NEWARK, NJ — June 14, 2001 – Net2Phone Inc. (NASDAQ: NTOP), the leading provider of voice and enhanced services on IP networks, today reported third quarter fiscal year 2001 results ended April 30, 2001. Revenues from continuing operations totaled $40.6 million for the quarter, representing a 115% increase over revenues of $18.9 million for the third quarter FY2000 and a 17% increase over the prior quarter revenues of $34.7 million.

Net2Phone Inc. and Liberty Media Corporation (NYSE: LMG.A and LMG.B) also today announced a five-year $20 million licensing agreement. Under the terms of the Binding Memorandum of Understanding, Liberty Media will license some of Net2Phone’s core VoIP technology and make it available to its International cable affiliates serving over 25 million households.

The license marks two new milestones for Net2Phone: (i) The significant entry into the international cable sector with one of the most substantial players in the space, and (ii) The introduction of licensing as a new revenue stream for Net2Phone. Consistent with previous strategic guidance, licensing Net2Phone’s technology enables telecommunications companies and cable operators to reap the benefits of Net2Phone’s proven Voice over IP technology without investing heavily in R&D, infrastructure, and technology. Net2Phone expects to enter into other licensing agreements with additional telcos and broadband providers, enabling them with core Voice over IP technology and services.

This license facilitates Net2Phone as a platform to provide IP dial tone to Liberty and other cable operators.

“We are very excited about Liberty’s decision to license our technology, as this validates our business,” said Howie Balter, CEO of Net2Phone. “As we’ve repeatedly communicated, our core business of routing voice and enhanced services over IP networks has and will continue to grow steadily as we have forecasted in the past, and we believe that licensing fees can provide high margin revenue that can support both top and bottom line growth.”

Net loss from continuing operations (excluding restructuring and other charge) for the third quarter of FY2001 was ($23.9) million or ($0.41) per share. Net loss before restructuring and other charges for the quarter including free minutes was ($28.7) million or ($0.50) per share, as compared to a net loss of ($11.4) million or ($0.21) per share for the third quarter of fiscal 2000 and ($23.9) million or ($0.41) per share in the second quarter of fiscal 2001. Net loss for the quarter including restructuring and other charges and free minutes was ($119.3) million or ($2.06) per share, as compared to ($176.2) million or ($2.99) in the prior quarter.

This quarter, Net2Phone reported restructuring and other charges, write-downs of certain receivables, inventories and marketing distribution commitments from certain distribution channels and non-cash compensation charges from the issuance of stock options of approximately $88 million. Approximately half of the charge is attributed to the consolidation of business lines and the closing of certain corporate subsidiaries abroad. The remaining balance of the write-down resulted from the re-evaluation of certain marketing relationships to reflect current market values. The company will continue to support its product lines without incurring costs of operating these subsidiaries in its current fashion. As a result, the company is reducing the value of goodwill and intangibles from certain acquisitions and investments. The company expects to incur an additional $3-4 million for possible severance costs attributable to consolidating these operations in Q4 FY 2001.

“We have set out a clear path to profitability, which requires us to critically assess each line of business. As such, we have already hit break-even in our phone-to-phone consumer business, and are working closely to evaluate each product and service to ensure profitability,” said Howie Balter, CEO of Net2Phone. “We are on track to reach our objective of positive EBITDA for July of next year.”

Depreciation and amortization for the third quarter was $5.1 million as compared to $3.8 million in the prior quarter, and $1.6 million for the same quarter year-ago.

Cash, cash equivalents, marketable securities and related investments as of April 30, 2001 were approximately $268 million. In the last quarter, approximately $25.3 million was used for capital expenditures, and an additional $24 million was due to a decrease in value of certain marketable securities. The company expects a 40-50% reduction in capital expenditures in Q4 2001.

Gross margins in the quarter were 27%, excluding free minutes. Including free minutes but excluding one-time charges, gross margins for the quarter were 15%, as compared to 25% in the prior quarter and 42% in the same quarter year-ago. Gross margins were affected due to the following reasons:

1. The company upgraded its least cost routing software in the beginning of the quarter. During the migration, calling rates were not necessarily procured and then offered to the public at the most profitable, efficient rates. While the issue was recognized early on in the quarter and quickly rectified, its impact was significant.
2. As part of its transition from subsidized to paid services earlier in the quarter, Net2Phone was wholesaling minutes to Yahoo at lower margins. Over the course of the quarter, the company renegotiated its costs, which has resulted in a higher margin line of business, and affected margins by 5-7%.

Net2Phone’s gross margin for April – the last reported month of the third quarter – was 30-35%, trending in line with the company’s expectations for the fourth quarter and a much more accurate gauge of the strength of the company’s products and services.

“The good news is that we addressed the issues quickly, our operations are strong and product line robust, and we fully expect that our publicly-announced expectations of 30-35% gross margins for the coming quarters and 35-38% for the greater part of 2002 is fully achievable,” said Ilan Slasky, Chief Financial Officer of Net2Phone. “We exited the quarter much stronger than we entered into it, and gross margins have significantly increased month to month from February to May. If Net2Phone had normalized gross margins for the quarter, gross margins would have been 30% and EPS would be ($0.37).”

Improved Results based on Elimination of Free Minutes
Consistent with previous guidance, this will be the last quarter where Net2Phone includes free minutes in the breakout of its financial details, as the company is no longer subsidizing free minutes for its partners. The use of free minutes will be restricted to direct offerings to Net2Phone customers, and is considered an effective and inexpensive customer acquisition tool for the company.

Diversified Sources of Revenue Growth
1. Core Business
Total Net2Phone paid minutes of use grew to 386 million minutes for the quarter, a 219% increase over 121 million minutes for the same quarter year-ago and a 30% increase over the prior quarter's 296 million minutes. This quarter, Net2Phone hit breakeven for its phone-to-phone consumer business. By reducing its customer acquisition costs, termination costs, and overhead costs such as customer service, the company was able to efficiently turn its consumer phone-to-phone business into a profitable standalone unit. As of April 30, 2001, Net2Phone had over 1.8 million active users (not including customers using Net2Phone via MSN Messenger or Yahoo! Messenger services) who had used Net2Phone’s services during the past three months, a 118% increase over 825,000 customers in the same quarter year-ago.

2. Future Services
Broadband: Last week, Net2Phone rolled out its new VoiceLine service, enabling consumers and small businesses to place and receive telephone calls over existing broadband networks. This is part of Net2Phone’s three-pronged strategy to offer VoIP services to broadband networks. Net2Phone is also working with service providers and equipment manufacturers to incorporate Net2Phone’s services into their product offerings, thereby taking IP telephony to the edge of high-speed IP networks. Enhanced Services: Net2Phone is building enhanced applications to better take advantage of the efficiencies, flexibility and scalability of IP networks as part of the company’s strategy to deliver value-added voice services to businesses and carriers, enabling them to reduce infrastructure, labor and transit costs by approximately 40%. These new services offer the company a new high margin revenue stream. Last month, Net2Phone demonstrated its new voice activated dialer as an example of its enhanced services.

3. ADIR Technologies
This week, ADIR completed its initial phase of its second round of financing, raising an additional $46 million, $21 million of which is earmarked for the acquisition of NetSpeak. Current investors include Net2Phone, Cisco Systems, IDT Corporation, and SOFTBANK. Additionally, ADIR Technologies announced plans to acquire NetSpeak Corporation (NASDAQ: NSPK), a leading VoIP company that develops, markets, and supports advanced telephony solutions for Internet Protocol (IP) networks, complementing ADIR’s suite of network management software solutions. The combined company will market a complete end-to-end IP telephony software solution for carriers and enterprises globally. In the past nine months, ADIR has raised approximately $70 million. “Simply put, we can do with ADIR what IDT did with Net2Phone just two years ago. By spinning ADIR off as a separate entity from Net2Phone with the backing of corporate giants like Cisco, we can realize greater value for both companies,” said Stephen Greenberg, President of Net2Phone.

About Net2Phone
Founded in 1995, Net2Phone is a leading provider of voice and enhanced 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 more than 1.5 billion minutes of traffic over its award-winning network. Traded on the NASDAQ under the symbol NTOP, Net2Phone’s strategic partners and investors include AT&T, America Online, and Yahoo!. Net2Phone also offers enhanced hosted service solutions, including voice recognition, for businesses around the world. For more information about Net2Phone's products and services, please visit www.net2phone.com.