
and Lands' End's home page.

We also distribute our software through strategic relationships with leading
Internet and computer hardware and software companies, including IBM, Compaq,
Packard Bell-NEC Europe and Creative Labs. Our software is included with our
partners' products and services and distributed domestically and
internationally. We expect to distribute over 25 million units of our software
in 1999 as a result of these and other distribution arrangements.

We promote our services through online and Internet-based advertising venues
and traditional print advertising in domestic and international publications.
We will also be advertising our services on the NBC television network. Another
way we sell our services internationally is by entering into exclusive
agreements with resellers in other countries. We sell these resellers bulk
amounts of minutes of use of our products and services to be resold in the
resellers' respective countries. For example, in Asia, we have agreements with
Daewoo and Naray Mobile Telecom in South Korea and Marubeni in Japan. In Europe
and the Middle East, we have agreements with CAPCOM in Spain and Dot.LB in
Lebanon, among others. To facilitate distribution and attract users in foreign
countries, we have developed our software in eight languages (English, Spanish,
Japanese, French, Dutch, Portuguese, Italian and German) and intend to increase
the number of languages as our distribution broadens.

Customer Service

As part of our goal to attract and retain customers, we offer free live
customer support in multiple languages. We employ approximately 67 customer
service representatives, who offer customer support to our users 24 hours a
day, seven days a week. These services can be reached from anywhere in the
world at no cost using either our toll-free number, where available, or our
Web-based Internet telephony services. The customer support staff provides
technical assistance, as well as general service assistance, for all of our
products and services. We also offer customer support via e-mail and fax. Our
integrated customer billing software and call management system provide our
customer support staff with immediate access to user accounts, calling patterns
and billing history, thereby enhancing the quality of service provided to our
customers. In addition, our international resellers typically provide their own
front-line customer support.

Technology

PC2Phone Software

Our PC2Phone software is simple to install and to use and has won various
industry awards. The installation process is wrapped in the industry-standard
"Install Shield" product. During installation, the Net2Phone "wizard" verifies
that the user's microphone and speakers are properly set for Internet
telephony. The installation also has a service registration process that allows
the customer to quickly register for paid time with the product. Our software
has several buttons and drop down headings to enable customization. These
buttons allow the user to change specific properties, access and modify
customer account information, program and use speed dialing and verify rates.

Our PC2Phone software has gone through fourteen releases, each improving
upon our Internet telephony capabilities. The software is a Windows-compliant,
32-bit application written in a high-level PC language. The code is extendible
allowing us to easily add new functionality, yet is relatively compact. The
newest release of our software can record and play sound files allowing us to
deliver voice-mail services and can interface with third party PC mail software
applications such as Eudora and Microsoft Outlook.

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<PAGE>

We also have developed a software development kit allowing other companies
to quickly and easily integrate their products with our PC2Phone software. For
example, our services have been successfully integrated with Quicknet's line of
sound cards and telephone interface cards. This integration enables Internet
telephony service to be deployed through inexpensive equipment currently used
throughout the world.

Call Management System

To maintain our leadership position in the Internet telephony market, we
believe that reliable and flexible billing, information management, monitoring
and control systems are critical. Accordingly, we have invested substantial
resources to develop and implement our sophisticated real-time call management
information system. Key elements of this system include:

. Customer Provisioning. The system provides automated online customer
registration and customer registration through call centers and
resellers. It also provides online credit card authorization and batch
billing capabilities that streamline customer registration. A special
remote access application program allows other people access to our
database, enabling sophisticated partners to remotely service customers
through our system, and to tie our system directly to their own business
systems. This remote capability includes remote account management and
continuous real-time call detail and billing information. Additionally,
the system makes customer account records readily available to call
center representatives in the event of customer billing problems.

. Customer Access. Our system allows customers to independently access
their billing records online without the need to contact customer
service representatives.

. Fraud Control. Fraud detection and prevention features include caller
authentication, prevention of multiple simultaneous calls using the same
account, pin code verification and call duration timers. We also
generate reports on suspicious calling patterns to detect caller
registration fraud. We routinely scan for fraudulent content before
credit card purchases are allowed.

. Network Security. Firewalls are employed to prevent attacks on our
network. We use sophisticated techniques to safeguard sensitive database
information. In addition, we encrypt call requests and portions of the
call to prevent "network sniffers" from unauthorized access to data.

. Call Routing. The network management system identifies and routes calls
to the most efficiently priced carrier. The system also automatically
routes calls around links or servers that are experiencing problems,
have failed or have been manually taken out of service for maintenance
or upgrades. This system provides remote administration facilities for
maintaining routing tables and system monitoring.

. Monitoring. The management system provides for real-time monitoring of
all call information. We are able to track potential problems such as
too many short calls on a server or a low percentage of call
completions. The system also provides remote management that allows
partners to monitor and manage their own accounts.

. Reliability. We maintain two separate network operations centers in
Hackensack and Lakewood, New Jersey. These facilities house redundant
equipment and have the ability to track calls simultaneously. This
redundant system gives our network a high degree of reliability,
enabling each network operations center to serve as a back-up to the
other.

. Detailed Call Records. The management software maintains detailed
records for each call, including the account number of the caller, the
caller's phone number, access number used, the point at which the call
enters and exits our network, the account owner, the calling party, the
server/service phone number, the number of the called party, a running
account balance, and rate and billing information, including surcharges.

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The Net2Phone Network

Through an agreement with IDT, we lease capacity on an Internet network
comprised of leased high-speed fiber optic lines connecting eight major cities
across the United States, and lease high-speed fiber optic lines connecting
smaller cities to the network. We have a right to use network capacity leased
by IDT. The network backbone uses state-of-the-art hardware including Cisco
Series 7000 routers and Nortel Passport switches. Our high-speed backbone
connects traffic at four major public Internet exchange points and is also
facilitated by a growing number of private peering or exchange points with
other networks. Through peering arrangements, we exchange Internet traffic with
25 other Internet backbone providers at these points. We operate IDT's network,
one of the largest Internet access networks, providing local dial-up access
through 36 locations. Our Internet network also includes more than 700
additional network access locations owned by local and regional Internet
service providers.

We are able to provide service in areas where we do not have dial-up
equipment by utilizing call-forwarding technology to expand our coverage areas
by increasing the total number of local access numbers. We have been closing
down multiple network access points in a number of states in order to
consolidate our equipment into central "Super Point of Presence" locations. For
example, one Super Point of Presence in New Jersey can supply local access for
the entire state of New Jersey.

The diagram below illustrates the routing of an Internet telephony call
initiated by a customer using a telephone, fax or a personal computer to a
terminating telephone or fax machine over our network.

[Chart showing routing of Internet telephony call]

We seek to retain flexibility by utilizing dynamic call routing
alternatives. This approach is intended to enable us to take advantage of the
rapidly evolving Internet market in order to provide low-cost service to our
customers. Accordingly, our network employs an "Open Shortest Path First"
protocol that promotes efficient routing of traffic. Additionally, we have
placed redundant hardware for reliability in high traffic areas to minimize
loss of data packets. Each network data exchange point employs hardware to
direct network traffic and a minimum of two dedicated leased data lines to
further increase reliability.

We manage our network hardware remotely. It is compatible with a variety of
local network systems around the world. We believe our Internet telephony
network can currently support approximately 5,000 simultaneous calls. We
believe our systems are scalable to 10 times their current capacity through the
purchase and installation of certain additional hardware. To date, the highest
number of simultaneous calls serviced by our network was approximately 1,660
simultaneous calls made on Father's Day in June 1999.

The Network Operations Center

Our Network Operations Center, located in Hackensack, New Jersey, currently
employs a staff of 25 people. There are two groups that work within the network
operations center, the network analysis group and the Internet telephony
monitoring group. Both groups have 24 hours a day, seven days a week coverage
to quickly respond to any issues.

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The network analysis group works around-the-clock monitoring network issues,
handling customer requests, repairing outages and solving security problems.
Their key objective is to provide quality service upon which customers can
rely. Our monitoring group oversees a nationwide real-time network analysis
map, which notifies our staff of network errors. They also use software we
developed to monitor our hardware around the world. This group can dynamically
turn on or turn off equipment and re-route Internet telephony traffic, as
necessary.

Customers

We have a diverse, global customer base. As of April 30, 1999, approximately
65% of our customers were based outside of the United States. As of April 30,
1999, we served over 250,000 active customers who had used our services during
the preceding three months. In addition, as of June 25, 1999, we had installed
the Click2Talk service on approximately 150 commercial Web sites.

Competition

Long Distance Market

The long distance telephony market and, in particular, the Internet
telephony market, is highly competitive. There are several large and numerous
small competitors, and we expect to face continuing competition based on price
and service offerings from existing competitors and new market entrants in the
future. The principal competitive factors in the market include price, quality
of service, breadth of geographic presence, customer service, reliability,
network capacity and the availability of enhanced communications services. Our
competitors include AT&T, MCI WorldCom and Sprint in the United States and
foreign telecommunications carriers.

Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we
have. As a result, certain of these competitors may be able to adopt more
aggressive pricing policies, which could hinder our ability to market our
Internet telephony services. One of our key competitive advantages is the
ability to route calls through Internet service providers, which allows us to
bypass the international settlement process and realize substantial savings
compared to traditional telephone service. Any change in the regulation of an
Internet service provider could force us to increase prices and offer rates
that are comparable to traditional telephone call providers.

Web-Based Internet Telephony Services

As consumers and telecommunications companies have grown to understand the
benefits that may be obtained from transmitting voice over the Internet, a
substantial number of companies have emerged to provide voice over the
Internet. In addition, companies currently in related markets have begun to
provide voice over the Internet services or adapt their products to enable
voice over the Internet services. These related companies may potentially
migrate into the Internet telephony market as direct competitors.

. Internet Telephony Service Providers. During the past several years, a
number of companies have introduced services that make Internet
telephony services available to businesses and consumers. In addition to
us, AT&T Jens (a Japanese affiliate of AT&T), ICG Communications,
IPVoice.com, ITXC, OzEmail (which was recently acquired by MCI
WorldCom), RSL Communications (through its Delta Three subsidiary) and
VIP Calling provide a range of voice-over-the-Internet services. These
companies offer PC-to-phone or phone-to-phone services that are similar
to the services we offer. Some, such as AT&T Jens and OzEmail, offer
these services within limited geographic areas. Additionally, a number
of companies have recently introduced Web-based voice-mail services and
voice-chat services to Internet users.

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. Software/Hardware Providers. Many companies produce software and other
computer equipment that may be installed on a user's computer to permit
voice communications over the Internet. These products generally require
each user to have compatible software and hardware equipment and rely on
the public Internet for the transmission of traffic, which often results
in reduced quality of communications. Representative companies include
VocalTec and Netspeak. We believe VocalTec's software and hardware are
unable to handle large numbers of simultaneous calls. Netspeak focuses
on delivering solutions targeted at traditional call centers that
require significant customization.

. Telecommunications Companies. A number of telecommunications companies,
including AT&T, Deutsche Telekom, MCI WorldCom and Qwest, currently
maintain, or plan to maintain, packet-switched networks to route the
voice traffic of other telecommunications companies. These companies,
which tend to be large entities with substantial resources, generally
have large budgets available for research and development and therefore
may further enhance the quality and acceptance of the transmission of
voice over the Internet. However, many of these companies are new to the
Internet telephony market, and therefore may not build brand recognition
among consumers for these services. These companies also may not have
the range of product and service offerings that are necessary to
independently provide a broad set of voice-enabled Web services. AT&T,
for example, has attempted to enter the market but has focused its
effort on the cable market and it is unclear if it will continue to
pursue voice over the Web. Qwest has taken steps to enter the market by
building a high capacity network in the United States. In addition,
Qwest has also entered into a three-year strategic alliance with
Netscape to provide one-stop access to Internet services including long
distance calling, e-mail, voice mail, faxes, Internet access and
conference calls.

. Network Hardware Manufacturers. Several of the world's major providers
of telecommunications equipment, such as Alcatel, Cisco, Lucent,
Northern Telecom and Dialogic (which has entered into an agreement to be
acquired by Intel) have developed or plan to develop network equipment
that may be used in connection with the provision of voice over the Web
services, including routers, servers and related hardware and software.
By developing this equipment, these manufacturers may exert substantial
influence over the technology that is used in connection with
transmission of voice over the Web and may develop products that
facilitate the quality and timely roll-out of these networks. However,
these companies are dependent upon the operators of Internet telephony
networks to purchase and install their equipment into their networks.
They are also dependent upon the developers of hardware and software to
market their systems to end users. Cisco currently manufactures Internet
telephony equipment for low to medium scale networking, but does not
manufacture high-end Internet telephony equipment for large networks.
However, Cisco recently acquired two companies that produce devices to
help Internet service providers transition voice and data traffic to
packet networks while maintaining traditional phone usage and network
equipment. Lucent has recently co-developed with VocalTec a set of
industry standards that have been adopted by major competitors and is
currently marketing Internet telephony hardware, including servers that
allow the transmission of calls and faxes over the Internet. Lucent also
offers related support products, such as billing centers and "Internet
call centers," which allow Internet access and conversation with a
customer support agent on a single line.

Research and Development

Strategic Research and Development

At our primary research and development center in Lakewood, New Jersey, we
currently employ 12 engineers, whose specialties include software, hardware,
switching, Internet security, voice compression, engineering real-time online
transactions, billing, and network and call management. This staff is devoted
to the improvement and enhancement of our existing product and service
offerings, as well as to the

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development of new products and services. Current research and development
activities include enhancements to our customer billing software and call
management system to increase the capacity of these systems, improvements to
our Internet telephony hardware to increase capacity and modifications to our
PC2Phone software to increase functionality. Our future success will depend, in
part, on our ability to improve existing technology and develop new products
services that incorporate leading technology.

We incurred $473,000 and $481,000 in product development expenses during
fiscal 1997 and fiscal 1998, respectively. For the nine months ended April 30,
1999, we incurred product development expenses of $466,000.

Management Information Systems Research and Development

Our management information systems development team, located in Hackensack,
New Jersey, has eleven programmers and a development manager dedicated to
traditional management information systems development and upgrades. The group
supports back-office accounting and reporting software, customer service
support software and database support. The development schedule is primarily
focused on a detailed list of upgrades that have been identified and
prioritized by a team manager. The database architecture is managed by a senior
developer in our Lakewood laboratory who was responsible for similar database
functions at AT&T's WorldNet division.

Web Research and Development

The majority of our Web research and development is done by a separate Web
development group located in our headquarters in Hackensack. The group of nine
consists of five developers, two programmers, one graphics designer and one
development manager. The team is responsible for our multiple language Web
site, the EZSurf.com Web site and specialized Web interfaces, including the
integration of our PC2Phone client software into Netscape's Internet browser.

Regulation

Regulation of Internet Telephony

The use of the Internet to provide telephone service is a recent market
development. Currently, the Federal Communications Commission is considering
whether to impose surcharges or additional regulations upon certain providers
of Internet telephony. On April 10, 1998, the FCC issued its report to Congress
concerning the implementation of the universal service provisions of the
Telecommunications Act. In the report, the FCC indicated that it would examine
the question of whether certain forms of phone-to-phone Internet telephony are
information services or telecommunications services. The FCC noted that it did
not have, as of the date of the report, an adequate record on which to make a
definitive pronouncement, but that the record suggested that certain forms of
phone-to-phone Internet telephony appear to have the same functionality as non-
Internet telecommunications services and lack the characteristics that would
render them information services. If the FCC were to determine that certain
services are subject to FCC regulation as telecommunications services, the FCC
may require providers of Internet telephony services to make universal service
contributions, pay access charges or be subject to traditional common carrier
regulation. It is also possible that PC2Phone and Phone2Phone services may be
regulated by the FCC differently. In addition, the FCC sets the access charges
on traditional telephony traffic and if it reduces these access charges, the
cost of traditional long distance telephone calls will probably be lowered,
thereby decreasing our competitive pricing advantage.

In September 1998, two regional Bell operating companies, U S WEST and
BellSouth, advised Internet telephony providers that the regional companies
would impose access charges on Internet telephony traffic. In addition, U S
WEST has petitioned the FCC for a declaratory ruling that providers of
interstate Internet telephony must pay federal access charges, and has
petitioned the public utilities commissions of Nebraska and Colorado for
similar rulings concerning payment of access charges for intrastate Internet
telephone calls.

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At this time, it is not known whether these companies, U S WEST and BellSouth,
will actually impose access charges or when such charges will become effective.
If these companies succeed in imposing access charges that may reduce the cost
savings of using Internet telephony as compared to traditional telephone
service. The existence of these access charges would materially adversely
affect the development of our Internet telephony business. In February 1999,
the FCC adopted an order concerning payment of reciprocal compensation that
provides support for a possible finding by the FCC that providers of Internet
telephony must pay access charges for at least some subset of Internet
telephony services. If the FCC were to make such a finding, the payment of
access charges could materially adversely effect our business, results of
operations and financial condition. Many of our competitors are lobbying the
FCC for the imposition of access charges on Internet telephony traffic.

To our knowledge, there are currently no domestic and few foreign laws or
regulations that prohibit voice communications over the Internet. State public
utility commissions may retain jurisdiction to regulate the provision of
intrastate Internet telephony services. A number of countries that currently
prohibit competition in the provision of voice telephony have also prohibited
Internet telephony. Other countries permit but regulate Internet telephony. If
Congress, the FCC, state regulatory agencies or foreign governments begin to
regulate Internet telephony, such regulation may materially adversely affect
our business, financial condition or results of operations.

Regulation of the Internet

Congress has recently adopted legislation that regulates certain aspects of
the Internet, including online content, user privacy, taxation, access charges,
liability for third-party activities and jurisdiction. The European Union has
also enacted several directives relating to the Internet, one of which
addresses online commerce. In addition, federal, state, local and foreign
governmental organizations are considering other legislative and regulatory
proposals that would regulate the Internet. Increased regulation of the
Internet may decrease its growth, which may negatively impact the cost of doing
business via the Internet or otherwise materially adversely affect our
business, results of operations and financial condition.

The Federal Trade Commission has proposed regulations regarding the
collection and use of personal identifying information obtained from
individuals when accessing Web sites, with particular emphasis on access by
minors. These regulations may include requirements that companies establish
certain procedures to disclose and notify users of privacy and security
policies, obtain consent from users for certain collection and use of
information and to provide users with the ability to access, correct and delete
personal information stored by the company. These regulations may also include
enforcement and redress provisions. There can be no assurance that we will
adopt policies that conform with any regulations adopted by the FTC. Moreover,
even in the absence of those regulations, the FTC has begun investigations into
the privacy practices of companies that collect information on the Internet.
One investigation resulted in a consent decree pursuant to which an Internet
company agreed to establish programs to implement the principles noted above.
We may become subject to a similar investigation, or the FTC's regulatory and
enforcement efforts may adversely affect the ability to collect demographic and
personal information from users, which could have an adverse effect on our
ability to provide highly targeted opportunities for advertisers and electronic
commerce marketers. Any of these developments would materially adversely affect
our business, results of operations and financial condition.

The European Union has adopted a directive that imposes restrictions on the
collection and use of personal data. Under the directive, citizens of the
European Union are guaranteed rights to access their data, rights to know where
the data originated, rights to have inaccurate data rectified, rights to
recourse in the event of unlawful processing and rights to withhold permission
to use their data for direct marketing. The directive could, among other
things, affect United States companies that collect information over the
Internet from individuals in European Union member countries, and may impose
restrictions that are more stringent than current Internet privacy standards in
the United States. In particular, companies with offices located in European
Union countries will not be allowed to send personal information to countries
that do

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<PAGE>

not maintain adequate standards of privacy. The directive does not, however,
define what standards of privacy are adequate. As a result, the directive may
adversely affect the activities of entities such as us that engage in data
collection from users in European Union member countries.

Intellectual Property

Our performance and ability to compete are dependent to a significant degree
on our proprietary and licensed technology. We rely on a combination of patent,
copyright, trademark and trade secret laws and contractual restrictions to
establish and protect our technology. We do not currently have any issued
patents or registered copyrights. All key employees have signed confidentiality
agreements and we intend to require each newly hired employee to execute a
confidentiality agreement. These agreements provide that confidential
information developed by or with an employee or consultant, or disclosed to
such person during his or her relationship with us, may not be disclosed to any
third party except in certain specified circumstances. These agreements also
require our employees to assign their rights to any inventions to us. The steps
taken by us may not, however, be adequate to prevent the misappropriation of
our proprietary rights or technology. In addition, our competitors may
independently develop technologies that are substantially equivalent or
superior to our technology.

We own the registered service mark for two of the marks used in our business
and have applications pending to register several other service marks relating
to our business.

We have received correspondence from a company claiming that our use of the
mark "Net2Phone" in connection with Internet telephony services infringes one
of that company's United States registered trademarks, and requesting that we
cease and desist from using the Net2Phone mark. We have responded by denying
any infringement and no legal proceedings have been commenced against us with
respect to this matter. AT&T, which uses the terms "Click2Dial,"
"Click2Whisper" and "Click2Interact" in its business, has filed with the United
States Patent and Trademark Office for an extension of the time limit for
opposing the service mark application filed by us for our "Click2Talk" mark.
AT&T could oppose registration of our Click2Talk mark or take other action
aimed at restricting us from using our Click2Talk mark. We are also aware of
several other parties that employ marks that are the same or similar to marks
that we employ, though these parties are not in the same business as us. There
can be no assurance that the company which notified us or other companies with
similar marks to our marks will not bring suit to prevent us from using the
Net2Phone mark or other marks. Defending or losing any litigation relating to
intellectual property rights could materially adversely affect our business,
results of operations and financial condition.

In addition, one of our international resellers, a company known as ITM,
operates a Web site at www.net2phone.net without our permission or
authorization, and in violation of the agency agreement ITM entered into with
us for the distribution of the Net2Phone software with certain ITM software.
Furthermore, ITM has also taken steps to secure registration and ownership of
the Net2Phone mark in France. We have notified ITM of this violation, taken
some initial actions to oppose ITM's use of the Net2Phone mark, and will pursue
our claim against them, if necessary, but there can be no assurances that we
can prevent, through litigation or otherwise, ITM from continuing its operation
of the net2phone.net Web site or from obtaining registration and ownership of
the Net2Phone mark in France.

Another company, NetPhone, currently operates a Web site at www.netphone.com
where it sells a family of computer telephony hardware and applications. There
can be no assurance that the existence of NetPhone's business and Web site will
not materially adversely affect our business. Furthermore, we have not taken
steps to assure foreign protection of our trademarks, except for our recent
filing for registration of the Net2Phone mark in certain European countries. To
the extent trademark rights are acquired through registration in countries
outside the United States, we may not be able to protect our marks or assure
that we are not infringing other parties' marks in those countries.

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There can be no assurance that we will be able to secure significant
protection for all our service marks or trademarks. It is possible that
competitors of ours or others will adopt product or service names similar to
our marks, or try to prevent us from using our marks, thereby impeding our
ability to build brand identity and possible leading to customer confusion.

We have been assigned the rights to patent applications claiming a number of
the technologies underlying our products and services. Our two United States
patent applications have been rejected, but we are continuing to pursue patent
protection for the claimed subject material. There can be no assurance that the
applications will result in the issuance of patents or that, if issued, such
patents would adequately protect us against competitive technology or that they
would be held valid and enforceable against a challenge. In addition, it is
possible that our competitors may be able to design around any such patents.
Also, our competitors may obtain patents that we would need to license or
circumvent in order to make, use, sell or offer for sale the technology.

We believe that we do not infringe upon the proprietary rights of any third
party, and no third party has asserted a patent infringement claim against us.
It is possible, however, that such a claim might be asserted successfully
against us in the future. Our ability to make, use, sell or offer for sale our
products and services depends on our freedom to operate. That is, we must
ensure that we do not infringe upon the proprietary rights of others or have
licensed all such rights. We have not requested or obtained an opinion from our
outside counsel as to whether our products and services infringe upon the
intellectual property rights of any third parties. We are aware that patents
have recently been granted to others based on fundamental technologies in the
Internet telephony area. In addition, we are aware of at least one other patent
application involving potentially similar technologies to our own which if
issued could materially adversely affect our business. Because patent
applications in the Unites States are not publicly disclosed until issued,
other applications may have been filed which, if issued as patents, could
relate to our services and products. However, foreign patent applications do
publish before issuance. We are aware of several such publications that relate
to Internet telephony. One such published application claims as an inventor a
previous consultant to IDT and has been assigned to another company. Issuance
of a patent or patents from this application could materially adversely affect
our ability to operate. A party making an infringement claim could secure a
substantial monetary award or obtain injunctive relief which could effectively
block our ability to provide services or products in the United States or
abroad.

If any of these risks materialize, we could be forced to suspend operations,
to pay significant amounts to defend our rights, and a substantial amount of
the attention of our management may be diverted from our ongoing business, each
of which could materially adversely affect our ability to operate.

We rely on a variety of technology, primarily software, that we license from
third parties. Most of this technology was purchased or licensed on our behalf
by IDT. Continued use of this technology by us may require that we purchase new
or additional licenses from third parties or obtain consents from third parties
to assign the applicable licenses from IDT. There can be no assurances that we
can obtain those third party licenses needed for our business or that the third
party technology licenses that we do have will continue to be available to us
on commercially reasonable terms or at all. The loss or inability to maintain
or obtain upgrades to any of these technology licenses could result in delays
or breakdowns in our ability to continue developing and providing our products
and services or to enhance and upgrade our products and services.

Employees

As of May 31, 1999, we had approximately 171 full-time employees, including
approximately 66 in technical support and customer service, 26 in sales and
marketing, 20 in management and finance, 47 in operations, and 12 in research
and development. Our employees are not represented by any union, and we
consider our employee relations to be good. We have never experienced a work
stoppage.

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Properties

Our primary facilities consist of approximately 15,445 square feet, which
comprise our headquarters, executive offices and customer service and technical
support centers, and are located in two buildings in Hackensack, New Jersey
leased from corporations that are owned and controlled by Howard S. Jonas. Mr.
Jonas is one of our directors, a director of IDT and the controlling
stockholder of IDT. These leases expire at the end of February 2002 and require
us to make annual rental payments of $186,144. We also sublease space for some
of our computer equipment in Piscataway, New Jersey from IDT, which leases this
space from a company also owned and controlled by Mr. Jonas. This lease runs
for a three-year term, beginning in May 1999, with monthly rent of $8,400. In
addition, we lease office space in Lakewood, New Jersey for our research and
development center. Pursuant to this lease, which expires at the end of August
2001, we are required to make annual rental payments of $48,125. See "Certain
Transactions--Facility Leases."

Legal Proceedings

We are not currently a party to any material legal proceedings.

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MANAGEMENT

Executive Officers, Directors and Key Employees

The following persons are our executive officers and directors:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Clifford M. Sobel......... 50 Chairman of the Board
Howard S. Balter.......... 37 Chief Executive Officer and
Vice Chairman of the Board
Jonathan Fram............. 42 President
David Greenblatt.......... 47 Chief Operating Officer
Ilan M. Slasky............ 29 Chief Financial Officer
H. Jeff Goldberg.......... 46 Chief Technology Officer
Jonathan Reich............ 33 Executive Vice President-
Marketing and Corporate Development
Martin Rothberg........... 30 Executive Vice President-
Strategic Sales
Jonathan Rand............. 36 Executive Vice President-
International Sales
Howard S. Jonas........... 43 Director
James A. Courter.......... 57 Director
Gary E. Rieschel.......... 43 Director
James R. Mellor........... 69 Director
Stephen A. Oxman.......... 54 Director
</TABLE>

Clifford M. Sobel has been Chairman of the board of directors since May
1999, served as our President from October 1997 to July 1999 and served as our
Chief Executive Officer from October 1997 to January 1999. Since 1994, Mr.
Sobel has been Chairman and Chief Executive Officer of SJJ Investment Corp.,
which has invested in Internet, cable, real estate and cosmetics companies.
Prior to this, Mr. Sobel founded several companies in the design and
manufacturing of retail interiors and themed environments, including DVMI and
its subsidiary, Bon-Art International, and Bauchet International. These
companies were sold in 1994 by Bear, Stearns & Co. Inc. Mr. Sobel has testified
before Congress on foreign trade issues and, by Presidential appointment,
served on the Holocaust Memorial Council in Washington, D.C.

Howard S. Balter has been a director since October 1997, our Chief Executive
Officer since January 1999, and our Vice Chairman of the board of directors
since May 1999. Mr. Balter also served as our Treasurer from October 1997 to
January 1999. Prior to his employment with us, Mr. Balter was IDT's Chief
Operating Officer from 1993 to 1998 and Chief Financial Officer from 1993 to
1995. Mr. Balter was a director of IDT from December 1995 to January 1999 and
Vice Chairman of IDT's board from 1996 to 1999. From 1985 to 1993, Mr. Balter
operated his own real estate development firm.

Jonathan Fram became our President in July 1999. Prior to his employment
with us, Mr. Fram was General Manager of Bloomberg L.P.'s New Media Group from
1996 to 1999, where he was responsible for Bloomberg's Internet strategy. Mr.
Fram was employed as General Manager of Bloomberg's Television and Radio Group
from 1991 to 1996. From 1989 to 1991, Mr. Fram served as the Chief Executive
Officer of FNN:PRO - Institutional Research Network, Inc. Mr. Fram was also
employed by both Bear Stearns & Co. and Paine Webber, Inc. as a securities
analyst, and worked for IBM as a computer design engineer.

David Greenblatt has been our Chief Operating Officer since January 1999.
Between January 1998 and January 1999, Mr. Greenblatt served as IDT's Vice
President of Networks, during which time he was primarily responsible for the
operations of Net2Phone. Prior to his employment with IDT in January 1998,
Mr. Greenblatt was Senior Vice President of Research and Development for
Nextwave Communications from 1996 to 1997. From January 1984 to August 1996,
Mr. Greenblatt was a principal of Financial

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<PAGE>

Technologies, Inc., where he managed the process of software conversion for
large and medium-sized businesses. From January 1980 to December 1984, Mr.
Greenblatt was an information technologies consultant for various money center
banks. From 1970 to 1980, Mr. Greenblatt has lectured in the areas of Computer
Science and Mathematics at Queens College, New York University, Hunter College
and Pace University.

Ilan M. Slasky has been our Chief Financial Officer since January 1999.
Prior to his employment with us, Mr. Slasky was IDT's Executive Vice President
of Finance from December 1997 to January 1999, IDT's director of carrier
services from November 1996 to July 1997 and IDT's Director of Finance from May
1996 to November 1996. From 1991 to 1996, Mr. Slasky worked for Merrill Lynch
in various areas of finance, including risk management, fixed income trading
and equity derivatives.

H. Jeff Goldberg has been our Chief Technology Officer since January 1999.
From January 1996 to January 1999, Mr. Goldberg was our Director of Technology
and a consultant to IDT. Mr. Goldberg was an independent software consultant
from 1985 to 1995, Vice President of Software and a member of the board of
directors at Charles River Data Systems in Massachusetts from 1979 to 1985 and
a developer of multimedia communications software at AT&T Bell Laboratories
from 1977 to 1979. Mr. Goldberg is a founding member of the UNIX standards
committee.

Jonathan Reich has been our Executive Vice President--Marketing and
Corporate Development since January 1999. Prior to his employment with us, Mr.
Reich was IDT's Senior Vice President of Advertising, Marketing and Business
Development in charge of strategic relationships for both us and IDT from June
1997 to December 1998 and IDT's director of advertising from January 1995 to
November 1997. From 1992 to 1993, Mr. Reich worked for Sanford Bernstein & Co.
as an associate analyst. Prior to this, Mr. Reich was an internal consultant
for Morgan Stanley & Co.

Martin Rothberg has been our Executive Vice President--Strategic Sales since
January 1999 and a key employee since June 1997. Prior to his employment with
us, Mr. Rothberg was IDT's Director of International Sales from September 1996
to June 1997 and IDT's Director of Domestic Sales from June 1995 to September
1996.

Jonathan Rand has been our Executive Vice President--International Sales
since January 1999 and a key employee since January 1998. Prior to joining us,
Mr. Rand was a member of IDT's senior management from 1992 to January 1999,
including service as Senior Vice President--International Sales and Senior Vice
President--Finance. Additionally, Mr. Rand is a co-founder and director of the
International Internet Association. Prior to joining IDT, Mr. Rand operated his
own magazine publishing business from 1986 to 1992 and was employed by Procter
& Gamble from 1985 to 1986 in Brand Management.

Howard S. Jonas was appointed a director in October 1997. Mr. Jonas founded
IDT in August 1990 and has served as Chairman of the Board and Treasurer since
its inception and as Chief Executive Officer since December 1991. Additionally,
he served as President of IDT from December 1991 through September 1996. Mr.
Jonas is also the founder and has been President of Jonas Publishing Corp., a
publisher of trade directories, since its inception in 1979.

James A. Courter was appointed a director in May 1999. Mr. Courter has been
President of IDT since October 1996 and a director of IDT since March 1996. Mr.
Courter has been a senior partner in the New Jersey law firm of Courter,
Kobert, Laufer & Cohen, P.C. since 1972. He was also a partner in the
Washington, D.C. law firm of Verner, Liipfert, Bernhard, McPherson & Hand from
January 1994 to September 1996. From 1991 to 1994, Mr. Courter was chairman of
the President's Defense Base Closure and Realignment Commission. Mr. Courter
was a member of the United States House of Representatives for 12 years,
retiring in January 1991. Mr. Courter also serves on the board of directors of
Envirogen and The Berkeley School.

Gary E. Rieschel was appointed a director in June 1999. Mr. Rieschel is the
Executive Managing Director of SOFTBANK Technology Ventures, which he joined in
January 1996. Mr. Rieschel has extensive

45
<PAGE>

overseas experience, having spent over four years in Tokyo as General Manager
of Sequent Computer Systems' Asian operations. He serves as a Director for
several SOFTBANK Technology Ventures' portfolio companies and is a member of
SOFTBANK Corporation's Global Executive Board.

James R. Mellor was appointed a director in June 1999. Mr. Mellor served as
a director of IDT between August 1997 and June 1999. Since 1981, Mr. Mellor
worked for General Dynamics Corporation, a developer of nuclear submarines,
surface combatant ships and combat systems. From 1994 until 1997, Mr. Mellor
served as Chairman and Chief Executive Officer of General Dynamics, and from
1993 to 1994, he served as President and Chief Operating Officer of General
Dynamics. Before joining General Dynamics, Mr. Mellor served as President and
Chief Operating Officer of AM International, Inc. now Multigraphics, Inc.
Before that time, Mr. Mellor spent 18 years with Litton Industries in a variety
of engineering and management positions, including Executive Vice President in
charge of Litton's Defense Group from 1973 to 1997.

Stephen A. Oxman was appointed a director in July 1999. Mr. Oxman currently
serves as a managing director in the mergers, acquisitions and corporate
advisory group of Deutsche Bank Securities Inc., an affiliate of BT Alex. Brown
Incorporated. He heads the group's telecommunications practice and also focuses
on the firm's work in Europe. In 1995, Mr. Oxman became a partner in the
investment banking firm of James D. Wolfensohn Incorporated, which merged in
1996 with Bankers Trust, which in turn merged with Deutsche Bank in 1999. From
1993 to 1994, Mr. Oxman served as Assistant Secretary of State for European and
Canadian Affairs. From 1988 to 1993, Mr. Oxman was a managing director of
Wasserstein Perella & Co. and Deputy Chairman of Wasserstein Perella
International. From 1980 to 1988, he was a partner in the law firm of Shearman
& Sterling. During the Carter administration, Mr. Oxman was Executive Assistant
to the Deputy Secretary of State, and subsequently a consultant to the
Secretary of State concerning the Iran hostage crisis.

In addition, we employ the following additional key employees:

Ira A. Greenstein has been our General Counsel and Secretary since May 1999.
Mr. Greenstein has been a partner in the law firm of Morrison & Foerster LLP
since 1997 where he serves as the chair of that firm's New York office's
Corporate Department. Prior to 1997, Mr. Greenstein was an associate in the
New York and Toronto offices of Skadden, Arps, Slate, Meagher & Flom LLP. From
1991 to 1992, Mr. Greenstein served as counsel to the Ontario Securities
Commission advising on the implementation of the Multijurisdictional Disclosure
System with the Securities and Exchange Commission. Mr. Greenstein also served
on the Securities Advisory Committee to the Ontario Securities Commission from
1992 to 1996. Mr. Greenstein has testified as an expert in the U.S. securities
laws in U.S. District Court.

Chaim Ackerman has been a senior software engineer of ours since February
1996. Prior to his employment with us, Mr. Ackerman was a member of the
technical staff at AT&T Bell Laboratories from 1986 to 1996. From 1984 to 1986,
Mr. Ackerman was a member of the technical staff at AT&T Consumer Products.
From 1980 to 1984, Mr. Ackerman worked for Computer Horizons Corporation as a
consultant to Bell Laboratories.

Sarah Hofstetter has been our Vice President-Corporate Communications since
May 1999. Prior to her employment with us, Ms. Hofstetter was IDT's Vice
President of Corporate Communications, in charge of public relations and brand
imaging from April 1996 to January 1999. From 1995 to 1996, Ms. Hofstetter
worked at The New York Times Syndicate as an editor of the New America News
Service, a wire service specializing in issues related to diversity in the
marketplace. Ms. Hofstetter sits on the editorial boards of Telecom Business
and TeleCard World magazines, and on the Editorial Roundtable of Intel-Card
News magazine.

Board of Directors and Committees of the Board

Our certificate of incorporation, as amended and restated, provides that the
number of members of our board of directors shall be not less than five and not
more than 11. The number of directors is currently seven. We anticipate that
one additional director will be elected prior to the closing of this offering,
and that

46
<PAGE>

one additional director will be elected after the closing of this offering.
Upon consummation of this offering, the board of directors will be divided into
three classes, with each class to be as nearly equal in number as possible. At
each annual meeting of stockholders, the successors to the class of directors
whose term expires at that time will be elected to hold office for a term of
three years and until their respective successors are elected and qualified.
All of the officers identified above serve at the discretion of our board of
directors.

IDT and Clifford M. Sobel, our Chairman, have agreed to vote all of their
shares in favor of the election of a director nominated by SOFTBANK Technology
Ventures IV and a director nominated by either GE Capital Equity Investments or
NBC, in each case for as long as either entity holds a majority of the shares
of Series A convertible preferred stock originally purchased by them or the
shares into which they are convertible. Gary E. Rieschel was nominated to our
board by SOFTBANK. Neither GE nor NBC has nominated a director.

We have established an audit committee and a compensation committee, the
initial member of each of which will be James R. Mellor. We expect to appoint
one or more additional directors to each of these committees after the closing
of this offering.

The audit committee oversees the retention, performance and compensation of
the independent public accountants, and the establishment and oversight of such
systems of internal accounting and auditing control as it deems appropriate.

The compensation committee reviews and approves the compensation of our
executive officers, including payment of salaries, bonuses and incentive
compensation, determines our compensation policies and programs, and
administers our stock option plans.

The board of directors does not have a nominating committee. However, the
board of directors will consider nomination recommendations from stockholders,
which should be addressed to our corporate secretary at our principal executive
offices.

Executive Compensation

The following table identifies our most highly compensated executive
officers whose salaries and bonuses exceeded $100,000 during fiscal 1998 and
who served as executive officers of Net2Phone during fiscal 1998. Our Chief
Executive Officer, Howard S. Balter was employed as the Chief Operating Officer
and Vice Chairman of IDT during fiscal 1998 and did not serve as an executive
officer of Net2Phone during fiscal 1998. All of the named executive officers
listed below were compensated by IDT during fiscal 1998.

47
<PAGE>

Summary Compensation Table

<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
------------------ --------------
Securities
Name and Principal Fiscal Underlying All Other
Position Year Salary($) Bonus($) IDT Options(#) Compensation($)
- ------------------ ------ --------- -------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Clifford M. Sobel(1).... 1998 100,000 -- -- --
Chairman and President
David Greenblatt........ 1998 113,174 -- 20,000 --
Chief Operating Officer
H. Jeff Goldberg........ 1998 206,169 -- 50,000 --
Chief Technology
Officer
</TABLE>
- ---------------------
(1) Mr. Sobel served as our Chief Executive Officer from October 1997 to
January 1999 and our President from October 1997 to July 1999.

Option Grants During Fiscal 1998

No options to purchase shares of Net2Phone were granted to the executive
officers named above during fiscal 1998.

The following table describes the options to acquire shares of common stock
of IDT granted to the individuals named above during fiscal 1998:

<TABLE>
<CAPTION>
Potential
Realizable Value
% of at
Number of Total Assumed Annual
Securities Options Rates of Stock
Under- Granted Price
lying IDT to Exercise Appreciation
Options Employees of for Option Term
Granted in Fiscal Base Price Expiration -----------------
Name (#) Year (%) ($/Sh) Date 5% ($) 10% ($)
- ---- ---------- --------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
David Greenblatt.. 20,000 1.6 $18.00 Nov. 2007 226,402 573,747
H. Jeff Goldberg.. 50,000 4.0 $24.25 June 2008 762,534 1,932,413
</TABLE>

Value of IDT Options at Year End

The following table describes the value of IDT options exercised in fiscal
1998 and the value of unexercised options held by the individuals named above
at July 31, 1998:

<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Number of Underlying Unexercised in-the-Money
Shares Options at Fiscal Year-End Options at Fiscal Year-End
Acquired on --------------------------- -----------------------------
Names Exercise Value Realized Exercisable/Unexercisable Exercisable/Unexercisable (1)
- ----- ----------- -------------- --------------------------- -----------------------------
<S> <C> <C> <C> <C>
Clifford M. Sobel(2).... 100,000 $1,701,500 100,000/875,000 $1,775,000/--
David Greenblatt........ -- -- 20,000/0 125,000/--
H. Jeff Goldberg........ 5,000 111,250 210,000/50,000 3,556,500/0
</TABLE>
- ---------------------
(1) The closing price of IDT's common stock on July 31, 1998, as reported on
the Nasdaq National Market, was $24.25 per share.
(2) Mr. Sobel has an option that may be exercised beginning in September 1999,
to transfer his shares of Net2Phone to IDT in exchange for an option to
acquire 875,000 shares of IDT common stock at a purchase price of $6.50 per
share. Mr. Sobel will be prohibited by an agreement with the underwriters
from exercising this option during the 180-day period following the date of
this prospectus.

48
<PAGE>

Value of Net2Phone Options at Year End

The following table describes the value of Net2Phone options exercised in
fiscal 1998 and the value of unexercised options held by Clifford M. Sobel, our
Chairman and President, at July 31, 1998. None of the other individuals named
in the Summary Compensation Table were granted options to purchase shares of
Net2Phone prior to fiscal 1999.

<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Number of Underlying Unexercised in-the-Money
Shares Options at Fiscal Year-End Options at Fiscal Year-End
Acquired Value ---------------------------- ----------------------------
Names Exercise Realized(1) Exercisable/Unexercisable(2) Exercisable/Unexercisable(2)
- ----- --------- ----------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Clifford M. Sobel....... 3,096,000 $ 0 0/347,865 0/--
</TABLE>
- ---------------------
(1) For purposes of this table, the per share value of each share of Net2Phone
common stock in January 1998 is assumed to be $.03 per share, based upon a
valuation report prepared by an independent appraiser.
(2) Mr. Sobel received options to purchase an aggregate of 11% of Net2Phone's
capital stock in connection with his May 1997 employment agreement. Mr.
Sobel exercised his option to purchase 10% of Net2Phone's capital stock in
January 1998, and his option to purchase the additional 1% of Net2Phone's
capital stock terminated under an amendment to his employment agreement
entered into in May 1999. Mr. Sobel does not currently own any options to
purchase shares of Net2Phone.

Compensation of Directors

We intend to grant options to purchase shares of common stock to all of our
non-employee directors under the 1999 Stock Incentive Plan, other than non-
employee directors who serve as officers of IDT. See "1999 Stock Incentive
Plan." Other than as will be provided in that plan and the reimbursement of
reasonable expenses incurred with attending board and committee meetings, we
have not yet adopted specific policies on directors' compensation and benefits
following the closing of this offering.

Employment Agreements

Clifford M. Sobel, our Chairman, is employed pursuant to an employment
agreement that was entered into in May 1997 and amended in May 1999. The
agreement commenced in September 1997 and will expire in September 2000, and
will automatically be extended though September 2001 unless either we or Mr.
Sobel notifies the other that the extension will not take effect. Mr. Sobel
receives an annual base salary of $100,000. In January 1998, in connection with
an option set forth in his employment agreement, Mr. Sobel purchased 10% of our
common stock for $100,000. On the closing date of this offering, Mr. Sobel will
receive from IDT that number of shares of our common stock which will maintain
his holdings, when combined with shares owned by a trust for the benefit of his
offspring, at 8% of our total outstanding capital stock as of that date. Mr.
Sobel's employment agreement also provides him with an option to transfer his
interest in us to IDT in exchange for an option from IDT to purchase 875,000
registered shares of IDT common stock at a purchase price of $6.50 per share.
This option is exercisable at any time from September 15, 1999 through
September 15, 2000, so long as he is employed by us as of September 15, 1999
and owns and holds all of the stock he received, other than shares that he
transferred to a trust for the benefit of his offspring. Mr. Sobel will be
prohibited by an agreement with the underwriters from exercising this option
during the 180-day period following the date of this prospectus.

On July 2, 1999, we signed a three-year employment agreement with Jonathan
Fram, our President. After its initial term, which ends on June 30, 2002, our
agreement with Mr. Fram may be renewed annually. We will pay Mr. Fram an annual
base salary of $350,000 and he is entitled to receive an annual bonus
calculated on the basis of our gross revenue, which bonus could be up to
$100,000. Additionally, we granted Mr. Fram options to purchase 920,000 shares
of our common stock under our 1999 Stock Option and Incentive Plan. Of these
options, 460,000 were granted at an exercise price of $3.33, 153,333 of which
are

49
<PAGE>

vested and exercisable. The options to purchase the remaining 460,000 shares
were granted at the lower of our initial public offering price or $11.00. Other
than those options already vested, the remaining 766,667 options will vest in
three equal annual installments, commencing on July 20, 2000. These options
will vest immediately if we terminate Mr. Fram's employment without cause, if
Mr. Fram terminates his employment for good reason, or if the options of any
other employee are accelerated upon a change of control of our company.

At present, none of the other named executive officers or key employees is
party to an employment agreement with us.

1999 Stock Incentive Plan

Our 1999 Stock Option and Incentive Plan was adopted in April 1999. Under
the plan, our officers, directors, key employees and consultants, together with
those of IDT and its subsidiaries, are eligible to receive awards of stock
options, stock appreciation rights, limited stock appreciation rights and
restricted stock. Options granted under the plan may be incentive stock options
or nonqualified stock options. Stock appreciation rights and limited stock
appreciation rights may be granted simultaneously with the grant of an option
or, in the case of nonqualified stock options, at any time during its term.
Restricted stock may be granted in addition to or in lieu of any other award
made under the plan. A total of 11,040,000 shares of common stock have been
authorized to date for issuance under the plan, 5,040,000 of which were granted
in May 1999, and 1,345,219 of which have been exercised. These options have a
weighted average exercise price of $3.33 per share. In connection with loans
granted to several grantees under the plan to exercise a portion of these
options, 23,382 outstanding options were cancelled. Additional options to
purchase 6,996 shares were cancelled in connection with the termination of the
employment of four grantees. In July 1999, we granted options to purchase an
additional 920,000 shares of our common stock to Jonathan Fram, our President.
See "--Employment Agreements." We expect to grant options to purchase
approximately 2,111,000 additional shares of our common stock at the initial
public offering price upon the closing of this offering.

The 1999 Stock Option and Incentive Plan is administered by the compensation
committee of our board. Subject to the provisions of the plan, the board of
directors or the compensation committee will determine the type of award, when
and to whom awards will be granted, the number of shares covered by each award
and the terms and kind of consideration payable with respect to awards. The
board of directors or the compensation committee may interpret the plan and may
at any time adopt the rules and regulations for the plan as it deems advisable.
In determining the persons to whom awards shall be granted and the number of
shares covered by each award, the board of directors or the compensation
committee may take into account the duties of the respective persons, their
present and potential contribution to our success and other relevant factors.

Stock Options. An option may be granted on the terms and conditions as the
board of directors or the compensation committee may approve, and generally may
be exercised for a period of up to ten years from the date of grant. Generally,
incentive stock options will be granted with an exercise price equal to the
fair market value on the date of grant. Additional limitations will apply to
incentive stock options granted to a grantee that beneficially holds 10% or
more of our voting stock. The board of directors or compensation committee may
authorize loans to individuals to finance their exercise of vested options. See
"Certain Transactions--Officer Loans." Options granted under the 1999 Stock
Option and Incentive Plan will become exercisable at those times and under the
conditions determined by the board of directors or the compensation committee.
To date, the options that have been granted to our executive officers will
generally vest automatically in the event that there is a change of control of
our company, if we are merged into another company or if any of these
individuals are employed by a subsidiary of our company that is sold to another
company.

The 1999 Stock Option and Incentive Plan provides for automatic option
grants to eligible non-employee directors. Options to purchase 10,000 shares of
common stock will be granted to each eligible

50
<PAGE>

non-employee director upon consummation of this offering and options to
purchase 10,000 shares of common stock will be granted to each new eligible
non-employee director upon the director's initial election to the board. In
addition, options to purchase 10,000 shares of common stock are granted
annually to each eligible non-employee director on the anniversary date of his
or her election to the board. Each of these options will have an exercise price
equal to the fair market value of a share of common stock on the date of grant.
All options granted to non-employee directors will be immediately exercisable.
All options held by non-employee directors, to the extent not exercised, expire
on the earliest of:

. the tenth anniversary of the date of grant;

. one year following the optionee's termination of directorship other than
for cause; and

. three months following the optionee's termination of directorship for
cause.

Stock Appreciation Rights and Limited Stock Appreciation Rights. The 1999
Stock Option and Incentive Plan also permits the board of directors or the
compensation committee to grant stock appreciation rights and/or limited stock
appreciation rights with respect to all or any portion of the shares of common
stock covered by options. Generally, stock appreciation rights and limited
stock appreciation rights may be exercised only at that time as the related
option is exercisable. Upon exercise of a stock appreciation right, a grantee
will receive for each share for which an stock appreciation right is exercised,
an amount in cash or common stock, as determined by the board of directors or
the compensation committee, equal to the excess of the fair market value of a
share of common stock on the date the stock appreciation right is exercised
over the exercise price per share of the option to which the stock appreciation
right relates.

Limited stock appreciation rights may be exercised only during the 90 days
following a change in control, or a merger or similar transaction, involving
Net2Phone. Upon exercise of a limited stock appreciation right, a grantee will
receive, for each share for which a limited stock appreciation rights is
exercised, an amount in cash equal to the excess of the highest fair market
value of a share of our common stock during the 90-day period ending on the
date of the limited stock appreciation rights is exercised, or an amount equal
to the highest price per share paid for shares of our common stock in
connection with a merger or a change of control of Net2Phone, whichever is
greater, over the exercise price per share of the option to which the limited
stock appreciation rights relates. In no event, however, may the holder of a
limited stock appreciation right granted in connection with an incentive stock
option receive an amount in excess of the maximum amount that will enable the
option to continue to qualify as an incentive stock option.

Restricted Stock. The 1999 Stock Option and Incentive Plan further provides
for the granting of restricted stock awards, which are awards of common stock
that may not be disposed of, except by will or the laws of descent and
distribution, for a period of time determined by the compensation committee or
the board of directors. The board or the compensation committee may also impose
other conditions and restrictions on the shares as it deems appropriate,
including the satisfaction of performance criteria. All restrictions affecting
the awarded shares will lapse in the event of a merger or similar transaction
involving Net2Phone.

The board may amend or terminate the 1999 Stock Option and Incentive Plan.
However, as required by any law, regulation or stock exchange rule, no change
shall be effective without the approval of our stockholders. In addition, no
change may adversely affect an award previously granted, except with the
written consent of the grantee.

No awards may be granted under the 1999 Stock Option and Incentive Plan
after the tenth anniversary of its initial adoption.

Options and Awards Under the 1999 Stock Option and Incentive Plan. We cannot
now determine the number of options or awards to be granted in the future under
the 1999 Stock Option and Incentive Plan to officers, directors and employees.

51
<PAGE>

Compensation Committee Interlocks and Insider Participation.

We did not have a compensation committee during fiscal 1998. Compensation
decisions relating to our executive officers, key employees and other senior
personnel were made primarily by IDT, which owned all of our outstanding
capital stock at the beginning of fiscal 1998. During fiscal 1998, Howard S.
Jonas, who was serving as our chairman, and Howard S. Balter, who was serving
as our treasurer, also served as directors of IDT.

401(k) Plan

Prior to May 1999, our employees participated in IDT's 401(k) Savings and
Retirement Plan. We are in the process of establishing our own 401(k) plan that
is intended to qualify for preferential tax treatment under section 401(k) of
the Internal Revenue Code. We intend that most of our employees will be
eligible to participate in our 401(k) Savings and Retirement Plan upon
adoption.

52
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth information with respect to the beneficial
ownership of our outstanding common stock as of July 26, 1999 and as adjusted
to reflect the sale of the common stock offered hereby by:

. each person who is the beneficial owner of more than 5% of our capital
stock;

. each of our directors;

. each of our named executive officers; and

. all of our named executive officers and directors as a group.

Except as otherwise indicated, all of the shares indicated in the table are
shares of common stock.

<TABLE>
<CAPTION>
Percentage
Number of Shares Beneficially
Beneficially Owned Owned(1)
--------------------- -----------------
Prior to After Prior to After
Holders Offering Offering Offering Offering
- -------------------------------------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C>
IDT Corporation(2).................... 27,621,982 27,192,190 65.8% 57.8%
190 Main Street
Hackensack, New Jersey 07601

Howard S. Jonas(3).................... 27,621,982 27,192,190 65.8% 57.8%
c/o IDT Corporation
190 Main Street
Hackensack, New Jersey 07601

James A. Courter(4)................... 27,657,982 27,228,190 65.9% 57.8%
c/o IDT Corporation
190 Main Street
Hackensack, New Jersey 07601

SOFTBANK Technology Ventures IV,
L.P.(5).............................. 4,590,000 4,590,000 10.9% 9.8%
333 West San Carlos Street, Suite 1225
San Jose, California 95110

Gary E. Rieschel(6)(7)................ 4,590,000 4,600,000 10.9% 9.8%
c/o SOFTBANK Technology Ventures IV,
L.P.
333 West San Carlos Street, Suite 1225
San Jose, California 95110

Clifford M. Sobel(8).................. 3,338,018 3,767,810 8.0% 8.0%
c/o Net2Phone, Inc.
171 Main Street
Hackensack, New Jersey 07601

America Online, Inc.(9)............... 2,295,000 3,045,000 5.5% 6.5%
22000 AOL Way
Dulles, Virginia 20166

General Electric Company Group(10).... 2,295,000 2,795,000 5.5% 6.0%
120 Long Ridge Road
Stamford, Connecticut 06927

Howard S. Balter(7)(11)............... 669,138 736,188 1.6% 1.6%
Jonathan Fram(7)(12).................. 153,333 183,333 * *
David Greenblatt(7)(13)............... 105,840 135,840 * *
H. Jeff Goldberg(7)(14)............... 105,840 120,840 * *
James R. Mellor(7).................... -- 10,000 * *
Stephen A. Oxman(7)................... 2,500 12,500 * *
Officers and Directors as a Group
(14 Persons)(15)..................... 36,738,961 36,971,511 87.2% 78.1%
</TABLE>

53
<PAGE>

- ---------------------
* Less than one percent.

(1) Percentage of beneficial ownership prior to this offering is based on
4,683,237 shares of common stock and 27,621,982 shares of Class A stock
outstanding at July 16, 1999 plus 9,420,000 shares of Class A stock
issuable upon conversion of the Series A convertible preferred stock at
the same date and the exercise of 272,400 warrants to purchase our common
stock. Percentage of beneficial ownership after this offering is based on
47,097,619 total shares outstanding, which includes all shares outstanding
prior to this offering, plus 5,100,000 shares of common stock to be sold
in this offering at an assumed price of $10 per share. All percentage
calculations assume that all shares of Net2Phone's Class A stock have been
converted into shares of Net2Phone's common stock.
(2) All of the shares held by IDT are Class A stock. IDT has pledged its
shares as collateral to secure a credit facility. The lenders under the
credit facility have agreed to release IDT's shares from collateral to
permit IDT to transfer our shares free and clear of any liens as and when
IDT seeks to transfer our shares. Such transferability will cease if IDT's
ownership of our capital stock drops below 50% of the capital stock owned
by IDT 72 hours after the consummation of this offering. Unless IDT
defaults in its obligations under the pledge agreement, it has the voting
rights with respect to the pledged stock. In addition, in connection with
the employment agreement between IDT, Mr. Sobel and Net2Phone, IDT will
transfer to Mr. Sobel the number of shares of stock upon consummation of
this offering that is necessary to maintain Mr. Sobel's percentage
ownership of our outstanding stock, together with a trust for the benefit
of his offspring, at 8%.
(3) Howard S. Jonas, together with a number of entities formed for the benefit
of charities and members of his family, owns shares of IDT's capital stock
that enable him to vote more than 50% of IDT's capital stock. As a result,
he may be deemed to be the beneficial owner of the shares of Net2Phone
capital stock owned by IDT. Mr. Jonas disclaims beneficial ownership of
these shares.
(4) James A. Courter, one of our directors, is the President, Vice Chairman
and a director of IDT. As a result, in addition to the 36,000 shares of
our common stock that he holds directly, he may be deemed to be the
beneficial owner of the shares of Net2Phone capital stock owned by IDT.
Mr. Courter disclaims beneficial ownership of these additional shares.
(5) Includes 4,415,400 shares of Class A stock and 88,308 shares of common
stock issuable upon conversion of shares of Series A convertible preferred
stock and presently exercisable warrants, respectively, that have been
issued to SOFTBANK Technology Ventures IV, L.P. Also includes 84,600
shares of Class A stock and 1,692 shares of common stock issuable upon
conversion of shares of Series A preferred stock and presently exercisable
warrants, respectively, that have been issued to SOFTBANK Technology
Advisors Fund L.P.
(6) Gary E. Rieschel is the Executive Managing Director of SOFTBANK Technology
Ventures, and as a result, he may exercise the power to vote and to
dispose of the shares held by SOFTBANK.

(7) Shares owned after the offering include 10,000, 67,050, 30,000, 30,000,
15,000, 10,000 and 10,000, shares of common stock that will be issuable
upon the exercise of stock options that we expect to issue to Messrs.
Rieschel, Balter, Fram, Greenblatt, Goldberg, Mellor and Oxman,
respectively, upon the closing of this offering that will be immediately
exercisable.
(8) Clifford M. Sobel transferred 1% of our common stock to a trust for the
benefit of his offspring. All of these shares are deemed to be
beneficially owned by Mr. Sobel. In addition, in connection with the
employment agreement between IDT, Mr. Sobel and Net2Phone, IDT will
transfer to Mr. Sobel the number of shares of stock upon consummation of
this offering that is necessary to maintain Mr. Sobel's percentage
ownership of our outstanding stock, together with a trust for the benefit
of his offspring, at 8%.

(9) Includes 2,250,000 shares of Class A stock and 45,000 shares of common
stock issuable upon conversion of shares of Series A convertible preferred
stock and issuable upon exercise of presently exercisable warrants,
respectively. Shares owned after the offering assumes the purchase by
America Online of 750,000 shares in this offering.

(10) Includes 1,125,000 of Class A stock issuable upon conversion of shares of
Series A convertible preferred stock that are held of record by GE Capital
Equity Investments, Inc., which shares beneficial ownership with its
parent General Electric Capital Corporation, which is a wholly-owned
subsidiary of the General Electric Company. Also includes 1,125,000 shares
of Class A stock issuable upon exercise of shares of Series A convertible
preferred stock that are beneficially owned by NBC, a wholly-owned
indirect subsidiary of the General Electric Company, of which 300,000
shares are issuable upon conversion of shares of Series A convertible
preferred stock that are held of record by Snap! LLC, an Internet portal
service of NBC and CNET, Inc. Includes 22,500, 16,500 and 6,000 shares of
common stock issuable upon exercise of warrants held by GE Capital Equity
Investments, NBC and Snap! LLC, respectively. Shares owned after the
offering assumes the purchase by NBC of 300,000 shares in this offering
and the purchase by GE Capital of 200,000 shares in this offering.

(11) Includes 360,000 shares held of record by a trust for the benefit of
Mr. Balter's family members, of which Mr. Balter and his spouse are the
trustees. Also includes an aggregate of 138,000 shares held of record by
trusts for the benefit of the family members of Messrs. Greenblatt, Slasky
and Rothberg, for which Mr. Balter acts as trustee.

(12) Includes 153,333 shares of common stock issuable upon exercise of
presently exercised stock options.

(13) Includes 54,000 shares held of record by a trust for the benefit of Mr.
Greenblatt's family members, of which Mr. Balter is the trustee.

(14) Includes 72,000 shares held of record by a trust for the benefit of Mr.
Goldberg's family members, of which Mr. Goldberg's spouse is the trustee.

(15) Includes the shares of Class A stock held by IDT and the shares of Class A
stock and the shares of common stock issuable upon exercise of presently
exercisable warrants held by SOFTBANK. Shares owned after the offering
also includes options to purchase 225,050 shares of common stock that will
be granted to our directors and executive officers upon the closing of
this offering that will be immediately exercisable.

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CERTAIN TRANSACTIONS

We believe that all of the transactions set forth below were made on an
arms-length basis. All future transactions between us and our officers,
directors, principal stockholders and affiliates will be approved by a majority
of the board of directors, including a majority of the outside directors, and
will continue to be on terms no less favorable to us than could be obtained
from unaffiliated third parties.

Relationship with IDT

Upon the closing of this offering, IDT will own approximately 57.7% of our
capital stock. IDT owns Class A stock that has twice the voting power of our
common stock. Therefore, upon the closing of this offering, IDT will control
65.0% of our vote. Since inception, we have received various services from IDT,
including administration (accounting, human resources, legal), customer
support, telecommunications and joint marketing. IDT has also provided us with
the services of a number of its executives and employees. In consideration for
these services, IDT has historically allocated a portion of its overhead costs
related to those services to us. We believe that the amounts allocated to us
have been no greater than the expenses we would have incurred if we obtained
those services on our own or from unaffiliated third parties. Prior to the
execution of the agreements with IDT described below, none of these services
had been provided to us pursuant to any written agreement.

We entered into a suite of agreements with IDT in May 1999, including an
assignment agreement, a separation agreement, an IDT services agreement, a
Net2Phone services agreement, a tax sharing and indemnification agreement, a
joint marketing agreement and an Internet/telecommunications agreement.

Assignment Agreement

In connection with this agreement, IDT assigned to us certain proprietary
products, information, patent applications, trademarks and related intellectual
property rights used in connection with our business. IDT also licensed to us
certain proprietary business information that relates to our business. We
licensed back to IDT certain software that IDT will use in connection with its
business.

IDT Services Agreement

In connection with this agreement, IDT will continue to provide us with
various administrative services, including general accounting services, payroll
and benefits administration and customer support.

. General Accounting Services. IDT will provide us with accounts payable
services and general ledger services. IDT will charge us cost plus 20%
for these services. This portion of the IDT services agreement may be
cancelled by either party on 30-days prior written notice and may be
renewed by mutual agreement of the parties.

. Payroll and Benefits Administration. IDT will administer our payroll.
Until we terminate this agreement or establish our own benefit plan for
our employees, our employees will continue to be covered under IDT's
health insurance policies. We will pay IDT for administering our payroll
and benefits plans at IDT's cost plus 20%. Additionally, we will
reimburse IDT for the employer's cost of health insurance attributable
to each of our employees participating in IDT's group health insurance
plan and for any other direct costs attributable to our employees'
participation in IDT's benefit plans.

. Customer Support. IDT has agreed to provide customer support services to
our customers on a cost-plus 20% basis.

In the event we request additional services from IDT and IDT agrees to
provide those services, we will enter into an addendum to the IDT Services
Agreement covering those services. We will negotiate in good faith any fees
payable to IDT for those additional services.

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Net2Phone Services Agreement

In connection with this agreement, we will support IDT's debit card
platform, provide technical support for the debit card platform, order lines to
handle calls, manage the debit card database and monitor the network, 24 hours
per day, seven days per week. We will provide these services at the greater of
cost-plus 20% and $.0025 per minute of IDT usage of the debit card platform. In
addition, IDT will reimburse us for all of our direct costs in connection with
the acquisition, maintenance or support of any and all additional or
replacement equipment needed for the debit card platform.

The Net2Phone services agreement has an initial term of one year, which
automatically renews for subsequent one-year periods unless one party gives the
other 30-days prior written notice. In addition, following the initial term,
the Net2Phone services agreement may be terminated at any time at either
party's option upon 30-days prior written notice.

In the event IDT requests services in addition to those described in the
Net2Phone services agreement and we agree to provide those services, we will
enter into an addendum to the Net2Phone services agreement covering those
services. We will negotiate in good faith any fees payable to us for those
additional services.

Tax Sharing and Indemnification Agreement.

In connection with this agreement, IDT and Net2Phone will share certain past
tax liabilities and benefits, including:

. the allocation and payment of taxes for periods during which we and our
subsidiaries, if any, were included in the same consolidated group with
IDT for federal income tax purposes, and are, or were, included in the
same consolidated, combined or unitary returns for state, local or
foreign tax purposes;

. the allocation of responsibility for the filing of tax returns;

. the conduct of tax audits and the handling of tax controversies; and

. various related matters.

For periods during which we and our subsidiaries, if any, were or are
included in IDT's consolidated federal income tax returns or state, local or
foreign consolidated, combined, or unitary tax returns, we are required to pay
an amount of tax equal to the amount we would have paid had we and our
subsidiaries, if any, had filed a tax return as a separate affiliated group of
corporations filing a consolidated federal income tax return or state, local or
foreign consolidated, combined, or unitary tax returns. We are responsible for
our own separate tax liabilities that are not determined on a consolidated or
combined basis with IDT.

As a result of leaving the IDT consolidated group, certain tax attributes of
the IDT group attributable to our operations, such as net operating loss
carryforwards, may be allocated to us. The tax sharing and indemnification
agreement obligates us, where permitted by law, to elect to carry any post-
deconsolidation losses forward, rather than to carry back such losses to tax
years when we were included in the IDT consolidated or combined returns.

We were included in IDT's consolidated group for federal income tax purposes
from our incorporation in October 1997 until May 1999 when we concluded the
sale of our Series A convertible preferred stock. Each corporation that is a
member of a consolidated group during any portion of the group's tax year is
jointly and severally liable for the federal income tax liability of the group
for that year. While the tax sharing and indemnification agreement allocates
tax liabilities between us and IDT during the period on or prior to the closing
date of this offering, in which we are included in IDT's consolidated group, we
could be liable in the event federal tax liability allocated to IDT is
incurred, but not paid, by IDT or any other member of

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IDT's consolidated group for IDT's tax years that include such periods. In such
event, we would be entitled to seek indemnification from IDT pursuant to the
tax sharing and indemnification agreement.

Joint Marketing Agreement.

In connection with this agreement, we agreed to:

. continue to offer links to the other's Web site;

. cross-sell one another's products, including through their promotional
materials and customer services representatives; and

. undertake additional promotions as to which the parties shall agree from
time to time.

IDT will pay to us a fee of $8.00 for each of our customers who becomes a
new customer of IDT as a result of our referral. We will pay IDT a fee of $8.00
for each customer of IDT who becomes a new customer of ours as a result of an
IDT referral. However, in either case, these fees will be payable only with
respect to any new customer who incurs and pays $50.00 or more in charges.

The joint marketing agreement has an initial term of one year, which
automatically renews for subsequent one-year periods unless one party gives the
other party 60-days prior written notice. In addition, following the initial
term, the joint marketing agreement may be terminated at any time at either
party's option upon 60-days prior written notice.

Internet/Telecommunications Agreement.

IDT has granted us an indefeasible right to use portions of its current
high-speed network. We have the right to terminate portions of the existing
network to the extent that the existing network is replaced, the underlying
leases expire or at anytime with IDT's consent. We are obligated to reimburse
IDT for all termination or cancellation charges which it incurs. We have agreed
to pay IDT $60,000 per month for the right to use those portions of its
existing network. This amount will be reduced as IDT terminates portions of the
existing network at our request. IDT also granted us an indefeasible right to
use portions of a new DS3 Network, which it will have the right to use for 20
years. This grant will be effective as construction of this new network is
completed and delivered to IDT. This network has been pledged by IDT to the
lenders under a credit facility. We have agreed to pay IDT an installation fee
of $600,000 for this network, which we will pay as each portion of the new
network is delivered. We also will reimburse IDT for the one-time fee of
approximately $6.0 million payable in monthly installments over a five-year
period, with interest of 9% per annum. We will reimburse IDT for all of
maintenance and upgrade costs incurred by IDT with respect to those portions of
the network that we use.

Further, IDT has granted us a right to use IDT's equipment and other assets
at its backbone points of presence and its network operations center for a two-
year period. We will pay IDT an aggregate of $1.2 million for this right over
the two-year period. At the end of the two-year period, we have the right to
purchase any of this equipment then owned by IDT at fair market value. We must
pay for all repairs, maintenance and upgrades of equipment and other facilities
we use pursuant to this agreement.

IDT also has agreed to enter into transit relationship agreements with us
giving us access substantially identical to IDT's at five different core
locations for a period of one year commencing May 1999. Following the initial
term, the transit relationship agreements may be terminated at any time at
either party's option upon 60-days prior written notice.

IDT retains primary control over the equipment covered by this agreement but
may require assistance from us in gaining Internet access. We have agreed to
assist in facilitating access for a one-year period commencing May 1999. For
each month during the effectiveness of the agreement, IDT will pay us:

. $1.00 for each of IDT's dial-up Internet customers;

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. for each dedicated-line Internet customer, the lesser of $100.00 or 20%
of the fee IDT charges; and

. 25% of all fees charged by IDT for installation of dedicated lines.

Following the initial one year term, this agreement automatically renews for
one-year periods unless one party gives the other 60-days prior written notice
of termination.

Separation Agreement

The separation agreement with IDT provides for the following:

. Releases. This agreement provides for mutual general releases between us
and IDT for alleged liability to the date of the agreement, with certain
limited exceptions, including:

. liability specifically excluded by any of the other agreements
between us and IDT, and

. liability for unpaid amounts for products or services or refunds
owing on products or services due on a value-received basis for work
done by one party at the request or on behalf of the other.

. Indemnification by Net2Phone. We have agreed to indemnify IDT and each
of IDT's directors, officers and employees from all liabilities relating
to, arising out of or resulting from:

. our failure or the failure of any other person to pay, perform or
otherwise promptly discharge any of our liabilities in accordance
with their respective terms, and

. any breach by us of the agreements between us and IDT.

. Indemnification by IDT. IDT has agreed to indemnify us and each of our
directors, officers and employees from all liabilities relating to,
arising out of or resulting from:

. the failure of IDT or any other person to pay, perform or otherwise
promptly discharge any liabilities of IDT other than our
liabilities, and

. any breach by IDT of the agreements between us and IDT.

. Dispute Resolution. We will attempt to resolve disputes by referring
controversial matters to senior management (or other mutually agreed
upon) representatives of the parties. If these efforts are not
successful, either party may submit the dispute to mandatory, binding
arbitration. This agreement contains procedures that are intended to
expedite dispute resolution, including the selection of an arbitrator
and certain limitations on discovery. In the event that any dispute may
be in excess of $5.0 million, or in the event that an arbitration award
in excess of $5.0 million is issued, either party may submit the dispute
to a court of competent jurisdiction. If the parties disagree that the
amount in controversy is in excess of $5.0 million, the parties are
required to submit the disagreement to arbitration.

. Noncompetition; Certain Business Transactions. For a period of 36 months
commencing May 1999, IDT may not directly or indirectly, engage in the
provision of or developmental efforts related to Internet telephony
services and voice enabling Web applications anywhere in the world or
become a stockholder, partner or owner of any entity that is engaged in
such business anywhere in the world. However, subject to our approval,
which may not be unreasonably withheld, IDT may acquire a passive
interest of up to 20% in such entity so long as IDT does not assist that
entity in developing an Internet telephony business or otherwise
engaging in our business. Neither we nor IDT will have any duty to
communicate or offer any corporate opportunity to the other party and
may pursue or acquire any such opportunity for itself or direct such
opportunity to any other person.

Payable to IDT.

Since inception, IDT has provided the funds to finance our operations in the
form of advances (approximately $22.0 million as of April 30, 1999, of which we
repaid $8.0 million in May 1999). These

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advances have been converted into a note that is payable in 60 monthly
installments of principal and interest. $7.0 million of the proceeds of this
offering will be used to prepay a portion of the note. The balance of the note
is payable in 60 monthly installments of principal and interest at a rate of 9%
per annum.

Expenses

We have agreed to pay all third-party costs, fees and expenses relating to
this offering, all of the reimbursable expenses of the underwriters pursuant to
the underwriting agreement, all of the costs of producing, printing, mailing
and otherwise distributing this prospectus, as well as the underwriters'
discount as provided in the underwriting agreement. See "Underwriting." Except
as expressly set forth in the agreements between us and IDT, whether or not
this offering is consummated, each party shall bear its own respective third-
party fees, costs and expenses paid or incurred in connection with this
offering.

Relationship with Other Investors

Series A Subscription Agreements

Pursuant to Series A Subscription Agreements, dated as of May 13, 1999,
SOFTBANK Technology Ventures IV, GE Capital Equity Investments, America Online,
Access Technology Partners, Hambrecht & Quist and its affiliates and BT Alex.
Brown and its affiliates, purchased from us, in the aggregate, 3,140,000 shares
of Series A convertible preferred stock and warrants to purchase 180,000 shares
of our common stock, which expire upon the closing of this offering, for a net
aggregate purchase price of $29.9 million. Additionally, a warrant to purchase
92,400 shares of our common stock was issued to Hambrecht & Quist as part of
its fee as placement agent with respect to the sale of our Series A convertible
preferred stock. This warrant expires upon the closing of this offering. In
connection with the subscription agreements, we also entered into a
registration rights agreement and a stockholders agreement, each of which is
described below.

Registration Rights Agreement

The Series A investors acquired the following registration rights:

. one demand for registration at any time on or after the earlier to occur
of the second anniversary of the Series A offering or 180 days following
the consummation of this offering. This demand registration right may be
made by one or more holders of the Series A convertible preferred stock
that own at least 50% of the shares of Class A stock into which the
Series A convertible preferred stock converts. If our board of directors
determines in good faith that the demand registration would be
materially detrimental to us, we are entitled to postpone the filing of
the registration statement otherwise required to be prepared and filed
by us for a reasonable period of time, not to exceed 90 days;

. piggyback registration rights if we propose to register any securities
under the Securities Act in connection with any offering of our
securities other than a registration statement on Form S-8 or Form S-4,
subject to quantity limitations determined by underwriters if the
offering involves an underwriting; and

. two demand registrations at any time after we become eligible to
register our securities on Form S-3 (or any successor form). Holders
that beneficially own at least 20% of the shares of Class A stock into
which the Series A convertible preferred stock converts may make these
demands.

We agreed to pay all reasonable expenses incurred in connection with any
registration, filing or qualification pursuant to the Registration Rights
Agreement. We also agreed, to the extent permitted by law, to indemnify the
Series A investors against some liabilities in connection with the offering of
the shares, including liabilities arising under the Securities Act.

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Stockholders Agreement

IDT and Clifford M. Sobel, our Chairman, agreed to vote all of their shares
in favor of the election of a director nominated by SOFTBANK Technology
Ventures IV and a director nominated by GE Capital Equity Investments or NBC,
in each case for as long as either entity holds a majority of the shares of
Series A convertible preferred stock originally purchased by them or the shares
into which they are convertible.

In addition, each Series A convertible investor agreed to a lock up with
respect to their shares for a period of 180 days following this offering. The
Series A investors, IDT and Mr. Sobel also agreed not to transfer any of their
shares to any of our competitors for a period of 36 months, and thereafter only
subject to our right of first refusal. However, the stockholders agreement does
permit transfers between Series A investors.

Agreements with America Online and Subsidiaries

We signed a series of related agreements with Netscape, a subsidiary of
America Online, on January 31, 1999, allowing us to embed our software and
services in future versions of Netscape's Internet browsers. The two-year term
of our exclusive arrangement with Netscape commences with the beta release of
the next version of Netscape's Internet browser, which we believe will occur
later this year. In addition, our services will be displayed on Netscape
Netcenter and bundled with Netscape's suite of software and software updates.
We also have a right to place advertisements on Netscape's Web site. In
exchange, we will pay Netscape one-time licensing fees, a percentage of revenue
generated by calls provided through our co-branded service and a percentage of
advertising revenue generated by a co-branded Web page. Netscape's parent
company, America Online, will beneficially own over 5% of our common stock upon
the closing of this offering.

In July 1999, we entered into an exclusive, four-year distribution and
marketing agreement with ICQ, a subsidiary of America Online. Under this
agreement, ICQ has agreed to:

. co-brand and promote our phone-to-phone Internet telephony services in
the United States and in 19 other countries.

. embed customized versions of our software on an exclusive basis to allow
ICQ customers to make PC-to-phone and PC-to-PC calls and to receive
phone-to-PC calls;

. share revenue from advertisements and sponsorships sold by ICQ on our
software that is embedded in ICQ's Instant Messenger software; and

. promote our services on some of ICQ's Web sites.

We have agreed to:

. pay ICQ a fee of $7.5 million, $4.0 million of which was paid at
signing, with the remaining $3.5 million to be paid upon the closing of
this offering;

. pay ICQ a share of minutes-based revenue generated through ICQ and award
ICQ a performance bonus on the basis of the total revenue derived under
the agreement; and

. promote ICQ on our Web sites.

In connection with our distribution and marketing agreement with ICQ, we
issued a warrant to America Online to purchase up to 3% of our outstanding
capital stock on a fully-diluted basis. This warrant will vest in 1% increments
upon the achievement of each of three incremental thresholds of revenue
generated under the agreement during the first four years that the warrant is
outstanding. The per share exercise price under the warrant will be equal to
the lesser of 80% of the price per share in this offering, or $450 million
divided by the number of our fully-diluted shares on the initial exercise date.
The warrant may be exercised for a period of five years from the date of
issuance.

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The warrant grants to America Online demand registration rights enabling
America Online to cause us to effect two registrations and piggy-back
registration rights that can be used in connection with future registrations.
In addition, America Online will have the right to require us to file up to two
additional registration statements relating to the shares issuable upon
exercise of the warrant at such time as we shall become eligible to register
these shares on Form S-3 under the Securities Act of 1933.

Agreements with NBC and Snap

We signed an agreement with NBC on June 25, 1999 to purchase $1.5 million in
television advertising time on the NBC television network. We also have the
right to purchase additional spots to be telecast prior to June 30, 2000.
Additionally, on May 18, 1999, we signed a non-binding letter of intent with
NBC Multimedia, an affiliate of NBC. This letter of intent contemplates a one-
year agreement whereby we will pay NBC Multimedia $280,000 in exchange for the
integration of our services into the NBC.com and NBC Interactive Neighborhood
Web sites. Upon the closing of this offering, assuming that NBC purchases
300,000 shares in this offering, NBC will beneficially own 1,125,000 shares of
our Series A stock and 316,500 shares of our common stock.

On May 17, 1999, we entered into an agreement with Snap. Snap, an Internet
portal service of NBC and CNET, will strategically display links to our Web
site and services on its Snap.com Web site. In addition, we are their preferred
provider of PC-to-phone services during the two-year term of this agreement.
Snap also will deliver a preset minimum number of impressions on its site and
has agreed to give us the right to a certain amount of online advertising,
subject to certain conditions. In exchange, we agreed to pay Snap a one-time
fee, a percentage of revenue generated through their site and bonus payments
for customers delivered by Snap after meeting certain quotas.

Facility Leases

We have entered into leases for the use of our Hackensack facilities with
corporations that are owned and controlled by Howard S. Jonas, a member of our
board of directors and a director of IDT. Additionally, Mr. Jonas, together
with a number of entities formed for the benefit of charities and members of
his family, owns shares of IDT's capital stock that enable him to vote more
than 50% of IDT'S capital stock. As a result, he may be deemed to be the
beneficial owner of the shares of Net2Phone capital stock owned by IDT. The two
Hackensack leases run for three-year terms, beginning on March 1, 1999 with
monthly rent of $5,600 for 294-298 State Street and $9,912 for 171-173 Main
Street. We have also entered into a sublease with IDT for our Piscataway
facility, which is leased by IDT from a corporation owned and controlled by Mr.
Jonas. The Piscataway sublease runs for a three-year term, beginning in May
1999, with monthly rent of $8,400.

Officer Loans

In May 1999, Howard S. Balter, Ilan M. Slasky, David Greenblatt, Martin
Rothberg, H. Jeff Goldberg, Jonathan Reich, and Jonathan Rand, each of whom is
an executive officer, borrowed $1,447,240, $352,800, $352,800, $352,800,
$352,800, $98,000 and $44,100, respectively, from us. All of the proceeds of
these loans were used to purchase shares of Net2Phone common stock upon the
exercise of stock options. The loans bear interest at the rate of 7.0% per
annum, and will mature in May 2001. As a condition to receiving these loans,
these officers agreed to surrender their respective right to exercise 8,862,
2,160, 2,160, 2,160, 2,160, 600 and 270 immediately exercisable options,
respectively.

Relationship with Law Firm

Ira A. Greenstein, our General Counsel and Secretary, is a partner of the
law firm Morrison & Foerster LLP, which has provided legal services to us and
to IDT and its subsidiaries since December 1996, and in connection with this
offering.

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DESCRIPTION OF CAPITAL STOCK

Authorized Capital Stock

Our certificate of incorporation, as amended and restated, authorizes
247,042,089 shares of capital stock consisting of:

. 6,850,000 shares of preferred stock, $0.01 par value;

. 3,150,000 shares of Series A convertible preferred stock, $0.01 par
value;

. 37,042,089 shares of Class A stock, $0.01 par value; and

. 200,000,000 shares of common stock, $0.01 par value.

Of the shares of common stock, 5,100,000 shares of our common stock are
being offered through this prospectus. Immediately following the closing of the
offering, 10,485,429 shares of common stock and 36,612,190 shares of Class A
stock will be outstanding.

As of July 16, 1999, there were 23 holders of our Series A convertible
preferred stock, one holder of our Class A stock and 33 holders of our common
stock.

Common Stock and Class A Stock

General. The rights of holders of common stock and holders of Class A stock
are identical, except for voting rights, conversion rights and restrictions on
transferability. As of July 16, 1999, there were 4,683,237 shares of common
stock outstanding and 27,621,982 shares of Class A stock outstanding. An
additional 9,420,000 shares of Class A stock are issuable upon conversion of
our outstanding Series A convertible preferred stock.

Voting Rights. The holders of Class A stock are entitled to two votes per
share and the holders of common stock are entitled to one vote per share.
Except as otherwise required by law or as described below, holders of Class A
stock and common stock will vote together as a single class on all matters
presented to the stockholders for their vote or approval, including the
election of directors. Stockholders are not entitled to vote cumulatively for
the election of directors, and no class of outstanding capital stock acting
alone is entitled to elect any directors. IDT will hold 57.7% of our Class A
stock upon consummation of this offering. Accordingly, IDT will retain
effective control of us through holding approximately 65.0% of the combined
voting power of our outstanding capital stock. Therefore, IDT has the ability
to elect all of our directors and to effect or prevent certain corporate
transactions which require majority approval of the combined classes, including
mergers and other business combinations.

Transfer Restrictions. Class A stock is subject to certain limitations on
transferability that do not apply to the common stock. Our certificate of
incorporation provides that shares of Class A stock automatically convert into
an equal number of shares of common stock if there is a transfer of shares of
Class A stock to a person other than a permitted transferee. Thereafter, such
shares of common stock may be freely transferred, subject to restrictions
imposed under applicable securities laws. Shares of Class A stock acquired by
us will be canceled and may not be reissued.

Dividends and Liquidation. Holders of Class A stock and holders of common
stock have an equal right to receive dividends when and if declared by the
board of directors out of legally available funds. In the event of a
liquidation, dissolution or winding up, holders of the shares of Class A stock
and common stock are entitled to share equally, share-for-share, in the assets
available for distribution after payment of all creditors and the liquidation
preferences of our preferred stock.

Optional Conversion Rights. Each share of Class A stock may, at any time and
at the option of the holder, be converted into one fully paid and non-
assessable share of common stock. Upon conversion, such shares of common stock
would not be subject to restrictions on transfer that applied to the shares of
Class A

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stock prior to conversion except to the extent such restrictions are imposed
under applicable securities laws. The shares of common stock are not
convertible into or exchangeable for shares of Class A stock or any other
shares or securities.

Other Provisions. Holders of Class A stock and common stock have no
preemptive rights to subscribe to any additional securities of any class which
we may issue and there are no redemption provisions or sinking fund provisions
applicable to either such class, nor is the Class A stock or the common stock
subject to calls or assessments by us. The rights, preferences, and privileges
of the holders of common stock and Class A stock are subject to and may be
adversely affected by, the rights of the holders of any series of preferred
stock.

Preferred Stock

Our certificate of incorporation provides that we may issue up to 10,000,000
shares of preferred stock in one or more series as may be determined by our
board of directors who may establish the number of shares to be included in
each such series, fix the designation, powers, preferences and relative rights
of the shares of each such series and any qualifications, limitations, or
restrictions thereof, and increase or decrease the number of shares of any such
series without any further vote or action by the stockholders. 3,150,000 shares
of the preferred stock have been designated as Series A. The board of directors
may authorize, without stockholder approval, the issuance of preferred stock
with voting and conversion rights that could adversely affect the voting power
and other rights of holders of common stock or Class A stock. Preferred stock
could be issued quickly with terms designated to delay or prevent a change in
our control or to make the removal of management more difficult. This could
have the effect of decreasing the market price of the common stock. In May
1999, we sold 3,140,000 shares of Series A convertible preferred stock pursuant
to Series A Subscription Agreements. All shares of the Series A convertible
preferred stock will automatically convert into 9,420,000 shares of our Class A
stock at the closing of this offering.

We believe that the ability of the board to issue one or more series of
preferred stock will provide us with flexibility in structuring possible future
financings and acquisitions, and in meeting other corporate needs that might
arise. The authorized shares of preferred stock, as well as shares of common
stock, will be available for issuance without further action by our
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which our securities may be
listed or traded.

Although the board has no intention at the present time of doing so, it
could issue a series of preferred stock that could, depending on the terms of
such series, impede the completion of a merger, tender offer or other takeover
attempt. The board will make any determination to issue such shares based on
its judgment as to our best interests and the best interests of our
stockholders. The board could issue preferred stock having terms that could
discourage an acquisition attempt through which an acquirer may be able to
change the composition of the board, including a tender offer or other
transaction that some, or a majority, of our stockholders might believe to be
in their best interests or in which stockholders might receive a premium for
their stock over the then current market price.

Certain Anti-Takeover Effects. Certain provisions of the certificate of
incorporation and bylaws, summarized in the following paragraphs, may be
considered to have an anti-takeover effect and may delay, deter or prevent a
tender offer, proxy contest or other takeover attempt that a stockholder might
consider to be in such stockholder's best interest, including such an attempt
that might result in payment of a premium over the market price for shares held
by stockholders.

The certificate of incorporation and bylaws provide for the board of
directors to be divided into three classes of directors serving staggered
three-year terms upon the consummation of this offering. As a result,
approximately one-third of the board of directors will be elected each year.
Classification of the board of directors expands the time required to change
the composition of a majority of directors and may tend to

63
<PAGE>

discourage a proxy contest or other takeover bid for us. Moreover, under the
Delaware General Corporation Law, in the case of a corporation having a
classified board of directors, the stockholders may remove a director only for
cause.

The certificate of incorporation provides that a special meeting of
stockholders may be called by any of the following:

. the chairman of our board;

. our president;

. any of our vice presidents; or

. our secretary.

In addition, a special meeting of stockholders may be called by any such
officer at the written request of a majority of the board of directors or at
the written request of stockholders owning a majority of our capital stock
issued and outstanding and entitled to vote.

Section 203 of the Delaware General Corporation Law provides that, subject
to certain exceptions specified therein, an "interested stockholder" of a
Delaware corporation shall not engage in any business combinations, including
mergers or consolidations or acquisitions of additional shares of the
corporation, with the corporation for a three-year period following the date
that such stockholder becomes an interested stockholder unless:

. prior to such date, the board of directors of the corporation
approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder;

. upon consummation of the transaction that resulted in the
stockholder becoming an "interested stockholder," the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced
(excluding certain shares); or

. on or subsequent to such date, the business combination is approved
by the board of directors of the corporation and authorized at an
annual or special meeting of stockholders by the affirmative vote of
at least 66.67% of the outstanding voting stock that is not owned by
the interested stockholder.

Except as otherwise specified in Section 203 of the Delaware General
Corporation Law, an interested stockholder is defined to include (x) any person
that owns (or, within the prior three years, did own) 15% or more of the
outstanding voting stock of the corporation, or is an affiliate or associate of
the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within three years immediately prior to
the date of determination and (y) the affiliates and associates of any such
person.

Under certain circumstances, Section 203 of the Delaware General Corporation
Law makes it more difficult for a person who would be an interested stockholder
to effect various business combinations with a corporation for a three-year
period. We have not elected to be exempt from the restrictions imposed under
Section 203 of the Delaware General Corporation Law. However, IDT and its
affiliates are excluded from the definition of "interested stockholder"
pursuant to the terms of Section 203 of the Delaware General Corporation Law.
The provisions of Section 203 of the Delaware General Corporation Law may
encourage persons interested in acquiring us to negotiate in advance with the
board, since the stockholder approval requirement would be avoided if a
majority of the directors then in office approves either the business
combination or the transaction which results in any such person becoming an
interested stockholder. Such provisions also may have the effect of preventing
changes in our management. It is possible that such provisions could make it
more difficult to accomplish transactions that our stockholders may otherwise
deem to be in their best interests.

64
<PAGE>

Liability of Directors; Indemnification

The certificate of incorporation contains a provision that is designed to
limit directors' liability to the extent permitted by the Delaware General
Corporation Law. Specifically, directors will not be held liable
to us or our stockholders for monetary damages for any breach of fiduciary duty
as a director, except for liability as a result of:

. any breach of the duty of loyalty to us or our stockholders;

. actions or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

. payment of an improper dividend or improper repurchase of our stock
under Section 174 of the Delaware General Corporation Law; or

. actions or omissions pursuant to which the director received an
improper personal benefit.

The principal effect of the limitation of liability provision is that a
stockholder is unable to prosecute an action for monetary damages against a
director of ours unless the stockholder can demonstrate one of the specified
bases for liability. The provision, however, does not eliminate or limit
director liability arising in connection with causes of action brought under
the federal securities laws. The certificate of incorporation does not
eliminate a director's duty of care. The inclusion of this provision in the
certificate of incorporation may discourage or deter stockholders or management
from bringing a lawsuit against directors for a breach of their fiduciary
duties, even though such an action, if successful, might otherwise have
benefited us and our stockholders. This provision should not affect the
availability of equitable remedies such as injunction or rescission based upon
a director's breach of the duty of care.

The bylaws also provide that we will indemnify our directors and officers,
and may indemnify any of our employees and agents, to the fullest extent
permitted by Delaware law. We are generally required to indemnify our directors
and officers for all judgments, fines, penalties, settlements, legal fees and
other expenses incurred in connection with pending, threatened or completed
legal proceedings because of the director's or officer's position with us or
another entity that the director or officer serves at our request, subject to
certain conditions, and to advance funds to its directors and officers to
enable them to defend against such proceedings.

At present, there is no pending or threatened litigation or proceeding
involving any director or officer, employee or agent of ours where such
indemnification will be required or permitted.

Transfer Agent and Registrar

American Stock Transfer & Trust Company will be the transfer agent and
registrar for the common stock.

SHARES ELIGIBLE FOR FUTURE SALE

Of the 10,485,429 shares of common stock and 36,612,190 shares of Class A
stock to be outstanding on the closing of the offering (11,311,629 shares of
common stock if the underwriters exercise their over-allotment option in full),
the 5,100,000 shares of common stock sold in the offering (5,865,000 shares if
the underwriters exercise their over-allotment option in full) will be freely
tradable without restriction under the Securities Act of 1933, except for any
such shares which may be acquired by an affiliate of ours, as that term is
defined in Rule 144 promulgated under the Securities Act of 1933. On the
closing of the offering, IDT will own 27,192,190 shares of Class A stock, which
will constitute approximately 57.7% of our outstanding capital stock
(approximately 56.7% if the underwriters exercise their over-allotment option
in full).

65
<PAGE>

Persons who are affiliates of ours will be permitted to sell the shares of
common stock that are issued in the offering only pursuant to an effective
registration statement under the Securities Act of 1933 or an exemption from
the registration requirements of the Securities Act of 1933, including
exemptions provided by Rule 144 of the Securities Act of 1933.

Upon closing of this offering, we intend to file a registration statement
for the resale of the shares of common stock that are authorized for issuance
under our stock option plan. We expect this registration statement to become
effective immediately upon filing. Shares issued pursuant to our stock option
plan after the effective date of this registration statement (other than shares
issued to our affiliates) generally will be freely tradable without restriction
or further registration under the Securities Act of 1933. As of the date of
this prospectus, options to purchase 5,960,000 shares of common stock under our
stock option plan have been granted, of which 1,375,218 have been exercised. We
expect to grant options to purchase approximately 2,111,000 additional shares
prior to the closing of this offering, including options to purchase 10,000
shares of our common stock that we will grant to each of our eligible non-
employee directors. The exercise price of these options will be equal to the
initial public offering price of the common stock. See "Management--1999 Stock
Incentive Plan."

The shares of capital stock held by IDT are deemed "restricted securities"
as defined in Rule 144 of the Securities Act of 1933, and may not be sold other
than through registration under the Securities Act of 1933 or pursuant to an
exemption from the regulations thereunder, including exceptions provided by
Rule 144 of the Securities Act of 1933. Subject to applicable law and to the
contractual restriction with the underwriters described below, IDT may sell any
and all of the shares of capital stock it owns after completion of the
offering. We, along with each of our security-holders, our directors and
executive officers, IDT and the Series A investors have agreed, for a period of
180 days after the date of this prospectus, not to offer or sell any shares of
Class A stock or common stock, subject to limited exceptions, without the prior
written consent of Hambrecht & Quist LLC. IDT's shares of our capital stock are
pledged as collateral to secure a credit facility. If IDT defaults in its
obligations under the pledge agreement, then a third party could acquire the
pledged stock and would not be subject to these agreements. See "Underwriting."

Upon closing of this offering, the holders of 9,420,000 shares of our Class
A stock, or their transferees, will be entitled to request that we register
their shares under the Securities Act. See "Certain Transactions--Relationship
with Other Investors--Registration Rights Agreement."

66
<PAGE>

UNDERWRITING

Hambrecht & Quist LLC, BT Alex. Brown Incorporated and Bear, Stearns & Co.
Inc. are the representatives of the underwriters. Hambrecht & Quist LLC and BT
Alex. Brown Incorporated are acting as joint book-running managers and Bear,
Stearns & Co. Inc. is acting as co-manager. Subject to the terms and conditions
of the Underwriting Agreement, the underwriters named below, through their
representatives, have severally agreed to purchase from Net2Phone the following
respective number of shares of common stock:

<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Hambrecht & Quist LLC...................
BT Alex. Brown Incorporated.............
Bear, Stearns & Co. Inc.................

---------
Total................................... 5,100,000
=========
</TABLE>

The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in our business and the receipt of certain
certificates, opinions and letters from us, our counsel and the independent
auditors. The underwriters are committed to purchase all of the shares of
common stock offered by us if they purchase any shares.

The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters. Such amounts are shown assuming
both no exercise and full exercise of the underwriters' over-allotment option
to purchase additional shares.

Underwriting Discounts and Commissions

<TABLE>
<CAPTION>
With Without
Over-Allotment Over-Allotment
Exercise Exercise
-------------- --------------
<S> <C> <C>
Per Share................................... $ $
Total....................................... $ $
</TABLE>

We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $2.0 million.

The underwriters propose to offer the shares of common stock directly to the
public at the initial public offering price set forth on the cover page of this
prospectus and to certain dealers at that price less a concession not in excess
of $ per share. The underwriters may allow and such dealers may reallow a
concession not in excess of $ per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the underwriters.

We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to 765,000 additional
shares of common stock at the initial public offering price, less the
underwriting discount set forth on the cover page of this prospectus. To the
extent that the underwriters exercise this option, each of the underwriters
will have a firm commitment to purchase approximately the same percentage
thereof which the number of shares of common stock to be purchased by it shown
in the above table bears to the total number of shares of common stock offered
hereby. We will be obligated, pursuant to the option, to sell shares to the
underwriters to the extent the option is exercised. The underwriters may
exercise this option only to cover over-allotments made in connection with the
sale of shares of common stock offered by us.

67
<PAGE>

The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
the underwriters may be required to make in respect of these liabilities.

All of our security-holders, including the Series A investors, IDT, and our
executive officers and directors have agreed that they will not, without the
prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise
dispose of any shares of capital stock, options or warrants to acquire shares
of capital stock or securities exchangeable for or convertible into shares of
capital stock owned by them for a period of 180 days following the date of this
prospectus. We have agreed that we will not, without the prior written consent
of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any shares of
capital stock, options or warrants to acquire shares of capital stock or
securities exchangeable for or convertible into shares of capital stock for a
period of 180 days following the date of this prospectus, except that we may
issue shares upon the exercise of options and warrants granted prior to the
date hereof, and may grant additional options under our stock option plans.
Without the prior written consent of Hambrecht & Quist LLC, any additional
options granted shall not be exercisable during this 180-day period.

Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the common stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase, for the purpose of pegging,
fixing or maintaining the price of the common stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created
in connection with the offering. A penalty bid means an arrangement that
permits the underwriters to reclaim a selling concession from a syndicate
member in connection with the offering when shares of common stock sold by the
syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq National Market, in the over-the-
counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.

Prior to this offering, there has been no public market for our common
stock. The initial public offering price for the common stock will be
determined by negotiations among us and the representatives. Among the factors
to be considered in determining the initial public offering price will be
prevailing market and economic conditions, our revenue and earnings, market
valuations of other companies engaged in activities similar to our business
operations and our management. The estimated initial public offering price
range set forth on the cover of this preliminary prospectus is subject to
change as a result of market conditions or other factors.

At our request, the underwriters have reserved at the initial public
offering price the number of shares of common stock that may be purchased for
$7.5 million for sale to America Online, the number of shares of common stock
that may be purchased for $3.0 million for sale to NBC and the number of shares
of common stock that may be purchased for $2.0 million to GE Capital. Based
upon the low end of the estimated range on the front cover of this prospectus,
America Online may therefore purchase in the offering up to 750,000 shares of
our common stock, NBC may purchase up to 300,000 shares of our common stock and
GE Capital may purchase up to 200,000 shares of our common stock. America
Online, NBC and GE Capital have each expressed an interest in purchasing these
shares, which will be subject to a lock-up agreement that each company has
entered into with the underwriters, under which it has agreed not to sell
shares for 180 days after the date of this prospectus. There can be no
assurance that any of the reserved shares will be purchased. The number of
shares available for sale to the general public in this offering will be
reduced by the number of reserved shares sold. Any reserved shares not so
purchased will be offered to the general public on the same basis as the other
shares offered hereby.

68
<PAGE>

In addition, at our request, the underwriters have reserved up to 240,000
shares of common stock for sale at the initial public offering price to our
directors, officers, employees, business associates and related persons. The
number of shares of common stock available for sale to the general public will
be reduced if such persons purchase the reserved shares. Any reserved shares
which are not so purchased will be offered by the underwriters to the general
public on the same basis as the other shares offered hereby.

In connection with this offering, certain underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in our common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended. In general, a passive market maker
must display its bid at a price not in excess of the highest independent bid of
such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded.

Hambrecht & Quist LLC and persons associated with Hambrecht & Quist LLC
beneficially own 20,000 shares of Series A convertible preferred stock and
warrants to purchase 92,400 shares of common stock at an exercise price of
$3.33 per share, which warrants expire upon the closing of this offering.
Additionally, Access Technology Partners, L.P., a fund of outside investors
that is managed by a subsidiary of Hambrecht & Quist California, owns 80,000
shares of Series A convertible preferred stock.

BT Alex. Brown Incorporated and persons associated with BT Alex. Brown
Incorporated own 37,500 shares of Series A convertible preferred stock.
Additionally, Stephen A. Oxman, one of our directors and a managing director at
Deutsche Bank Securities Inc., an affiliate of BT Alex. Brown Incorporated,
owns 2,500 shares of Series A convertible preferred stock, and will be granted
options to purchase 10,000 shares of common stock upon the closing of this
offering which will have an exercise price equal to the initial public offering
price.

Denis Bovin, Vice Chairman-Investment Banking of Bear, Stearns & Co. Inc.,
owns options to purchase 75,000 shares of common stock at an exercise price of
$3.33 per share, which expire in May 2009. Addition- ally, Mr. Bovin will
receive options to purchase 50,000 shares of common stock at the offering price
upon the consummation of this offering.

Prior to the closing of this offering, each of Hambrecht & Quist LLC and
persons associated with it, BT Alex. Brown Incorporated and persons associated
with it, Denis Bovin and Stephen A. Oxman will enter into written agreements
with Net2Phone, whereby each of them will agree, for a period of one year from
the date of this prospectus, not to sell or otherwise transfer any shares of
capital stock, or options or warrants to purchase common stock, owned by them
that are deemed to be underwriting compensation.

Hambrecht & Quist LLC and BT Alex. Brown Incorporated have provided
financial advisory services to Net2Phone and IDT in the past and have received
compensation at market rates for these services.

69
<PAGE>

LEGAL MATTERS

Certain legal matters with respect to the validity of the common stock
offered hereby will be passed upon for us by Morrison & Foerster LLP, New York,
New York. Ira A. Greenstein, our General Counsel and Secretary, is a partner of
Morrison & Foerster LLP. Certain legal matters relating to this offering will
be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, New
York, New York.

EXPERTS

The financial statements of Net2Phone, Inc. and, for the periods prior to
its incorporation, the Net2Phone division of IDT Corporation, July 31, 1997 and
July 31, 1998 and for the period from January 2, 1996 (date of inception) to
July 31, 1996 and the years ended July 31, 1997 and 1998, appearing in this
prospectus and registration statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933 with respect to the
common stock offered hereby. This prospectus does not contain all of the
information set forth in the registration statement, certain portions of which
are omitted as permitted by the rules and regulations of the Securities and
Exchange Commission. For further information pertaining to us and the common
stock to be sold in this offering, reference is made to the registration
statement, including the exhibits thereto and the financial statements, notes
and schedules filed as a part thereof. Statements contained in this prospectus
regarding the contents of any contract or other document referred to herein or
therein are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
registration statement or such other document, each such statement being
qualified in all respects by such reference.

On the closing of the offering, we will be subject to the informational
requirements of the Securities Exchange Act of 1934 and will file reports,
proxy statements and other information with the Securities and Exchange
Commission. Such reports, proxy statements and other information, as well as
the registration statement and the exhibits and schedules thereto, may be
inspected, without charge, at the public reference facility maintained by the
Securities and Exchange Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, NW, Washington, D.C. 20549, and at the Securities and Exchange
Commission's regional offices located at Seven World Trade Center, New York,
New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material may also be obtained
from the Public Reference Section of the Securities and Exchange Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such
materials can also be inspected on the Securities and Exchange Commission's Web
site at www.sec.gov.

70
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................ F-2
Balance Sheets as of July 31, 1997 and 1998 and April 30, 1999
(Unaudited).............................................................. F-3
Statements of Operations for the period from January 2, 1996 (date of
inception) to July 31, 1996 and the years ended July 31, 1997 and 1998
and the nine months ended April 30, 1998 and 1999 (Unaudited)............ F-4
Statements of Stockholders' Deficit for the period from January 2, 1996
(date of inception) to July 31, 1996 and the years ended July 31, 1997
and 1998 and the nine months ended April 30, 1999 (Unaudited)............ F-5
Statements of Cash Flows for the period from January 2, 1996 (date of
inception) to July 31, 1996 and the years ended July 31, 1997 and 1998
and the nine months ended April 30, 1998 and 1999 (Unaudited)............ F-6
Notes to Financial Statements............................................. F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Net2Phone, Inc.

We have audited the accompanying balance sheets of Net2Phone, Inc. and, for
the periods prior to its incorporation, the Net2Phone division of IDT
Corporation (the "Company") as of July 31, 1997 and 1998, and the related
statements of operations, stockholders' deficit and cash flows for the period
from January 2, 1996 (date of inception) to July 31, 1996 and the years ended
July 31, 1997 and 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at July 31,
1997 and 1998 and the results of its operations and its cash flows for the
period from January 2, 1996 (date of inception) to July 31, 1996 and the years
ended July 31, 1997 and 1998, in conformity with generally accepted accounting
principles.

Ernst & Young LLP

New York, New York
May 11, 1999, except for Note 9,
the date of which is June 25, 1999

F-2
<PAGE>

Net2Phone, Inc.

BALANCE SHEETS

<TABLE>
<CAPTION>
July 31 April 30
------------------------ -----------
1997 1998 1999
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............. $ -- $ 10,074 $ 1,782,194
Trade accounts receivable, net........ 16,500 1,465,475 329,577
Due from IDT Corporation.............. -- -- 346,176
Prepaid contract deposits............. -- -- 4,000,000
Other current assets.................. -- -- 31,051
----------- ----------- -----------
Total current assets................ 16,500 1,475,549 6,488,998
Property and equipment, net............. 899,525 5,409,061 8,228,218
Trademark, net.......................... -- -- 5,000,000
Other assets............................ -- 90,498 101,112
----------- ----------- -----------
Total assets........................ $ 916,025 $ 6,975,108 $19,818,328
=========== =========== ===========
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable...................... $ -- $ -- $ 248,675
Deferred revenue...................... 161,001 810,114 1,495,775
Due to IDT Corporation................ 2,960,429 11,814,988 22,000,000
----------- ----------- -----------
Total current liabilities........... 3,121,430 12,625,102 23,744,450
Commitments and contingencies
Redeemable convertible preferred
stock, Series A, $.01 par value;
authorized shares--3,150,000; no
shares issued and outstanding........ -- -- --
Stockholders' deficit:
Preferred stock, $.01 par value;
authorized shares--6,850,000; no
shares issued and outstanding........ -- -- --
Common stock, $.01 par value;
authorized shares--200,000,000;
30,960,000 shares issued and
outstanding at July 31, 1998 and
April 30, 1999 (None at July 31,
1997)................................ -- 100,100 309,600
Class A stock, $.01 par value;
authorized shares--37,042,089; no
shares issued and outstanding........ -- -- --
Additional paid-in capital............ -- -- 4,420,338
Accumulated deficit................... (2,205,405) (5,750,094) (8,656,060)
----------- ----------- -----------
Total stockholders' deficit......... (2,205,405) (5,649,994) (3,926,122)
----------- ----------- -----------
Total liabilities and stockholders'
deficit............................ $ 916,025 $ 6,975,108 $19,818,328
=========== =========== ===========
</TABLE>

See accompanying notes.

F-3
<PAGE>

Net2Phone, Inc.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Period from
January 2, 1996
(date of inception) Nine months ended April
to July 31 Year ended July 31 30
------------------- ------------------------- -------------------------
1996 1997 1998 1998 1999
------------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
(Unaudited)
Revenues:
Service revenue....... $ -- $ 2,652,303 $ 10,490,972 $ 6,439,374 $ 21,757,721
Product revenue....... -- -- 1,515,000 1,515,000 445,536
---------- ----------- ------------ ----------- ------------
Total revenue....... -- 2,652,303 12,005,972 7,954,374 22,203,257
Costs and expenses:
Direct cost of
revenue:
Service cost of
revenue*............. -- 1,547,443 6,576,523 3,317,065 11,787,689
Product cost of
revenue*............. -- 6,000 272,236 272,236 60,400
---------- ----------- ------------ ----------- ------------
Total direct cost of
revenue*........... -- 1,553,443 6,848,759 3,589,301 11,848,089
Selling and
marketing............ 34,468 76,724 2,887,766 1,363,060 4,746,316
General and
administrative....... 465,015 2,599,283 5,087,628 3,254,287 7,298,106
Depreciation.......... 8,275 120,500 726,508 421,648 1,216,712
---------- ----------- ------------ ----------- ------------
Total costs and
expenses........... 507,758 4,349,950 15,550,661 8,628,296 25,109,223
---------- ----------- ------------ ----------- ------------
Loss from operations
before provision for
income taxes........... (507,758) (1,697,647) (3,544,689) (673,922) (2,905,966)
Provision for income
taxes.................. -- -- -- -- --
---------- ----------- ------------ ----------- ------------
Net loss................ $ (507,758) $(1,697,647) $ (3,544,689) $ (673,922) $ (2,905,966)
========== =========== ============ =========== ============
Net loss per share--
basic and diluted...... $ (0.02) $ (0.06) $ (0.12) $ (0.02) $ (0.09)
========== =========== ============ =========== ============
Weighted average number
of shares used in
calculation of basic
and diluted net loss
per share.............. 27,864,000 27,864,000 30,186,000 29,928,000 30,960,000
========== =========== ============ =========== ============
</TABLE>

- --------
* Excludes depreciation and amortization

See accompanying notes.

F-4
<PAGE>

Net2Phone, Inc.

STATEMENTS OF STOCKHOLDERS' DEFICIT

Period from January 2, 1996 (date of inception) to July 31, 1996 and the years
ended July 31, 1997 and 1998 and the nine months ended April 30, 1999
(unaudited with respect to the nine months ended April 30, 1999)

<TABLE>
<CAPTION>
Common Stock Additional Total
------------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
---------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net loss for the
period January 2,
1996 (date of
inception) to July
31, 1996............. -- $ -- $ -- $ (507,758) $ (507,758)
---------- -------- ---------- ----------- -----------
Balance at July 31, 1996
....................... -- -- -- (507,758) (507,758)
Net loss for the year
ended July 31, 1997.. -- -- -- (1,697,647) (1,697,647)
---------- -------- ---------- ----------- -----------
Balance at July 31,
1997................... -- -- -- (2,205,405) (2,205,405)
Issuance of Stock to
IDT Corporation...... 27,864,000 100 -- -- 100
Sale of Common Stock
to officer........... 3,096,000 100,000 -- -- 100,000
Net loss for the year
ended
July 31, 1998........ -- -- -- (3,544,689) (3,544,689)
---------- -------- ---------- ----------- -----------
Balance at July 31,
1998................... 30,960,000 100,100 -- (5,750,094) (5,649,994)
Capital contributions
from IDT
Corporation.......... -- 209,500 4,420,338 -- 4,629,838
Net loss for the nine
months ended April
30, 1999............. -- -- -- (2,905,966) (2,905,966)
---------- -------- ---------- ----------- -----------
Balance at April 30,
1999................... 30,960,000 $309,600 $4,420,338 $(8,656,060) $(3,926,122)
========== ======== ========== =========== ===========
</TABLE>

See accompanying notes.

F-5
<PAGE>

Net2Phone, Inc.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Period from
January 2, 1996
(date of Nine months ended
inception) Year ended July 31 April 30
to July 31 ------------------------ -----------------------
1996 1997 1998 1998 1999
--------------- ----------- ----------- ---------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net loss................ $(507,758) $(1,697,647) $(3,544,689) $ (673,922) $(2,905,966)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation........... 8,275 120,500 726,508 421,648 1,216,712
Changes in assets and
liabilities:
Accounts receivable.. -- (16,500) (1,448,975) (555,000) 1,135,898
Due from IDT
Corporation......... -- -- -- -- (346,176)
Prepaid contract
deposits............ -- -- -- -- (4,000,000)
Other current
assets.............. -- -- -- -- (31,051)
Other assets......... -- -- (90,498) (73,323) (10,614)
Accounts Payable..... -- -- -- -- 248,675
Deferred revenue..... -- 161,001 649,113 471,524 685,661
--------- ----------- ----------- ---------- -----------
Net cash used in
operating activities... (499,483) (1,432,646) (3,708,541) (409,073) (4,006,861)
Investing activities
Purchase of trademark... -- -- -- -- (5,000,000)
Purchases of property
and equipment.......... (182,949) (845,351) (5,236,044) (4,230,909) (4,035,869)
--------- ----------- ----------- ---------- -----------
Net cash used in
investing activities... (182,949) (845,351) (5,236,044) (4,230,909) (9,035,869)
Financing activities
Proceeds from issuance
of Common Stock to IDT
Corporation -- -- 100 100 --
Proceeds from issuance
Common Stock to
officer................ -- -- 100,000 -- --
Capital contributions
from IDT Corporation... -- -- -- -- 4,629,838
Net advances from IDT
Corporation............ 682,432 2,277,897 8,854,559 4,639,882 10,185,012
--------- ----------- ----------- ---------- -----------
Net cash provided by
financing activities... 682,432 2,277,987 8,954,659 4,639,982 14,814,850
--------- ----------- ----------- ---------- -----------
Net increase in cash and
cash equivalents....... -- -- 10,074 -- 1,772,120
Cash and cash
equivalents at
beginning of period.... -- -- -- -- 10,074
--------- ----------- ----------- ---------- -----------
Cash and cash
equivalents at end of
period................. $ -- $ -- $ 10,074 $ -- $ 1,782,194
========= =========== =========== ========== ===========
Supplemental disclosure
of cash flow
information:
Cash payments made for
interest............... $ -- $ -- $ -- $ -- $ --
========= =========== =========== ========== ===========
Cash payments made for
income taxes........... $ -- $ -- $ -- $ -- $ --
========= =========== =========== ========== ===========
</TABLE>

See accompanying notes.

F-6
<PAGE>

Net2Phone, Inc.

NOTES TO FINANCIAL STATEMENTS

July 31, 1998 (unaudited with respect to the
nine months ended April 30, 1998 and 1999)

1. Description of Business and Basis of Presentation

The accompanying financial statements reflect the historical financial
information of Net2Phone, Inc. and, for the periods prior to its incorporation,
the Net2Phone division of IDT Corporation (the "Company"), a majority owned
subsidiary of IDT Corporation ("IDT"), incorporated in October 1997, to operate
and develop its Internet telephony business. Prior to such time, the Company's
business was conducted as a division of IDT. The incorporation of Net2Phone
Inc. as a subsidiary of IDT was accounted for similar to a recapitalization.
All earnings per share calculations assume that such shares were outstanding
for all prior periods.

The Company's statements of operations include allocations of certain costs
and expenses from IDT (Note 4). Although such allocations are not necessarily
indicative of the costs that would have been incurred if the Company operated
as an unaffiliated entity, management believes that the allocation methods are
reasonable.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates.

Interim Financial Information

The unaudited interim information as of April 30, 1999 and for the nine
months ended April 30, 1998 and 1999 has been prepared on the same basis as the
annual financial statements and, in the opinion of the Company's management,
contains all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation. Operating results for any interim period are not
necessarily indicative of results to be expected for the entire year.

Revenue Recognition

Internet telephony service revenue is recognized as service is provided.
Revenue derived from equipment sales and from services provided to IDT is
recognized upon installation of the equipment and performance of the services,
respectively. (See Note 4)

Direct Cost of Revenue

Direct cost of revenue consists primarily of telecommunication costs,
connectivity costs, and the cost of equipment sold to customers. Direct cost of
revenue excludes depreciation and amortization.

Property and Equipment

Equipment and furniture and fixtures are recorded at cost and depreciated
using the straight-line method over the estimated useful lives of the assets of
five years.

Computer software is amortized using the straight-line method over the
shorter of five years or the term of the related agreement.

F-7
<PAGE>

Net2Phone, Inc.

NOTES TO FINANCIAL STATEMENTS--(Continued)

July 31, 1998 (unaudited with respect to the
nine months ended April 30, 1998 and 1999)

2. Summary of Significant Accounting Policies (continued)

Advertising Costs

The Company expenses the costs of advertising as incurred. For the years
ended July 31, 1997 and 1998 and the nine months ended April 30, 1998 and 1999,
advertising expense totaled approximately $6,000, $1,962,000, $888,000, and
$3,165,000, respectively. There was no advertising expense for the period from
January 2, 1996 (date of inception) to July 31, 1996.

Software Development Costs

Costs for the internal development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, at which time any additional
costs would be capitalized. To date, the Company has essentially completed its
software development concurrently with the establishment of technological
feasibility and, accordingly, no such costs have been capitalized to date.
Software development costs are the Company's only research and development
expenditures. For the period from January 2, 1996 (date of inception) to July
31, 1996, software development costs of $340,000 were expensed. No software
development costs were expensed for the years ended July 31, 1997 and 1998 and
the nine months ended April 30, 1998 and 1999.

Capitalized Internal Use Software Costs

In March 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. The SOP, which has been
adopted by the Company requires the capitalization of certain costs incurred in
connection with developing or obtaining internal use software. The Company's
policy prior to the adoption of the SOP was to capitalize substantially all
internal use software costs. These costs consisted of payments made to third
parties and the salaries of employees working on such software development.
Therefore, the adoption of the SOP did not have a material effect on the
Company's financial position or results of operations. At July 31, 1997 and
1998 and April 30, 1999, the Company has capitalized $493,000, $2,198,000 and
$3,598,000, respectively, of internal use software costs as computer software.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash and cash equivalents
are carried at cost which approximates market value.

Trademark

Costs associated with obtaining the right to use trademarks owned by third
parties are capitalized and amortized on a straight-line basis over the two
year term of the agreement.

Income Taxes

The Company accounts for income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities.

Stock Based Compensation

The Company applies the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. The Company accounts for stock options
using APB Opinion No. 25, Accounting for Stock Issued to Employees and related
interpretations. Options issued to non-employees are accounted for in
accordance with SFAS No. 123.

F-8
<PAGE>

Net2Phone, Inc.

NOTES TO FINANCIAL STATEMENTS--(Continued)

July 31, 1998 (unaudited with respect to the
nine months ended April 30, 1998 and 1999)

2. Summary of Significant Accounting Policies (continued)

Earnings (Loss) Per Share

Earnings (loss) per share is calculated in accordance with FASB Statement
No. 128, Earnings per Share. Basic earnings (loss) per share is computed by
dividing the net income (loss) applicable to common shares by the weighted
average of common shares outstanding during the period. Diluted earnings (loss)
per share adjusts basic earnings (loss) per share for the effects of
convertible securities, stock options and other potentially dilutive financial
instruments, only in the periods in which such effect is dilutive. There were
no dilutive securities in any of the periods presented herein.

Current Vulnerability Due to Certain Concentrations

Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash, cash equivalents, and trade
receivables. Concentrations of credit risk with respect to trade receivables
are limited due to the large number of customers comprising the Company's
customer base.

Management regularly monitors the creditworthiness of its domestic and
international customers and believes that it has adequately provided for any
exposure to potential credit losses.

Recently Issued Financial Accounting Standards

SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, was issued in June 1997. The Company will be required to adopt the
new statement for the year ending July 31, 1999. This statement requires use of
the "management approach" model for segment reporting. The management approach
model is based on the way a company's management organizes segments within the
company for making operating decisions and assessing performance. Reportable
segments are based on products and services, geography, legal structure,
management structure, or any other manner in which management disaggregates a
company. The Company intends to adopt this statement in fiscal 1999 and does
not anticipate that the adoption of the statement will have significant impact
on its financial statements.

3. Property and Equipment

Property and equipment consists of the following:

<TABLE>
<CAPTION>
July 31 April 30
--------------------- ----------
1997 1998 1999
--------- ---------- ----------
<S> <C> <C> <C>
Equipment............................... $ 348,625 $3,631,140 $6,094,189
Computer software....................... 679,484 2,595,572 4,118,590
Furniture and fixtures.................. 191 37,632 87,415
--------- ---------- ----------
1,028,300 6,264,344 10,300,194
Accumulated depreciation................ (128,775) (855,283) (2,071,976)
--------- ---------- ----------
Property and equipment, net............. $ 899,525 $5,409,061 $8,228,218
========= ========== ==========
</TABLE>

4. Related Party Transactions

In May 1999, the Company and IDT entered into a separation agreement whereby
the transactions and agreements necessary to govern the relationship between
the two companies necessary to effect their separation were determined. In
accordance with such agreement, it was determined that amounts paid by IDT in
excess of $22 million would be deemed to be capital contributions.

F-9
<PAGE>

Net2Phone, Inc.

NOTES TO FINANCIAL STATEMENTS--(Continued)

July 31, 1998 (unaudited with respect to the
nine months ended April 30, 1998 and 1999)

4. Related Party Transactions (continued)

In May 1999, the Company and IDT entered into an Internet/telecommunications
agreement whereby the Company has agreed to pay IDT up to $110,000 per month
for connectivity, the use of certain computer software and equipment owned or
leased by IDT and to provide a platform for IDT's Internet services for a
monthly per customer charge. In connection with such agreement, IDT has also
granted the Company an indefeasible right, for a period of 20 years, to use a
certain telecommunications network as it is completed and delivered for up to
approximately $6.0 million.

In May 1999, the Company and IDT entered into two one-year services
agreements whereby the Company agreed to pay IDT for certain administrative,
customer support and other services that IDT provides to it at the cost of such
services plus 20%. Also, in conjunction with such agreements, the Company has
agreed to provide IDT with certain support services for the cost of such
services plus 20%. The agreement is effective for a period of two years.

In May 1999, the Company and IDT entered into a joint marketing agreement
whereby the companies have agreed to jointly advertise and market their
products. The agreement continues for a term of one year and is automatically
renewable for an additional one year unless terminated by either party. In
conjunction with such agreement, a commission will be earned by each company
for new customers generated by the other company as a result of such programs.

In May 1999, the Company and IDT entered into an assignment agreement
whereby IDT assigned all of its rights in certain trademarks, patents and
proprietary products and information to the Company. These assets were
contributed at IDT's historical cost which was $0.

The accompanying financial statements for periods prior to the signing of
the aforementioned agreements include charges by IDT to the Company for the
aforementioned services. Such charges were based principally upon the Company's
allocable portion of IDT's costs for such services. The ratios used to allocate
these costs were the Company's total payroll to IDT's total payroll and the
Company's total revenue to IDT's total revenue, depending on the type of
services provided. The allocated costs approximate the amounts that would have
been charged under the inter-company agreements if they had been in effect
during such periods.

For the period from January 2, 1996 (date of inception) to July 31, 1996 and
the years ended July 31, 1997 and 1998 and the nine months ended April 30, 1998
and 1999, all of the Company's operations were financed by IDT.

For the years ended July 31, 1997 and 1998 and the nine months ended April
30, 1998 and 1999, the Company recognized revenue for services provided to IDT
of $297,000, $453,000, $323,000, and $680,000, respectively.

At July 31, 1997 and 1998 and April 30, 1999, the due to IDT balance
represents the net amounts owed to IDT as a result of the aforementioned
agreements and financing. No interest was charged on the Company's advances
from IDT. The average balance owed to IDT during the period from January 2,
1996 (date of inception) to July 31, 1996, the years ended July 31, 1997 and
1998, and the nine months ended April 30, 1999 and 1998 were $341,000,
$1,821,000, $7,388,000, $16,907,000 and $5,280,000, respectively.

F-10
<PAGE>

Net2Phone, Inc.

NOTES TO FINANCIAL STATEMENTS--(Continued)

July 31, 1998 (unaudited with respect to the
nine months ended April 30, 1998 and 1999)

4. Related Party Transactions (continued)

The activity in the intercompany account with IDT was as follows:

<TABLE>
<CAPTION>
Period from Nine months
January 2, 1996 Year Ended July 31 ended
(date of inception) ----------------------- April 30,
to July 31, 1996 1997 1998 1999
------------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Opening balance......... $ -- $ 682,432 $ 2,960,429 $11,814,988
Expenses paid by IDT on
behalf of the Company,
net of cash received... 315,565 1,225,771 6,955,525 7,234,992
Net charges to the
Company for services
provided by IDT........ 366,867 1,349,226 2,351,934 3,420,520
Revenue recognized by
the Company for
services provided to
IDT.................... -- (297,000) (453,000) (680,000)
Capital contribution
from IDT............... -- -- 100 209,500
-------- ---------- ----------- -----------
Ending balance.......... $682,432 $2,960,429 $11,814,988 $22,000,000
======== ========== =========== ===========
</TABLE>

5. Income Taxes

The Company files a consolidated Federal income tax return with IDT and has
entered into a tax sharing agreement with IDT. Pursuant to such tax sharing
agreement, the Company would, while included in the IDT consolidated tax
return, be reimbursed for the use of its tax losses to the extent IDT realizes
a tax reduction from the use of such tax losses. When IDT's ownership interest
in the Company falls below 80%, the Company will no longer be a part of the
IDT consolidated Federal tax group.

Significant components of the Company's deferred tax assets and liabilities
consists of the following:

<TABLE>
<CAPTION>
July 31 April 30
------------------ ---------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......... $ -- $ 314,000 $ 670,000
Deferred tax liabilities:
Depreciation.............................. -- (300,000) (609,000)
-------- --------- ---------
Net deferred tax assets................... -- 14,000 61,000
Valuation allowance....................... -- (14,000) (61,000)
-------- --------- ---------
Total deferred tax assets................. $ -- $ -- $ --
======== ========= =========
</TABLE>

The net deferred tax assets have been fully offset by a valuation allowance
due to the uncertainty of the realization of the assets.

At April 30, 1999, the Company had net operating loss carryforwards for
state income tax purposes of approximately $7.5 million expiring in years
through 2006. These net operating loss carryforwards may be limited to future
taxable earnings of the Company.

<TABLE>
<CAPTION>
Period from Year Ended Nine Months
January 2, 1996 July 31 Ended April 30
(date of inception) -------------------- ------------------
to July 31, 1996 1997 1998 1998 1999
------------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Tax at effective rate... (173,000) (577,000) (1,205,000) (229,000) (988,000)
Benefit used by IDT for
which the Company
received no
compensation........... 173,000 577,000 1,205,000 229,000 988,000
-------- -------- ---------- -------- --------
Tax provision........... -- -- -- -- --
======== ======== ========== ======== ========
</TABLE>

F-11
<PAGE>

Net2Phone, Inc.

NOTES TO FINANCIAL STATEMENTS--(Continued)

July 31, 1998 (unaudited with respect to the
nine months ended April 30, 1998 and 1999)

6. Stockholders' Deficit

In April 1999, the Company amended and restated its Certificate of
Incorporation (the "Amendment"). As a result of the Amendment, the Company
increased its authorized shares of capital stock from 1,500 to 110,000,000, of
which 100,000,000 shares are designated as common stock and 10,000,000 shares
are designated as preferred stock.

Subject to any voting rights which may be provided to future holders of
preferred stock, the holders of common stock have exclusive voting rights on
all matters requiring a vote of the Company and are entitled to one vote per
share of common stock held.

In conjunction with the Amendment, the Company effectuated a 10,320 for one
stock split. The accompanying financial statements give retroactive effect to
the stock split.

7. Commitments

On February 8, 1998, the Company entered into an agreement with an Internet
company to develop a link between its Internet site and that of the Company and
advertise Company products on such site. The agreement is effective for fifteen
months upon the completion of the link and automatically extends for an
additional one year unless terminated by either party. Pursuant to such
agreement, the Company has made payments of $2.85 million through April 30,
1999 for the design, development, installation and implementation of the link
as well as the placement of Company advertisements on the Internet company's
site, of which $750,000 attributable to the establishment of such link was
deferred and is being amortized over the term of the agreement and $2.1 million
attributable to monthly payments for advertising and the maintenance of the
link was expensed monthly as incurred. As of April 30, 1999, the Company was
required to make an additional payment of $150,000 in fiscal 1999 and pay
certain future commissions, as defined, based upon revenue earned and usage of
the link.

On August 4, 1998, the Company entered into an agreement with an Internet
company to advertise Company products on its Internet site. The agreement is
effective as of October 1, 1998, the launch date of the link, and extends
indefinitely until the Internet company fully provides all advertising
impressions guaranteed under the agreement. Pursuant to such agreement, the
Company has made payments of $495,000 through April 30, 1999 for the Company
advertisements on such site. As of April 30, 1999, the Company is required to
make additional payments of $213,000 in fiscal 1999, $975,000 in fiscal 2000,
and $167,000 in fiscal 2001 and pay certain future commissions, as defined,
based upon revenue earned and usage of the link. Advertising expense is
recorded as payments are made, over two years, which the Company believes is
the period over which the guaranteed advertising impressions will be provided.

On February 19, 1999, the Company entered into an agreement under which an
international computer company is to provide connections to its global network.
These connections will allow worldwide transport of the Company's IP traffic.
The agreement is effective for 63 months upon availability of the connections.
Pursuant to such agreement, the Company has made payments of $1 million through
April 30, 1999 which have been reflected on the consolidated balance sheets as
prepaid contract deposits. As of April 30, 1999, the Company is required to
make an additional payment of $1 million when the connections are available and
pay fees for additional connections and usage. The $2 million of prepayments
will be amortized over the term of the agreement beginning at the time the
connections are available for use.

F-12
<PAGE>

Net2Phone, Inc.

NOTES TO FINANCIAL STATEMENTS--(Continued)

July 31, 1998 (unaudited with respect to the
nine months ended April 30, 1998 and 1999)

7. Commitments (continued)

On January 31, 1999, the Company entered into a series of agreements with a
third party. The agreements call for the bundling of the Company's Internet
telephony products with the third party's Internet browser, the purchase of
software from the third party and the use of the third party's trademark. The
agreements require the Company to pay the third party (i) $5,000,000 for the
use of the trademark (ii) $8,000,000 for the purchase of software and (iii)
commissions on revenues generated from customers that the Company obtains from
the bundling of products. Through April 30, 1999, the Company had paid $5
million for the right to use the trademark and $3 million for certain software.
The Company has capitalized the costs of the right to use the trademark and the
software costs and will amortize them over the term of the bundling agreement,
which expires two years after the release of the bundled product.

The Company has distribution agreements under which it has agreed to pay its
agents commissions for obtaining new Internet telephony customers. The
agreements require commissions upon activation of the customers.

In May 1997, the Company entered into a three year employment agreement with
one of its officers. Under the terms of such agreement, which was amended in
May 1999, the Company agreed to, among other things, provide such officer with
an annual salary of $100,000 and the right to purchase a 10% interest in the
Company for $100,000, which was the fair market value of the Company at that
time. Such right, which includes an anti-dilutive provision mandating that the
officer's ownership interest cannot be diluted below 8% of the total
outstanding shares upon consummation of an initial public offering of the
Company's common stock, was exercised during fiscal 1998. The agreement is
automatically renewable on an annual basis after its initial three year term
unless terminated by either party.

8. Customer and Geographical Area

Revenue from customers outside the United States represented approximately
44%, 72%, 63%, and 58% of total revenue during the years ended July 31, 1997
and 1998 and the nine months ended April 30, 1998 and 1999, respectively.
During the year ended July 31, 1998 and the nine months ended April 30, 1998,
revenues derived from equipment sales to a customer in Korea represented
approximately 14% and 19%, respectively, of total revenue. No single geographic
area accounted for more than 10% of total revenue during the year ended July
31, 1997 and the nine months ended April 30, 1999. No customer accounted for
more than 10% of revenue during the year ended July 31, 1997 and the nine
months ended April 30, 1999.

9. Subsequent Events

On June 25, 1999, the Company effectuated a three-for-one stock split. The
financial statements give retroactive effect to the stock split. In addition,
the Company designated 15,000,000 shares of its capital stock as Class A stock.
The holders of Class A stock are identical to those of common stock except for
voting and conversion rights and restrictions on transferability. The Class A
stock is entitled to two votes per share.

In March 1999, the Company entered into two lease agreements with companies
which are owned by the Chairman, Chief Executive Officer and Treasurer of IDT.
Pursuant to such lease agreements, the Company is required to make equal
monthly rental payments aggregating $558,000 to such companies through February
2002.

F-13
<PAGE>

Net2Phone, Inc.

NOTES TO FINANCIAL STATEMENTS--(Continued)

July 31, 1998 (unaudited with respect to the
nine months ended April 30, 1998 and 1999)

9. Subsequent Events (continued)

On May 12, 1999, the Company converted a portion of its liability to IDT
into a $14,000,000 promissory note. Such promissory note accrues interest at a
rate of 9% per annum and is payable in 60 equal monthly installments of
principal and interest. Notwithstanding the foregoing, $7,000,000 in principal
will be repaid within 10 days of the consummation of a proposed initial public
offering of the Company's common stock.

On May 13, 1999, the Company designated 3,150,000 shares of its preferred
stock as Series A ("Series A Stock") and sold 3,140,000 of such shares to
unrelated third parties in a private placement transaction for aggregate gross
proceeds of $31,400,000.

The Series A Stock entitles its holders to a non-cumulative dividend of 8%
per annum on the original issue price. Each share of Series A Stock is
convertible into three shares of Class A stock at the option of the holder,
subject to certain adjustments as, defined. Each share of Series A stock also
entitles its holders to vote on corporate matters on an as if converted basis.
Holders of Series A Stock have priority over common stock and Class A stock
with respect to the payment of dividends and in the event of the liquidation or
dissolution of the Company.

The liquidation preference of the Series A Stock is equivalent to the
original issue price plus an amount equal to 8% of the original issue price
compounded on an annual basis from the date of issuance plus any declared, but
unpaid dividends.

In connection with the sale of Series A Stock, the Company granted warrants
to purchase 272,400 shares of common stock at an exercise price of $3.33 per
share, subject to certain adjustments as defined, from the date of issuance
through May 13, 2004 to the Series A Stock investors and placement agent. The
warrants contain a provision whereby they are automatically terminated upon a
merger or sale of the Company or an initial public offering of the Company's
stock. As a result, the warrants are expected to be exercised prior to the
proposed initial public offering of the Company's common stock.

In April 1999, the Company adopted a stock option and incentive plan (the
"Plan"). Pursuant to the Plan, the Company's officers, employees and non-
employee directors, as well as those of IDT, are eligible to receive awards of
incentive and non-qualified stock options, stock appreciation rights, limited
stock appreciation rights and restricted stock.

In May 1999, a total of 5,040,000 shares of common stock were authorized for
issuance under the plan to employees of the Company and to employees and
consultants of IDT, all of which were granted with an exercise price of $3.33
per share and 1,345,219 of which were exercised through June 25, 1999. The
options generally vest over periods up to four years and expire ten years from
the date of grant. In connection with the exercise of such options, the Company
extended $3,150,000 in loans to employees. In order to obtain such loans, the
optionees agreed to the cancellation of 23,382 outstanding options.
Compensation expense in connection with the options to purchase 3,718,503
shares of common stock issued to employees of the Company will be computed in
accordance with APB 25. The expense will be computed as the difference between
the exercise price of $3.33 per share and the fair market value of the stock on
the date of grant ($11 per share). The deferred compensation expense of
approximately $28.5 million will be amortized over the vesting period of the
options. Compensation expense in connection with the options to purchase
1,321,497 shares of common stock issued to employees and consultants of IDT
will be computed in accordance with

F-14
<PAGE>

Net2Phone, Inc.

NOTES TO FINANCIAL STATEMENTS--(Concluded)

July 31, 1998 (unaudited with respect to the
nine months ended April 30, 1998 and 1999)

9. Subsequent Events (continued)

FAS 123. The expense will be computed using the Black Scholes model with the
fair market value of the common stock on date of grant equal to $11.00 per
share. The deferred compensation expense of approximately $12.4 million will be
amortized over the vesting period of the options. Compensation expense from
both the options issued to the Company's employees and employees and
consultants to IDT will be charged to expense over the vesting period: fiscal
1999, $14.8 million; fiscal 2000, $9.8 million; fiscal 2001, $9.8 million; and
fiscal 2002, $6.5 million. On June 25, 1999, the shares authorized for issuance
under the plan was increased by 6,000,000 shares.

The Company entered into an agreement with Snap, an Internet postal service
of NBC and CNET, on May 17, 1999. Snap will display links to the Company's Web
site and services on its Snap.com Web site. In addition, the Company is Snap's
preferred provider of PC-to-phone services during the two-year term of this
agreement. Snap also will deliver a preset minimum number of impressions on its
site and agreed to give the Company the right to advertise on its Snap.com Web
site, subject to certain conditions. In exchange, the Company agreed to pay
Snap a one-time fee, a percentage of revenue generated through their site and
bonus payments for customers delivered by Snap after meeting certain quotas.
The Company will amortize the up front payment over the term of the agreement.

The Company signed an agreement with NBC on June 25, 1999 to purchase $1.5
million in television advertising on the NBC television network. The Company
also has the right to purchase additional spots to be telecast prior to June
30, 2000. The cost of the advertising will be expensed as the spots are shown.

On July 2, 1999, the Company signed a three-year employment agreement with
its new President. After the initial term, the agreement may be renewed
annually. The Company will pay its President an annual base salary of $350,000
and he is entitled to receive an annual bonus calculated on the basis of the
Company's gross revenue, which bonus could be up to $100,000. The Company
granted its President options to purchase 920,000 shares of its common stock
under its 1999 Stock Option and Incentive Plan. Of these options, 460,000 were
granted at an exercise price of $3.33 per share, 153,333 of which are vested
and exercisable. The options to purchase the remaining 460,000 shares were
granted at the lower of the initial public offering price or $11.00 per share.
Other than those options which are vested, the remaining 766,667 options will
vest in three equal annual installments, commencing on July 20, 2000. The
Company will record compensation in connection with the issuance of options
with an exercise price less than the fair market value of the stock.

On July 15, 1999, the Company entered into a four-year distribution and
marketing agreement with ICQ, a subsidiary of America Online. Under this
agreement, ICQ has agreed to co-brand and promote the Company's Internet
telephony services in the U.S. and in 19 other countries, embed customized
versions of the Company's software to allow ICQ customers to make PC-to-phone
and PC-to-PC calls and to receive phone-to-PC calls, share revenue from
advertisements and sponsorships sold by ICQ on the Company's software that is
embedded in ICQ's Instant Messenger software, and promote the Company's
services on some of ICQ's Web sites. The Company agreed to pay ICQ a fee of
$7.5 million, $4.0 million of which was paid at signing, and the remainder of
which will be paid at the closing of the Company's initial public offering. The
Company also agreed to pay ICQ a share of minutes-based revenue generated
through ICQ and to award ICQ a performance bonus on the basis of the total
revenue derived under the agreement, and to promote ICQ on the Company's Web
sites.

F-15
<PAGE>

Net2Phone, Inc.

NOTES TO FINANCIAL STATEMENTS--(Concluded)

July 31, 1998 (unaudited with respect to the
nine months ended April 30, 1998 and 1999)

9. Subsequent Events (continued)

In connection with the Company's distribution and marketing agreement with
ICQ, the Company issued a warrant to America Online to purchase up to 3% of the
Company's outstanding capital stock on a fully-diluted basis. This warrant will
vest in 1% increments upon the achievement of each of three incremental
thresholds of revenue generated under the agreement during the first four years
that the warrant is outstanding. The per share exercise price under the warrant
will be equal to the lesser of 80% of the price per share in the Company's
initial public offering, or $450 million divided by the number of the Company's
fully-diluted shares on the initial exercise date. The warrant may be exercised
for a period of five years from the date of issuance.

F-16
<PAGE>

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

5,100,000 Shares

[NET2PHONE LOGO]

Common Stock

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

PROSPECTUS

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

HAMBRECHT & QUIST

BT ALEX. BROWN

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

BEAR, STEARNS & CO. INC.

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

, 1999

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

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.

No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in that jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are required to inform
themselves about and to observe any restrictions as to this offering and the
distribution of this prospectus applicable to that jurisdiction.

Until , 1999, all dealers that buy, sell or trade in our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

Other expenses in connection with the issuance and distribution of the
securities to be registered hereunder, all of which will be paid by us, will be
substantially as follows (all amounts are estimated except the Securities and
Exchange Commission registration fee, the National Association of Securities
Dealers filing fee and the Nasdaq National Market listing fee):

<TABLE>
<CAPTION>
Item Amount
---- ----------
<S> <C>
Securities and Exchange Commission registration fee........... $ 19,566
NASD filing fee............................................... 7,538
Nasdaq National Market listing fee............................ 5,000
Blue Sky filing fees and expenses............................. 20,000
Accounting fees and expenses.................................. 300,000
Legal fees and expenses....................................... 900,000
Transfer agent fees and expenses.............................. 3,500
Printing and engraving expenses............................... 400,000
Miscellaneous expenses........................................ 344,282
----------
Total....................................................... $2,000,000
==========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Reference is made to Section 145 of the Delaware General Corporation Law,
which provides for indemnification of directors, officers and other employees
in certain circumstances, and to Section 102(b)(7)of the Delaware General
Corporation Law, which provides for the elimination or limitation of the
personal liability for monetary damages of directors under certain
circumstances. Article Sixth of our certificate of incorporation, as amended
and restated, eliminates the personal liability for monetary damages of
directors under certain circumstances. Our bylaws provide indemnification to
our directors and officers to the fullest extent permitted by the Delaware
General Corporation Law for, among other things, liabilities for judgments in
and settlements of lawsuits and other proceedings and for the advance and
payment of fees and expenses reasonably incurred by the director or officer in
defense of any such lawsuit or proceeding.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

In October 1997, in connection with our initial organization, IDT
Corporation purchased 27,864,000 shares of our common stock for nominal
consideration.

In January 1998, pursuant to the terms of his employment agreement with IDT
Corporation, Mr. Clifford M. Sobel purchased 3,096,000 shares of our common
stock for the purchase price of $100,000. This transaction was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended.

In May 1999, we issued and sold an aggregate of 3,140,000 shares of Series A
convertible preferred stock at $10.00 per share, which are convertible into
9,420,000 shares of our common stock, together with warrants to purchase
180,000 shares of our class A stock to several investors for an aggregate of
$31,400,000, pursuant to Series A Subscription Agreements, dated as of May 13,
1999. This transaction was exempt from registration under Section 4(2) of the
Securities Act of 1933.

We also issued a warrant to purchase 92,400 shares of our common stock to
the placement agent as partial consideration for its services. This transaction
was exempt from registration under Section 4(2) of the Securities Act of 1933.

In May 1999, we issued options to purchase 5,040,000 shares pursuant to our
1999 Stock Option and Incentive Plan, and issued approximately 1,345,219 shares
of common stock upon exercise of these options. In July 1999, we issued options
to purchase an additional 920,000 shares under the Plan to our President. These
transactions were exempt from registration under Section 4(2) of the Securities
Act of 1933.

II-1
<PAGE>

In July 1999, in connection with our distribution and marketing agreement
with ICQ we issued a warrant to America Online, enabling it to acquire shares
of common stock representing up to 3% of our outstanding capital on a fully-
diluted basis. This transaction was exempt from registration under Section 4(2)
of the Securities Act of 1933.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Exhibits:

<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1+ Form of Underwriting Agreement.
3.1+ Certificate of Incorporation, as amended.
3.2+ Bylaws.
3.3+ Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant.
3.4 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant.
4.1+ Specimen Common Stock Certificate of the Registrant.
5.1+ Form of Opinion of Morrison & Foerster LLP.
10.1+ Employment Agreement, dated May 1, 1997, by and between Clifford M.
Sobel and IDT Corporation.
10.2+ Amendment to Employment Agreement between IDT Corporation and Clifford
M. Sobel, dated as of May 11, 1999, by and between Clifford M. Sobel,
IDT Corporation and the Registrant.
10.3#+ Bundling and Distribution Services Agreement, dated as of January 31,
1999, by and between Netscape Communications Corporation and the
Registrant.
10.4+ General License Terms & Conditions, dated as of January 31, 1999, by
and between Netscape Communications Corporation and the Registrant.
10.5+ Trademark License Agreement, dated as of January 31, 1999, by and
between Netscape Communications Corporation and the Registrant
Assignment .
10.6+ Internet/Telecommunications Agreement, dated as of May 7, 1999, by and
between IDT Corporation and the Registrant.
10.7+ Joint Marketing Agreement, dated as of May 7, 1999, by and between IDT
Corporation and the Registrant.
10.8+ IDT Services Agreement, dated as of May 7, 1999, by and between IDT
Corporation and the Registrant.
10.9+ Net2Phone Services Agreement, dated as of May 7, 1999, by and between
IDT Corporation and the Registrant.
10.10+ Assignment Agreement, dated as of May 7, 1999, by and between IDT
Corporation and the Registrant.
10.11+ Tax Sharing and Indemnification Agreement, dated as of May 7, 1999, by
and between IDT Corporation and the Registrant.
10.12+ Separation Agreement, dated as of May 7, 1999, by and between IDT
Corporation and the Registrant.
10.13+ Lease Agreement, dated as of March 1, 1999, by and between 171-173
Main Street Corporation and the Registrant.
10.14+ Lease Agreement, dated as of March 1, 1999, by and between 294-298
State Street Corporation and the Registrant.
10.15+ The Registrant's Amended and Restated 1999 Stock Option and Incentive
Plan.
10.16+ Series A Subscription Agreement, dated as of May 13, 1999, by and
between the Investors listed therein and the Registrant.
10.17+ Series A Preferred Shareholder Registration Rights Agreement, dated as
of May 13, 1999, by and between the Investors listed therein and the
Registrant.
10.18+ Form of Warrant to Purchase Common Stock.
10.19+ Promissory Note of Registrant to IDT Corporation, dated as of May 12,
1999.
</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.20+ Stockholders Agreement, dated as of May 13, 1999, by and among the
Investors listed therein, IDT Corporation, Clifford M. Sobel, the
trustee of the Scott Sobel Annual Gift Trust and the Registrant.
10.21+ Letter agreement, dated as of May 12, 1999, by and among IDT
Corporation, Clifford M. Sobel and the Registrant.
10.22+ Letter agreement, dated as of May 17, 1999, by and among IDT
Corporation, Clifford M. Sobel and the Registrant.
10.23+ Co-Location and Facilities Management Services Agreement, dated as of
May 20, 1999, by and between IDT Corporation and the Registrant.
10.24+ Form of Loan Agreement between the Registrant and each of its
executive officers.
10.25+ Form of Stock Option Agreement for Executive Officers.
10.26#+ Letter agreement, dated as of June 25, 1999, by and between National
Broadcasting Company, Inc. and the Registrant.
10.27+ Employment Agreement, dated July 2, 1999, by and between Jonathan Fram
and the Registrant.
10.28# IP Telephony Services Distribution and Interactive Marketing
Agreement, dated as of July 15, 1999, by and between ICQ, Inc. and the
Registrant.
10.29# Stock Subscription Warrant, dated July 15, 1999, by and between
America Online, Inc. and the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2+ Consent of Morrison & Foerster LLP (incorporated by reference into
Exhibit 5.1).
24.1+ Power of Attorney (set forth on the signature page to this
registration statement).
27.1+ Financial Data Schedule.
</TABLE>
- --------

# Confidential treatment has been requested with respect to certain portions of
the Exhibit. Omitted portions will be filed separately with the Securities
and Exchange Commission.
+ Previously filed.

Financial Statements and Schedule:

Financial Statements:

Financial Statements filed as a part of this registration statement are
listed in the Index to Financial Statements of page F-1.

Financial Statement Schedules:

None.

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing of the offering specified in the Underwriting Purchase
Agreement, certificates in such denominations and registered in such names as
required by the underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.

II-3
<PAGE>

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II- 4
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 3 to the registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Hackensack, State of New Jersey, on July 19, 1999.

Net2Phone, Inc.

/s/ Howard S. Balter
By: _________________________________
Howard S. Balter
Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
Name and Signatures Title Date
------------------- ----- ----

<S> <C> <C>
/s/ Clifford M. Sobel Chairman of the Board July 19, 1999
___________________________________________
Clifford M. Sobel*

/s/ Howard S. Balter Chief Executive Officer July 19, 1999
___________________________________________ and Director (Principal
Howard S. Balter Executive Officer)

/s/ Ilan M. Slasky Chief Financial Officer July 19, 1999
___________________________________________ (Chief Accounting
Ilan M. Slasky* Officer)

/s/ James R. Mellor Director July 19, 1999
___________________________________________
James R. Mellor*

/s/ Howard S. Jonas Director July 19, 1999
___________________________________________
Howard S. Jonas*

Director July 19, 1999
___________________________________________
Gary E. Rieschel

/s/ James A. Courter Director July 19, 1999
___________________________________________
James A. Courter*

Director July 19, 1999
___________________________________________
Stephen A. Oxman
</TABLE>

/s/ Howard S. Balter
- ------------------------
*Executed by attorney-in-fact: Howard S. Balter

II-5
<PAGE>

INDEX OF EXHIBITS

<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.21+ Letter agreement, dated as of May 12, 1999, by and among IDT
Corporation, Clifford M. Sobel and the Registrant.
10.22+ Letter agreement, dated as of May 17, 1999, by and among IDT
Corporation, Clifford M. Sobel and the Registrant.
10.23+ Co-Location and Facilities Management Services Agreement, dated as of
May 20, 1999, by and between IDT Corporation and the Registrant.
10.24+ Form of Loan Agreement between the Registrant and each of its
executive officers.
10.25+ Form of Stock Option Agreement for Executive Officers.
10.26#+ Letter agreement, dated as of June 25, 1999, by and between National
Broadcasting Company, Inc. and the Registrant.
10.27+ Employment Agreement, dated July 2, 1999, by and between Jonathan Fram
and the Registrant.
10.28# IP Telephony Services Distribution and Interactive Marketing
Agreement, dated as of July 15, 1999, by and between ICQ, Inc. and the
Registrant.
10.29# Stock Subscription Warrant, dated July 15, 1999, by and between
America Online, Inc. and the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2+ Consent of Morrison & Foerster LLP (incorporated by reference into
Exhibit 5.1).
24.1+ Power of Attorney (set forth on the signature page to this
registration statement).
27.1+ Financial Data Schedule.
</TABLE>
- --------

# Confidential treatment has been requested with respect to certain portions of
the Exhibit. Omitted portions will be filed separately with the Securities
and Exchange Commission.
+ Previously filed.

<PAGE>

EXHIBIT 3.4

CERTIFICATE OF AMENDMENT

TO THE

RESTATED CERTIFICATE OF INCORPORATION

NET2PHONE, INC.

NET2PHONE, INC., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:

1. The name of the corporation is Net2Phone, Inc. (hereinafter the
"Corporation").

2. The Corporation's Certificate of Incorporation was initially filed with
the Secretary of State of the State of Delaware on October 10, 1997 and was
amended and restated on May 14, 1999.

3. The Certificate of Incorporation of the Corporation is hereby amended by
deleting Section (e)(11) of Article Fourth thereof and replacing it with the
following:

(11) Automatic Conversion. Each share of Series A Preferred shall
--------------------
automatically be converted into shares of Class A Stock, based on the then-
effective applicable Conversion Price, immediately upon the closing of a firm
commitment underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, covering the offer and
sale of Common Stock for the account of the Corporation (an "IPO") in which (i)
the valuation of the Corporation on a fully-diluted basis including options
reserved under option plans at the time of such IPO, calculated based on the per
share offering price of the IPO (excluding proceeds from the IPO), is equal to
or greater than $150,000,000, and (ii) the gross cash proceeds to the
Corporation (before underwriting discounts, commissions and fees) from such IPO
are at least $30,000,000 (a "Qualifying Public Offering"). Upon such automatic
conversion, all declared but unpaid dividends, if any, shall be paid in
accordance with Paragraph (e)(12).

[Signature Page follows]
<PAGE>

IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be executed on its behalf this 16th day of July, 1999.

NET2PHONE, INC.

By:/s/ Howard S. Balter
-----------------------------------
Name: Howard S. Balter
Title: Chief Executive Officer

<PAGE>

**** CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED.

EXHIBIT 10.28

IP TELEPHONY SERVICES DISTRIBUTION AND INTERACTIVE MARKETING AGREEMENT
----------------------------------------------------------------------

This IP Telephony Services Distribution and Interactive Marketing Agreement
(this "Agreement"), dated as of July 14, 1999 (the "Effective Date"), is between
ICQ, Inc., a Delaware corporation, with offices at 22000 AOL Way, Dulles,
Virginia 20166 ("ICQ"), and Net2Phone, Inc. ("N2P"), a Delaware corporation,
with offices at 171 Main Street, Hackensack, NJ 07601. ICQ and N2P may be
referred to individually as a "Party" and collectively as the "Parties."

INTRODUCTION
------------

ICQ is a provider of online communication services, including the ICQ
Service, and is a subsidiary of America Online, Inc., a Delaware corporation
("AOL"). N2P is a provider of various IP Telephony services. The Parties wish
for N2P to develop and provide to ICQ a customized version of certain N2P
Services that can be distributed through the ICQ Service so as to enable ICQ
Users to send and receive free, or low cost, Internet-enabled telephony
communications. This relationship is further described below and is subject to
the terms and conditions set forth in this Agreement. Defined terms used but
not defined in the body of the Agreement shall have the meanings ascribed to
such terms in Exhibit A hereto.

TERMS
-----

1. ICQ IP TELEPHONY SERVICES GENERALLY
-----------------------------------

1.1 Description of ICQ IP Telephony Services. The N2P Services to be
----------------------------------------
offered collectively as the customized ICQ IP Telephony Services shall
be comprised of the following:

1.1.1. PC-to-PC Service. A PC-to-PC calling service (the
----------------
"PC-to-PC Service"), which shall allow any ICQ User (through use of
the ICQ IP Telephony Software as distributed through the ICQ Service
in accordance with the terms of this Agreement) to originate a voice
conversation on an Internet enabled PC and to terminate such
conversation on another Internet-enabled PC. The PC-to-PC Service
initially shall be provided to ICQ Users without a per-minute or other
similar charge. The provision of such PC-to-PC Service by N2P shall
not be designed to compromise the ability of any ICQ User to make PC-
to-PC calls through ICQ with other clients (e.g., ****).

1.1.2. PC-to-Phone Service. A PC-to-telephone calling
-------------------
service (the "PC- to-Phone Service"), which shall allow any ICQ User
to originate a voice conversation on an Internet-enabled PC (through
use of the ICQ IP Telephony Software as distributed through the ICQ
Service in accordance with the terms of this Agreement) and terminate
such conversation on a telephone located virtually anywhere in the
world.

1.1.3. Phone-to-PC Service. A telephone-to-PC calling service
-------------------
(the "Phone-to-PC Service"), which shall allow any ICQ User to
originate a voice conversation from a telephone and terminate such
voice conversation on an Internet-enabled PC (through use of the ICQ
IP Telephony Software as distributed through the ICQ Service in
accordance with the terms of this Agreement). Such calls shall be
initiated by any such ICQ User by dialing a local and/or toll-free N2P
access number (i.e., a local POP) and entering any such ICQ User's
account number and PIN, and then the number of the receiving party.
The Phone-to-PC Service generally shall enable telephone conversations
with any ICQ User online even if such ICQ User is also using his or
her only telephone line for online access.

[****] REPRESENTS MATERIAL, WHICH HAS BEEN REDACTED AND SEPARATELY FILED WITH
THE COMMISSION, PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO
RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

<PAGE>

EXECUTION VERSION

1.1.4. Phone-to-Phone Calling Card Service. A
-----------------------------------
telephone-to-telephone calling card service using IP Telephony (the
"PTP Calling Card Service"), which shall allow any ICQ User to call a
third party by dialing a local and/or toll-free N2P access number
(i.e., local POP) and entering the ICQ User's account number and PIN,
and then dialing the phone number of the person whom such ICQ User is
calling. For the avoidance of doubt, the Parties acknowledge that the
PTP Calling Card Service shall include fax-to-fax service.

1.1.5. Conference Calling Service. A conference calling
--------------------------
service (the "Conference Calling Service"), which shall allow
conference calls initiated from a combination of phones and/or
Internet-enabled PCs.

1.1.6. Optional Services. ICQ shall provide N2P with a ****
-----------------
(for a period not to exceed **** with respect to the provision of the
following additional services as additional ICQ IP Telephony Services:
(i) an integrated voice-messaging service, whereby ICQ Users shall be
able to send and receive voice messages online and via telephone; (ii)
a video conference calling service; (iii) a universal messaging
service, whereby ICQ Users shall be able to access voice mails, e-
mails, faxes, etc., in one area of the ICQ Service, with such
messaging capable of being accessed via telephone, the ICQ Client or
the Worldwide Web; and (iv) **** (the **** aforementioned services,
collectively, the "Optional Services" and each, an "Optional
Service"). In the event that the Parties cannot agree, within any such
**** period, to the terms and conditions pursuant to which N2P would
offer any such Optional Service(s) to ICQ Users, then ICQ shall have
the right to enter into an arrangement with any third party
(including, without limitation, any N2P Competitor) regarding the
provision of any such Optional Service(s) to ICQ Users through the ICQ
Service. In addition, the Parties shall, within **** after the
Effective Date, mutually determine whether (i) a PC-to-fax service,
whereby ICQ Users may send faxes from their PCs to a facsimile machine
of a third party, (ii) a fax-to-PC service, whereby ICQ Users may
receive faxes through their PCs from a facsimile machine of a third
party, and/or (iii) a virtual private network (VPN) service shall be
added to this Agreement as additional ICQ IP Telephony Services.
Moreover, ICQ shall provide N2P with a **** (for a period not to
exceed ****) with respect to the offering of any Core Premium Services
in any country other than a Collective International Gateway.

N2P acknowledges, for the avoidance of doubt, that the right to access the
ICQ IP Telephony Services initially shall be free of any member fee or
similar access charge (but excluding per-minute, flat-rate or other usage
charges and Internet service provider access charges) to ICQ Users,
provided that N2P reserves the right to charge any fee or charge for such
--------
services consistent with its obligations under Sections 3.1 and 3.3. In
addition to the foregoing services, N2P shall (i) provide APIs and (ii) to
the extent commercially reasonable (a) provide connection for ICQ to N2P's
local equipment and (b) assist finding space for ICQ and its Affiliates to
locate equipment along with or near N2P's local equipment to enable ICQ and
its partners to link into aspects or features of the ICQ IP Telephony
System to provide related services (e.g., voice messaging); provided,
--------
however, that any such arrangement shall be subject to the mutual agreement
-------
of the Parties as to the reasonable terms and conditions for such
arrangement.

1.2 Performance Each Party shall cause all aspects of the ICQ IP Telephony
-----------
Services within its control, including customer service and billing,
network coverage and performance and fraud detection, to comply in all
material respects with the applicable standards set forth on Exhibits B, C
and D.

2
<PAGE>

EXECUTION VERSION

1.3 Launch Cutoff
-------------

1.3.1 Cutoff Dates. N2P shall cause (i) the PTP Calling Card
------------
Service to be fully prepared for launch on the ICQ Service (A) for
calls originating in the United States, within **** (****) ****
following the Effective Date, (B) for calls originating in the Primary
International Gateways, within **** (****) **** following the
Effective Date, and (C) for calls originating in the Secondary
International Gateways, within **** (****) **** following the
Effective Date; and (ii) each of the Secondary ICQ IP Telephony
Services (including, without limitation, with respect to the
Collective International Gateways) to be fully prepared for launch on
the ICQ Service by the respective cutoff dates therefor set forth on
Exhibit I to this Agreement (each such date in clauses (i) and (ii)
above, a "Cutoff Date," and collectively, the "Cutoff Dates"). If any
Core Premium Service is not fully prepared for launch in a particular
country (whether the United States or a Collective International
Gateway) by the applicable Cutoff Date, ICQ shall have the right to
terminate the exclusivity (as set forth in Section 9 of this
Agreement) with respect to such Core Premium Service in such country
(each such country, a "Non-Exclusive Gateway"), and thereby enter into
an agreement with any third party (including a N2P Competitor) with
respect to such Core Premium Service in such Non-Exclusive Gateway. In
the event that within **** (****) **** following any Cutoff Date (as
to a Core Premium Service), N2P shall not have caused any such Core
Premium Service to be fully prepared for launch in any such Non-
Exclusive Gateway and fails to cause such Core Premium Service to be
fully ready for launch in substitute gateways approved by ICQ (such
approval not to be unreasonably withheld) that would provide a
substantially similar percentage of the ICQ User base access to such
Core Premium Service, then ICQ shall have the right to terminate the
exclusivity (as set forth in Section 9 of this Agreement) with respect
to such Core Premium Service, and thereby to enter into an agreement
with any third party (including, without limitation, any N2P
Competitor) with respect to such Core Premium Service.

1.3.2 ICQ Assistance. To the extent that it shall be reasonably
--------------
necessary for ICQ to undertake any activities within ICQ's reasonable
control (including providing information or materials) reasonably
requested by N2P in order to enable N2P to fulfill its development and
deployment obligations and meet any Cutoff Date, ICQ shall undertake
any such activities in a timely manner.

1.3.3 Excusable Delays. Each applicable Cutoff Date (together
----------------
with any rights of ICQ related thereto, including, without limitation,
any right to terminate this Agreement or any exclusivity hereunder)
shall be deemed extended, subject to the remainder of this Section
1.3.3, to the extent (and only for the duration in which): (i) ICQ
fails to undertake the reasonably requested and reasonably necessary
activities described in Section 1.3.2 with respect to any Core Premium
Service, and N2P has provided ICQ with reasonable informal notice
(e.g., by e-mail message to the ICQ Technical Liaison or through
discussion at the quarterly meetings described in Section 2.8) of such
failure and of its causal effect on N2P's ability to meet any such
Cutoff Date (an "ICQ Delay"); (ii) there is (or is reasonably
expected to be) a U.S. or other regulation which would prevent N2P
from offering a Core Premium Service in the United States or in any
Collective International Gateway (or which such regulation would make
it commercially unreasonable for N2P to offer any such Core Premium
Service (in such country)) (collectively, a "Regulatory Event"); or
(iii) any other Force Majeure Event occurs. The Parties, through the
Management Committee, shall determine in good faith the period by
which the Cutoff Date is to be extended (or any other obligations or
criteria that are to be affected), if at all, by any of the events
described in this Section 1.3.3; provided, however, that, unless
-------- -------
otherwise agreed by the Parties, the extension of any Cutoff Date
resulting from any Regulatory Event or Force Majeure Event shall not
exceed **** (****) **** in the aggregate. In the event that a
Regulatory Event or Force Majeure Event affects N2P Competitors
generally with respect to the provision of the PTP Calling Card
Service, then

3
<PAGE>

EXECUTION VERSION

ICQ shall discuss with N2P in good faith extending the Cutoff Date
beyond such **** (**) *** period. Notwithstanding the foregoing, so
long as any such Regulatory Event or Force Majeure Event prevents N2P
from offering the PTP Calling Card Service to ICQ Users in any
particular Collective International Gateway(s), then N2P's exclusivity
with respect to the PTP Calling Card Service in such Collective
International Gateway(s) shall extend beyond such **** (**) *** period
unless and until a third party is in a position to provide a
comparable phone-to-phone calling card service in such Collective
International Gateway(s) and ICQ enters into an agreement with such
third party for the provision of such phone-to-phone calling card
service to ICQ Users in such Collective International Gateway(s). For
the avoidance of doubt, any extension of a Cutoff Date due to an ICQ
Delay shall be as mutually agreed upon in writing by the Parties.

1.4 Launch Dates. The Parties shall record the date on which each ICQ IP
------------
Telephony Service is launched (each such date, a "Launch Date") in a
written instrument signed by both Parties promptly following any such
Launch Date; provided, however, that in the event that the Parties
-------- -------
cannot agree as to the definitive Launch Date with respect to a
particular ICQ IP Telephony Service, the Parties shall submit such
Dispute to the dispute resolution provisions set forth in Section 17
of this Agreement.

2. DEVELOPMENT OBLIGATIONS
-----------------------

2.1 Initial Version. The initial version of each of the ICQ IP
---------------
Telephony Services shall be developed by N2P, by customizing each of
the existing N2P Services as set forth in Sections 1.1.1 through 1.1.5
to conform to the product specifications set forth in Exhibit B to
this Agreement (collectively, together with such modifications thereto
or any such additional specifications as may be agreed to in writing
by the Parties after the Effective Date, the "Specifications"). As
part of such customization, the N2P Services shall be developed to
function in an integrated manner with the operation of the ICQ Client
to the extent set forth in the Specifications or elsewhere in this
Agreement. To the extent that any material conflict exists between
(i) Exhibit B to this Agreement and (ii) the provisions of the
principal body of this Agreement, the principal body of this Agreement
(i.e., Sections 1 through 18 hereof) shall govern.

2.2 Updates.
-------

2.2.1 Notification of Updates. If, during the Term, N2P
---------------------
develops any Update of any N2P Service that is generally commercially
available to users of the N2P Services, N2P shall, in each such case,
(i) promptly notify ICQ of such Update and (ii) promptly (i.e., in the
shortest commercially reasonable time period) include such Update
(provided that such Update complies with the Specifications or the
---------
terms of this Agreement) in the applicable ICQ IP Telephony Service.

2.2.2 No Notification Required. N2P shall not be
------------------------
obligated to notify ICQ of or to provide to ICQ any modification,
improvement, addition, deletion, feature or functionality of the N2P
Services provided by N2P to another customer if such modification,
improvement, addition, deletion, feature or functionality is subject
to contractual restrictions that would prohibit N2P from providing it
to ICQ hereunder. For the avoidance of doubt, the Parties acknowledge
that N2P shall not be required to notify ICQ of or provide to ICQ any
modification, improvement, addition, deletion, feature or
functionality of any Optional Service, Expanded Service or other IP
Telephony Service (apart from any Core Premium Service) unless the
Parties have agreed to the provision by N2P to ICQ Users of any such
service pursuant to the terms of this Agreement.

4
<PAGE>

EXECUTION VERSION

2.2.3 Disagreement. In the event of any disagreement between
------------
the Parties regarding the provision by N2P of any such Updates to ICQ
(e.g., as to whether any such Update is generally commercially
available, the length of the time period in which any such Update is
to be implemented, etc.), such disagreement shall be submitted to the
Management Committee pursuant to Section 17 of this Agreement.

2.3 Additional ICQ Modifications.
----------------------------

2.3.1 Definition. ICQ may in its discretion, from time
----------
to time during the Initial Term, request that N2P, to the extent
commercially reasonable, (i) add new functionality or features to any
ICQ IP Telephony Service(s), (ii) modify elements related to the ICQ
GUI (but not elements of the ICQ GUI itself), and/or (iii) modify the
ICQ IP Telephony Services in connection with modifications of the ICQ
Client and ICQ Service (which modifications shall be subject to
Section 2.7 and which modifications ICQ estimates will occur at least
twice a year), (each of (i), (ii) and (iii) above, an "Additional ICQ
Modification"). The Parties agree that any features, functionality,
additions, deletions or other modifications necessary to be carried
out by N2P in order for N2P to comply with its obligations under
Section 3 of this Agreement (collectively, the "Necessary
Modifications") shall not constitute Additional ICQ Modifications and
that ICQ shall not be required to pay for any such Necessary
Modifications.

2.3.2 Request for Non-Substantial Modification. In the
----------------------------------------
event that ICQ requests Additional ICQ Modifications that N2P
reasonably believes would not involve (i) a substantial cost or
expense to N2P (i.e., less than **** Dollars
($****) in the aggregate during any Year of this Agreement) or (ii)
a substantial commitment of N2P personnel, N2P shall develop the
Additional ICQ Modifications in cooperation with ICQ on a schedule to
be mutually agreed upon by the Parties. Each Party shall allocate
development resources on a high priority basis to complete such
Additional ICQ Modifications in accordance with such schedule. ICQ
shall pay for the actual, reasonable, fully-allocated cost of
developing any such Additional ICQ Modifications.

2.3.3 Request for Substantial Modification. In the event
------------------------------------
that ICQ requests an Additional ICQ Modification that N2P reasonably
believes would involve a substantial cost or expense to N2P, or a
substantial commitment of N2P personnel, the Parties shall negotiate
in good faith regarding the request for such Additional ICQ
Modification, including, without limitation, the appropriate schedule
for development and deployment, rights to the results of the
development, interoperability requirements, and the relevant business
terms (e.g., amount of any payments for the development, the revenue
model for the features or functions, etc.). If and when the Parties
reach agreement on the terms and conditions for such Additional ICQ
Modification, N2P shall develop the Additional ICQ Modification in
cooperation with ICQ, and each Party shall allocate development
resources on a high priority basis to complete such Additional ICQ
Modification in accordance with such schedule.

2.3.4 Commissioned Works. Notwithstanding the foregoing,
------------------
in the event that the Parties are unable to agree as to the
development or deployment of any Additional ICQ Modification in
accordance with Section 2.3.3, ICQ shall have the right during the
Initial Term to require N2P to assist ICQ in securing a mutually
agreed-upon third party to develop any such Additional ICQ
Modifications for ICQ; provided, however, that either N2P or (at ICQ's
-------- -------
option) ICQ may perform such development. In the event that a third
party is secured to perform such development, N2P will use
commercially reasonable efforts to assist such third party in
performing such development. Any development by any such third parties
shall not be considered the responsibility of N2P, and such third
parties shall not be considered contractors of N2P. To the extent that
portions of such Additional ICQ Modifications (including intellectual
property rights therein) are developed

5
<PAGE>

EXECUTION VERSION

by N2P specifically for ICQ pursuant to this Section 2.3.4, such
portions shall be considered "Commissioned Works," but "Commissioned
Works" shall exclude, any software, modules, routines or subroutines,
documentation or other materials, and any methods, processes,
techniques or inventions, that were (i) developed by or for N2P prior
to such development for ICQ or (ii) developed independently by or for
N2P (i.e., independent of the development carried out for ICQ under
this Section 2.3.4 by N2P). To the extent that (a) N2P develops any
Commissioned Works pursuant to this Section 2.3.4 without requiring
that ICQ pay for such Commissioned Works (in cash or such other
consideration as may be agreed to by the Parties), then N2P shall own
all right, title and interest in and to such Commissioned Works
(provided, however, that in such case, ICQ shall have a fully paid-up,
-------- -------
royalty-free, non-exclusive, non-transferable and worldwide license
for the Term to use, reproduce, directly and indirectly distribute,
transmit, display, perform, sublicense and adapt such Commissioned
Works), (b) ICQ pays (in cash or such other consideration as may be
agreed to by the Parties) for any such Commissioned Works pursuant to
this Section 2.3.4, then ICQ shall own all right, title and interest
in and to such Commissioned Works, and (c) the Parties so agree, the
Parties shall co-own all right, title and interest in and to such
Commissioned Works, which shall be treated as Joint Work Product for
purposes of this Agreement. Each Party shall cooperate with the other
Party in documenting and perfecting all rights with respect to the
Commissioned Works, including executing any necessary assignments,
applications or other documentation with respect to the Commissioned
Works.

2.3.5 Disagreement. In the event that the Parties
------------
disagree as to the development or deployment of any Additional ICQ
Modification, including any disagreement as to the terms and
conditions for the development or deployment thereof, the Parties
shall submit such Dispute to the Management Committee in accordance
with the terms of Section 17 of this Agreement.

2.4 Expansion to Cover Other Services and Platforms of ICQ.
------------------------------------------------------

2.4.1 Request by ICQ to Encompass Expanded Service Within an ICQ
----------------------------------------------------------
Telephony Service. ICQ may in its discretion, from time to time
-----------------
during the Initial Term, seek to expand any ICQ IP Telephony
Service(s) to provide service through any and all platforms and
services hereafter offered by ICQ or an Affiliate of ICQ (other than
the ICQ Service) (the "Expanded Services"). In such event, ICQ may in
its discretion request that N2P develop or deploy or assist with the
development or deployment of any such Expanded Services. Upon the
receipt of any such request, and before any development or deployment
of any Expanded Services, the Parties shall negotiate in good faith
regarding the request for any such Expanded Services, including,
without limitation, with respect to the appropriate schedule for any
development and deployment, and the relevant business terms (e.g., the
amount of any payments for any development, the revenue model for the
Expanded Services, etc.). If and when the Parties reach agreement on
the terms and conditions related to the development and deployment of
such Expanded Services, each Party shall allocate development and
deployment resources on a high priority basis towards the development
and deployment of an updated version of the applicable ICQ IP
Telephony Software to support such Expanded Services in accordance
with the terms and conditions agreed upon by the Parties.

2.4.2 Failure to Agree. In the event that the Parties disagree
----------------
as to the development or deployment of any Expanded Service, including
any disagreement as to the terms and conditions for the development or
deployment thereof, the Parties shall submit such Dispute to the
Management Committee in accordance with the terms of Section 17 of
this Agreement; provided, however, that in the event that the
-------- -------
Management Committee is unable to agree as to the terms and conditions
regarding such development and deployment, such Expanded Service shall
not constitute an ICQ IP Telephony

6
<PAGE>

EXECUTION VERSION

Service for purposes of this Agreement, and N2P shall not have any
rights or obligations with respect to such Expanded Service.

2.4.3 Agreement. Nonetheless, if the Parties agree to add an
---------
Expanded Service to this Agreement, such Expanded Service, for all
purposes hereof, shall be considered part of the ICQ IP Telephony
Services, and all rights and obligations of ICQ and N2P hereunder
shall apply to such Expanded Service and users of such services shall
be considered ICQ Users for purposes of this Agreement. For purposes
of calculating the Revenue Share and the Revenue Threshold hereunder,
any such agreed-upon Expanded Service shall be aggregated with the ICQ
IP Telephony Services as if only one service existed (unless otherwise
agreed upon by the Parties).

2.5 Delivery and Acceptance.
-----------------------

2.5.1 Initial Versions. Following the completion of the
----------------
development and internal testing of each initial version of the Core
Premium Services, N2P shall deliver each such initial version to ICQ
for evaluation and acceptance in accordance with the delivery dates
set forth on Exhibit I hereto. ICQ shall have thirty (30) days
following such delivery by N2P to evaluate whether each such initial
version functions in accordance with the Specifications and without
any Severity 1 or Severity 2 Problems. If ICQ reasonably determines
that any such initial version of any Core Premium Service does not
function in material conformity with the Specifications and/or without
Severity 1 or Severity 2 Problems, ICQ may reject such version by
providing N2P with written notice within such thirty (30) day period
specifying in detail the reason for rejection. Any initial version of
the Core Premium Services that has not been so rejected within such
thirty (30) day period shall be deemed accepted. If ICQ rejects any
initial version of any Core Premium Service, then following such
rejection, N2P shall use commercially reasonable efforts to correct
(as promptly as commercially possible but in any case by the
applicable Cutoff Date) in all material respects, the deficiencies in
such initial version that were specified in ICQ's notice of rejection.
If the deficiencies specified in any such ICQ notice of rejection have
not been remedied in all material respects by such Cutoff Date, ICQ
shall have the right to terminate the exclusivity (as set forth in
Section 9 of this Agreement) with respect to such Core Premium Service
and thereby enter into an agreement with any third party (including a
N2P Competitor) with respect to such Core Premium Service.

2.5.2 Subsequent Versions. Following the completion of the
-------------------
development and internal testing of each subsequent version (i.e.,
subsequent to the initial version) of any Core Premium Service (or any
initial version of any Optional Service, Expanded Service or other IP
Telephony service mutually agreed upon by the Parties to be provided
by N2P hereunder) (each, a "Subsequent Version"), N2P shall deliver
each such Subsequent Version to ICQ for evaluation and acceptance.
ICQ shall have thirty (30) days following such delivery by N2P to
evaluate whether such Subsequent Version functions in accordance with
the Specifications and without any Severity 1 or Severity 2 Problems.
If ICQ reasonably determines that any such Subsequent Version does not
function in material conformity with the Specifications and without
Severity 1 or Severity 2 Problems, ICQ may reject such Subsequent
Version by providing N2P with written notice within such thirty (30)
day period specifying in detail the reason for rejection. Any
Subsequent Version that has not been so rejected within such thirty
(30) day period shall be deemed accepted.

2.5.3 Acceptance Process. The acceptance criteria set forth in
-------------------
Sections 2.5.1 and Section 2.5.2 of this Agreement shall not include
as factors the Core ICQ Obligations, and ICQ shall not withhold any
such acceptance due to its failure to comply with the Core ICQ
Obligations.

7
<PAGE>

EXECUTION VERSION

2.6 Assistance from ICQ. ICQ shall provide N2P with reasonable
-------------------
consultative assistance in connection with the development obligations
of N2P as set forth in this Section 2. In addition, during the Term,
ICQ agrees to notify N2P in advance of any modifications and/or
changes to the ICQ Service that ICQ believes may result in
incompatibility between the Parties' respective systems or
interruptions in the ICQ IP Telephony Services (including without
limitation, network configuration changes and system maintenance).
The Parties shall work together to resolve any such potential or
actual incompatibility, or interruptions, in connection with ICQ's
implementation of any such change and/or modification.

2.7 Other Modifications. ICQ reserves the right to redesign and/or modify
-------------------
the organization, structure, "look and feel," navigation, features and
other elements of the ICQ Service and the ICQ IP Telephony Services
(subject to (i) the technical limitations and design requirements of
the N2P Services and N2P System (which shall themselves remain subject
to the Specifications) and (ii) the requirement that such ICQ Service
and ICQ IP Telephony Services remain in compliance with the terms and
conditions of this Agreement. ICQ shall provide N2P with reasonable
notice of any proposed redesign and/or modification in advance of
developing such redesign or modification, and the Parties shall
consult in good faith on how to avoid any adverse effect on the ICQ
Telephony Services (including, without limitation, any adverse effect
on the functionality or performance thereof) as a result of such
redesign and/or modification. Such notice shall be sufficiently in
advance of the proposed redesign or modification such that the Parties
will have a reasonable opportunity to complete the process, and avoid
the adverse effect on the ICQ IP Telephony Services, as contemplated
by this Section 2.7.

2.8 Meetings. In furtherance of the rights and obligations of the Parties
--------
under this Agreement, the Parties shall meet, in person on a quarterly
basis (the "Quarterly Meetings") and by telephone on a monthly basis
(the "Telephone Meetings"). With respect to the four (4) Quarterly
Meetings to take place during each Year of the Initial Term, two (2)
such Quarterly Meetings shall take place in Israel (at ICQ
headquarters or such other location as mutually agreed upon by the
Parties) and the other two (2) such Quarterly Meetings shall take
place in the United States (at N2P headquarters or such other location
as mutually agreed upon by the Parties). The Quarterly Meetings shall
be used to discuss, inter alia, long-term planning, strategic and
----- ----
development issues, and marketplace and performance information
regarding the obligations and criteria applicable to the Parties
hereunder (including the obligations and criteria under Section 3),
and shall be attended by the Technical Liaisons and appropriate senior
development and management personnel. The Parties anticipate that the
first such Quarterly Meeting shall occur as promptly as possible
following the Effective Date but in no event later than two (2) months
following the Effective Date. The Telephone Meetings shall be used to
discuss, among other things, the activities and relationship
contemplated by this Agreement, including the proposed implementation
and/or progress of any Updates or Additional ICQ Modifications,
changes to the operating standards set forth on Exhibit B, Exhibit C
or Exhibit D hereto, ICQ Exclusive Offers to be provided during the
subsequent quarter, and the redesign or modification of elements of
the ICQ Service or ICQ IP Telephony Services.

2.9 No Support for ICQ Modifications. The Parties acknowledge that any
--------------------------------
modifications or additions to the ICQ IP Telephony Services that are
carried out by ICQ (or carried out for ICQ by a third party not
contracted or subcontracted by N2P) shall not affect the determination
of whether N2P has met its obligations or the criteria set forth in
Sections 1.3 or 3 of this Agreement.

8
<PAGE>

EXECUTION VERSION

3. N2P PERFORMANCE
---------------

3.1 Pricing and Terms. N2P will ensure that the prices (including any
-----------------
other required consideration) for each Core Premium Service and other
aspects of such Core Premium Service (including, without limitation,
the terms and conditions related to such Core Premium Service, the
scope, quality and functionality of each such Core Premium Service,
customer service and billing, user experience and interface) are,
taken as a whole, not materially less favorable as compared to the
corresponding N2P Service as offered by or on behalf of N2P directly
to retail customers through any Additional N2P Channel. In the event
that at any time during the Initial Term, N2P fails to comply with
such obligation (i) as to any pricing aspect of a Core Premium Service
(a "Pricing Failure"), and such Pricing Failure is not cured within
**** (****) **** after notice to N2P of such Pricing Failure (unless
otherwise agreed upon in writing by the Parties), or (ii) as to a non-
pricing aspect of a Core Premium Service (a "Non-Pricing Failure"),
and such Non-Pricing Failure is not cured within **** (****) *****
after notice thereof to N2P (unless otherwise agreed upon in writing
by the Parties), ICQ shall have the right to suspend, until such time
as N2P cures such failure, (i) distribution of such Core Premium
Service, (ii) any of ICQ's promotional obligations hereunder related
specifically to such Core Premium Service, and/or (iii) any Listings
related specifically to such Core Premium Service. In addition, in the
event that N2P fails to cure such Pricing Failure within **** (****)
**** after notice thereof to N2P or such Non-Pricing Failure within
**** (****) **** after notice thereof to N2P (or, in each case, such
shorter period as is reasonably feasible) ICQ shall have the right to
terminate the exclusivity granted to N2P hereunder with respect to
such non-compliant Core Premium Service (and in the event that N2P
shall have failed to cure, within thirty (30) days after notice
thereof to N2P, any such Pricing Failure and/or Non-Pricing Failure as
to a total of **** (****) **** during the Initial Term, then ICQ shall
have the right to terminate this Agreement in accordance with Section
16.6 hereof). For purposes of this Section 3.1, the categorization of
what constitutes retail customers, as opposed to wholesale customers,
shall be consistent with general telecommunications industry practice,
and the characterization (as retail or wholesale) of services provided
to customers through a N2P Affiliate shall be based on the delivery
mechanism of such services by such N2P Affiliate to any third party
(i.e., if the services are sold by N2P Affiliates to third parties on
a retail basis, then such services shall be deemed to be retail
services for purposes of this Section 3.1). Any dispute as to such
categorization shall be submitted to the Management Committee in
accordance with Section 17 of this Agreement.

3.2 Operating Standards.
-------------------

3.2.1 Compliance. During the Term, N2P will cause the ICQ IP
----------
Telephony Services to comply in all material respects with the
standards set forth in each of Exhibit B, Exhibit C and Exhibit D. To
the extent standards are not established in Exhibits B, C or D with
respect to any aspect of the ICQ IP Telephony Services, N2P will use
commercially reasonable efforts to provide such aspect at a level of
quality, completeness or timeliness which meets or exceeds prevailing
standards in the IP Telephony industry. Without limiting the
generality of the foregoing, N2P will use commercially reasonable
efforts to provide all hardware, software, telecommunications lines
and other infrastructure necessary to meet traffic and usage demands
on the ICQ Service in connection with the offering of the ICQ IP
Telephony Services.

9
<PAGE>

EXECUTION VERSION

3.2.2 N2P Technical Problem.
---------------------

(a) Occurrence; Cure Period. In the event of any
-----------------------
material technical problem (over which N2P exercises control)
affecting the use by ICQ Users of any ICQ IP Telephony Service
and constituting a Severity 1 Problem or Severity 2 Problem (an
"N2P Technical Problem"), ICQ shall have the right to suspend (i)
distribution of such ICQ IP Telephony Service, (ii) any of ICQ's
promotional obligations hereunder related specifically to such
ICQ IP Telephony Service, and/or (iii) any Listings related
specifically to the such ICQ IP Telephony Service until such time
as N2P corrects such N2P Technical Problem. Prior to suspending
any such distribution of any particular ICQ IP Telephony Service,
related promotional obligations of ICQ or related Listings
hereunder, ICQ shall provide N2P with notice and an opportunity
to cure, as provided below, unless, in its reasonable discretion,
ICQ will be materially and adversely affected in a substantial
manner by failing to act immediately or at some subsequent time
prior to the completion of the notice and cure period. Any such
notice shall be in writing and shall contain a reasonably
detailed explanation for ICQ's intention to suspend (and, in
reasonable detail, the reasons for suspending) access to the
particular ICQ IP Telephony Service and related promotional
obligations and Listings due to the occurrence of the N2P
Technical Problem. Upon receipt of such notice, N2P will have at
least **** (****) **** to cure the applicable N2P Technical
Problem to ICQ's reasonable satisfaction and, if cured, ICQ shall
not suspend the affected ICQ IP Telephony Service(s) and/or
related promotional obligations or Listings. ICQ will make good
faith efforts to facilitate N2P's cure efforts and to extend the
cure period as appropriate, so long as ICQ, in its reasonable
discretion, is not materially adversely affected by any such
extension. In the event ICQ suspends distribution of any ICQ IP
Telephony Service, any ICQ promotional obligations and/or any
Listings due to the occurrence of any such N2P Technical Problem,
ICQ will notify N2P in writing within **** (****) **** of such
decision, setting forth in reasonable detail the explanation
therefor.

(b) Cure; Resumption of Distribution. When and if the cure
---------------------------------
to an N2P Technical Problem is demonstrated to ICQ's reasonable
satisfaction, which satisfaction shall not be unreasonably
withheld, ICQ shall resume distribution of the affected ICQ IP
Telephony Service, promotional obligations and Listings as soon
as commercially practical; provided, however, that (in addition
-------- -------
to any other remedies available to ICQ in this Agreement,
including, without limitation, in Section 16.6 hereof) in the
event that N2P shall fail to cure any such N2P Technical Problem
within thirty (30) days following notice thereof by ICQ to N2P,
then ICQ shall have the right to terminate the exclusivity (as
set forth in Section 9 of this Agreement) with respect to the
Core Premium Service(s) affected by such N2P Technical Problem
and thereby enter into an agreement with any third party
(including any N2P Competitor) to promote (or offer the services
of) such third party with respect to such Core Premium
Service(s).

3.3 Competitive Performance Standards. N2P will use commercially
---------------------------------
reasonable efforts during the Initial Term to cause each of the Core
Premium Services included in the ICQ IP Telephony Services to be "Best
of Breed." For purposes of this Agreement, "Best-of-Breed" means, as
to each Core Premium Service, that, as determined by a cross-section
of mutually agreed-upon third-party reviewers who are recognized
authorities in the IP Telephony industry, (i) such Core Premium
Service is competitive, when taken as a whole, with the same or
substantially similar services offered by any N2P Competitor through
any similar online distribution channel; (ii) the rates associated
with such Core Premium Service (including per-minute rates), when
taken as a whole, are equal to or lower than the rates, when taken as
a whole, for the same or substantially similar

10
<PAGE>

EXECUTION VERSION

products or services offered by any N2P Competitor; and (iii) N2P is
included within the top **** (****) providers of such IP Telephony
Service (when taken as a whole) in the IP Telephony industry, taking
into consideration, as a whole, such factors as pricing, scope and
selection of products and services, technology platform and other
aspects of the distribution channel, quality and ease of use of
products and services, functionality, call quality, quality of
customer support, success rates of call completion and overall level
of customer satisfaction. The determination of "Best-of-Breed" shall
not take into account limited promotions (e.g., ****) In the event
that at any time during the Initial Term, a Core Premium Service fails
to be Best-of-Breed, ICQ may notify N2P of such failure (including the
reasons therefor and the basis for the determination thereof under
this Agreement) and of its intention to terminate exclusivity with
respect to the non-Best-of-Breed Core Premium Service. For a period of
**** (****) **** following receipt of such notice, N2P shall have the
opportunity to remedy the failure. Notwithstanding the foregoing (and
in addition to any other remedies available to ICQ in this Agreement,
including, without limitation, in Section 16.6 hereof), in the event
that N2P has not cured any such failure (regardless of the level of
effort by N2P to cure such failure) by the end of such **** (****)
**** period (unless the Parties mutually agree in writing to extend
such cure period), ICQ shall have the right to terminate the
exclusivity (as set forth in Section 9 of this Agreement) with respect
to such non-Best-of-Breed Core Premium Service and thereby enter into
an agreement with any third party (including a N2P Competitor) to
promote (or offer the services of) such third party with respect to
the corresponding non-Best-of-Breed Core Premium Service.

3.4 No Payment by ICQ. For the avoidance of doubt, the Parties
-----------------
acknowledge that ICQ shall not be required to pay N2P any compensation
in connection with any modification, addition, deletion, feature or
functionality or other improvement required to be provided by N2P in
order for N2P to comply with its obligations under Section 3 of this
Agreement.

3.5 N2P Not Responsible for Core ICQ Obligations. The Parties acknowledge
---------------------------------------------
that the Core ICQ Obligations shall not affect the determination as to
whether N2P has satisfied the criteria and obligations set forth in
Section 3 of this Agreement. The Parties also acknowledge that the
determination of whether N2P has satisfied the criteria and
obligations set forth in Sections 3.1, 3.2 or 3.3 of this Agreement
shall not be affected by features or functionality that N2P offers to
ICQ and that ICQ (a) declines to implement or support or (b) cannot
(e.g., due to technological or operational constraints within the
control of ICQ) reasonably implement or support, provided that (i) in
either such case, N2P provides ICQ with reasonable prior, informal,
written notice (e.g., by e-mail) of the anticipated effects of ICQ's
not implementing or supporting the features or functions on the ICQ IP
Telephony Services and (ii) in the case of technological or
operational constraints within ICQ's control, N2P provides ICQ with
reasonable prior informal notice of such constraints.

4. DISTRIBUTION AND PROMOTION
--------------------------

4.1 Distribution and Promotion Requirements. During the Term, subject to
---------------------------------------
the terms and conditions herein, the Parties agree to the following:

4.1.1. Access to ICQ IP Telephony Service. ICQ shall distribute
----------------------------------
the ICQ IP Telephony Services and the ICQ IP Telephony
Software, provided that ICQ shall determine in its
reasonable discretion (upon consultation with N2P) the
manner in which such distribution occurs (e.g., through the
bundling with the ICQ Client of the ICQ-customized N2P IP
Telephony Software, through a "plug-in" of such software,
etc.).

4.1.2 Distribution of ICQ IP Telephony Software.
-----------------------------------------

11
<PAGE>

EXECUTION VERSION

(a) PTP Calling Card Service. Promptly upon the
------------------------
acceptance by ICQ of the initial version of the PTP Calling Card
Service (including any Updates thereto), ICQ shall promote and
distribute such initial version as part of the ICQ Service
subject to the remainder of this Section 4.1.2.

(b) Secondary ICQ IP Telephony Services. Following the
-----------------------------------
acceptance by ICQ of the initial version of any Secondary ICQ IP
Telephony Service (including any Updates thereto) and subject to
the remainder of this Section 4.1.2, ICQ shall promote and
distribute such accepted Secondary ICQ IP Telephony Service as
part of the 2000a ICQ Client and related version of the ICQ
Service. ICQ shall launch (i.e., make generally commercially
available) such 2000a ICQ Client and version of the ICQ Service
no later than **** provided, however, that in the event
-------- -------
that ICQ shall not have launched the 2000a Client and related
version of the ICQ Service by **** (as N2P's sole and
exclusive remedy hereunder), the Initial Term shall be extended
by one day for each day beyond **** that ICQ fails to
launch the 2000a ICQ Client and related version of the ICQ
Service.

(c) Distribution. The version of the ICQ Client that is
------------
generally made available for downloading on the ICQ Service or
otherwise generally distributed in connection with the ICQ
Service shall include either the ICQ IP Telephony Software or a
means (consistent with Section 4.1.4 of this Agreement) by which
ICQ Users can access and use the ICQ IP Telephony Services.

(d) Exceptions. ICQ shall be relieved of the foregoing
----------
obligations under the conditions of, and in accordance with,
Section 4.2 and the other terms of this Agreement. In addition,
ICQ may also support other IP Telephony services (including those
of N2P Competitors) as to which, and in the countries in which,
N2P (on the Effective Date or thereafter) does not have
exclusivity. Moreover, but subject to the requirements of this
Agreement, ICQ may provide to a particular customer a version of
the ICQ Client that does not include the customizations developed
by N2P hereunder or any other IP Telephony capability if such
customer requests (provided that ICQ does not encourage such
customer to so request or offer such customer in a prominent
fashion an opportunity to so request) that it receive a version
of the ICQ Client that does not include N2P customizations.

(e) Subsequent Versions. Following the acceptance by ICQ
-------------------
of any Subsequent Version, ICQ will distribute such Subsequent
Version with the ICQ Service within a time period (of not more
than six (6) months) to be determined by ICQ in its reasonable
discretion (e.g., taking into account such factors as the
imminence of the launch of a new version of the ICQ Client,
etc.), upon consultation with N2P.

4.1.3 Localized Versions. At such time as ICQ makes generally
------------------
commercially available localized versions of the ICQ Client
(including, without limitation, any translation service
distributed by ICQ in connection therewith) for use in the
Collective International Gateways (or in any other countries in
which the Parties agree that N2P shall provide the ICQ IP
Telephony Services) (collectively, the "Localized Versions"), N2P
shall cause (within a commercially reasonable time period) to be
fully prepared for launch through the ICQ Service versions of the
Core Premium Services, if any, that are required to be compatible
with such Localized Versions. The Parties shall use commercially
reasonable efforts to develop, make available and otherwise
distribute Updates to such Localized Versions, from time to time
as Updates for the U.S. English-language versions of

12
<PAGE>

EXECUTION VERSION

the ICQ IP Telephony Services are publicly released. ICQ shall be
responsible for the localization of the ICQ GUI.

4.1.4 N2P Listing and Promotion. ICQ (together with any Affiliate of
-------------------------
ICQ that offers the ICQ Service) shall feature, offer and
promote the ICQ IP Telephony Services prominently in the ICQ
Service.

(a) In furtherance and as part of the foregoing, the initial
implementation of such promotional requirement shall include,
where feasible, the following (and any future implementation
shall be consistent in terms of prominence (e.g., in terms of
size, location, appearance and the like) with the following):

(i) Each ICQ IP Telephony Service will be "sub-branded"
with the name "Net2Phone," "N2P" or any other N2P Mark designated
by N2P, subject to the approval of ICQ not to be unreasonably
withheld (the "N2P Name"). "Sub-branding" means that each ICQ IP
Telephony Service will be labeled and marketed with the name
"****" or such other ICQ name as ICQ designates (the "ICQ Name"),
but that each such ICQ IP Telephony Service shall, where feasible
and to the extent not inconsistent with the ICQ Look and Feel,
have a prominent tag line such as "****" or "****," and a N2P
Mark. The N2P tag line and Mark (the "Brandings") will be
included prominently in (and where feasible, will be placed
within reasonable proximity to the ICQ brandings in) the (A)
areas which provide information regarding the use of and enable
ICQ users to launch the ICQ IP Telephony Service (collectively,
the "Support Area"), (B) other areas within the ICQ Service that
relate principally to the ICQ IP Telephony Services (including,
without limitation, ****), and (C) the ICQ IP Telephony Software
or areas within the ICQ Client that relate principally to an ICQ
IP Telephony Service (the "Branded Areas").

(ii) The Brandings will also appear prominently in
advertising, promotional, public relations and marketing material
relating principally to the ICQ IP Telephony Services.

(iii) There will be links (evidenced by the ICQ Name or
a graphical image of a telephone, or such other link as ICQ
selects) to the PC-originated ICQ IP Telephony Services
(initially, the PC-to-PC Service and PC-to-Phone Service)
throughout the ICQ Service in areas providing ICQ Users with the
ability to perform communication functions (e.g., white page
results, yellow page results, directory search results, ****
etc.) (collectively, the "Links"). The Links will launch the ICQ
IP Telephony Services.

(b) The name, design and "look and feel" of the Branded
Areas, the Brandings and the Links (collectively, the "Listings")
will be determined by ICQ in its reasonable discretion in
consultation with N2P. The Listings will properly convey the
functionality of the ICQ IP Telephony Services.

(c) ICQ generally will provide to N2P branding, marking and
promotion that are no less prominent, in terms of size,
placement, appearance and the like, than those accorded to
****. In the event that ICQ begins to sell advertising inventory
on **** "****" ****, ICQ shall provide N2P with
an opportunity to bid on the purchase of a placement within such
inventory.

(d) Subject to the other requirements of this Section 4.1.4
and the other provisions of this Agreement, the foregoing will
not preclude users from

13
<PAGE>

EXECUTION VERSION

linking to another such provider from the ICQ Service, provided
that the link to such other provider is limited to a ****
--------
that is no more prominent than any similar reference to N2P.
Nothing in this Agreement shall prevent ICQ from offering
(whether through buttons, icons or otherwise) an AOL PC-to-PC
communication function on the ICQ Service, subject to the other
requirements of this Section 4.1.4.

4.1.5 Promotion of ICQ Service by N2P; Promotion of ICQ IP Telephony
--------------------------------------------------------------
Services by ICQ.
---------------

(a) N2P. N2P shall promote the ICQ Service to its
---
customers and partners, and shall use reasonable efforts to
encourage such customers and partners to adopt the ICQ Service as
an integrated component of the IP Telephony products and services
provided to such customers and partners by N2P, as and to the
extent set forth in Exhibit E. ICQ shall assist N2P, as
reasonably requested by N2P, in such promotional efforts.

(b) ICQ. ICQ shall use reasonable efforts to ****
---
as part of the products and services offered to their
respective users. N2P shall assist ICQ, as reasonably requested
by ICQ, in such promotional efforts.

4.2 General Conditions to Distribution and Promotional Obligations.
--------------------------------------------------------------
Notwithstanding anything contained in this Section 4, ICQ shall have
no obligation to promote a particular version of the ICQ IP Telephony
Services, to distribute to ICQ Users a particular version of the ICQ
IP Telephony Services or to provide any Listing therefor to the
extent that and for so long as:

(i) ICQ has received notice (whether written or verbal) of, and
reasonably believes, that the reproduction, use or distribution
of such version of the ICQ IP Telephony Services in accordance
with this Agreement infringes or misappropriates the
intellectual property rights of any third party, provided that
--------
ICQ may not promote or offer access to any other IP Telephony
product unless ICQ reasonably believes that it raises a lesser
risk of infringement or misappropriation; or

(ii) An aspect of any such version of the ICQ IP Telephony Service
exists, other than an acknowledged security risk that a
corporation/user accepts by opening up holes in its firewall to
enable use of any such ICQ IP Telephony Service (and other than
security risks ordinarily associated with Web-based
communications products), that could be exploited in a manner
that ICQ reasonably believes (a) would expose ICQ Users to
potential efforts to invade their privacy or damage or modify
data, software or hardware in an unauthorized manner or (b)
would otherwise result in meaningful and serious claims that any
such ICQ IP Telephony Service presents a security risk to its
users, provided that ICQ may not promote or offer access to any
--------
other IP Telephony product unless ICQ reasonably believes that
it raises a lesser security risk.

4.3 Exclusive Offers/ICQ User Benefits. N2P shall offer through the
----------------------------------
ICQ Service on a regular and consistent basis (but no less than once
per quarter) special offers comparable to those available through
Additional N2P Channels (e.g., preferred rates to specific termination
points to be offered periodically, raffle or sweepstakes conducted
from time to time, etc.), which such special offers shall be
exclusively available to ICQ Users (the "ICQ Exclusive Offers"). Each
ICQ Exclusive Offer made available by N2P shall provide a substantial
member benefit to ICQ Users, either by virtue of a meaningful price
discount, product enhancement, unique service benefit or other special
feature. N2P will provide ICQ with reasonable prior notice of ICQ
Exclusive Offers so that ICQ

14
<PAGE>

EXECUTION VERSION

can market the availability of such ICQ Exclusive Offers in the manner
ICQ deems appropriate in its reasonable discretion; provided that ICQ
--------
shall consult with N2P regarding the marketing of the ICQ Exclusive
Offers.

4.4 ICQ Search Keywords. During the Initial Term, subject to the
-------------------
terms and conditions hereof, ICQ (in its sole discretion) may provide
N2P with ICQ Search Keywords to be mutually agreed upon by the
Parties.

5. ICQ USER REGISTRATION AND INFORMATION
-------------------------------------

5.1 Ownership of Assets and Customer Relationships. ICQ shall own
----------------------------------------------
all tangible and intangible assets (and all personal and intellectual
property) provided by ICQ in developing the ICQ IP Telephony Services
(except as otherwise expressly set forth herein) and the Support Area,
including all materials provided by ICQ to N2P for the purpose of
branding the ICQ IP Telephony Service and the Support Area ("ICQ
Branding Materials"), and the relationship with ICQ IP Telephony
Users, including, without limitation, all aspects of such relationship
specified in this Section 5. ICQ shall own any and all rights in the
call detail records generated in providing the ICQ IP Telephony
Services which shall be treated as Confidential Information for
purposes of this Agreement (collectively, the "Call Detail Records").
ICQ hereby grants N2P a non-exclusive, non-transferable, worldwide,
royalty-free license to use the Call Detail Records only to the extent
necessary to provide the ICQ IP Telephony Services to be provided by
N2P hereunder (including any related planning and development). Such
license shall continue through the end of the Term, but shall survive
expiration of the Term with respect to the provision by N2P of the PTP
Calling Card Service.

5.2 ICQ User Relationship.
---------------------

5.2.1 Registration Information. In order to use the Surcharged
------------------------
ICQ IP Telephony Services, an ICQ User will be required to register
for such ICQ IP Telephony Services. The Parties shall determine by
mutual agreement the terms and conditions of use to be agreed to by
such ICQ Users (including, without limitation, with respect to any
special access codes to be used by such ICQ Users in connection with
the ICQ IP Telephony Services, provided, that neither Party shall
--------
unreasonably withhold such agreement with respect to the use of such
special access codes), and ICQ shall determine both (i) the
information to be collected from the ICQ Users as part of the
registration process (provided that such information shall in any
--------
event include information that N2P reasonably requests in connection
with the provision of the ICQ IP Telephony Services, including,
without limitation, any Personal Identification Numbers (PINs) for use
by ICQ Users in connection with the ICQ IP Telephony Services) and
(ii) any domain names, unique identifier numbers, e-mail addresses and
passwords to be assigned and/or used by such ICQ Users in connection
with such ICQ IP Telephony Services. Notwithstanding the foregoing,
it is the Parties' intention that ICQ Users initially shall not be
required to register for, or provide any information in connection
with the use of, the PC-to-PC Service. Registration for the ICQ IP
Telephony Services shall take place at the Support Area or at such
other location as may be mutually agreed upon by the Parties. ICQ
shall use reasonable efforts to build into the end of the registration
process for the ICQ Service (the "ICQ Registration Process") a sub-
routine for the registration for the ICQ IP Telephony Services.
Notwithstanding the foregoing, in the event that any ICQ Users shall
not have registered for the Surcharged ICQ IP Telephone Services prior
to attempting to use any such service, ICQ shall cause any such ICQ
User to register for the Surcharged ICQ IP Telephony Services prior to
the use thereof. N2P shall determine the pricing for the Core Premium
Services and other ICQ IP Telephony Services to be provided by N2P
hereunder. In addition, N2P shall handle the assignment of applicable
phone numbers to ICQ Users (using the ICQ User unique identifier
number as an identifier and provided that such phone numbers and
--------
special access codes (unless

15
<PAGE>

EXECUTION VERSION

otherwise agreed upon in writing by the Parties) shall be different
from any phone numbers and access numbers used in connection with any
N2P Services), and shall handle the billing and collection of any fees
or other amounts to be charged to ICQ Users from time to time in
connection with the ICQ IP Telephony Services (collectively, the "IPT
Fees"); provided, however that, unless otherwise expressly consented
-------- -------
to in writing by ICQ, N2P shall not directly contact or communicate
with any ICQ IP Telephony Users other than in connection with the
billing and collection of the IPT Fees, or in connection with
maintenance and customer support for the ICQ IP Telephony Services;
provided, further, that such communications shall be limited to
-------- -------
obtaining billing information, providing pricing information related
to the ICQ IP Telephony Services and ensuring collection of the IPT
Fees or providing maintenance or customer support, and shall not be
used by N2P as a platform to sell, market, advertise or promote any
products or services other than the ICQ IP Telephony Services.

5.2.2 Billing Transition. Notwithstanding the foregoing, at any
------------------
time during the Term and at ICQ's sole discretion, ICQ shall have the
right to assume responsibility for the aforementioned billing and
collection obligations with respect to the IPT Fees (collectively, the
"Billing Transition"); provided, however, that (i) ICQ shall give N2P
-------- -------
reasonable advance notice of any such Billing Transition; (ii) the
Billing Transition shall be subject to agreement of the Parties on
arrangements (a) for N2P to receive the same portion of revenue from
the ICQ IP Telephony Services as it would have received before the
Billing Transition (and on procedures to verify the proper payment of
such revenue), (b) for handling fraud, and (c) for the handling of the
billing for the PTP Calling Card Service after the Initial Term, and
(iii) ICQ shall be responsible for all costs and out-of-pocket
expenses incurred by N2P in connection with such Billing Transition.
In the event of such Billing Transition, N2P hereby agrees to provide
ICQ with reasonable assistance (and to otherwise cooperate with ICQ),
at ICQ's expense, regarding such Billing Transition, and following
such Billing Transition, ICQ shall use commercially reasonable efforts
to ensure that the billing services comply in all material respects
with the standards set forth in Exhibits B and C of this Agreement.

5.3 ICQ User Information and Solicitation.
-------------------------------------

5.3.1 Ownership of ICQ User Information. ICQ shall own any and
---------------------------------
all information collected from ICQ Users in connection with the ICQ IP
Telephony Services, including, without limitation, information
collected during the registration processes for the ICQ Service and/or
any ICQ IP Telephony Service, respectively, and information then or
subsequently obtained from any use of the ICQ Service and/or any ICQ
IP Telephony Services, including without limitation ****
(collectively, "User Information"). All User Information shall be
deemed Confidential Information of ICQ. N2P agrees, both during and
after the Term, not to (i) use any User Information for any purpose
other than in connection with the operation of the ICQ IP Telephony
Services or (ii) disclose any such information to any third party
without the prior written consent of ICQ, which consent may be
granted or withheld in ICQ's sole and absolute discretion;
provided, however, that N2P may disclose User Information solely as
necessary (and only to the extent necessary) to comply with applicable
laws, regulations and government orders or requests; provided,
--------
further, that N2P shall use all reasonable efforts to limit any such
-------
disclosure to the maximum extent possible and to provide ICQ with as
much advance written notice of N2P's intended use or disclosure as is
practicable. N2P agrees to comply with the ICQ Privacy Policy to the
same extent as ICQ, as such policy exists on the Effective Date (i.e.,
the ICQ Privacy Policy dated as of January 26, 1999), as the same may
be modified and notified to N2P from time to time. N2P shall not sell,
license, rent or otherwise transfer any ICQ User Information or any
list of ICQ Users for any

16
<PAGE>

EXECUTION VERSION

purpose whatsoever, without ICQ's prior written consent.
Notwithstanding the foregoing, N2P shall have the right to use User
Information to the extent necessary to provide the PTP Calling Card
Service to then-existing ICQ User customers following the expiration
of the Initial Term, and ICQ shall provide N2P with the customer
records and other information to the extent necessary for N2P to
continue providing the PTP Calling Card Service to such customers for
the **** period immediately following the expiration of the Initial
Term, subject to Section 5.3.2 and 5.3.3 of this Agreement and
prohibitions, if any, under applicable law.

5.3.2 No Competitive Solicitation. During the Term and for the
---------------------------
**** period following the expiration or termination of this
Agreement (and without limiting any other provision of this Agreement,
including Section 5.3.1), neither N2P nor its agents shall use the ICQ
Service or the ICQ IP Telephony Services or information owned by ICQ
or an ICQ Affiliate to (i) solicit third parties or ICQ Users when
that solicitation is for the benefit of any entity (including N2P)
which could reasonably be construed to be or to become in competition
with ICQ, the ICQ Service or the ICQ IP Telephony Services, or (ii)
promote any services or products which could reasonably be construed
to be in competition with services or products provided by ICQ,
through the ICQ Service or through the ICQ IP Telephony Services.
Except as otherwise prohibited in this Section 5, nothing in this
Section 5.3.2 shall be construed to prohibit N2P or its agents from
soliciting or promoting the N2P Services to any third party, whether
during the Term or thereafter, provided that, in connection with such
solicitation or promotion, N2P complies with the terms of (a) Section
9 (Exclusivity) during the Initial Term and (b) Section 13
(Confidential Information) during the Term (and after the Term for the
period set forth in such Section 13). The Parties acknowledge that
any incidental (i.e., de minimis) failure by N2P to comply with the
terms of this provision shall not be deemed a material breach of this
Agreement; provided, however, that N2P shall take appropriate steps to
-------- -------
prevent any further failure to comply with the terms of this Section
5.3.2.

5.3.3 No Communication. During the Term and for the ****
----------------
period following the expiration or termination of this Agreement
(and without limiting any other provision of this Agreement, including
Section 5.3.1), N2P agrees not to send any ICQ User any messages or
communications on or through the Qualified ICQ Services for any
commercial purpose, unless N2P has an Independent Business
Relationship with such ICQ User. Any commercial e-mail communications
(i.e., e-mail communications offering products or services) to ICQ
Users on or through the ICQ Service or the ICQ IP Telephony Services
which are otherwise permitted hereunder (i.e., permitted as exceptions
to general prohibitions included in this Agreement) shall include a
prominent and easy means to "opt-out" of receiving any future
commercial e-mail communications from N2P. The Parties acknowledge
that any incidental (i.e., de minimis) failure by N2P to comply with
the terms of this provision shall not be deemed a material breach of
this Agreement; provided, however, that N2P shall take appropriate
-------- -------
steps to prevent any further failure to comply with the terms of this
Section 5.3.3.

6. TECHNICAL SUPPORT
-----------------

N2P shall provide all frontline technical and customer support to ICQ
Users as set forth in Exhibit B, including, without limitation,
technical and customer support for ICQ Users who have problems with,
or questions concerning, the installation, use, operation or
maintenance of the ICQ IP Telephony Service (collectively, the
"Frontline Support"). The Parties acknowledge that N2P may provide
such Frontline Support using e-mail and/or telephone support, at N2P's
option. N2P shall, at no cost to ICQ, provide to ICQ the back-end
support regarding the ICQ IP Telephony Service specified on Exhibit D.
During the Term, each Party will designate one (1) internal technical
contact (each such contact,

17
<PAGE>

EXECUTION VERSION

a "Technical Liaison") and will conduct technical communication
activities as may be necessary for the optimization of the integration
of the ICQ IP Telephony Services into the ICQ Service. ICQ will use
commercially reasonable efforts to provide technical and marketing
assistance, including facilitating the maintenance of regular
communication channels between relevant personnel, for the purpose of
assisting both Parties in abiding by their respective obligations
under this Agreement. The initial Technical Liaison for N2P shall be
**** and the initial Technical Liaison for ICQ shall be ****,
unless otherwise designated from time to time by the Parties.
Each Party may change its Technical Liaison from time to time, in its
sole discretion. Unless otherwise agreed upon by the Parties, N2P
shall not be obligated to provide support for any modifications or
additions to the ICQ IP Telephony Services carried out by ICQ (or
carried out for ICQ by a third party not contracted or subcontracted
by or on behalf of N2P); provided, however, that where not required to
-------- -------
provide such support pursuant to the terms of this Section 6, N2P
shall assist in the support of such work to the extent necessary for
either Party to comply with its obligations under this Agreement.

7. PAYMENT AND REVENUE PROVISIONS
------------------------------

7.1 Guaranteed Payments; Refund. In partial consideration for ICQ's
---------------------------
marketing of the ICQ IP Telephony Services, N2P shall pay to ICQ a
non-refundable guaranteed payment of Seven Million Five Hundred
Thousand Dollars (US$7,500,000) as follows: (i) Four Million Dollars
(US$4,000,000) on the Effective Date, and (ii) Three Million Five
Hundred Thousand Dollars (US$3,500,000) on the earlier of (a) the one
(1) year anniversary of the Effective Date or (b) consummation of an
initial public offering of shares of N2P under the Securities Act of
1933, as amended. In the event of any termination of this Agreement
before expiration of the Initial Term in accordance with (i) Section
16.2 due to a material breach by ICQ of this Agreement, (ii) Section
16.3 due to a Change of Control of ICQ by a N2P Competitor or a Parent
Company Competitor or (iii) Section 16.5 due to the occurrence of a
Regulated Entity Event, ICQ shall refund to N2P the pro rata portion
--- ----
(based on a four (4) year term) of any guaranteed payments made by N2P
prior to the date of such early termination (e.g., if such termination
occurs on the **** anniversary of the Effective Date, and N2P has paid
ICQ **** (US$****) in guaranteed payments as required by the terms of
this Agreement, ICQ shall refund to N2P **** (****%) of such
guaranteed payments, ****. In the event of any termination of this
Agreement before the expiration of the Initial Term in accordance with
Section 16.6(i)(c) or Section 16.6(i)(d), then ICQ shall refund to N2P
**** of the pro rata portion (based on a four (4) year term) of any
--- ----
guaranteed payments made by N2P prior to the date of such early
termination. In partial consideration for such guaranteed payments,
ICQ shall provide N2P during the Initial Term with promotional
placements (on areas of the ICQ Service to be determined by ICQ in its
reasonable discretion as further set forth in Section 4.1.4) with a
value of **** (based on average amounts actually charged by ICQ for
comparable Advertisements or, if unavailable, amounts set forth on
ICQ's advertising rate card).

7.2 Net Advertising Revenue for IP Telephony Services.

7.2.1 Advertising Sales. ICQ shall have the right to license or
-----------------
sell promotions, advertisements, links, sponsorships, pointers or
similar services or rights ("Advertisements") through the ICQ Service,
subject to ICQ's then-applicable advertising policies.

18
<PAGE>

EXECUTION VERSION

7.2.2 Revenue Sharing.
---------------

(a) Net Advertising Revenue. As partial
-----------------------
consideration for its marketing efforts hereunder, ICQ shall
retain **** percent (****%) of the Net Advertising Revenue. ICQ
shall pay N2P, within **** following the end of each quarter
during the Term, the remaining **** percent (****%) of the Net
Advertising Revenue that is actually collected by ICQ or any
Affiliate of ICQ (collectively, the "Advertising Revenue Share").

(b) Net Button Advertising Revenue. In the event
------------------------------
that ICQ sells (which such decision to sell shall be in ICQ's
sole discretion) any buttons that appear on the ICQ IP Telephony
client (the "Special Buttons"), (i) N2P shall receive (1) ****
percent (****%) of the Net Button Advertising Revenue generated
from the sale (without N2P participation or support) of any such
Special Button or (2) **** percent (****%) of the Net Button
Advertising Revenue generated from the sale (with N2P
participation or support) of any such Special Button, and (ii)
ICQ shall retain the remainder of such Net Button Advertising
Revenue (clauses (i) and (ii) above, collectively, the "Net
Button Advertising Revenue Share"). Notwithstanding the
foregoing, in no event shall the total portion of the Net Button
Advertising Revenue received by N2P during the Term exceed ****
Dollars (US$****) (i.e., after the receipt by N2P of US$**** in
Net Button Advertising Revenue, ICQ shall retain **** (****%) of
such Net Button Advertising Revenue). In the event that ICQ
utilizes such Special Buttons to promote any ICQ or other
commercial products or services, ICQ shall utilize a portion of
such Special Buttons (i.e., at least one such Special Button) to
promote the ICQ IP Telephony Services.

7.2.3 Definition of Net Advertising Revenue. For purposes of
-------------------------------------
this Agreement, "Net Advertising Revenue" shall mean, for any calendar
quarter, (i) the gross revenue (including cash and the value of any
non-cash consideration) received by ICQ, or any Affiliate of ICQ, from
Advertisements in (a) the Support Area, (b) other areas within the ICQ
Service that principally list the ICQ IP Telephony Services, or (c)
the ICQ IP Telephony Software or areas within the ICQ Client that
principally list the ICQ IP Telephony Services (collectively, the
"Designated Advertising Areas"), less (ii) the actual commissions paid
to third party agencies by ICQ in connection with the placement of
such Advertisements (or, if no such commissions were incurred, ****
percent (****%) of the gross revenues received by ICQ for such
Advertisements). If Advertisements in the Designated Advertising
Areas are sold or otherwise made available to a party that also
purchases or obtains Advertisements through one or more other areas or
media of ICQ or an Affiliate (collectively, a "Combined Sale"), the
revenue from the Combined Sale shall be allocated pro rata between
--- ----
such Designated Advertising Areas and such other areas or media (based
on list prices for such Designated Advertising Areas and other areas
or media). For the avoidance of doubt, "Net Advertising Revenues"
shall not include Net Button Advertising Revenues.

7.2.4. Ownership of Advertising. The right of N2P to
------------------------
participate in the Net Advertising Revenue pursuant to the provisions
of this Section 7.2 shall in no way create any ownership interest in
N2P with respect to ICQ advertising inventory. ICQ owns all right,
title and interest in and to the Advertisements and promotional spaces
within the ICQ Service, including the Support Area and the ICQ Client,
and ICQ has the sole authority to market and sell such Advertisements;
provided, however, that ICQ agrees that, during the Initial Term
-------- -------
within the Designated Advertising Areas, ICQ shall not include any
Advertisements for (or sell any advertising inventory to) N2P
Competitors with respect to

19
<PAGE>

EXECUTION VERSION

(i) the Core Premium Services (to the extent that N2P enjoys
exclusivity with respect thereto under this Agreement) and (ii) any
Optional Service(s) or Expanded Service(s) which the Parties mutually
agree from time to time shall be exclusive to N2P). Further, ICQ shall
be responsible for all obligations, liabilities and duties under any
and all agreements that ICQ has with third parties and otherwise with
regard to such Advertisements, including serving such advertisements,
subject to Section 15 of this Agreement.

7.3 Transaction Revenues Sharing Arrangement.
----------------------------------------

7.3.1 Revenue Threshold. If at any time (i) during Year One the
-----------------
amount of Transaction Revenues received by N2P during such year
exceeds **** Dollars (US$****) or (ii) during each of Years Two
through Four of this Agreement, the amount of the Transaction
Revenues received by N2P exceed **** Dollars (US$****) (for each such
Year, the "Revenue Threshold"), then N2P will pay ICQ, in partial
consideration for ICQ's marketing and distribution efforts hereunder,
the Revenue Share with respect to the incremental Transaction Revenues
received during any such Year above the Revenue Threshold for such
Year (the "Incremental Transaction Revenues"). N2P will pay all of the
foregoing amounts within thirty (30) days following the end of the
Year in which the applicable Transaction Revenues were received. At
the end of each such Year, the calculation of Transaction Revenues for
purposes of this Section 7.3.1 shall recommence. N2P shall have the
right to collect and retain all Transaction Revenues other than the
Revenue Share paid to or retained by ICQ. To the extent mutually
agreed upon by the Parties in writing in connection with any Billing
Transition, ICQ shall be responsible (following any such Billing
Transition) for calculating the Revenue Share and for paying N2P its
portion of such Revenue Share as contemplated by this Section 7.3.1.

7.3.2 Revenue Share. The "Revenue Share" shall mean the amounts
-------------
to be paid to ICQ (in each case, determined as a percentage of
Incremental Transaction Revenues) set forth on Exhibit H hereto.

7.3.3 **** Users. To the extent that N2P is required to
--------------
share revenue with ****(pursuant to agreements in full force and
effect on the Effective Date) for transaction revenues generated with
respect to the Core Premium Services, any Transaction Revenue received
by N2P hereunder from any **** user with respect to the Core Premium
Services shall not constitute Transaction Revenues for purposes of
this Section.

7.4 No Other Revenue Sharing. Except as expressly provided in this
------------------------
Section 7 and on Exhibit H, neither Party shall be entitled to any
revenues derived from, or related to, the activities of the other
Party.

7.5 Alternative Revenue Streams. In the event that N2P receives or
---------------------------
desires to receive (directly or indirectly) any compensation in
connection with the ICQ Service from the sale of any Products other
than the ICQ IP Telephony Services or as otherwise agreed to by the
Parties (an "Alternative Revenue Stream"), N2P will promptly inform
ICQ in writing, and the Parties will negotiate in good faith regarding
whether N2P will be allowed to market the Products producing such
Alternative Revenue Stream (the "Alternative Products") through the
ICQ Service, and if so, the equitable portion of revenues from such
Alternative Revenue Stream (if applicable) that will be shared with
ICQ.

20
<PAGE>

EXECUTION VERSION

7.6 Reports and Payments. Each Party (the "Paying Party") shall comply
--------------------
with the following requirements in connection with its payment
obligations to the other Party (the "Payee Party") under this
Agreement: Within thirty (30) days following the end of each payment
period, the Paying Party shall provide the Payee Party with a report
that contains information detailing the amount payable for such
payment period. Such report shall, with reasonable detail, explain the
basis upon which such payment has been determined and shall be
accompanied by payment in full of all amounts indicated on such report
as due for such period. Each such report shall constitute Confidential
Information of the Paying Party. Without limiting the generality of
the foregoing:

7.6.1 Reports on Transaction Revenues. N2P will provide
-------------------------------
ICQ with a report in a mutually agreed-upon format, detailing the
following activity in such period (and any other information mutually
agreed upon by the Parties as required for measuring Transaction
Revenues): (i) summary sales information (e.g., total number of
orders, average sales per customer and per order); and (ii) detailed
sales information to be agreed upon by the Parties (collectively,
"Sales Reports"). ICQ will be entitled to use the Sales Reports only
in its internal business operations, subject to the terms of this
Agreement. The report will also contain information which supports the
payment based on Transaction Revenues, including information
identifying gross Transaction Revenues and all items deducted or
excluded from gross Transaction Revenues to produce Transaction
Revenues, including, without limitation, charge-backs and credits for
returned or canceled goods or services (and, where reasonably
practicable, an explanation in general of the types of reasons
therefor (e.g., bad credit card information, poor customer service,
etc.)).

7.6.2 Reports on Advertising Revenue Share. ICQ will provide
------------------------------------
N2P with a quarterly report in a mutually agreed-upon format,
detailing the following in such quarter (and any other information
mutually agreed upon by the Parties as required for measuring
Advertising Revenues): (i) aggregate cash, plus the fair market value
(and basis for determining the fair market value) of any non-cash
consideration received (such as barter advertising), received by ICQ
or any ICQ Affiliate from Advertisements in the Designated Advertising
Areas, (ii) to the extent applicable, the agency fees incurred in
connection with the placement of such Advertisements, and (iii) if
applicable, the basis for allocating revenue from Combined Sales to
Advertisements in the Designated Advertising Areas.

7.7 Late Payments; Wired Payments. All amounts owed hereunder not paid
-----------------------------
when due and payable will bear interest from the date such amounts are
due and payable at the prime rate in effect at such time. All
payments required to be paid to ICQ hereunder will be paid in
immediately available, non-refundable U.S. funds wired to ****. All
payments required to be paid to N2P hereunder will be paid in
immediately available, non-refundable U.S. funds wired to an account
to be designated by N2P (within thirty (30) days following the
Effective Date) in a written notification to ICQ.

7.8 Audit Rights. Each Party (as Paying Party) will maintain complete,
------------
clear and accurate records of the information required to determine
the amounts of payments made hereunder. For the sole purpose of
ensuring compliance with the payment obligations of this Agreement,
either Party (as Payee Party) will have the right to request that an
independent certified accountant selected by the Parties (and which
accountant enters into a confidentiality agreement mutually agreed to
by the Parties) conduct (no more than twice per calendar year of this
Agreement) a reasonable and necessary inspection of portions of such
books and records as are necessary to verify the correctness of the

21
<PAGE>

EXECUTION VERSION

payments made hereunder. Any such audit may be conducted after twenty
(20) business days prior written notice to the Paying Party. The
Payee Party shall bear the expense of any audit conducted pursuant to
this Section 7.8 unless such audit shows an error in the Payee Party's
favor amounting to a deficiency in excess of five percent (5%) of the
actual amounts payable to the Payee Party hereunder, in which event
the Paying Party shall bear the reasonable costs and expenses incurred
in connection with such audit. The Paying Party shall pay the Payee
Party the amount of any deficiency discovered by the Payee Party
within thirty (30) days after receipt of notice thereof from the Payee
Party, except to the extent disputed in good faith by the Paying
Party.

7.9 Taxes. Each Party will collect and pay, and indemnify and hold
-----
harmless the other Party from, any sales, use, excise, import or
export value added or similar tax or duty required to be collected and
paid by such Party, including any penalties and interest, as well as
any costs associated with the collection or withholding thereof,
including attorneys' fees (collectively, the "Taxes").

7.10 Fraudulent Transactions. To the extent permitted by applicable law,
-----------------------
N2P will (i) provide ICQ with prompt notice of any fraudulent order (a
"Fraudulent Order"), including the date, screen name or e-mail address
and amount associated with such order, promptly following N2P
obtaining knowledge that the order is, in fact, fraudulent and (ii) as
promptly as possible following the occurrence of any such Fraudulent
Order (but in no event later than one (1) month after the occurrence
thereof), provide ICQ with a report regarding any such order and the
steps taken by N2P with respect thereto.

7.11 Most Favored Customer. N2P represents that the terms and conditions
---------------------
accorded to ICQ under this Agreement (including any consideration
provided to ICQ and any of its Affiliates in connection herewith) are,
taken as a whole, no less favorable than the terms and conditions
accorded to any (i) ICQ Competitor, (ii) AOL Competitor or (iii)
**** (a "Regulated Telecommunications Service Provider") with respect
to the N2P Services provided to ICQ hereunder. In addition, if during
the Initial Term, N2P enters into an agreement with an ICQ Competitor,
AOL Competitor or Regulated Telecommunications Service Provider with
respect to the N2P Services provided hereunder that accords to such
ICQ Competitor, AOL Competitor or Regulated Telecommunications Service
Provider terms and conditions that, taken as a whole, are more
favorable than those accorded to ICQ under this Agreement (including
any such consideration provided to ICQ and any of its Affiliates in
connection herewith), then N2P shall adjust the terms and conditions
of this Agreement so that ICQ obtains terms and conditions (including
any such consideration provided to ICQ and any of its Affiliates in
connection herewith) that, taken as a whole, are no less favorable
than those accorded to such ICQ Competitor, AOL Competitor or
Regulated Telecommunications Service Provider (as the case may be)
(including any consideration provided to such ICQ Competitor, AOL
Competitor or Regulated Telecommunications Service Provider (as the
case may be) and any Affiliates thereof).

8. STOCK WARRANTS
--------------

Attached hereto as Exhibit G is a form of common stock warrant to be
executed by N2P on behalf of ICQ, or, if ICQ so directs N2P in writing, any
parent, subsidiary or affiliate entity of ICQ (including AOL.). In the
event that ICQ directs N2P to issue such warrant to such other entity, the
Parties agree that such entity shall have the right to enforce the terms of
such warrant against N2P.

22
<PAGE>

EXECUTION VERSION

9. EXCLUSIVITY
-----------

9.1 Scope.
-----

9.1.1 N2P Exclusivity. Except to the extent that ICQ is
---------------
expressly relieved of its exclusivity obligations under this
Agreement, N2P shall be the exclusive provider of the Core Premium
Services on the ICQ Service during the Initial Term (the "N2P
Exclusivity"); provided, however, that ICQ shall be free to enter into
-------- -------
agreements with third parties (including, without limitation, with any
N2P Competitor) for the use, integration, offering and/or promotion of
IP Telephony services (and any other telecommunications services or
products) other than the Core Premium Services within the ICQ Service.
Provided that N2P retains exclusivity hereunder with respect to any
Core Premium Service, ICQ will not promote on the ICQ Service any IP
Telephony service which is comparable to such Core Premium Service.
Notwithstanding the foregoing, unless otherwise agreed by the Parties,
the N2P Exclusivity shall not extend to any country outside the United
States other than the Collective International Gateways. The Parties
hereby acknowledge and agree that the N2P Exclusivity may be
terminated with respect to particular ICQ IP Telephony Services (or
with respect to particular Collective International Gateways) in
accordance with the terms of this Agreement.

9.1.2 ICQ Exclusivity. N2P agrees that N2P shall not (i)
---------------
authorize the public release before **** of a product in which N2P or
any third party has integrated (e.g., **** etc.) the N2P IP Telephony
Software (or any portion thereof) into or with an instant messaging or
similar online, real time messaging product of **** or **** or (ii)
announce or authorize the announcement of the release (whether planned
or actual) of such an integrated product of an **** or an **** (or
announce or authorize the announcement of the distribution of the N2P
IP Telephony Software by or through **** or **** where the
announcement refers to any instant messaging or similar online real
time communications service (e.g., **** etc.))) before the earlier of
**** or the date for public release of each of the initial versions of
the Core Premium Services ("ICQ Exclusivity"). During the Initial
Term, N2P will promote ICQ as a preferred integrated instant messaging
service and product; provided, however, that during the Initial Term,
-------- -------
N2P shall not promote an instant messaging service or similar online,
real time messaging product of an ICQ Competitor or an AOL Competitor
more prominently than ICQ. Notwithstanding the foregoing, the Parties
hereby acknowledge that N2P shall have the right to offer its PC-to-PC
voice-enabled chat service to any third party following the earlier of
(a) June 5, 2000 or (b) three (3) months following the date on which
ICQ integrates such voice-enabling chat service into the ICQ Service.

9.2 Optional Services. With respect to all Optional Services and other IP
-----------------
Telephony services not expressly contemplated by this Agreement, ICQ
shall offer N2P a **** (not to exceed **** (****)) with respect to the
offering of such additional services through the ICQ Service. In the
event that the Parties cannot agree, within such time period, to the
terms and conditions regarding the provision of any such additional
service to ICQ Users through the ICQ Service, ICQ shall have the right
to offer such additional service(s) to ICQ Users through any third
party (including, without limitation, any N2P Competitor).

9.3 Termination of Exclusivity. In the event that ICQ is entitled to
--------------------------
relief from the N2P Exclusivity as to a particular Core Premium
Service and/or country in accordance with the express terms and
conditions of this Agreement, then only the N2P Exclusivity with
respect to such Core Premium Service and/or country (as the case may
be and subject to Section 16 hereof) shall terminate.

23
<PAGE>

EXECUTION VERSION

9.4 Exception to Exclusivity. For the avoidance of doubt, the Parties
------------------------
acknowledge that the N2P Exclusivity does not preclude the listing of
N2P Competitors or any AOL PC-to-PC communication function in any
whites pages, yellow pages or other online search or directory
service, subject to Section 4.1.4 and Section 7.2.4.

10. LICENSE FROM N2P
----------------

10.1 License.
-------

10.1.1 Software License. Subject to all the terms and
----------------
conditions of this Agreement, N2P hereby grants to ICQ a worldwide,
non-exclusive, non-transferable, royalty-free license for the Term to
use, reproduce, distribute directly and indirectly, transmit, display,
perform and sublicense (i.e., grant to end-users the right to use) and
adapt the ICQ IP Telephony Software, including any and all components
contained in the ICQ IP Telephony Software necessary to effectuate the
provision of the ICQ IP Telephony Services to ICQ, and the use by end-
users of the ICQ IP Telephony Services, in each case, in object code
form only (except as provided in Section 10.2) in accordance with the
terms of this Agreement. To the extent reasonably requested by ICQ,
N2P shall deliver the ICQ IP Telephony Software electronically to ICQ.

10.1.2 Purpose of License. The foregoing license is expressly
------------------
intended to permit (and limited to permitting) ICQ to effectuate all
of its rights and conduct all of the business expressly contemplated
hereunder, including distributing the ICQ IP Telephony Services
pursuant to the terms and conditions of this Agreement. Except as set
forth in Sections 10.2 and 12.1 or as otherwise set forth in this
Agreement (including, without limitation, with respect to the ICQ
GUI), ICQ acknowledges and agrees that N2P and its licensors retain
all rights, title and interest in and to the ICQ IP Telephony Software
in both object and source code forms. ICQ shall not have any right
under any circumstances, or authorize any third party (which, for
avoidance of doubt, includes any Affiliate of ICQ), to (i) **** the
ICQ IP Telephony Software (other than adaptation in accordance with
Section 10.1.1 or as otherwise authorized by the Source Code Escrow
Agreement or license described in Section 10.2), (ii) **** or
otherwise **** the source code for or underlying algorithms, processes
or methods of the ICQ IP Telephony Software that is provided in object
code form, or (iii) **** or **** the ICQ IP Telephony Software to any
third party (other than as expressly provided in this Agreement). All
copies of the ICQ IP Telephony Software made hereunder shall include
all proprietary notices included on the copy provided by N2P, and ICQ
shall not remove, deface or obscure or authorize to be removed,
defaced or obscured any of N2P's or its licensors' proprietary rights
notices on or in the ICQ IP Telephony Software or on output generated
by the software; provided that the placement of such notices, if any,
in the ICQ IP Telephony Software that are visible in the user
interface of such software shall be subject to ICQ's prior written
approval, which approval will not be unreasonably withheld. ICQ agrees
that any and all copies of the ICQ IP Telephony Software distributed
to third parties shall be pursuant to binding license agreements no
less restrictive or protective of N2P's rights than this Section 10.1.
ICQ agrees that any material violation of this Section 10.1 by ICQ
that is not cured by ICQ within thirty (30) days shall constitute a
material breach of this Agreement. N2P agrees to provide the ICQ IP
Telephony Software in object code form, including all required
Documentation, to ICQ as and when needed for ICQ to exercise its
rights under this Agreement. For the avoidance of doubt, the Parties
acknowledge that the host components of the ICQ IP Telephony Software,
if any, are for use only by ICQ and may not be provided to any third
party.

24
<PAGE>

EXECUTION VERSION

10.2 Source Code License and Escrow.
------------------------------

10.2.1 Escrow Agreement. N2P and ICQ will enter into an escrow
----------------
agreement (the "Source Code Escrow Agreement"), containing terms and
conditions subject to the mutual agreement of the Parties, for the
limited use by ICQ of the ICQ IP Telephony Software in source code
form (the "Source Code") solely for the purposes of undertaking any
activity which N2P is obligated to perform or undertake hereunder and
fails to perform or undertake as required hereunder. The Source Code
Escrow Agreement shall provide that ICQ shall be entitled to a copy of
the Source Code only upon the occurrence of all of the following three
(3) events (collectively, the "Release Conditions"): (i) N2P's
material breach of its material obligations hereunder to provide,
maintain or support the ICQ IP Telephony Software, which breach
materially adversely affects the ICQ IP Telephony Services; (ii) ICQ's
written notice to N2P detailing such material breach; and (iii) N2P
fails to cure such material breach within ninety (90) days of receipt
of such notice. The license will not include any right to ****
the Source Code to any third party without N2P's prior written
consent, and the Source Code Escrow Agreement will contain provisions,
reflective of the sensitivity of the Source Code, to preclude the
unauthorized use or disclosure of the Source Code or information
derived therefrom. Promptly after execution of this Agreement, and in
any event within thirty (30) days, N2P and ICQ shall negotiate and
enter into the Source Code Escrow Agreement with Data Securities
International or another escrow holder acceptable to each Party. The
Source Code Escrow Agreement will contain provisions for N2P to
provide ICQ with reasonable assistance in understanding and using the
Source Code upon occurrence of the Release Conditions.

10.2.2 Limited Source Code License. To the extent reasonably
---------------------------
necessary for ICQ to modify, develop, add, delete or use any
functionality or features of the ICQ IP Telephony Services in
connection with the development of any Additional ICQ Modifications
pursuant to Section 2.3.4, N2P shall provide to ICQ APIs to the ICQ IP
Telephony Software so that such Additional Modifications (whether
developed by N2P, ICQ or any third party) can interoperate with
(including use of the principal functions of) the ICQ IP Telephony
Software; provided, however, that, to the extent that such APIs are
-------- -------
insufficient to enable such interoperability, N2P shall either (i)
modify, as promptly as commercially practicable, the APIs (at no cost
to ICQ), the ICQ IP Telephony Software or the Additional Modifications
to enable such interoperability, or (ii) in the event that (a) N2P
does not perform the work described in clause (i) of this Section
10.2.2 as promptly as commercially practicable or (b) elects not to
perform such work, provide to ICQ portions of the Source Code for the
ICQ IP Telephony Software (and grant a license) necessary to permit
ICQ to modify the APIs or ICQ IP Telephony Software to enable such
interoperability. If N2P elects to do the modifications, it shall
make the modifications as promptly as is commercially reasonable.
ICQ's use of the Source Code pursuant to this Section 10.2.2 will not
include any right to sublicense, transfer, assign, disclose or
distribute the Source Code to any third party without N2P's prior
written consent, and will be subject to mutually agreed provisions,
reflective of the sensitivity of the Source Code, to preclude the
unauthorized use or disclosure of the Source Code or information
derived therefrom.

10.2.3 Limits on Use. ICQ's use of the Source Code shall not
-------------
exceed the narrow purpose set forth in Section 10.2.1 or Section
10.2.2.

10.3 Trademark License. Subject to the terms and conditions of this
-----------------
Agreement, N2P will be entitled to use the following trade names,
trademarks, and service marks of ICQ: the "ICQ(TM)" trademark and
service mark and other trademarks and service marks relating
specifically to one or more of the ICQ IP Telephony Services, provided
that ICQ has approved in writing the use of each such other trademarks
or service marks (collectively,

25
<PAGE>

EXECUTION VERSION

the "ICQ Marks"). Subject to the terms and conditions of this
Agreement, ICQ will be entitled to use the trademarks and service
marks of N2P set forth on Exhibit J hereto and other trademarks and
service marks relating specifically to one or more of the N2P IP
Telephony Services, provided that N2P has approved in writing the use
of such other trademarks or service marks (collectively, the "N2P
Marks") (collectively, together with the ICQ Marks, the "Marks");
provided that: (i) each Party does not create a unitary composite mark
--------
involving a Mark of the other Party without the prior written approval
of such other Party; (ii) each Party displays symbols and notices
clearly and sufficiently indicating the trademark status and ownership
of the other Party's Marks in accordance with applicable trademark law
and practice; and (iii) all such uses of the other Party's Marks shall
be subject to the quality standards set forth in Section 10.5 of this
Agreement, and the granting Party's prior written approval.

10.4 Ownership of Trademarks. Each Party acknowledges the ownership
-----------------------
right of the other Party in the Marks of the other Party and agrees
that all use of the other Party's Marks will inure to the benefit, and
be on behalf, of the other Party. Each Party acknowledges that its
utilization of the other Party's Marks will not create in it, nor will
it represent it has, any right, title, or interest in or to such Marks
other than the licenses expressly granted herein. Each Party agrees
not to do anything contesting or impairing the rights of the other
Party in such other Party's Marks.

10.5 Quality Standards. Each Party agrees that the nature and quality
-----------------
of its products and services supplied in connection with the other
Party's Marks will conform to quality standards set by the other
Party. Each Party agrees to supply the other Party, upon request,
with a reasonable number of samples of any materials publicly
disseminated by such Party which utilize the other Party's Marks.
Each Party will comply with all applicable laws, regulations, and
customs and obtain any required government approvals pertaining to use
of the other Party's Marks.

10.6 Infringement Proceedings.
------------------------

10.6.1 Notification. Each Party agrees to promptly notify the
------------
other Party of any third party's unauthorized use of the other Party's
Marks or other intellectual property rights (including, without
limitation, those set forth in Section 12) of which it has actual
knowledge. Each Party will have the sole right and discretion to
bring proceedings alleging infringement of its Marks and other
intellectual property rights; provided, however, that each Party
-------- -------
agrees to provide the other Party with its reasonable cooperation and
assistance with respect to any such infringement proceedings.

10.6.2 Infringement Claims. In addition to the remedies set
-------------------
forth in Sections 16.2 and 16.7 of this Agreement, in the event that
during the Initial Term, one (1) or more infringement actions, claims
or proceedings are brought against either Party concerning (i) ****
(each an "Infringement Claim" and collectively, "Infringement Claims")
and such Infringement Claim or Infringement Claims result(s) in the
issuance of a preliminary or permanent injunction prohibiting the
promotion, distribution or use of **** (****) **** during the Initial
Term, and which last (with respect to each such service) **** (****)
following the issuance thereof, ICQ shall have the following rights
and remedies with respect to N2P:

(a) ICQ may immediately terminate its exclusivity obligations with
respect to such preliminarily or permanently enjoined Core Premium
Services upon delivery of notice to N2P; and

26
<PAGE>

EXECUTION VERSION

(b) ICQ shall be entitled to immediately terminate this Agreement
in the event that (a) an injunction or injunctions (whether
preliminary or permanent) is or are issued with respect to any Core
Premium Service or Core Premium Services, and (b) any such injunction
or injunctions lasts or last, in the aggregate, for a period of ****
(****) ****.

11. PUBLICITY
---------

11.1 Press Releases. After execution of this Agreement, N2P may issue an
--------------
initial press release, with terms to be mutually agreed by the
Parties, regarding this Agreement and the relationship between the
Parties established hereby. Prior to (i) the launch of the PTP
Calling Card Service and (ii) the launch of the 2000a ICQ Client, N2P
may issue an additional press release, with terms to be mutually
agreed by the Parties in advance. The Parties will mutually agree on
the appropriate timing of each such release and any other public
announcement of the relationship. Each Party agrees that it shall not
issue any other press release or make any public announcement
regarding this Agreement, including ICQ or the ICQ IP Telephony
Services, without the prior written consent of the other Party;
provided, however, that each Party shall be permitted, without the
-------- -------
other Party's prior consent, merely to list the other Party's as one
of its industry partners and to repeat factual information or
statements contained in any mutually agreed-upon press release.

11.2 Statements to Third Parties. Neither Party shall make, publish, or
---------------------------
otherwise communicate, or cause to be made, published, or otherwise
communicated, any deleterious remarks whatsoever to any third parties
concerning the other Party or its affiliates, directors, officers,
employees or agents, including without limitation, the other Party's
products, services, business projects, business capabilities,
performance of duties and services or financial position.

12. OWNERSHIP
---------

12.1 ICQ Properties. As between the Parties, ICQ owns all copyrights,
--------------
patents, trade secrets, trademarks, trade name rights, other
intellectual property rights, and all other right, title and interest,
in and to (i) the components of the ICQ Client and the ICQ Service,
and any Updates thereto, including, but not limited to the ICQ GUI,
that (in each case) are developed or supplied by ICQ and (ii) the
Commissioned Works (but excluding the Joint Work Product), subject to
the rights expressly granted to N2P as set forth in this Agreement.
Without limiting the generality of the foregoing, all right, title and
interest in and to all servers and server-based technology related to
the ICQ Service developed or supplied by ICQ (including, without
limitation, protocols, parameters, designs, specifications and user
identification algorithms and technology underlying such algorithms)
shall be owned by ICQ.

12.2 N2P Properties. As between the Parties, N2P owns all copyrights,
--------------
patents, trade secrets, trademarks, trade name rights, other
intellectual property rights, and all other right, title and interest,
in and to the N2P System, the N2P Services (including, but not limited
to, the elements of graphics, design, organization, presentation,
layout, navigation and stylistic convention (including the digital
implementations thereof) of the graphical user interface generally
associated with online areas contained within the N2P System and the
N2P Services), the N2P IP Telephony Software, the ICQ IP Telephony
Software and the ICQ IP Telephony Services (including, in each case,
Updates thereto) that (in each case) are developed or supplied by N2P
(but excluding the ICQ GUI, the Joint Work Product and the
Commissioned Works), subject to the rights expressly granted to ICQ as
set forth in this Agreement. Without limiting the generality of the
foregoing, all right, title

27
<PAGE>

EXECUTION VERSION

and interest in and to all servers and server-based technology related
to the N2P System and the N2P Services developed or supplied by N2P,
including, without limitation, protocols, parameters, designs,
specifications and user identification algorithms and technology
underlying such algorithms, shall be owned by N2P.

12.3 Co-Development. Any works, including without limitation, software or
--------------
other copyrightable materials, as to which both Parties (or their
employees, contractors or agents) are joint authors, and any patents
as to which both Parties (or their employees, contractors, or agents)
are co-inventors (collectively, the "Joint Work Product") shall be
jointly owned by the Parties (with each Party having the right to use
and exploit, or authorize the use or exploitation by others of such
Joint Work Product, provided that such use or exploitation is not in
breach of this Agreement), without an obligation to obtain the consent
of, or to account to, the other Party and subject to N2P's and ICQ's
respective proprietary rights in any underlying software, works, or
technology to the extent incorporated or included in such Joint Work
Product. Notwithstanding the foregoing, to the extent that with
respect to any co-developed works created under this Agreement, the
Parties shall not constitute co-authors or co-inventors, and N2P owns
such works or inventions as a matter of law, any and all such works or
inventions shall be deemed included in the license set forth in
Section 10.1, and ICQ shall be deemed by this reference to have a
fully paid-up, royalty-free, non-exclusive, non-transferable and
worldwide license for the Term to use, reproduce, distribute (directly
and indirectly), transmit, display, perform, sublicense and adapt such
works as set forth in Section 10.1 of this Agreement. Each Party
shall cooperate with the other Party in documenting and perfecting all
rights with respect to the Joint Work Product, including executing any
necessary assignments, applications or other documentation with
respect to the Joint Work Product.

13. CONFIDENTIAL INFORMATION
------------------------

Each Party acknowledges that Confidential Information may be disclosed to
the other Party during the course of this Agreement. Each Party agrees
that it will take reasonable steps, at least substantially equivalent to
the steps it takes to protect its own proprietary information (and, in no
event, with less than the exercise of reasonable care), during the Term,
and for a period of **** (****) **** following expiration or termination
of this Agreement, to prevent the duplication or disclosure of Confidential
Information of the other Party, other than by or to its employees or agents
who must have access to such Confidential Information to perform such
Party's obligations hereunder, each of whom shall agree to comply with this
Section. Notwithstanding the foregoing, either Party may disclose
Confidential Information without the consent of the other Party, to the
extent such disclosure is required by law, rule, regulation or government
or court order. In such event, the disclosing Party will provide at least
five (5) business days' prior written notice of such proposed disclosure to
the other Party. Furthermore, in the event that such disclosure is required
of either Party under the laws, rules or regulations of the Securities and
Exchange Commission or any other applicable governing body, such Party will
(i) redact portions of this Agreement (as reasonably agreed to by both
Parties) to the fullest extent permitted under applicable laws, rules and
regulations and (ii) submit a request to such governing body that such
portions and other provisions of this Agreement receive confidential
treatment under the laws, rules and regulations of the governing body or
otherwise be held in the strictest confidence to the fullest extent
permitted under such laws, rules and regulations.

14. REPRESENTATIONS AND WARRANTIES; INDEMNITIES
-------------------------------------------

14.1 Joint. Each Party represents and warrants to the other Party that:
-----
(i) such Party has the full corporate right, power and authority to
enter into this Agreement, to grant the licenses

28
<PAGE>

EXECUTION VERSION

granted hereunder and to perform the acts required of it hereunder;
(ii) the execution of this Agreement by such Party, and the
performance by such Party of its obligations and duties hereunder, do
not and shall not violate any agreement to which such Party is a party
or by which it is otherwise bound or any applicable law; (iii) when
executed and delivered by such Party, this Agreement shall constitute
the legal, valid and binding obligation of such Party, enforceable
against such Party in accordance with its terms; and (iv) to the best
of its knowledge after due inquiry, the N2P Indemnified Properties (in
the case of N2P) and the ICQ Indemnified Properties (in the case of
ICQ) do not infringe, misappropriate or violate any patents,
copyrights, trade secrets, trademarks or other proprietary rights of
any third parties. Additionally, N2P hereby represents, to the best of
its knowledge and after due inquiry, that it possesses (and warrants
that it will obtain during the Term) all authorizations, approvals,
consents, licenses, permits, certificates and all other rights and
permissions necessary for it to (a) perform under this Agreement or
(b) to offer the ICQ IP Telephony Software and the ICQ IP Telephony
Services hereunder (including, without limitation, the N2P Services
and N2P IP Telephony Software offered as part thereof).

14.2 Intellectual Property Indemnity. Each Party (the "IP Indemnifying
-------------------------------
Party") shall, at its sole cost and expense, indemnify, hold harmless
and defend the other Party, and such other Party's officers,
directors, agents, affiliates, distributors, franchisees and employees
(the "IP Indemnified Party"), from any and all claims, demands,
liabilities, costs or expenses of third parties (including, without
limitation, reasonable attorney's fees) (collectively, the
"Liabilities") arising from or in connection with a third-party claim
that the N2P Indemnified Properties (in the case of N2P) or the ICQ
Indemnified Properties (in the case of ICQ) infringes upon any
patents, copyrights, trade secrets, trademarks or other proprietary
rights of such third party. The IP Indemnifying Party shall pay any
damages (including costs and attorneys' fees) finally awarded against
the IP Indemnified Party by a court of competent jurisdiction as a
result of such claim (or pay any settlement of such claim agreed to by
the IP Indemnifying Party). The foregoing obligation of the
Indemnifying Party shall not apply to any such claim to the extent
that it is based on or arises out of services, software, materials or
rights specifically granted pursuant to this Agreement by the IP
Indemnified Party. The IP Indemnified Party shall promptly notify the
IP Indemnifying Party in writing of any indemnifiable claim after the
IP Indemnified Party first learns of such claim, and shall provide the
Indemnifying Party with such assistance and cooperation as the IP
Indemnifying Party may reasonably request from time to time in
connection with the defense or settlement thereof. The IP Indemnified
Party shall have the right to employ separate counsel and to
participate in the defense of any such claim at its own expense. If
any settlement requires a material affirmative obligation of, results
in any material ongoing liability to, or prejudices or detrimentally
impacts in any material way, the IP Indemnified Party, then such
settlement shall require the IP Indemnified Party's written consent,
which shall not be unreasonably withheld. If the IP Indemnified Party
is enjoined or restrained from exercising any of its rights under this
Agreement as a result of an infringement claim, or if any such claim
is brought or threatened, the IP Indemnifying Party shall have the
right, at its option, to (i) obtain a license at no cost to the IP
Indemnified Party permitting continued use of the software or other
materials that are the subject of such claim on terms and conditions
consistent with the rights granted to the IP Indemnified Party
hereunder, (ii) modify the software or other materials that are the
subject of such claim to perform their intended function without
infringing third party rights and without materially affecting the
functionality or performance of such software or other materials,
(iii) substitute software or other materials that are the subject of
such claim with items of comparable functionality and performance, or
(iv) if none of the foregoing is reasonably practicable, terminate
this Agreement.

29
<PAGE>

EXECUTION VERSION

14.3 Indemnity. Each Party (the "Indemnifying Party") shall, at its
---------
sole cost and expense, indemnify, hold harmless and defend the other
Party, and its officers, directors, agents, affiliates, distributors,
franchisees and employees (the "Indemnified Party"), from any and all
Liabilities arising from or in connection with a third-party claim
based upon the Indemnifying Party's material breach of any duty,
representation or warranty contained in this Agreement, and shall pay
any damages (including costs and attorneys' fees) finally awarded
against the Indemnified Party by a court of competent jurisdiction as
a result of such claim (or pay any settlement of such claim agreed to
by the Indemnifying Party). The foregoing obligation of the
Indemnifying Party shall not apply to any such claim to the extent
that it is based on or results from services, software, materials,
information or rights provided by the Indemnified Party. The
Indemnified Party shall promptly notify the Indemnifying Party in
writing of any indemnifiable claim after the Indemnified Party first
learns of such claim, and shall provide the Indemnifying Party with
such assistance and cooperation as the Indemnifying Party may
reasonably request from time to time in connection with the defense or
settlement thereof. The Indemnified Party shall have the right to
employ separate counsel and to participate in the defense of any such
claim at its own expense. If any settlement requires a material
affirmative obligation of, results in any material ongoing liability
to, or prejudices or detrimentally impacts the Indemnified Party in
any material way, then such settlement shall require the Indemnified
Party's written consent, which shall not be unreasonably withheld.

15. LIMITATION ON LIABILITY; DISCLAIMER
-----------------------------------

15.1 Liability. UNDER NO CIRCUMSTANCES WILL EITHER PARTY BE LIABLE TO THE
---------
OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR
EXEMPLARY DAMAGES (EVEN IF THAT PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES), ARISING FROM BREACH OF OR OTHERWISE
RELATING TO THIS AGREEMENT OR THE SUBJECT MATTER HEREOF, INCLUDING,
WITHOUT LIMITATION, THE SALE OF PRODUCTS, THE USE OR INABILITY TO USE
THE ICQ SERVICE, THE ICQ CLIENT, THE ICQ IP TELEPHONY SERVICE, THE
SUPPORT AREA, THE ICQ IP TELEPHONY SOFTWARE, THE N2P SYSTEM, OR THE
N2P IP TELEPHONY SOFTWARE, INCLUDING, BUT NOT LIMITED TO, LOSS OF
REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS (COLLECTIVELY,
"DISCLAIMED DAMAGES"); PROVIDED THAT EACH PARTY WILL REMAIN LIABLE TO
THE OTHER PARTY TO THE EXTENT ANY DISCLAIMED DAMAGES ARE PAYABLE TO A
THIRD PARTY AND ARE SUBJECT TO INDEMNIFICATION PURSUANT TO SECTION
14.2 OR 14.3. EXCEPT FOR SUCH LIABILITY UNDER SECTIONS 14.2 AND
14.3, (I) LIABILITY ARISING UNDER THIS AGREEMENT WILL BE LIMITED TO
DIRECT, OBJECTIVELY MEASURABLE DAMAGES, AND (II) THE MAXIMUM LIABILITY
OF ONE PARTY TO THE OTHER FOR ANY CLAIMS ARISING IN CONNECTION WITH
THIS AGREEMENT WILL NOT EXCEED (EXCLUSIVE OF AMOUNTS ALREADY PAID BY
EITHER PARTY TO THE OTHER PARTY HEREUNDER) **** ($****); PROVIDED THAT
EACH PARTY WILL REMAIN LIABLE FOR THE AGGREGATE AMOUNT OF ANY PAYMENT
OBLIGATIONS DUE AND PAYABLE TO THE OTHER PARTY PURSUANT TO THE
AGREEMENT.

15.2 No Additional Warranties. EXCEPT AS EXPRESSLY SET FORTH IN THIS
------------------------
AGREEMENT, NEITHER PARTY MAKES, AND EACH PARTY HEREBY SPECIFICALLY
DISCLAIMS, ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE AND IMPLIED WARRANTIES ARISING FROM COURSE OF
DEALING OR COURSE OF PERFORMANCE. WITHOUT LIMITING THE GENERALITY OF
THE FOREGOING, EACH PARTY SPECIFICALLY DISCLAIMS ANY WARRANTY
REGARDING THE

30
<PAGE>

EXECUTION VERSION

REVENUE FROM OR SUCCESS OF THE ICQ IP TELEPHONY SERVICES.

16. TERM AND TERMINATION
--------------------

16.1 Term.
----

16.1.1 Initial Term. Unless earlier terminated as set forth
------------
herein, the initial term of this Agreement (the "Initial Term") shall
be four (4) years from the Effective Date.

16.1.2 Extension Periods. Upon the expiration of the Initial
-----------------
Term, ICQ may elect, in its sole discretion, to extend the term of
this Agreement for two additional periods of **** (****) **** each
(each, an "Extension Period"), up to an aggregate maximum of ***
(****) **** (the Initial Term, together with any Extension Periods,
collectively referred to herein as the "Term"). ICQ shall be deemed to
have exercised its option for any Extension Period unless, at least
thirty (30) days prior to the expiration of the Initial Term (or, as
to the second Extension Period, at least thirty (30) days prior to the
end of the first Extension Period), ICQ provides written notice to N2P
that ICQ does not wish to exercise its option for the forthcoming
Extension Period. During any Extension Period, the obligations of the
Parties with respect to exclusivity, development, promotions and
performance shall not apply. Without limitation of the generality of
the foregoing, during any Extension Period, (i) the Parties will not
be subject to the obligations of Sections **** of this Agreement; (ii)
N2P shall not be required to pay ICQ any guaranteed fixed payments;
and (iii) N2P shall continue to pay ICQ the Revenue Share set forth in
Exhibit H hereto with respect to all Transaction Revenues generated
during the Extension Period and ICQ shall continue to pay to N2P the
Advertising Revenue Share set forth in Section 7.2.2 of this
Agreement. In addition, N2P reserves the right during any Extension
Period to cease providing particular ICQ IP Telephony Services in
particular countries, provided that it may not cease providing the ICQ
--------
IP Telephony Services in the top **** percent (****%) of Collective
International Gateways, based on the respective amount of Transaction
Revenues generated in or from each such Collective International
Gateway during the Initial Term.

16.2 Termination for Breach. Except as expressly provided elsewhere in
----------------------
this Agreement, either Party may terminate this Agreement at any time
in the event of a material breach of the Agreement by the other Party
which remains uncured after thirty (30) days written notice thereof to
the other Party (or such other period as may be expressly specified
elsewhere in this Agreement); provided that the cure period with
--------
respect to any scheduled payment shall be thirty (30) days following
receipt by the Party owing such payment of written notice of the
failure to make such payment. For avoidance of doubt, the Parties
acknowledge that, if a particular provision of this Agreement includes
a right to terminate this Agreement due to breach of such provision
after a cure period set forth in such provision, only such other cure
period shall apply, and the thirty (30) day cure period set forth in
this Section 16.2 shall not be in addition to such other cure period.

16.3 Termination on Change of Control. Promptly upon undergoing any Change
--------------------------------
of Control, each Party shall provide the other Party with written
notice thereof. In the event of (i) a Change of Control of N2P
resulting in Control of N2P by an ICQ Competitor or AOL Competitor or
(ii) in the event that N2P is (at the time of such Change of Control)
Controlled by the Parent Company, any Change of Control of the Parent
Company resulting in Control of the Parent Company by any ICQ
Competitor or AOL Competitor, ICQ shall have the right to terminate
this Agreement by providing thirty (30) days' prior

31
<PAGE>

EXECUTION VERSION

written notice of such intent to terminate. In the event of (i) a
Change of Control of ICQ resulting in Control of ICQ by an N2P
Competitor or Parent Company Competitor or (ii) if ICQ is (at the time
of such Change of Control) Controlled by AOL, any Change of Control of
AOL resulting in Control of AOL by any N2P Competitor or Parent
Company Competitor, N2P may terminate this Agreement by providing
thirty (30) days' prior written notice of such intent to terminate.
Notwithstanding anything to the contrary, each Party's termination
right under this Section 16.3 shall be exercised no later than thirty
(30) days following such Party's receipt of written notice of the
Change of Control triggering such termination right, and shall expire
if not exercised within such thirty (30) day period.

16.3.1 ICQ Buyout Right. Notwithstanding the provisions of the
----------------
Section 16.3, if during the Initial Term, AOL or ICQ is acquired by or
acquires a telecommunications company with a market capitalization in
excess of the Buyout Threshold, ICQ shall have the right to terminate
this Agreement by providing thirty (30) days prior written notice to
N2P and ICQ shall refund to N2P an amount equal to the product of the
pro rata portion (based on a four (4) year term) of any guaranteed
--- ----
payments made by N2P prior to the date of such early termination
multiplied by **** (****) (e.g., if such termination occurs on the two
(2) year anniversary of the Effective Date, and N2P has paid ICQ
**** (US$****) in guaranteed payments as required by the terms of this
Agreement, ICQ shall refund to N2P **** percent (****%) of such
guaranteed payments multiplied by **** (****), or **** Dollars
($****)).

16.4 Termination for Bankruptcy/Insolvency. Either Party may terminate
-------------------------------------
this Agreement immediately following written notice to the other party
if the other party (i) ceases to do business in the normal course,
(ii) becomes or is declared insolvent or bankrupt, (iii) is the
subject of any proceeding related to its liquidation or insolvency
(whether voluntary or involuntary) which is not dismissed within
ninety (90) calendar days or (iv) makes an assignment for the benefit
of creditors.

16.5 Termination for Regulated Entity Event.
--------------------------------------

16.5.1 United States. The Parties acknowledge that in
-------------
undertaking the obligations set forth herein, ICQ is not offering
services as a reseller of telecommunications services or as a provider
of telecommunications services. It is understood and agreed that if,
during the Term, the Federal Communications Commission or any other
relevant United States federal regulatory body issues (or is
reasonably likely to issue) a ruling that subjects (or is reasonably
likely to subject, as the case may be) ICQ to regulation as a reseller
or provider of telecommunications services (or similar regulation)
(collectively, a "Regulated Entity Event"), the Parties agree to work
together in good faith to amend this Agreement to ensure that ICQ can
secure the benefit of the bargain under this Agreement without being
subject to telecommunications related regulation in the United States
as a telecommunications reseller or provider (or similar status). If
the Parties are unable to agree upon such amendments within ninety
(90) days of ICQ's notification of the Regulatory Entity Event, ICQ
may terminate this Agreement without liability by providing written
notice of its intention to terminate.

16.5.2 International. In the event that during the Term any
-------------
non-US regulatory body issues (or is reasonably likely to issue) a
ruling that subjects (or is reasonably likely to subject, as the case
may be) ICQ to a telecommunications or similar regulation that could
prevent ICQ from obtaining the benefit of the bargain under this
Agreement (e.g., regulation as a reseller or provider of
telecommunications services (or similar status)), the Parties shall
work together in good faith to amend this Agreement to ensure that ICQ
can

32
<PAGE>

EXECUTION VERSION

secure the benefit of the bargain under this Agreement without being
subject to telecommunications related or similar regulation in such
country. If the Parties are unable to agree upon such amendments
within ninety (90) days of ICQ's notification of the regulatory event
likely to cause ICQ to be subjected to any such regulation, ICQ may
terminate this Agreement with respect to the country (or countries) in
which such regulatory event applies without liability, upon delivery
of written notice.

16.6 Termination for Non-Competitiveness. At any time following the one
-----------------------------------
(1) year anniversary of the Effective Date, (i) ICQ shall have the
right to terminate this Agreement, in the event that:

(a) **** (****) or more of the Core Premium Services do not satisfy
the requirements of Section 3.1 of this Agreement;

(b) **** (****) or more of the Core Premium Services do not satisfy
the requirements of Section 3.2 of this Agreement;

(c) **** (****) or more of the Core Premium Services are not Best
of Breed as defined in Section 3.3(i) or Section 3.3(ii) of this
Agreement (notwithstanding N2P's efforts to satisfy such standard);

(d) N2P is not Best of Breed as defined in Section 3.3(iii) of this
Agreement (notwithstanding N2P's efforts to satisfy such standard); or

(e) N2P shall have missed the Cutoff Dates for **** (****) or more
Core Premium Services in accordance with and subject to Section 1.3 of
this Agreement;

unless (ii) N2P cures such failure within the applicable cure
------
periods set forth in Section 3.1 (in the case of clause (a) above),
Section 3.2 (in the case of clause (b) above), Section 3.3 (in the
case of clauses (c) and (d) above) or Section 1.3 and Exhibit I (in
the case of clause (e) above), respectively.

16.7 ICQ IP Termination Right. At any time during the Term, in the event
------------------------
that any Infringement Claim(s) materially adversely affect the
integration, distribution, promotion or offering of the ICQ IP
Telephony Software or any ICQ IP Telephony Service, then ICQ shall
have the right to terminate this Agreement upon thirty (30) days prior
written notice to N2P, and without any refund to N2P (collectively,
the "IP Termination Right").

16.8 Termination for Strategic Relationship; Termination Fee.
-------------------------------------------------------
If at any time after the two (2) year anniversary of the Effective
Date, AOL enters into a broad-ranging, strategic relationship with (i)
any major national or international telecommunications company
(****), (ii) any **** or (iii) any major wireless carrier (****) for
the distribution of telecommunication services across substantially
all of the properties of AOL and its Affiliates as in existence on the
Effective Date (collectively, the "New Strategic Relationship"), then
ICQ shall have the right to terminate this Agreement; provided,
--------
however, that ICQ and AOL (as applicable) shall use commercially
-------
reasonable efforts to have such company enter into an agreement with
N2P to distribute or otherwise offer the Core Premium Services in
connection with such New Strategic Relationship on terms and

33
<PAGE>

EXECUTION VERSION

conditions comparable to those contained herein (including those with
respect to promotion, distribution, exclusivity for N2P and revenue
share to N2P, but specifically excluding any warrants or similar
rights). In the event of any such termination of this Agreement
pursuant to this Section 16.8, ICQ shall pay N2P (as its sole and
exclusive remedy), within **** (****) days after the earlier of notice
to N2P of the New Strategic Relationship or the public announcement by
AOL of the New Strategic Relationship, a termination fee of ****
dollars (US$****); provided, however, that (a) if, before the
-------- -------
expiration of such **** (****) day period, such company and N2P have
entered into such an agreement to distribute or otherwise offer some
but not all of the Core Premium Services in connection with such New
Strategic Relationship, then ICQ shall instead pay N2P (as its sole
and exclusive remedy) a termination fee equal to the pro rata share of
such **** Dollars (US$****), based on the percentage of the aggregate
Transaction Revenues to date represented by the Core Premium
Service(s) that will not be distributed or otherwise offered by such
company (i.e., the Core Premium Services of N2P that are not included
in such agreement between such company and N2P) (e.g., in the event
such company does not agree with N2P to distribute or otherwise offer
the PC-to-PC Service and the PC-to-Phone Service in connection with
such New Strategic Relationship, and the Transaction Revenues
generated by such services represent seventy-five percent (75%) of the
aggregate Transaction Revenues to date, then ICQ shall pay N2P ****
dollars (US$****)); or (b) if, before the expiration of such ****
(****) day period, such company and N2P have entered into such an
agreement to distribute or otherwise offer all of the Core Premium
Services in connection with such New Strategic Relationship, then ICQ
shall have no obligation to pay any such termination fee to N2P. The
Parties acknowledge and agree that the payment contemplated by this
Section 16.8 is solely a termination fee agreed to by the Parties, and
shall not be used to determine any damages payable by either Party to
the other Party hereunder, which shall be determined in accordance
with the remainder of this Agreement (including, without limitation,
Section 15.1 hereof) and applicable law.

16.9 Transition Assistance. In the event of any termination of this
---------------------
Agreement other than pursuant to Sections 16.1, 16.4 or 16.5, each
Party will provide to the other Party the dedicated, full-time
services of one (1) qualified engineer for a period of ninety (90)
days to assist the other Party in effecting an orderly termination of
this Agreement, including minimizing disruption for customers of the
ICQ IP Telephony Services. In the event of termination due to an ICQ
material breach of this Agreement pursuant to Section 16.2, or a
Change of Control of ICQ under Section 16.3, or the occurrence of a
Regulated Entity Event under Section 16.5, ICQ shall pay N2P the
actual, reasonable, fully-allocated costs incurred in connection with
N2P's assistance in the migration or transition. In the event of
termination due to a N2P material breach of this Agreement pursuant to
Section 16.2, a Change of Control of N2P under Section 16.3, or the
exercise by ICQ of its IP Termination Right under Section 16.7 of this
Agreement, N2P shall pay for the actual, reasonable, fully-allocated
costs incurred in connection with ICQ's assistance in the migration or
transition. In the event of any other termination of this Agreement,
each Party shall pay for its own costs and out-of-pocket expenses
incurred in connection with such migration or transition. For the
avoidance of doubt, such migration or transition assistance shall not
include development obligations. At ICQ's request, at the end of the
Initial Term, N2P shall use commercially reasonable efforts to
transfer to ICQ the phone numbers and special access codes referred to
in Section 5.2.1 of this Agreement unless such phone numbers are used
for N2P Services other than the ICQ IP Telephony Services.

16.10 Transition Period. For a period of up to ninety (90) days following
-----------------
the termination or expiration of this Agreement (the duration of
which, up to ninety (90) days, shall be determined by ICQ and notified
to N2P) (the "Transition Period"), the Parties shall cooperate to
effect an orderly termination of this Agreement, including minimizing
disruption for customers of the ICQ IP Telephony Services. During the
Transition Period, each of ICQ and N2P shall have all of the rights
and obligations set forth in this Agreement (including, without
limitation, with respect to the ICQ IP Telephony Services) that they
had prior to the date of termination or expiration (including, in the
case of ICQ, all rights necessary to enable ICQ to transition the ICQ
IP Telephony Services (other than PTP Calling Card Services) to
another system without interruption of service). Notwithstanding the
foregoing, during the Transition Period, N2P shall be entitled to
Transaction Revenues to the same extent as before such termination or
expiration, but the Parties shall not be subject to the obligations
and criteria in this Agreement with respect to exclusivity,
promotions, development, delivery, performance and Updates. During the
Transition Period, N2P shall remain obligated to provide to ICQ the
support services described in Section 6. Also, during the Transition
Period, N2P shall provide ICQ with reasonable assistance in migrating
or transitioning the ICQ IP Telephony

34
<PAGE>

EXECUTION VERSION

Services (other than PTP Calling Card Services) to another provider.
Each Party shall be entitled to seek injunctive relief such as
specific performance in the event the other Party fails to comply with
its transition obligations under this Section 16.10; provided,
--------
however, that, following any termination or expiration of this
-------
Agreement, in the event either Party fails to comply with its
transition obligations under this Section 16.10, the Parties shall
attempt to resolve such failure to the satisfaction of both Parties
through the Management Committee, and in the event that the Parties
are unable to do so, ICQ shall be entitled to seek injunctive relief
in accordance with this Section 16.10. Notwithstanding the foregoing,
all end-user sublicenses of the ICQ IP Telephony Software shall
survive the termination or expiration of this Agreement pursuant to
the terms of such end user license agreement as provided herein.

16.11 Return of Information. Upon the expiration or termination of this
---------------------
Agreement, each Party shall, upon the written request of the other
Party, return or destroy (at the option of the party receiving the
request) all Confidential Information of the other Party.

16.12 Survival. Notwithstanding anything to the contrary contained
--------
herein, the provisions of Sections 7.1, 7.2, 7.3 and 7.6 (as to
amounts accrued but unpaid), 7.7, 7.8, 7.9, 12, 13, 14, 15, 16.8,
16.9, 16.10, 16.11, 16.12, 17, 18.1, 18.3, 18.5 and 18.14 shall
survive the termination, cancellation or expiration of this
Agreement. In addition, all payment terms of this Agreement and any
provision which, by its nature, must survive the expiration,
termination or cancellation of this Agreement, shall survive the
expiration, termination or cancellation of this Agreement. All
licenses granted by either Party to the other pursuant to this
Agreement shall terminate upon termination or expiration of this
Agreement except as otherwise expressly set forth herein with respect
to the Transition Period.

17. DISPUTE RESOLUTION
------------------

17.1 Management Committee. The Parties will act in good faith and use
--------------------
commercially reasonable efforts to promptly resolve any claim,
dispute, controversy or disagreement between the Parties or any of
their respective Affiliates, successors and assigns under or related
to this Agreement (including, without limitation) any document
executed pursuant to this Agreement or any of the transactions
contemplated hereby or any rights or obligations hereunder (each, a
"Dispute"). If the Parties cannot resolve any such Dispute within ten
(10) business days, such Dispute will be submitted to the Management
Committee for resolution. For ten (10) days following submission of
the Dispute to the Management Committee, the Management Committee
will have the exclusive right to resolve such Dispute; provided,
--------
further, that the Management Committee will have the final and
-------
exclusive right to resolve Disputes arising from any provision of the
Agreement which expressly or implicitly provides for the Parties to
reach mutual agreement as to certain terms. If the Management
Committee is unable to amicably resolve the Dispute during the ten
(10) day period, then such Dispute shall be subject to the resolution
mechanisms described below. Neither Party shall seek, nor shall be
entitled to seek, binding outside resolution of the Dispute unless
and until the Parties have been unable amicably to resolve the
Dispute as set forth in this Section 17.1 and then, only in
compliance with the procedures set forth in this Section 17. For the
avoidance of doubt, neither Party shall be required to submit any
Dispute to the Management Committee or to arbitration prior to
issuing any notice of suspension or termination under Sections 3, 4,
9 or 16 of this Agreement. In addition, the submission of any Dispute
to the Management Committee or to arbitration hereunder shall not
affect either Party's right to exercise any such suspension or
termination right under this Agreement, except as otherwise
determined, pursuant to a binding decision or order, by a court of
competent jurisdiction (in accordance with Section 17.4 of this
Agreement) or an arbitral panel (in accordance with Section 17.2 of
this Agreement).

35
<PAGE>

EXECUTION VERSION

17.2 Arbitration.
-----------

17.2.1 Arbitration. Any Dispute not resolved by amicable
-----------
resolution as set forth in Section 17.1 shall be governed exclusively
and finally by arbitration conducted by the American Arbitration
Association ("AAA") in New York, New York in accordance with the
Commercial Arbitration Rules ("Commercial Rules") of the AAA,
including the AAA Supplementary procedures for Large Complex
Commercial Disputes ("Complex Procedures"), as such rules shall be in
effect on the date of delivery of a demand for arbitration ("Demand"),
except to the extent that such rules are inconsistent with the
provisions set forth herein. Notwithstanding the foregoing, the
Parties may agree in good faith that the Complex Procedures shall not
apply in order to promote the efficient arbitration of Disputes where
the nature of the Dispute, including without limitation the amount in
controversy, does not justify the application of such procedures.

17.2.2 Selection of Arbitrators. The arbitration panel shall
------------------------
consist of three (3) arbitrators. Each Party shall name one (1)
arbitrator within ten (10) days after the delivery of the Demand, and
the two Party-appointed arbitrators shall appoint the third
arbitrator. The third arbitrator shall be a neutral participant, with
no prior working relationship with either Party. If the two
arbitrators are unable to select a third arbitrator within ten (10)
days, a third neutral arbitrator shall be appointed by the AAA from
the panel of commercial arbitrators of any of the AAA Large and
Complex Resolution Programs.

17.2.3 Arbitral Rules. The Federal Arbitration Act, 9 U.S.C.
--------------
Secs. 1-16, and not state law, shall govern the arbitrability of all
Disputes. The arbitrators shall allow such discovery as is
appropriate to the purposes of arbitration in accomplishing a fair,
speedy and cost-effective resolution of the Disputes. The arbitrators
shall reference the Federal Rules of Civil Procedure then in effect in
setting the scope and timing of discovery.

17.2.4 Arbitration Awards. The arbitrators shall have the
------------------
authority to award compensatory damages only. Any award by the
arbitrators shall be accompanied by a written opinion setting forth
the findings of fact and conclusions of law relied upon in reaching
the decision. The award rendered by the arbitrators shall be final,
binding and non-appealable, and judgment upon such award may be
entered by any court of competent jurisdiction. The Parties agree
that the existence, conduct and content of any arbitration shall be
kept confidential and no Party shall disclose to any person any
information about such arbitration, except as may be required by law
or by any governmental authority or for financial reporting purposes
in each Party's financial statements.

17.2.5 Arbitration Expenses. Each Party shall pay the fees of
--------------------
its own attorneys, expenses of witnesses and all other expenses and
costs in connection with the presentation of such Party's case
(collectively, "Attorneys' Fees"). The remaining costs of the
arbitration, including without limitation, fees of the arbitrators,
costs of records or transcripts and administrative fees (collectively,
"Arbitration Costs") shall be borne equally by the Parties.
Notwithstanding the foregoing, the arbitrators may modify the
allocation of Arbitration Costs and award Attorneys' Fees in those
cases where fairness dictates a different allocation of Arbitration
Costs between the Parties and an award of Attorneys' Fees to the
prevailing Party as determined by the arbitrators.

17.3 Governing Law. This Agreement shall be governed by and interpreted
--------------
under the laws of the State of New York, without reference to New
York's choice of law rules.

36
<PAGE>

EXECUTION VERSION

17.4 Limited Interim Injunctive Relief; Consent to Jurisdiction.
----------------------------------------------------------
Notwithstanding the foregoing, the Parties hereby acknowledge and
agree that the Parties may seek interim injunctive relief with respect
to any Disputes arising under Sections 5.3, 10.3 and 13 of this
Agreement. In connection with any such Disputes, each of ICQ and N2P:
(i) irrevocably consents to the exclusive jurisdiction of any state or
Federal court located in the Borough of Manhattan, City of New York,
State of New York over any and all such interim injunctive relief;
(ii) waives personal service of any and all process upon it in
connection with such interim injunctive relief; (iii) consents that
any such service of process in connection therewith shall be made by
registered mail directed to ICQ or N2P (as the case may be), and that
such service shall be deemed to have been completed on the date
determined in accordance with Section 18.3 of this Agreement; and (iv)
waives any objection based upon forum non conveniens and any objection
----- --- ----------
to venue in connection with any such interim injunctive relief.

18. GENERAL PROVISIONS
------------------

18.1 Acknowledgment. ICQ AND N2P EACH ACKNOWLEDGE THAT THE PROVISIONS OF
--------------
THIS AGREEMENT WERE NEGOTIATED TO REFLECT AN INFORMED, VOLUNTARY
ALLOCATION BETWEEN THEM OF ALL RISKS (BOTH KNOWN AND UNKNOWN)
ASSOCIATED WITH THE TRANSACTIONS CONTEMPLATED HEREUNDER. THE
LIMITATIONS AND DISCLAIMERS RELATED TO WARRANTIES AND LIABILITY
CONTAINED IN THIS AGREEMENT ARE INTENDED TO LIMIT THE CIRCUMSTANCES
AND EXTENT OF LIABILITY. THE PROVISIONS OF THIS SECTION 18.1 SHALL BE
ENFORCEABLE INDEPENDENT OF AND SEVERABLE FROM ANY OTHER ENFORCEABLE OR
UNENFORCEABLE PROVISION OF THIS AGREEMENT.

18.2 Independent Contractors. The Parties to this Agreement are
-----------------------
independent contractors. Neither Party is an agent, representative,
or partner of the other Party. Neither Party shall have any right,
power or authority to enter into any agreement for or on behalf of, or
incur any obligation or liability of, or to otherwise bind, the other
Party. This Agreement shall not be interpreted or construed to create
an association, agency, joint venture or partnership between the
parties or to impose any liability attributable to such a relationship
upon either Party.

18.3 Notice. Any formal notice under this Agreement will be given in
------
writing and will be deemed to have been delivered and given for all
purposes (i) on the delivery date if delivered by confirmed facsimile;
(ii) on the delivery date if delivered personally to the Party to whom
the same is directed; (iii) one (1) business day after deposit with a
commercial overnight carrier, with written verification of receipt; or
(iv) five (5) business days after the mailing date, whether or not
actually received, if sent by U.S. mail, return receipt requested,
postage and charges prepaid, or any other means of rapid mail delivery
for which a receipt is available.

To ICQ: To N2P:
ICQ, Inc. Net2Phone Inc.
22000 AOL Way 171 Main Street
Dulles, Virginia 20166 Hackensack, NJ 07601
Attention: **** Attention: ****
Phone: **** Phone: ****
Fax: **** Fax: ****
E-mail: **** E-mail: ****

In the case of ICQ, such notice also will be provided to both the
Senior Vice President for

<PAGE>

EXECUTION VERSION

Business Affairs (fax no. 703-265-1206 and the Deputy General Counsel
(fax no. 703-265-1105), each at the address set forth above. In the
case of N2P, such notice also will be provided to the General Counsel
at the address and fax number set forth above.

18.4 No Waiver. The failure of either Party to insist upon or enforce
strict performance by the other Party of any provision of this
Agreement or to exercise any right under this Agreement shall not be
construed as a waiver or relinquishment to any extent of such Party's
right to assert or rely upon any such provision or right in that or
any other instance; rather, the same shall be and remain in full force
and effect.

18.5 Entire Agreement. This Agreement sets forth the entire agreement, and
supersedes any and all prior and contemporaneous agreements of the
Parties with respect to the transactions set forth herein. Neither
Party shall be bound by, and each Party specifically objects to, any
term, condition or other provision which is different from or in
addition to the provisions of this Agreement (whether or not it would
materially alter this Agreement) and which is proffered by the other
Party in any correspondence or other document, unless the party to be
bound thereby specifically agrees to such provision in writing.

18.6 Amendment. No change, amendment or modification of any provision of
this Agreement will be valid unless set forth in a written instrument
signed by each Party by an executive or officer authorized to bind
such Party.

18.7 Assignment. Neither Party may assign any of its rights, interest or
----------
benefits or delegate any of its duties under this Agreement, or
otherwise transfer this Agreement without the prior written consent of
the other Party; provided that either party may assign this Agreement
as part of a reincorporation, change of domicile or merger of a Party
with or into, or sale of all or substantially all of the assets of a
Party to another entity that is not a competitor of the non-assigning
Party (i.e., an ICQ Competitor or AOL Competitor if ICQ is the non-
assigning Party or an N2P Competitor or Parent Company Competitor if
N2P is the non-assigning Party) if, in any such event, the assignee
(and any successor entity) agrees to be bound by this Agreement to the
same extent as the assigning Party. Subject to the foregoing, this
Agreement shall be fully binding upon, inure to the benefit of and be
enforceable by the Parties hereto and their respective successors and
assigns.

18.8 Construction. In the event that any provision of this Agreement
conflicts with the law under which this Agreement is to be construed
or if any such provision is held invalid by a court with jurisdiction
over the parties to this Agreement, (i) such provision shall be deemed
to be restated to reflect as nearly as possible the original
intentions of the Parties in accordance with applicable law, and (ii)
the remaining terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect.

18.9 Export Controls. With respect to their activities under this
Agreement, both Parties shall adhere to all applicable laws,
regulations and rules relating to the export of technical data and
shall not export or re-export any technical data, any products
received from the other Party or the direct product of such technical
data to any proscribed country listed in such applicable laws,
regulations and rules unless properly authorized.

18.10 Headings. The captions and headings used in this Agreement are
inserted for convenience only and shall not affect the meaning or
interpretation of this Agreement.

18.11 Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original and all of which together shall
constitute one and the same document. This Agreement may also be
signed by facsimile transmission and any

38
<PAGE>

EXECUTION VERSION

signature sent or received via facsimile transmission shall constitute
an original signature.

18.12 Force Majeure. N2P shall not be responsible for (any delays, errors,
failures to perform, interruptions or disruptions caused by or
resulting from any acts of God, strikes, lockouts, riots, acts of war,
fire, power failure, earthquakes, severe weather, floods or other
natural disaster or from any other unforeseeable events outside of
N2P's reasonable control (not including any subcontractor of services
provided by N2P hereunder) that prevents N2P from complying with any
of its material obligations under this Agreement (each, a "Force
Majeure Event"). The foregoing shall not relieve N2P from
responsibility to the extent that reasonable actions or actions
normally undertaken in the industry would have made such events within
N2P's reasonable control or prevented any such delays, errors,
failures, interruptions or disruptions. In addition, in no event will
a Force Majeure Event permit any delay, error, failure, interruption
or disruption for longer than a commercially reasonable time
considering the event (or beyond any applicable cure period expressly
set forth in this Agreement), and after such reasonable time period
(or express cure period, as the case may be), the Force Majeure Event
shall no longer be deemed to exist or apply.

18.13 Insurance. N2P, at its cost and expense, shall secure and maintain
---------
adequate insurance coverage as is necessary for N2P to bear all of its
obligations under this Agreement. Maintenance of such insurance shall
not be deemed to relieve or limit N2P of any responsibility or
obligation hereunder whatsoever. N2P assumes full and complete
liability for all injuries to, or death of, any person or for any
damages to property arising from its acts or omissions. N2P will add
ICQ as an additional insured on all appropriate insurance policies,
including all liability policies, with endorsements that require
thirty (30) days notice of ICQ of any cancellation of such policies,
and shall promptly provide ICQ with copies of such policies and
endorsements and any changes thereto from time to time. N2P's
insurance shall be primary as to any other insurance ICQ may have.

18.14 Remedies. Except where otherwise specified, the rights and remedies
--------
granted to a Party under this Agreement are cumulative and in addition
to, and not in lieu of, any other rights or remedies which the Party
may possess at law or in equity; provided that, in connection with any
--------
dispute hereunder, neither Party will be entitled to offset any
amounts that it claims to be due and payable from the other Party
against amounts otherwise payable by such Party to the other Party.

18.15 Disclaimers. Each ICQ IP Telephony Service shall contain an
------------
appropriate disclaimer (the specific form and substance to be mutually
agreed upon by the Parties).

IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the
date first above written.

ICQ, INC. NET2PHONE INC.

/s/ David M. Colburn /s/ Jonathan Reich
By: _______________________________ By: __________________________________
Print Name: David M. Colburn Print Name: Jonathan Reich
Title: Senior Vice President Title: Executive Vice President

<PAGE>
Exhibit 10.29

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED. THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AS AMENDED. THESE
SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID
ACT OR LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED.

NET2PHONE, INC.

STOCK SUBSCRIPTION WARRANT

July 15, 1999

1. General.
-------

(a) THIS CERTIFIES that, for value received, AMERICA ONLINE, INC. ("AOL")
or its assigns, is entitled to subscribe for and purchase from NET2PHONE, INC.,
a Delaware corporation (the "Corporation"), at any time or from time to time
during the period (the "Exercise Period") commencing with the date hereof and
ending on the fifth (5th) anniversary of the date hereof, on the terms and
subject to the provisions hereinafter set forth, up to a maximum of that number
of shares (subject to adjustment as provided herein) (the "Warrant Shares") of
fully paid and non-assessable shares of Common Stock, $.01 par value, of the
Corporation (the "Common Stock") as shall be determined in accordance with the
provisions of Section 1(b) and Section 1(c) hereof and Exhibit A hereto that
---------
shall constitute three percent (3.0%) of the number of shares of voting capital
stock of the Corporation outstanding on the date of exercise or exchange of this
Warrant after giving effect to the exercise, exchange or conversion of all
outstanding securities, rights, options, warrants (including this Warrant),
calls, commitments or agreements of any nature or character (whether debt or
equity) that are, directly or indirectly, exercisable or exchangeable for, or
convertible into or otherwise represent the right to purchase or otherwise
receive, directly or indirectly, any such capital stock or other arrangement to
acquire at any time or under any circumstance, voting capital stock of the
Corporation or any such other securities and assuming that all stock options
and/or shares of capital stock reserved for grant or issuance to officers,
directors, employees and consultants under all agreements, plans or arrangements
theretofore approved by the Board of Directors of the Corporation have been so
granted or issued (as the case may be) (collectively, the "Fully-Diluted
Shares"), at a price per share (the "Warrant Price") determined on the
Designated Date (as hereinafter defined) (subject to adjustment as set forth in
Section 4 hereof) of (i) if the Corporation has consummated an underwritten
public offering of Common Stock of the Corporation registered pursuant to the
Securities Act of 1933, as amended, resulting in aggregate cash proceeds (prior
to underwriters' commissions and expenses) of more than $15,000,000 (a
"Qualified IPO"), the lesser of (A) 80% of the price per share in the Qualified
IPO (prior to underwriters' commissions and expenses) or (B) $450,000,000
divided by the number of Fully Diluted Shares on the

<PAGE>

Designated Date, or (ii) if the Corporation has not consummated a Qualified IPO,
the lesser of (A) 80% of the per share Fair Market Value (as defined in Section
3 below) of the Corporation's common stock or (B) $450,000,000 divided by the
number of Fully Diluted Shares, at such times as shall be determined in
accordance with Section 1(b) hereof. As used herein, the term "Designated Date"
shall mean the date on which the holder of this Warrant shall first deliver
notice of its intention to exercise or exchange this Warrant, in whole or in
part, pursuant to the terms hereof (including Exhibit A). Upon receipt of any
---------
notice of exercise the Corporation shall certify to the holder of this Warrant
in writing (i) the number of Warrant Shares being issued to the holder of this
Warrant pursuant to its exercise thereof, (ii) the Warrant Price and (iii) the
basis for such calculations; provided, that the failure of the Corporation to
--------
deliver such certification shall not effect the validity or terms of this
Warrant or derogate from the rights of the holder hereunder. This Warrant is
being issued pursuant to an IP Telephony Services Distribution and Interactive
Marketing Agreement dated as of the date hereof (the "Agreement"), between the
Corporation and ICQ, Inc.. a Delaware corporation. All terms used but not
defined herein shall have the meanings set forth in the Agreement.

(b) This Warrant shall become exercisable as to that number of Warrant
Shares, and at such times, as are determined in accordance with Exhibit A
---------
attached hereto; provided, however, that this Warrant shall become exercisable
-------- -------
as to all of the Warrant Shares immediately upon the occurrence of a Stipulated
Event. As used herein, the term "Stipulated Event" shall mean (a) a Corporate
Transaction (as hereinafter defined) or (b) a termination of the Agreement that
results from a material breach by the Corporation of the Agreement (except for a
termination pursuant to Section 16.6(i)(c) or Section 16.6(i)(d) of the
Agreement). "Corporate Transaction" means (A) any consolidation or merger of
the Corporation with or into any other corporation or other entity, other than
any merger or consolidation resulting in the holders of the capital stock of the
Corporation entitled to vote for the election of directors holding a majority of
the capital stock of the surviving or resulting corporation or other entity
entitled to vote for the election of directors, (B) subject to subsection (b)(D)
below, any person or entity (including any affiliates thereof) becoming the
holder of a majority of the capital stock of the Corporation entitled to vote
for the election of directors, (C) any sale or other disposition by the
Corporation of all or substantially all of its assets or capital stock or (D)
IDT Corporation becoming the beneficial owner of greater than seventy-five
percent (75.0%) of the outstanding capital stock of the Corporation.

(c) If this Warrant is exercised or exchanged for less than all of the
Warrant Shares on the Designated Date, either because (i) the registered holder
of this Warrant elects not to exercise or exchange this Warrant for all of the
Warrant Shares or (ii) Warrant Shares remain subject to vesting in accordance
with Exhibit A hereto, then the number of Warrant Shares for which this Warrant
---------
may be exercised after such partial exercise shall be equal to (A) the
percentage of Fully Diluted Shares for which this Warrant was exercisable
immediately prior to such exercise, minus (ii) the percentage of Fully Diluted
-----
Shares for which this Warrant was so exercised; provided, however, that the
-------- -------
number of shares for which this Warrant may be exercised is subject to further
increase after such adjustment in accordance with Exhibit A hereto. For
---------
example, if this Warrant is exercisable for 2.0% of the Fully Diluted Shares on
the date of exercise, and
<PAGE>

the holder exercises the Warrant for 1.0% of the Fully Diluted Shares, this
Warrant may subsequently be exercised for up to 1.0% of the Fully Diluted
Shares, as determined on the date of subsequent exercise; if after such exercise
the number of Warrant Shares for which this Warrant may be exercised pursuant to
Exhibit A increases by an additional 1.0%, then this Warrant may subsequently be
- ---------
exercised for up to 2.0% of the Fully Diluted Shares, as determined on the date
of subsequent exercise.

2. Exercise of Warrant. The rights represented by this Warrant may be
-------------------
exercised by the holder hereof, as to those Warrant Shares for which this
Warrant is then exercisable as determined in accordance with Section 1, in whole
or in part, at any time or from time to time during the Exercise Period, by the
surrender of this Warrant (properly endorsed) at the office of the Corporation
at 171 Main Street, Hackensack, NJ 07601, or at such other agency or office of
the Corporation in the United States of America as it may designate by notice in
writing to the holder hereof at the address of such holder appearing on the
books of the Corporation, and by payment (either in cash, by check, by
cancellation of indebtedness and/or in shares of capital stock of the
Corporation valued at Fair Market Value (as hereinafter defined) on the date of
such exercise) to the Corporation of the Warrant Price for each Warrant Share
being purchased. In the event of the exercise of the rights represented by this
Warrant, a certificate or certificates for the Warrant Shares so purchased,
registered in the name of the holder, and if this Warrant shall not have been
exercised for all of the Warrant Shares, a new Warrant, registered in the name
of the holder hereof, of like tenor to this Warrant, shall be delivered to the
holder hereof within a reasonable time, after the rights represented by this
Warrant shall have been so exercised. The person in whose name any certificate
for Warrant Shares is issued upon exercise of this Warrant shall for all
purposes be deemed to have become the holder of record of such shares on the
date on which the Warrant was surrendered and payment of the Warrant Price and
any applicable taxes was made, irrespective of the date of delivery of such
certificate, except that, if the date of such surrender and payment is a date
when the stock transfer books of the Corporation are closed, such person shall
be deemed to have become the holder of such shares at the close of business on
the next succeeding date on which the stock transfer books are open.

3. Exchange of Warrant.
-------------------

(a) In addition to, and independent of, the rights of the holder of
this Warrant set forth in Section 2 hereof, the holder hereof may at any time or
from time to time elect to receive, without the payment by the holder of any
additional consideration, that number of Warrant Shares determined as
hereinafter provided in this Section 3 by the surrender of this Warrant or any
portion hereof to the Corporation, accompanied by an executed Notice of Exchange
in substantially the form thereof attached hereto (the "Net Issue Election").
Thereupon, the Corporation shall issue to the holder hereof such number of fully
paid and nonassessable Warrant Shares as is computed using the following
formula:
<PAGE>

X = Y (A-B)
-------
A

where X = the number of Warrant Shares to be issued to the holder pursuant to
this Section 3.

Y = the number of Warrant Shares covered by this Warrant in respect of
which the Net Issue Election is made pursuant to this Section 3.

A = the Fair Market Value (as hereinafter defined) of one Warrant Share
determined at the time the Net Issue Election is made pursuant to this
Section 3 (the "Determination Date").

B = the Warrant Price in effect under this Warrant at the time the Net
Issue Election is made pursuant to this Section 3.

For purposes of the above calculation, "Fair Market Value" of one Warrant Share
as of the Determination Date shall mean:

(i) (A) if the Common Stock of the Corporation is not then traded on a
national securities exchange, the average of the closing prices quoted on
the National Association of Securities Dealers, Inc. Automated Quotation
National Market System, if applicable, or the average of the last bid and
asked prices of the Common Stock quoted in the over-the-counter-market or
(B) if the Common Stock is then traded on a national securities exchange,
the average of the high and low prices of the Common Stock listed on the
principal national securities exchange on which the Common Stock is so
traded, in each case for the twenty (20) trading days immediately preceding
the Determination Date or, if such date is not a business day on which
shares are traded, the next immediately preceding trading day;

(ii) in the event of a Warrant Exchange in connection with a Corporate
Transaction, the value per share of Common Stock received or receivable by
each holder thereof (assuming for purposes of this determination, in the
case of a sale of assets, the Corporation is liquidated immediately
following such sale and the consideration paid to the Corporation is
immediately distributed to its stockholders); and

(iii) in all other circumstances, the fair market value per share of
Common Stock as determined by a nationally recognized independent
investment banking firm selected by the Corporation and consented to by the
holder of this Warrant, which consent shall not be unreasonably withheld
(if the parties are unable to agree on a nationally recognized independent
investment banking firm within five business days after delivery of the
Notice of Exchange referred to above, such selection shall be made by a
nationally recognized independent investment banking firm selected by the
American Arbitration Association then obtaining).
<PAGE>

The closing of any Warrant Exchange shall take place at the offices of the
Corporation on the date specified in the Notice of Exchange (the "Exchange
Date"), which shall be not less than ten and not more than 40 days after the
delivery of such Notice. At such closing, the Corporation shall issue and
deliver to the holder or its designee a certificate or certificates for the
Warrant Shares to be issued upon such Warrant Exchange, registered in the name
of the holder or such designee, and if such Warrant Exchange shall not have been
for all Warrant Shares, a new Warrant, registered in the name of the holder, of
like tenor to this Warrant for the number of shares still subject to this
Warrant following such Warrant Exchange.

(b) If as of the expiration of the Exercise Period this Warrant is in the money
based on the cash or other property to be received, such exercise shall be
deemed to have automatically taken place immediately prior to the expiration of
the Exercise Period with respect to all then outstanding and exercisable (but
not exercised) Warrant Shares (the "Termination Date Exercise"), on a net
exercise basis; provided, however, that the Corporation may condition such
exercise on the reasonable satisfaction of the Corporation that all applicable
securities laws have been complied with. For purposes of such automatic
exercise, the Fair Market Value of the shares of the Company's Common Stock upon
the expiration of the Exercise Period shall be the Fair Market Value determined
pursuant to Section 3(a) above. No such Termination Date Exercise shall take
place if such issuance would not comply with applicable securities laws,
whereupon the expiration of the Exercise Period shall occur as scheduled.

4. Adjustment of Warrant Price.
---------------------------

(a) If this Warrant is exercised in part but not in whole, then the
Warrant Price with respect to the Warrant Shares for which this Warrant may be
exercised after such partial exercise shall be subject to adjustment from time
to time as follows:

(i) If the Corporation shall at any time or from time to time after
the Designated Date, issue any shares of Common Stock (or be deemed to have
issued any shares of Common Stock as provided herein), other than Excluded
Securities (as defined in Section 4(a)(iv)) without consideration or for a
consideration per share less than the Warrant Price in effect immediately
prior to the issuance of Common Stock, the Warrant Price in effect
immediately prior to such issuance shall forthwith be lowered to a price
equal to the quotient obtained by dividing: (x) an amount equal to the sum
of (1) the total number of shares of Common Stock outstanding (including
any shares of Common Stock deemed to have been issued pursuant to Section
4(a)(ii)(D)) immediately prior to such issuance multiplied by the Warrant
Price in effect immediately prior to such issuance, plus (2) the
----
consideration received by the Corporation upon such issuance, by (y) the
total number of shares of Common Stock outstanding (including any shares of
Common Stock deemed to have been issued pursuant to Section 4(a)(ii)(D))
immediately after the issuance of such Common Stock.
<PAGE>

(ii) For the purposes of any adjustment of the Warrant Price pursuant
to Section 4(a)(i), the following provisions shall be applicable:

(A) In the case of the issuance of Common Stock for cash, the
consideration shall be deemed to be the amount of cash paid therefor before
deducting therefrom any discounts, commissions or other expenses allowed,
paid or incurred by the Corporation for any underwriting or otherwise in
connection with the issuance and sale thereof.

(B) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair market value thereof as determined
in good faith by the Board of Directors of the Corporation, irrespective of
any accounting treatment.

(C) In the case of the issuance of Common Stock without
consideration, the consideration shall be deemed to be $0.01 per share.

(D) In the case of the issuance of (x) options to purchase or
rights to subscribe for Common Stock, (y) securities by their terms
convertible into or exchangeable for Common Stock or (z) options to
purchase rights to subscribe for such convertible or exchangeable
securities:

(1) the aggregate maximum number of shares of Common Stock
deliverable upon exercise of such options to purchase or rights to
subscribe for Common Stock shall be deemed to have been issued at the
time such options or rights were issued and for a consideration equal
to the consideration (determined in the manner provided in
subdivisions (A), (B) and (C) above), if any, received by the
Corporation upon the issuance of such options or rights plus the
minimum purchase price provided in such options or rights for the
Common Stock covered thereby;

(2) the aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such convertible
or exchangeable securities or upon the exercise of options to purchase
or rights to subscribe for such convertible or exchangeable securities
and subsequent conversion or exchange thereof shall be deemed to have
been issued at the time such securities were issued or such options or
rights were issued and for a consideration equal to the consideration
received by the Corporation for any such securities and related
options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the additional consideration, if
any, to be received by the Corporation upon the conversion or exchange
of such securities or the exercise of any related options or rights
(the consideration in each case to be determined in the manner
provided in subdivisions (A), (B) and (C) above);
<PAGE>

(3) on any change in the number of shares or exercise price
of Common Stock deliverable upon exercise of any such options or
rights or conversions of or exchanges for such securities, other than
a change resulting from the antidilution provisions thereof, the
applicable Warrant Price shall forthwith be readjusted to such Warrant
Price as would have resulted had the adjustment made upon the issuance
of such options, rights or securities not converted prior to such
change (or options or rights related to such securities not converted
prior to such change) been made upon the basis of such change;
provided, however, that such readjustment shall not result in a
-------- -------
Warrant Price that is greater than the original Warrant Price; and

(4) on the expiration of all such options or rights, the
termination of all such rights to convert or exchange or the
expiration of all options or rights related to such convertible or
exchangeable securities in each case having been issued by the
Corporation for the same consideration (as determined pursuant to
subdivision (A), (B) and (C) above), the applicable Warrant Price
shall forthwith be readjusted to such Warrant Price as would have
resulted had the adjustment made upon the issuance of such options,
rights, securities or options or rights related to such securities
been made upon the basis of the issuance of only the number of shares
of Common Stock actually issued upon the exercise of such options or
rights, upon the conversion or exchange of such securities, or upon
the exercise of the options or rights related to such securities and
subsequent conversion or exchange thereof; provided, however, that
-------- -------
such readjustment shall not result in a Warrant Price that is greater
that the original Warrant Price.

(iii) If, at any time during the Exercise Period, the number of
shares of Common Stock outstanding is increased by a stock dividend payable in
shares of Common Stock or by a subdivision or split-up of shares of Common
Stock, then, following the record date fixed for the determination of holders
of Common Stock entitled to receive such stock dividend, subdivision or split-
up, the Warrant Price shall be appropriately decreased and the number of
shares of Common Stock issuable upon exercise of this Warrant shall be
appropriately increased, in each case in proportion to such increase in
outstanding shares.

(iv) If, at any time during the Exercise Period, the number of
shares of Common Stock outstanding is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date for such
combination, the Warrant Price shall be appropriately increased and the number
of shares of Common Stock issuable upon exercise of this Warrant shall be
appropriately decreased, in each case, in proportion to such decrease in
outstanding shares.

(v) For purposes of Section 4(a), the term "Excluded Securities"
shall mean (A) up to 11,040,000 shares of Common Stock (subject to
<PAGE>

equitable adjustment for stock splits, dividends, combinations and like
occurrences) issued to officers, employees or directors of the Corporation,
pursuant to any agreement, plan or arrangement approved by the Board of
Directors of the Corporation, or options to purchase or rights to subscribe
for such Common Stock, or securities by their terms convertible into or
exchangeable for such Common Stock, or options to purchase or rights to
subscribe for such convertible or exchangeable securities pursuant to such
agreement, plan or arrangement; (B) shares of Common Stock issued as a stock
dividend or upon any stock split or other subdivision or combination of shares
of Common Stock; or (C) securities issued pursuant to the acquisition of
another corporation or other entity by the Corporation by merger or purchase
of stock or purchase of all or substantially all of such other corporation's
or other entity's assets whereby the Corporation owns not less than a majority
of the voting power of such other corporation or other entity following such
acquisition or purchase.

(vi) All calculations under this Section 4 shall be made to the
nearest one tenth (1/10) of a cent or to the nearest one tenth (1/10) of a
share, as the case may be.

(b) Whenever the Warrant Price shall be adjusted as provided in this
Section 4 the Corporation shall forthwith file, at the office of the Corporation
or any transfer agent designated by the Corporation for the Common Stock, a
statement, signed by its chief financial officer, showing in detail the facts
requiring such adjustment and the adjusted Warrant Price. Each such statement
shall be available at reasonable times for inspection by the Holder and after
such adjustment the Corporation shall also cause a copy of such statement to be
sent by facsimile or overnight courier to each holder of a Warrant at his or its
address appearing on the Corporation's records. Where appropriate, such copy
may be given in advance and may be included as part of a notice required to be
mailed under the provisions set forth immediately below.

5. Covenants as to Common Stock. The Corporation covenants and agrees
----------------------------
that all shares of Common Stock that may be issued upon the exercise of the
rights represented by this Warrant, will, upon issuance, be validly issued,
fully paid and non-assessable and free from all taxes, liens and charges with
respect to the issuance thereof. The Corporation further covenants and agrees
that the Corporation will from time to time take all such action as may be
requisite to assure that, subject to applicable to law, the stated or par value
per share of Common Stock is at all times equal to or less than the then
effective Warrant Price per share of Common Stock issuable upon exercise of this
Warrant. The Corporation further covenants and agrees that, subject to
applicable law, the Corporation will at all times have authorized and reserved,
free from preemptive rights, a sufficient number of shares of Common Stock to
provide for the exercise of the rights represented by this Warrant. If and so
long as the Common Stock issuable upon the exercise of the rights represented by
this Warrant is listed on any national securities exchange, the Corporation
will, if permitted by the rules of such exchange, list and keep listed on such
exchange, upon official notice of issuance, all shares of such capital stock.
<PAGE>

6. No Shareholder Rights. This Warrant shall not entitle the holder
---------------------
hereof to any voting rights or other rights as a shareholder of the Corporation.

7. Restrictions on Transfer. The holder of this Warrant acknowledges
------------------------
that neither this Warrant nor the Warrant Shares have been registered under the
Securities Act of 1933, as amended (the "Securities Act") and the holder of this
Warrant agrees that no sale, transfer, assignment, hypothecation or other
disposition of this Warrant or the Warrant Shares shall be made in the absence
of (a) a current registration statement under the Securities Act as to this
Warrant or the Warrant Shares and the registration or qualification of this
Warrant or the Warrant Shares under any applicable state securities laws is then
in effect or (b) an opinion of counsel reasonably satisfactory to the
Corporation to the effect that such registration or qualification is not
required. Each certificate or other instrument for Warrant Shares issued upon
exercise of this Warrant shall, if required under the Securities Act or the
rules promulgated thereunder, be imprinted with a legend substantially to the
foregoing effect.

8. Attached Rights. The Corporation hereby grants to the holder of this
---------------
Warrant those rights set forth on Exhibit B attached hereto, the provisions of
---------
which are incorporated herein by reference and made a part hereof as if set
forth herein in their entirety.

9. Transfer of Warrant; Amendment. Subject to the restriction set forth
------------------------------
in Section 7, this Warrant and all rights hereunder are transferable, in whole,
or in part, at the agency or office of the Corporation referred to in Section 2,
by the holder hereof in person or by duly authorized attorney, upon surrender of
this Warrant properly endorsed; provided that, the transferor and transferee
shall promptly notify the Corporation of a transfer of the warrant.
Notwithstanding the foregoing, this Warrant may not be transferred to any N2P
Competitor or IDT Competitor, as those terms are defined in the Agreement. Each
taker and holder of this Warrant, by taking or holding the same, consents and
agrees that this Warrant, when endorsed, in blank, shall be deemed negotiable,
and, when so endorsed the holder hereof may be treated by the Corporation and
all other persons dealing with this Warrant as the absolute owner hereof for any
purposes and as the person entitled to exercise the rights represented by this
Warrant, or to the transfer hereof on the books of the Corporation, any notice
to the contrary notwithstanding; but until each transfer on such books, the
Corporation may treat the registered holder hereof as the owner hereof for all
purposes.

10. Reorganizations, Etc. In case, at any time during the Exercise
--------------------
Period, of any capital reorganization, of any reclassification of the stock of
the Corporation (other than a change in par value or from par value to no par
value or from no par value to par value or as a result of a stock dividend or
subdivision, split-up or combination of shares), or the consolidation or merger
of the Corporation with or into another corporation (other than a consolidation
or merger in which the Corporation is the continuing operation and which does
not result in any change in the Common Stock) or of the sale of all or
substantially all the properties and assets of the Corporation as an entirety to
any other corporation, this Warrant shall, after such reorganization,
reclassification, consolidation, merger or sale, be exercisable for the kind and
number of shares of stock or other
<PAGE>

securities or property of the Corporation or of the corporation resulting from
such consolidation or surviving such merger or to which such properties and
assets shall have been sold to which such holder would have been entitled if he
had held the Common Stock issuable upon the exercise hereof immediately prior to
such reorganization, reclassification, consolidation, merger or sale. In any
such reorganization or other action or transaction described above, appropriate
provision shall be made with respect to the rights and interests of the holder
of this Warrant to the end that the provisions hereof (including, without
limitation, provisions for adjustments of the Warrant Price and of the number of
shares purchasable and receivable upon the exercise of this Warrant) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise hereof.

11. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is
--------------------------------------------
lost, stolen, mutilated or destroyed, the Corporation may, on such terms as to
indemnity or otherwise as it may in its discretion impose (which shall, in the
case of a mutilated Warrant, include the surrender thereof), issue a new Warrant
of like denomination and tenor as the Warrant so lost, stolen, mutilated or
destroyed. Any such new Warrant shall constitute an original contractual
obligation of the Corporation, whether or not the allegedly lost, stolen,
mutilated or destroyed Warrant shall be at any time enforceable by anyone.

12. Modification and Waiver. This Warrant and any provision hereof may be
-----------------------
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.

13. Notices. All notices, advices and communications to be given or
-------
otherwise made to any party to this Agreement shall be deemed to be sufficient
if contained in a written instrument delivered in person or by telecopier or
duly sent by first class registered or certified mail, return receipt requested,
postage prepaid, or by overnight courier, or by electronic mail, with a copy
thereof to be sent by mail (as aforesaid) within 24 hours of such electronic
mail, addressed to such party at the address set forth below or at such other
address as may hereafter be designated in writing by the addressee to the
addresser listing all parties:

If to the Corporation, to:

Name of Corporation: Net2Phone, Inc.
Address: 171 Main Street, Hackensack, NJ 07601
Attention: Clifford Sobel and Howard Balter
Telecopier: (201) 907-5351
e-mail address: [email protected]; [email protected]

with a copy to:

Ira Greenstein, Esq.
Morrison & Foerster
1290 Avenue of the Americas
<PAGE>

New York, New York 10104
Telecopier: (212) 468-7900
e-mail address: [email protected]

and

If to AOL as follows:

AOL, Inc.
22000 AOL Way
Dulles, Virginia 20166
Attention: General Counsel and Senior Vice President, Business
Affairs
Telecopier: (703) 265-2208 and (703) 265-1202
e-mail address: [email protected], [email protected]

Or to such other address as the party to whom notice is to be given may have
furnished to the other parties hereto in writing in accordance herewith. Any
such notice or communication shall be deemed to have been delivered and received
(i) in the case of personal delivery or delivery by telecopier, on the date of
such deliver, (ii) in the case of nationally-recognized overnight courier, on
the next business day after the date when sent and (iii) in the case of mailing,
on the third business day following that on which the piece of mail containing
such communication is posted. As used in this Section 14, "business day" shall
mean any day other than a day on which banking institutions in the Commonwealth
of Virginia are legally closed for business.

14. Binding Effect on Successors; Survival. This Warrant shall be binding
--------------------------------------
upon any corporation succeeding the Corporation by merger, consolidation or
acquisition of all or substantially all of the Corporation's assets. All of the
obligations of the Corporation relating to the Common Stock issuable upon the
exercise of this Warrant shall survive the exercise and termination of this
Warrant. All of the covenants and agreements of the Corporation shall inure to
the benefit of the successors and assigns of AOL.

15. Descriptive Headings and Governing Law. The description headings of
--------------------------------------
the several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of the Commonwealth of Virginia.

16. Fractional Shares. No fractional shares shall be issued upon exercise
-----------------
of this Warrant. The Corporation shall, in lieu of issuing any fractional
share, pay the holder entitled to such fraction a sum in cash equal to such
fraction multiplied by the then Fair Market Value of one Warrant Share.

* * *
<PAGE>

IN WITNESS WHEREOF, the undersigned have caused this Warrant and Warrant
Agreement to be executed by their duly authorized officers on the date first
above written.

NET2PHONE, INC.

By: ______________________________
Name:
Title:

ATTEST: ______________________
Secretary

America Online, INC.

By: ______________________________
Name:
Title:
<PAGE>

Form of Subscription

[To be signed upon exercise of Warrant]

The undersigned, the holder of the Warrant, hereby irrevocably elects
to exercise the purchase rights represented by such Warrant for, and to purchase
thereunder, [_________ shares of Common Stock / ________percent (__%) of the
capital stock of Net2Phone, Inc. determined on a fully diluted basis] and
herewith makes payment of $_________ therefor, and requests that the
certificates for such shares be issued in the name of and delivered to,
_________________________________, whose address is _________________________
________________________.

Dated:_____________
_________________________________
(Signature)

_________________________________
(Address)
<PAGE>

Notice of Exchange

(To be executed by the Holder in
order to exchange the Warrant.)

The undersigned hereby irrevocably elects to exchange this Warrant
into [__________ shares of Common Stock (the foregoing number constituting the
number of Warrant Shares to be issued pursuant to Section 3 of this Warrant) /
_____ percent (__%) of the outstanding capital stock] of Net2Phone, Inc., minus
any shares to be deducted from the foregoing number in accordance with the terms
of this Warrant, according to the conditions thereof. The undersigned desires
to consummate such exchange on ________________.

Dated:

_____________________________
Name of Holder:

By:__________________________
<PAGE>

Form of Assignment

[To be signed only upon transfer of Warrant]

For value received, the undersigned hereby sells, assigns and
transfers unto _____________ the right represented by the Warrant to purchase
_______ shares of Net2Phone, Inc., to which the Warrant relates, and appoints
_________________ to transfer such right on the books of Net2Phone, Inc., with
full power of substitution in the premises.

Dated:_____________

____________________________
(Signature)

Signed in the presence of:

______________________________
<PAGE>

EXHIBIT A
---------

Number of Shares For Which the
Warrant Shall be Exercisable:

The Warrant Shares shall vest during the period commencing with the date of the
Warrant and ending four (4) years thereafter as follows:

<TABLE>
<CAPTION>
Number of Warrant Shares Vesting
- -----------------------------------------------------------------------------------------------
<S> <C>
(A) 1% of Fully Diluted Shares Once aggregate Transaction Revenues, Net
Advertising Revenue and N2P's share of Net
Button Advertising Revenue exceed ****
Dollars (US$****)
- -----------------------------------------------------------------------------------------------
(B) 1% of Fully Diluted Shares Once aggregate Transaction Revenues, Net
Advertising Revenue and N2P's share of Net
Button Advertising Revenue exceed ****
Dollars (US$****)
- -----------------------------------------------------------------------------------------------
(C) 1% of Fully Diluted Shares Once aggregate Transaction Revenues, Net
Advertising Revenue and N2P's share of Net
Button Advertising Revenue exceed ****
Dollars (US$****)
- -----------------------------------------------------------------------------------------------
</TABLE>

[****] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED AND SEPARATELY FILED WITH
THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO
RULE 406 UNDER THE SECURITIES ACT 1933, AS AMENDED.
<PAGE>

EXHIBIT B
---------

Additional Rights

1. Information Rights.
------------------

(a) Until such time as the Corporation becomes subject to the periodic
reporting provisions of Securities Exchange Act of 1934 (the "Exchange Act"),
the Corporation shall afford to AOL and its authorized employees, counsel,
accountants and other representatives, upon reasonable notice and during
ordinary business hours, (i) reasonable access to all books, records, and
properties of the Corporation and (ii) the opportunity to interview any officer
of the Corporation regarding its affairs; provided, however, that any individual
seeking to exercise the rights granted hereunder will only be permitted to
review confidential and/or sensitive information if such person executes a
confidentiality agreement in form and substance acceptable to the Corporation.

(b) Until such time as the Corporation becomes subject to the periodic
reporting provisions of the Exchange Act, the Corporation shall furnish to the
holder hereof:

(i) within 30 days after the end of each month in each fiscal
year (other than the last month in each fiscal year), a balance sheet of
the Corporation and the related consolidated statement of income, unaudited
but certified by the principal financial officer of the Corporation, such
balance sheets to be as of the end of such month and such statements of
income to be for such month and for the period from the beginning of the
fiscal year to the end of such month, in each case subject to normal year-
end adjustments and without supporting notes;

(ii) within 45 days after the end of each quarter in each fiscal
year, a balance sheet of the Corporation and the related consolidated
statement of income, unaudited but certified by the principal financial
officer of the Corporation, such balance sheets to be as of the end of each
quarter and such statements of income to be for such quarter and for the
period from the beginning of the fiscal year to the end of such quarter, in
each case subject to normal year-end adjustments and without supporting
notes;

(iii) within 90 days after the end of each fiscal year of the
Corporation, a balance sheet of the Corporation as of the end of such
fiscal year and the related statements of income, changes in stockholders'
equity and cash flows of the Corporation for the fiscal year then ended,
together with supporting notes thereto, certified in accordance with
generally accepted accounting principles, without qualification as to scope
of audit, by a firm of independent public accountants of recognized
national standing selected by the Corporation;

(iv) within 45 days prior to the beginning of each fiscal year of
the Corporation (and with respect to any revision thereof, promptly after
such
<PAGE>

revision has been prepared), a proposed operating budget for the
Corporation, including projected monthly income statements, cash flow
statements during such fiscal year and a projected consolidated balance
sheet as of the end of such fiscal year, and each monthly financial
statement furnished pursuant to clause (ii) above shall reflect variances
from such operating budget, as the same may from time to time be revised;
and

(v) prompt notice of (A) any event of default under any agreement
with respect to material indebtedness for borrowed money or a material
purchase money obligation which would permit the holder of such
indebtedness or obligation to accelerate the maturity thereof, and any
event which, upon notice or lapse of time or both, would constitute such an
event of default, and (B) any action, suit or proceeding at law or in
equity or by or before any governmental instrumentality or agency which, if
adversely determined, would materially impair the right of the Corporation
to carry on its business substantially as now or then conducted, or
materially adversely affect the business, operations, properties, assets or
financial condition of the Corporation.

(c) At such time as the Corporation becomes subject to the periodic
reporting provisions of the Exchange Act, the Corporation shall provide the
holder hereof promptly upon filing, copies of all registration statements,
prospectuses, periodic reports and other documents filed by the Corporation with
the Commission, or provide notice of such filings.

2. Participation Rights.
--------------------

(a) The following terms have the following meanings:

(i) "Equity Securities" means (i) all shares of capital stock of
-----------------
the Corporation, (ii) all securities convertible into or exchangeable for
shares of capital stock of the Corporation and (iii) all options, warrants,
or other rights to purchase or otherwise acquire from the Corporation
shares of such capital stock, or securities convertible into or
exchangeable for shares of such capital stock.

(ii) "New Securities" means all Equity Securities other than
--------------
Excluded Securities (as defined in Section 4 of the Warrant)

(iii) "Proportionate Percentage" shall mean, that percentage
------------------------
figure which expresses the ratio that (x) the number of Warrant Shares
issued or issuable to AOL (assuming the exercise of all vested warrants as
of the date of the Offer (as defined below)) bears to (y) the aggregate
number shares of voting capital stock of the Corporation then outstanding.
For purposes solely of the computation required under the preceding clauses
(x) and (y), all of the Corporation's outstanding securities that are
convertible into or exercisable or exchangeable directly or indirectly for
shares of Common Stock shall be deemed to have been converted into or
exercised or exchanged for shares of Common Stock at the rate at which such
securities are convertible into or exercisable or
<PAGE>

exchangeable for shares of Common Stock in effect at the time of delivery
by the Corporation of the Purchase Notice (as hereinafter defined).

(b) If the Corporation proposes to offer New Securities to any person
or entity at any time, the Corporation shall, before such issuance or sale,
deliver to AOL an offer (the "Offer") to sell, upon the terms set forth in this
Section, AOL's Proportionate Percentage of the New Securities (the "Offered
Securities") to AOL and AOL's Proportionate Percentage of any New Securities not
accepted for purchase by any other parties having similar rights to purchase the
same (as to AOL the "Over-Allotment Right"). The Offer shall state that the
Corporation proposes to issue the Offered Securities and specify their number
and terms (including purchase price). The Offer shall remain open and
irrevocable for a period of 5 business days (the "Preemptive Period") from the
date of its delivery.

(c) AOL may accept the Offer by delivering to the Corporation a notice
(the "Purchase Notice") within the Preemptive Period. The Purchase Notice shall
state the number of Offered Securities AOL desires to purchase (including
whether and to what extent AOL desires to exercise its Over-Allotment Right).
The sale of Offered Securities with respect to which AOL delivered a Purchase
Notice shall be made on a mutually acceptable business day, after expiration of
the Preemptive Period on those terms and conditions of the Offer not
inconsistent with this Section.

(d) The Corporation may issue and sell the remaining Offered
Securities or any portion thereof not so subscribed for on the terms and
conditions of the Offer to any person or entity within 90 days after expiration
of the Preemptive Period. If such issuance is not made within such 90-day
period, the restrictions provided for in this Section shall again become
effective.

(e) The obligations of the Corporation under this Section 2 shall not
apply to (i) a public offering of Equity Securities of the Corporation
registered pursuant to the Securities Act (an "IPO"), (ii) a Corporate
Transaction (as defined in the Warrant), (iii) issuances of capital stock
pursuant to Section 5 of the Series A Subscription Agreement, dated as of May
13, 1999, among the Corporation, AOL and certain other investors in the
Corporation, or (iv) up to 11,040,000 shares of Common Stock issued pursuant to
the Corporation's 1999 Stock Option and Incentive Plan. The obligations of the
Corporation under this Section 2 shall expire upon the consummation of a
Qualified IPO.

3. Registration Rights.
-------------------

(a) As used in this Agreement, the following terms shall have the
following meanings:

(i) "Commission" means the Securities and Exchange Commission or
any other Federal agency at the time administering the Securities Act.
<PAGE>

(ii) "Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated
thereunder, all as the same shall be in effect from time to time.

(iii) "Other Shares" means at any time those shares of Common
Stock which do not constitute Primary Shares or Registrable Shares.

(iv) "Primary Shares" means at any time the authorized but
unissued shares of Common Stock or shares of Common Stock held by the
Corporation in its treasury.

(v) "Registrable Shares" means at any time the shares of Common
Stock held (or to be held upon conversion of any Restricted Shares) by
AOL or its successors, assigns or transferees that constitute
Restricted Shares.

(vi) "Registration Date" means the date upon which the
registration statement pursuant to which the Corporation shall have
initially registered shares of Common Stock under the Securities Act
for sale to the public shall have been declared effective.

(vii) "Restricted Shares" means at any time the Warrant Shares,
any shares of Common Stock issued or issuable upon conversion thereof,
and any shares or other securities received in respect thereof, which
are held by AOL and which have not previously been sold to the public
pursuant to a registration statement under the Securities Act or
pursuant to Rule 144.

(viii) "Rule 144" means Rule 144 promulgated under the
Securities Act or any successor rule thereto or any complementary rule
thereto.

(ix) "Securities Act" means the Securities Act of 1933, as
amended, and the rules and regulations of the Commission thereunder,
all as the same shall be in effect from time to time.

(x) "Transfer" means any disposition of any Restricted Shares or
of any interest therein which constitutes a sale within the meaning of
the Securities Act, other than any disposition pursuant to an
effective registration statement under the Securities Act and
complying with all applicable state securities and "blue sky" laws.

(b) Required Registration. If the Corporation at any time after
---------------------
October 1, 2000 shall be requested by AOL to effect the registration under the
Securities Act of Registrable Shares in accordance with this Section, and if the
Corporation has effected an IPO and AOL owns at least fifty percent of the
shares which have been issued
<PAGE>

to it pursuant to the Warrant, the Corporation shall promptly use its reasonable
best efforts to effect such registration under the Securities Act of the
Registrable Shares which the Corporation has been so requested to register;
provided, however, that the Corporation shall not be obligated to effect any
registration under the Securities Act except in accordance with the following
provisions:

(i) the Corporation shall not be obligated to file (i) more than
two (2) registration statements initiated pursuant to this Section which
become effective or (ii) any registration statement during any period in
which any other registration statement (other than on Form S-4 or Form S-8
promulgated under the Securities Act or any successor forms thereto)
pursuant to which Primary Shares or Registrable Shares are to be or were
sold has been filed and not withdrawn or has been declared effective within
the prior 120 days;

(ii) if AOL or any other holders have not or do not agree to
comply with Regulation M, or if any such party fails to complete and/or
execute all questionnaires, powers of attorney, indemnities, agreements and
other documents as may be required by the Corporation and/or the
underwriters, such holder will not be permitted to participate in such
registration;

(iii) the Corporation may delay the filing or effectiveness of
(a) the registration statement related to its initial public offering for
any reasonable period of time, or (b) any registration statement for a
period not to exceed 120 days after the date of a request for registration
pursuant to this Section 3(b) if (i) at the time of such request the
Corporation is engaged, or has fixed plans to engage within 60 days of the
time of such request, in a firm commitment underwritten public offering of
Primary Shares in which AOL may include Registrable Shares pursuant to
Section 3 or (ii) the Corporation shall furnish AOL a certificate signed by
an executive officer of the Corporation stating that, in the good faith
judgment of the Board of Directors of the Corporation, such registration
statement would materially impede, delay or interfere with any material
financing, offer or sale of securities, acquisition, corporate
reorganization or other significant transaction involving the Corporation
or any of its subsidiaries which material financing, offer or sale of
securities, acquisition, corporate reorganization or other significant
transaction is under active consideration at the at the time of such
postponement or suspension; provided, however, that the Corporation shall
not be entitled to such postponement or suspension more than twice in any
twenty-four-month period; and

(iv) with respect to any registration pursuant to this Section,
the Corporation may include in such registration any Primary Shares or
Other Shares; provided, however, that if the managing underwriter advises
the Corporation that the inclusion of all Registrable Shares, Primary
Shares and Other Shares proposed to be included in such registration would
interfere with the successful marketing (including pricing) of all such
securities, then the number of Registrable Shares, Primary Shares and Other
Shares proposed to be included in such registration shall be included in
the following order:
<PAGE>

first, the Registrable Shares;

second, the Primary Shares; and

third, the Other Shares;

provided, however, that to the extent that the Corporation has granted
-----------------
registration rights to stockholders other than AOL as of the date of the
Warrant, then AOL's Restricted Shares shall be included in the registration
on a pro rata basis with such stockholders' shares which are included in
the registration.

A requested registration under this Section may be rescinded or withdrawn by
written notice to the Corporation by AOL; provided, however, that such rescinded
-------- -------
registration shall not count as a registration statement initiated pursuant to
this Section for purposes of paragraph (a) above if such recission or withdrawal
is based upon material adverse information relating to the Corporation or its
condition, business or prospectus that is different from that generally known to
AOL at the time of its request. In connection with a registration under this
Section 3(b), the underwriters shall be a nationally recognized independent
investment banking firm selected by the Corporation and consented to by the
holder of this Warrant, which consent shall not be unreasonably withheld (if the
parties are unable to agree on a nationally recognized independent investment
banking firm within five business days after delivery of the Notice of Exchange
referred to above, such selection shall be made by a nationally recognized
independent investment banking firm selected by the American Arbitration
Association then obtaining).

(c) Piggyback Registration. If the Corporation at any time proposes
----------------------
for any reason to register Primary Shares, Registrable Shares (other than in an
initial public offering or pursuant to Section 3(b) hereof) or Other Shares
under the Securities Act (other than on Form S-4 or Form S-8 promulgated under
the Securities Act or any successor forms thereto or other than in connection
with an exchange offer or offering solely to, the Corporation's stockholders),
it shall promptly give written notice to AOL of its intention so to register the
Primary Shares or Other Shares and, upon the written request, given within 10
days after delivery of any such notice by the Corporation, of AOL to include in
such registration Registrable Shares (which request shall specify the number of
Registrable Shares proposed to be included in such registration), the
Corporation shall use its best efforts to cause all such Registrable Shares to
be included in such registration on the same terms and conditions as the
securities otherwise being sold in such registration; provided, however, that if
-------- -------
the managing underwriter advises the Corporation that the inclusion of all
Registrable Shares and/or Other Shares proposed to be included in such
registration would interfere with the successful marketing (including pricing)
of the Primary Shares proposed to be registered by the Corporation, then the
number of Primary Shares, Registrable Shares and Other Shares, proposed to be
included in such registration shall be included in the following order:

(i) first, the Primary Shares;
-----
(ii) second, the Registrable Shares held by AOL; and
------
(iii) third, the Other Shares.
-----
<PAGE>

If a piggyback registration effects the registration of greater than twenty
percent (20 %) of the Registrable Shares, such registration shall be counted as
a required registration for purposes of the limits on required registrations in
subsection (b).

(d) Registrations on Form S-3. Anything contained in Section 3 to the
-------------------------
contrary notwithstanding, at such time as the Corporation shall have qualified
for the use of Form S-3 promulgated under the Securities Act or any successor
form thereto, AOL shall have the right to request in writing two registrations
on Form S-3 or such successor form of Registrable Shares, which request or
requests shall (i) specify the number of Registrable Shares intended to be sold
or disposed of, (ii) state the intended method of disposition of such
Registrable Shares, and (iii) relate to Registrable Shares having an anticipated
aggregate offering price of at least $1,500,000; provided, however, AOL may only
-------- -------
make one such request in any 6-month period. A requested registration on Form
S-3 or any such successor form in compliance with this Section shall not count
as a registration statement demanded pursuant to Section 3(b), but shall
otherwise be treated as a registration initiated pursuant to and shall, except
as otherwise expressly provided in this Section, be subject to Section 3(b).

(e) Holdback Agreement. If in connection with any initial public
------------------
offering of shares of Common Stock of the Corporation registered pursuant to the
Securities Act, the managing underwriter for such registration shall so request,
AOL shall not sell, make any short sale of, grant any option for the purchase
of, or otherwise dispose of any Restricted Shares (other than those shares of
Common Stock included in such registration) without the prior written consent of
the Corporation for a period designated by the Corporation in writing to AOL,
which period shall not begin more than 10 days prior to the effectiveness of the
registration statement pursuant to which such public offering shall be made and
shall not last more than 180 days after the effective date of such registration
statement; provided that AOL be bound by this provision only if, and to the
--------
extent, all officers and directors of the Corporation and all holders of at
least 7% of the outstanding Common Stock of the Corporation shall be bound by
such a provision.

(f) Preparation and Filing. If and whenever the Corporation is under
----------------------
an obligation pursuant to the provisions of this Agreement to use its reasonable
best efforts to effect the registration of any Registrable Shares, the
Corporation shall, as expeditiously as practicable:

(i) use its reasonable best efforts to cause a registration
statement that registers such Registrable Shares to become and remain
effective for a period of 180 days or until all of such Registrable Shares
have been disposed of (if earlier);

(ii) furnish, at least five business days before filing a
registration statement that registers such Registrable Shares, a prospectus
relating thereto or any amendments or supplements relating to such a
registration statement or prospectus, to one counsel selected by AOL,
copies of all such
<PAGE>

documents proposed to be filed (it being understood that such five-
business-day period need not apply to successive drafts of the same
document proposed to be filed so long as such successive drafts are
supplied to such counsel in advance of the proposed filing by a period of
time that is customary and reasonable under the circumstances);

(iii) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for at least a period of 180 days or until all of such
Registrable Shares, have been disposed of (if earlier) and to comply with
the provisions of the Securities Act with respect to the sale or other
disposition of such Registrable Shares;

(iv) notify in writing AOL's counsel promptly (i) of the receipt
by the Corporation of any notification with respect to any comments by the
Commission with respect to such registration statement or prospectus or any
amendment or supplement thereto or any request by the Commission for the
amending or supplementing thereof or for additional information with
respect thereto, (ii) of the receipt by the Corporation of any notification
with respect to the issuance by the Commission of any stop order suspending
the effectiveness of such registration statement or prospectus or any
amendment or supplement thereto or the initiation or threatening of any
proceeding for that purpose and (iii) of the receipt by the Corporation of
any notification with respect to the suspension of the qualification of
such Registrable Shares, for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purposes;

(v) use its reasonable best efforts to register or qualify such
Registrable Shares, under such other securities or blue sky laws of such
jurisdictions as any seller of Registrable Shares reasonably requests and
do any and all other acts and things which may be reasonably necessary or
advisable to enable such seller of Registrable Shares to consummate the
disposition in such jurisdictions of the Registrable Shares owned by such
seller; provided, however, that the Corporation will not be required to
qualify generally to do business, subject itself to general taxation or
consent to general service of process in any jurisdiction where it would
not otherwise be required so to do but for this paragraph (v);

(vi) furnish to each seller of such Registrable Shares such
number of copies of a summary prospectus or other prospectus, including a
preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as such seller of Registrable
Shares may reasonably request in order to facilitate the public sale or
other disposition of such Registrable Shares;

(vii) use its reasonable best efforts to cause such Registrable
Shares to be registered with or approved by such other governmental
agencies or
<PAGE>

authorities as may be necessary by virtue of the business and operations of
the Corporation to enable the seller or sellers thereof to consummate the
disposition of such Registrable Shares;

(viii) notify on a timely basis each seller of such Registrable
Shares at any time when a prospectus relating to such Registrable Shares is
required to be delivered under the Securities Act within the appropriate
period mentioned in paragraph (a) of this Section, of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances then existing and, at the request of such seller, prepare and
furnish to such seller a reasonable number of copies of a supplement to or
an amendment of such prospectus as may be necessary so that, as thereafter
delivered to the offerees of such shares, such prospectus shall not include
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing;

(ix) make available for inspection by any seller of such
Registrable Shares, any underwriter participating in any disposition
pursuant to such registration statement and any attorney, accountant or
other agent retained by any such seller or underwriter (collectively, the
"Inspectors"), all pertinent financial and other records, pertinent
corporate documents and properties of the Corporation (collectively, the
"Records"), as shall be reasonably necessary to enable them to exercise
their due diligence responsibility, and cause the Corporation's officers,
directors and employees to supply all information (together with the
Records, the "Information") reasonably requested by any such Inspector in
connection with such registration statement. Any of the Information which
the Corporation determines in good faith to be confidential, and of which
determination the Inspectors are so notified, shall not be disclosed by the
Inspectors unless (i) the disclosure of such Information is necessary to
avoid or correct a misstatement or omission in the registration statement,
(ii) the release of such Information is ordered pursuant to a subpoena or
other order from a court of competent jurisdiction or (iii) such
Information has been made generally available to the public. The seller of
Registrable Shares, agrees that it will, upon learning that disclosure of
such Information is sought in a court of competent jurisdiction, give
notice to the Corporation and allow the Corporation, at the Corporation's
expense, to undertake appropriate action to prevent disclosure of the
Information deemed confidential;

(x) use its reasonable best efforts to obtain from its
independent certified public accountants "comfort" letters in customary
form and at customary times and covering matters of the type customarily
covered by comfort letters;
<PAGE>

(xi) use its reasonable best efforts to obtain from its counsel
an opinion or opinions in customary form;

(xii) provide a transfer agent and registrar (which may be the
same entity and which may be the Corporation) for such Registrable Shares;

(xiii) issue to any underwriter to which any seller of
Registrable Shares may sell shares in such offering certificates evidencing
such Registrable Shares;

(xiv) list such Registrable Shares on any national securities
exchange on which any shares of the Common Stock are listed or, if the
Common Stock is not listed on a national securities exchange, use its best
efforts to qualify such Registrable Shares for inclusion on the automated
quotation system of the National Association of Securities Dealers, Inc.
(the "NASD");

(xv) otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Commission and make available to
its securityholders, as soon as reasonably practicable, earnings statements
(which need not be audited) covering a period of 12 months beginning within
three months after the effective date of the registration statement, which
earnings statements shall satisfy the provisions of Section 11(a) of the
Securities Act; and

(xvi) use its best efforts to take all other steps necessary to
effect the registration of such Registrable Shares contemplated hereby.

(g) Expenses. All expenses incurred by the Corporation in complying
--------
with Section 3, including, without limitation, all registration and filing fees
(including all expenses incident to filing with the NASD), fees and expenses of
complying with securities and blue sky laws, printing expenses, and fees and
expenses of the Corporation's counsel and accountants; provided, however, that
-------- -------
all underwriting discounts and selling commissions, and all transfer taxes, if
any, applicable to the Registrable Shares and all fees and expenses of any
special or interim audit for any registration initiated by AOL pursuant to
Section 3 that is not otherwise required under the Securities Act in connection
with such registration, shall be borne by the seller or sellers thereof, in
proportion to the number of Registrable Shares sold by such seller or sellers.

(h) Information. Each seller of Registrable Securities as to which
-----------
any registration is being effected agrees, as a condition to the registration
obligations with respect to such seller provided herein, to furnish to the
Corporation such information regarding seller and the distribution of such
Registrable Securities as the Corporation may, from time to time, reasonably
request in writing to comply with the Securities Act and other applicable law.
The Corporation may exclude from such registration the Registrable Securities of
any seller for so long as such seller fails to furnish such information after
receiving such request. If the identity of a seller of Registrable
<PAGE>

Securities is to be disclosed in the registration statement, such seller shall
be permitted to include all information regarding such seller as is required by
applicable securities laws.

(i) Indemnification.
---------------

(i) In connection with any registration of any Registrable Shares
under the Securities Act pursuant to this Agreement, the Corporation shall
indemnify and hold harmless the seller of such Registrable Shares, its
partners, members in the case of a limited liability corporation,
beneficiaries in the case of a trust, officers and directors, partners,
employees and affiliates and each other person, if any, who controls any of
the foregoing persons within the meaning of the Securities Act against any
losses, claims, damages or liabilities, joint or several, (or actions in
respect thereof) to which any of the foregoing persons may become subject
under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material
fact contained in the registration statement under which such Registrable
Shares were registered under the Securities Act, any preliminary prospectus
or final prospectus contained therein or otherwise filed with the
Commission, any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading or, with respect to any prospectus, necessary to
make the statements therein in light of the circumstances under which they
were made not misleading, or any violation by the Corporation of the
Securities Act or state securities or blue sky laws applicable to the
Corporation and relating to action or inaction required of the Corporation
in connection with such registration or qualification under such state
securities or blue sky laws; and shall reimburse such seller, such officer
or director, such underwriter, such broker or such other person acting on
behalf of such seller and each such controlling person for any legal or
other expenses reasonably incurred by any of them in connection with
investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Corporation shall not be liable in any
such case to the extent that any such loss, claim, damage, liability or
action arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in said registration
statement, preliminary prospectus, final prospectus, amendment, supplement
or document in reliance upon and in conformity with written information
furnished to the Corporation by such seller or underwriter that states that
it is specifically for use in the preparation thereof. The Corporation
shall not be liable for any misstatement or omission in any preliminary
prospectus if such misstatement or omission is corrected in the final
prospectus.

(ii) In connection with any registration of Registrable Shares,
under the Securities Act pursuant to this Agreement, each seller of
Registrable Shares shall indemnify and hold harmless (in the same manner
and to the same extent as set forth in the preceding paragraph of this
Section) the Corporation, each director of the Corporation, each officer of
the Corporation who shall sign
<PAGE>

such registration statement, employees and affiliates, each person who
controls any of the foregoing persons within the meaning of the Securities
Act and each other seller of Registrable Shares under such registration
statement with respect to any statement or omission from such registration
statement, any preliminary prospectus or final prospectus contained therein
or otherwise filed with the Commission, any amendment or supplement thereto
or any document incident to registration or qualification of any
Registrable Shares, if such statement or omission was made in reliance upon
and in conformity with written information furnished to the Corporation or
such underwriter through an instrument duly executed by such seller or
underwriter that states that it is specifically for use in connection with
the preparation of such registration statement, preliminary prospectus,
final prospectus, amendment, supplement or document; provided, however,
that the obligation to indemnify will be several, not joint and several,
among such sellers of Registrable Shares, and the maximum amount of
liability in respect of such indemnification shall be in proportion to and
limited to, in the case of each seller of Registrable Shares, an amount
equal to the proceeds received by such seller from the sale of Registrable
Shares effected pursuant to such registration.

(iii) The indemnification required by this Section 3(h) will be
made by periodic payments during the course of the investigation or
defense, as and when bills are received or expenses incurred, subject to
prompt refund in the event any such payments are determined not to have
been due and owing hereunder.

(iv) Promptly after receipt by an indemnified party of notice of
the commencement of any action involving a claim referred to in the
preceding paragraphs of this Section, such indemnified party will, if a
claim in respect thereof is made against an indemnifying party, give
written notice to the latter of the commencement of such action. In case
any such action is brought against an indemnified party, the indemnifying
party will be entitled to participate in and to assume the defense thereof,
jointly with any other indemnifying party similarly notified to the extent
that it may wish, with counsel reasonably satisfactory to such indemnified
party, and after notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof, the indemnifying
party shall not be responsible for any legal or other expenses subsequently
incurred by the latter in connection with the defense thereof; provided,
however, that if any indemnified party shall have reasonably concluded that
there may be one or more legal or equitable defenses available to such
indemnified party which are additional to or conflict with those available
to the indemnifying party, or that such claim or litigation involves or
could have an effect upon matters beyond the scope of the indemnity
agreement provided in this Section, the indemnifying party shall not have
the right to assume the defense of such action on behalf of such
indemnified party and such indemnifying party shall reimburse such
indemnified party and any person controlling such indemnified party for
that portion of the reasonable fees and expenses of any counsel retained by
the indemnified party which is reasonably related to the matters covered by
the
<PAGE>

indemnity agreement provided in this Section, provided, however, that
the Indemnifying Party shall not be liable for fees and expenses of more
than one law firm for all indemnified parties. An indemnifying party shall
not be liable for any settlement or compromise of, or consent to entry of
any judgment with respect to, any action, suit, claim or proceeding
effected without its prior written consent (which consent in the case of an
action, suit, claim or proceeding exclusively seeking monetary relief shall
not be unreasonably withheld). Such indemnification shall remain in full
force and effect irrespective of any investigation made by or one behalf of
an indemnified party.

(v) The indemnification provided for under this Agreement will
remain in full force and effect regardless of any investigation made by or
on behalf of the indemnified party or any officer, director or controlling
person of such indemnified party and will survive the transfer of
securities.

(vi) If the indemnification provided for in this Section is held
by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, claim, damage, liability or action referred
to herein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amounts paid or
payable by such indemnified party as a result of such loss, claim, damage,
liability or action in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and of the
indemnified party on the other in connection with the statements or
omissions which resulted in such loss, claim, damage or liability as well
as any other relevant equitable considerations. The relative fault of the
indemnifying party and of the indemnified party shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the indemnifying party or
by the indemnified party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement
or omission. The Corporation and the sellers of Registrable Shares agree
that it would not be just and equitable if contributions pursuant to this
paragraph were determined by pro rata allocation or by any other method of
allocation which did not take into account the equitable considerations
referred to herein. The amount paid or payable to an indemnified party as
a result of the losses, claims, damages, liabilities or expenses referred
to above shall be deemed to include, subject to the limitation set forth in
this Section (h)(iv), any legal or other expenses reasonably incurred in
connection with investigating or defending the same. Notwithstanding the
foregoing, in no event shall the amount contributed by a seller of
Registrable Shares exceed the aggregate offering proceeds received by such
seller from the sale of such seller's Registrable Shares.

(j) Information by Holder. AOL shall furnish to the Corporation such
---------------------
written information regarding AOL and the distribution proposed by AOL as the
Corporation may reasonably request and as shall be reasonably required in
connection with any registration, qualification or compliance referred to in
this Agreement.
<PAGE>

(k) Exchange Act Compliance. From and after the Registration Date or
-----------------------
such earlier date as a registration statement filed by the Corporation pursuant
to the Exchange Act relating to any class of the Corporation's securities shall
have become effective, the Corporation shall use its reasonable best efforts to
comply with all of the reporting requirements of the Exchange Act and with all
other public information reporting requirements of the Commission which are
conditions to the availability of Rule 144 for the sale of the Common Stock.
Until such date, the Corporation shall cooperate with AOL in supplying such
information as may be necessary for AOL to complete and file any information
reporting forms presently or hereafter required by the Commission as a condition
to the availability of Rule 144.

(l) No Conflict of Rights. The Corporation represents and warrants to
---------------------
AOL that the registration rights granted to AOL hereby do not conflict with any
other registration rights granted by the Corporation. The Corporation shall
not, after the date hereof, grant any registration rights which conflict with or
impair the registration rights granted hereby.

(m) Termination. This Agreement shall terminate and be of no further
-----------
force or effect when there shall not be any Restricted Shares, or upon the tenth
(10th) anniversary of the initial public offering of shares of Common Stock of
the Corporation registered pursuant to the Securities Act.

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated May 11, 1999 (except for
Note 9, as to which the date is June 25, 1999), in the Registration Statement
(Form S-1 No. 333-78713) and related Prospectus of Net2Phone, Inc. for the
registration of shares of its common stock.

/s/ Ernst & Young LLP

New York, New York
July 19, 1999