Sequential EBITDA improvement of 34% to ($10.0) million driven by gross margin expansion to 46.3% (excluding Adir and charges)

Consolidated revenues of $37.8 million and EPS loss of ($0.33) excluding charges beats guidance and consensus estimates

Introduces consolidated EPS breakeven target for exiting the fourth quarter of fiscal 2003 ending July 31, 2003

Note: Net2Phone CEO Stephen Greenberg will host a conference call at 4:30 p.m. EST today. The call can be accessed at www.net2phone.com/corporate/ir/ or www.vcall.com or by dialing (800) 446-2782. A replay of the conference call will be available by dialing (888) 843-8996, passcode: 5413767.

NEWARK, NJ —February 28, 2002 – Net2Phone, Inc. (Nasdaq: NTOP), the leading provider of Voice-over-IP (VoIP) services, today announced results ahead of guidance for the second quarter of fiscal 2002 ended January 31, 2002.

Highlights for the second fiscal quarter and beyond include:

• EBITDA loss improvement of 34% sequentially and 61% year-over-year to ($10.0) million excluding Adir and restructuring, non-recurring and non-cash compensation charges and expenses.
• Third straight quarter of gross margin expansion with a sequential increase of over five percentage points to 46.3% and year-over-year increase of over 20 percentage points, excluding Adir and non-recurring charges.
• Introduction of consolidated earnings per share (EPS) breakeven target (excluding charges) of exiting the fourth quarter of fiscal 2003 ending July 31, 2003.
• Fully funded to EBITDA and EPS breakeven with a $157.2 million consolidated cash balance at the end of the second quarter of fiscal 2002, or $2.72 per share.

Second Quarter Fiscal 2002:

Consolidated revenues for the second quarter totaled $37.8 million, ahead of the $35 to $37 million range outlined in the previous quarter; and representing a 9.2% year-over-year increase.

Consolidated gross margins for the second quarter increased strongly to 47.2%, excluding non-recurring items, driven by the company’s continued ability to lower termination and connectivity costs while maintaining relatively stable average revenue per minute for both domestic and international termination.  Excluding Adir and non-recurring items, Net2Phone generated gross margins of 46.3%, a substantial improvement of 5.4 percentage points over the corresponding gross margin of 40.9% in the prior quarter.  (Refer to Footnote 3.)

EBITDA (earnings before interest, taxes, depreciation & amortization) loss from continuing operations (excluding Adir and restructuring, non-recurring and non-cash compensation charges and expenses) for the quarter stood at ($10.0) million, a 34.3% improvement over the corresponding first quarter EBITDA loss of ($15.3) million and a 61.0% improvement year-over-year.  (Refer to Footnote 3.)

"We are tremendously excited by the great strides Net2Phone has made in expanding its gross margins and improving bottom line profitability.  EBITDA losses for the quarter were the lowest we have seen for the company since 1999,” said Stephen Greenberg, CEO of Net2Phone. “While the recent restructuring announcement will add some variability to topline results, our recent actions have placed the company firmly on the path to profitability and we are committed to delivering on the EBITDA breakeven target exiting the July 2002 quarter.”

Including Adir, consolidated EBITDA loss from continuing operations (excluding restructuring, non-recurring and non-cash compensation charges and expenses) was ($15.7) million, an 18.2% improvement over the corresponding ($19.2) million EBITDA loss in the first quarter of fiscal 2002.  (Refer to Footnote 2.)

Consolidated net loss (excluding restructuring, non-recurring and non-cash compensation charges and expenses) for the second quarter totaled ($19.2) million or ($0.33) per share, ahead of consensus EPS loss estimate of ($0.34).  (Refer to Footnote 1.)

“This quarter was of significant importance in that it demonstrated yet another quarter of continued EBITDA and gross margin improvement – in fact a tripling of gross margins over the past nine months. This was all done in the midst of making painful decisions that resulted in the reduction of our workforce by approximately 60% over the past few months. We have realigned the businesses for near-term profitability with an eye towards long term sustainable growth,” commented departing CFO Ilan Slasky.

Cash And Capital Expenditures:

Capital expenditures for the second quarter were $9.4 million, excluding the impact of $3.3 million for the delivery of network capacity contracted and paid for in a previous quarter, as compared to $9.7 million in the first quarter.  Cash, cash equivalents, marketable securities and related investments as of January 31, 2002 were approximately $157.2 million versus $174.5 million in the prior quarter.

Restructuring charges for the quarter totaled $17.5 million, resulting largely from the reduction-in-force announced on November 7, 2001.

Projections

Net2Phone is introducing an EPS breakeven target for exiting the fourth quarter of fiscal 2003, ending July 31, 2003.  Topline growth will be achieved from our core Reseller, Phone2Phone, Carrier and PC2Phone business lines, with conservative revenue contributions from broadband and other next generation opportunities in the second half of fiscal 2003.

“While we will be conservative in guiding expectations for broadband’s near-term financial impact, the company and its strategic partners believe the longer-term upside could be tremendous,” said Norman Klugman, CFO of Net2Phone.  “Over fifty million cable modem users (excluding the larger set-top market) are expected worldwide by 2005.  With only a 25% penetration rate of this base with a conservative $10 per month per user, the annualized revenue opportunities are roughly $1.5 billion.”

Additionally, Net2Phone continues to benefit from the capacity oversupply as well as pricing pressure in the wholesale markets, which has driven down our cost of services and improved gross margins.  While costs are falling, the company’s focus on servicing the end user in both retail and enterprise markets has minimized declines in average revenue per minute for our core businesses.  We expect continued strength in gross margins for at least the remainder of fiscal 2002.

In particular, the International Reseller business has proven to be an ideal market to showcase a service that 1) would not exist without Net2Phone’s VoIP expertise and 2) presents a wealth of pricing flexibility to capture market share rapidly while maintaining gross margins at Net2Phone’s current run rates.

Adir Technologies:

While Net2Phone and Adir continue discussions with Adir’s strategic partners, the company has taken aggressive steps to lower Adir’s operating losses.  As a result, EBITDA losses for Adir are projected to total approximately ($3) million for both the third and fourth quarters of fiscal 2002, an approximate 50% improvement over the second quarter’s EBITDA loss run rate.  (Refer to Footnote 3.)  For the first quarter of fiscal 2003, the company anticipates Adir will no longer be dilutive to consolidated EBITDA results.

About Net2Phone:

Founded in 1995, Net2Phone is a leading provider of voice services over IP networks to consumers, businesses and carriers worldwide. With millions of users around the world, Net2Phone enables toll-quality calls between computers, telephones, and broadband devices utilizing IP networks. Recognized as the first company to bridge the Internet with the public switched telephone network, Net2Phone has routed billions of minutes of traffic over its award-winning network. Traded on the NASDAQ under the symbol NTOP, Net2Phone’s strategic partners and investors include Liberty Media Corporation (NYSE: LMC.A; LMC.B), AT&T Corporation (NYSE: T), AOL Time Warner Inc. (NYSE: AOL), and IDT Corporation (NYSE: IDT; IDT.B). For more information about Net2Phone's products and services, please visit www.net2phone.com.

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward- looking statements involve risks and uncertainties and actual results could differ materially from those discussed in the forward-looking statements. For this purpose, any statements contained in this press release that are not statements of historical fact may be deemed to be forward-looking statements. Factors which may affect the Company's results include, but are not limited to, the Company's ability to expand its customer base, the Company's ability to develop additional and leverage its existing distribution channels for its products and solutions, dependence on strategic and channel partners including their ability to distribute the Company's products and meet or renew their financial commitments, the Company's ability to address international markets, the effectiveness of the Company's sales and marketing activities, the acceptance of the Company's products in the marketplace, the timing and scope of deployments of the Company's products by customers, fluctuations in customer sales cycles, customers' ability to obtain additional funding, technical difficulties with respect to the Company's products or products in development, the need for ongoing product development in an environment of rapid technological change, the emergence of new competitors in the marketplace, the Company's ability to compete successfully against established competitors with greater resources, the uncertainty of future governmental regulation, the Company's ability to manage growth, obtain patent protection, and obtain additional funds, general economic conditions and other risks discussed in this Report and in the Company's other filings with the Securities and Exchange Commission. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to the Company as of the date thereof, and the Company assumes no obligation to update any forward-looking statement or risk factors.