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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2005

or

Commission File Number: 1-16371

IDT CORPORATION

(Exact Name of Registrant as Specified in its Charter)

(973) 438-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

As of March 8, 2005, the registrant had the following shares outstanding:

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IDT CORPORATION

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PART I. FINANCIAL INFORMATION

IDT CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements.

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IDT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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IDT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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IDT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of IDT Corporation and its subsidiaries (the “Company” or “IDT”) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain reclassifications have been made to the prior year’s condensed consolidated financial statements to conform to the current year’s presentation. Operating results for the three and six-month periods ended January 31, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2005. The balance sheet at July 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2004, as filed with the U.S. Securities and Exchange Commission.

The Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., fiscal 2005 refers to the fiscal year ending July 31, 2005).

Note 2—Stock-Based Compensation

As permitted under Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended, the Company applies Accounting Policy Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its stock option plans and, accordingly, compensation cost is recognized for repriced options that are subject to variable accounting treatment and therefore must be marked-to-market each quarter. In addition, compensation cost is recognized for stock options if it relates to non-qualified stock options for which the exercise price was less than the fair market value of the Company’s stock as of the date of grant. The compensation cost for these grants is amortized to expense on a straight-line basis over their vesting periods.

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IDT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value based method of accounting provisions of SFAS No. 123 to stock-based employee compensation for the three and six months ended January 31, 2005 and 2004:

Effective January 24, 2005, the compensation committee of the Company’s Board of Directors approved the acceleration of vesting of all outstanding unvested options to purchase shares of the Company’s Class B common stock. The Company accelerated the vesting of the options in anticipation of the impact of the Financial Accounting Standards Board’s (“FASB”) recent adoption of SFAS No. 123 (revised 2004) Share-Based Payment, which requires among other things, the expensing of unvested options over the remaining vesting period of the options, beginning August 1, 2005 (See Note 11). Options to purchase approximately 4.5 million shares of the Company’s Class B common stock became immediately exercisable on January 24, 2005, as a result of the acceleration. Generally, these options were scheduled to vest annually over 3 years beginning on the first anniversary of the grant date.

During the three and six months ended January 31, 2005, the Company granted 1.5 million and 1.6 million restricted shares, respectively, and during the three and six months ended January 31, 2004, the Company granted 1.1 million restricted shares of IDT Class B common stock to directors, officers and employees under its stock option and incentive plan. In general, one third of the restricted shares vest on or about the anniversary date of each of the three years following the year of grant. Total non-cash compensation expense relating to the amortization of restricted shares was $3.5 million and $7.3 million during the three and six months ended January 31, 2005, respectively, and $1.5 million during the three and six months ended January 31, 2004.

Note 3—Investment in Net2Phone

In November 2003, Net2Phone issued additional shares through an underwritten common stock offering. The offering, which was priced at $4.50 per share, included 11.5 million shares issued to the public, and an aggregate of 2.5 million shares purchased by IDT and Liberty Media Corporation. Net2Phone received net proceeds of $58.6 million from the offering (of which $5.6 million was paid by IDT). Net2Phone has used and intends to use the remaining net proceeds for capital expenditures and working capital, primarily relating to its

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IDT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

cable and other broadband telephony business, and for general corporate purposes. As a result of this common stock offering, the Company’s ownership percentage in the equity of Net2Phone decreased from 21.2% to approximately 18.9% as of November 25, 2003.

The Company has historically accounted for sales of stock of its subsidiaries in accordance with Staff Accounting Bulletin No. 51, Accounting for Sales of Stock by a Subsidiary, which permits the Company to record the change in the carrying value of its share in the equity of its subsidiaries as a gain or loss. Accordingly, in connection with this sale, the Company recognized a gain of $9.4 million in the second quarter of fiscal 2004.

On December 15, 2004, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), which was consummated on March 8, 2005, with certain subsidiaries of Liberty Media. Pursuant to the Merger Agreement, the Company acquired all of Liberty Media’s direct and indirect interests in Net2Phone, with a fair market value of $59.4 million, in exchange for 3.75 million shares of the Company’s Class B common stock, with an equal fair market value. Liberty Media’s interests in Net2Phone consisted of 1.25 million shares of common stock of Net2Phone and membership interests in NTOP Holdings, LLC. NTOP Holdings is a consortium formed in October 2001 to hold 28.9 million shares of Class A common stock of Net2Phone. IDT now owns all of the interests in NTOP Holdings, and through this transaction, IDT has increased its effective equity interest in Net2Phone to approximately 40.9% and its aggregate voting power in Net2Phone to approximately 57.0%. The acquisition will be accounted for under the purchase method of accounting.

As of January 31, 2005 and 2004, IDT’s effective equity interest in Net2Phone (both through NTOP Holdings and otherwise) was approximately 14.0% and 19.1%, respectively. Accordingly, in the accompanying condensed consolidated financial statements, during the three and six months ended January 31, 2005 and 2004, the Company reversed in minority interests the share of Net2Phone’s net income (loss) attributable to the remaining shareholders of Net2Phone.

Note 4—Business Segment Information

The Company has six reportable business segments: Wholesale Telecommunications Services, Retail Telecommunications Services, IDT Entertainment, Voice over IP, IDT Capital and IDT Solutions. The operating results of these business segments are distinguishable and are regularly reviewed by the Company’s chief operating decision maker.

The Wholesale Telecommunications Services business segment consists of wholesale carrier services provided to other long distance carriers. The Retail Telecommunications Services business segment markets and sells prepaid and rechargeable calling cards, consumer local and long distance phone services, and wireless cellular services to individuals and businesses. The IDT Entertainment business segment is comprised of

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IDT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

complementary operations and investments that acquire, develop, finance and produce animated entertainment programming and distribute filmed entertainment content to the mass market. The Voice over IP business segment consists mostly of Net2Phone, a provider of VoIP telephony products and services and of cable and other broadband telephony services. The IDT Capital business segment consists primarily of IDT’s brochure distribution, software development, call center services and radio broadcasting operations. In May 2004, the Company announced the restructuring of its IDT Solutions business segment, which consists of Winstar Holdings, LLC. IDT Solutions currently provides communications services only to select governmental customers in 14 markets. In this report, we use the term IDT Solutions, which represented a Winstar product line and marketing arm, interchangeably with Winstar.

The Company evaluates the performance of its business segments based primarily on operating income (loss). All overhead is allocated to the business segments, except for certain specific corporate costs, such as corporate management compensation, treasury and tax management costs, investor and public relations costs, corporate legal and governance costs, and certain insurance and facilities costs. Operating results presented for the business segments of the Company are as follows (in thousands):

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IDT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 5—Earnings (Loss) Per Share

The Company computes earnings (loss) per share under the provisions of SFAS No. 128, Earnings per Share, whereby basic earnings (loss) per share is computed by dividing net income (loss) attributable to all classes of common shareholders by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings (loss) per share is determined in the same manner as basic earnings (loss) per share, except that the number of shares is increased to include unvested restricted stock and to assume exercise of potentially dilutive stock options using the treasury stock method, unless the effect of such increase is anti-dilutive. For the three and six months ended January 31, 2005, stock options for 14.1 million shares and 2.1 million shares of unvested restricted stock were not included in the computation of diluted earnings (loss) per share. Diluted earnings (loss) per share equaled basic earnings (loss) per share because the Company reported net losses and the impact of the assumed exercise of stock options and grant of unvested restricted stock would have been anti-dilutive. The following table sets forth the computation of basic and diluted earnings per share:

Note 6—Treasury Stock Activity

On January 12, 2005, the Company exchanged an aggregate of 0.24 million shares of newly issued IDT Class B common stock with a fair market value of $3.7 million for 0.25 million shares of IDT common stock, with an equal fair market value, which was held by IDT Corporation 401(k) plan participants. In connection with this exchange, the Company recorded a $3.7 million increase in the carrying value of its treasury stock, with the offset as an increase in additional paid in capital.

On January 3, 2005, the Company acquired 0.1 million shares of its Class B common stock for $2.0 million.

Note 7—Liquidation of ADIR Technologies, Inc.

In September 2003, Net2Phone acquired 1,750 shares of Series A-1 preferred stock of its subsidiary, ADIR Technologies, Inc., from a group of investment funds.

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IDT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In addition, in consideration for general releases from certain employees of Net2Phone, and the surrender by them of their shares of ADIR common stock, ADIR cancelled promissory notes originally delivered by such employees. Following these transactions, Net2Phone became the sole shareholder of ADIR, and no longer had any minority shareholders in any of its subsidiaries. As a result, Net2Phone recorded non-cash other income of $12.2 million in the first quarter of fiscal 2004, representing the reversal of the remaining minority interests balance after all minority shareholder interests were satisfied. The non-cash gain of $12.2 million is recorded in “investment and other income (expense)” in the accompanying condensed consolidated statements of operations for the six months ended January 31, 2004.

Note 8—Comprehensive Income (Loss)

Comprehensive income (loss) consists of the following:

Note 9—Restructuring and Impairment Charges

Restructuring and impairment charges consist of the following:

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IDT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

IDT Solutions

In the first quarter of fiscal 2004, the Company approved a restructuring plan aimed at reducing the operating losses of IDT Solutions. On May 12, 2004, the Company announced a further restructuring plan for IDT Solutions, including the exit from IDT Solutions’ CLEC (Competitive Local Exchange Carrier) business, by ending the provision of retail switched communications services. As of November 1, 2004, all of IDT Solutions’ commercial customers have found replacement services and are no longer on the Winstar network. IDT Solutions currently provides service only to select governmental customers in 14 markets.

The restructuring plans included reductions to IDT Solutions’ workforce, real estate network and network connectivity, as well as the impairment of assets to their estimated net recoverable value. The first quarter of fiscal 2004 restructuring plan has been fully implemented, while the May 2004 restructuring plan is expected to be completed by the end of fiscal 2005.

During fiscal 2004 and throughout the first half of fiscal 2005, IDT Solutions did not meet the criteria to report its exit from the retail switched communications services business as a discontinued operation, since it continued to generate revenues from the business and to be continuously involved in the business during the winding down process.

As the Company continues to restructure IDT Solutions, the Company will be required to maintain minimum service level commitments to customers. Failure to maintain adequate network infrastructure and or support services could result in additional costs and liabilities to the Company pursuant to our agreements with these customers.

Workforce reductions

In connection with the first quarter of fiscal 2004 restructuring plan, IDT Solutions reduced its workforce during that quarter by 163 employees, to approximately 400 employees. As a result, during the three months ended October 31, 2004, the Company recorded severance related charges of $1.1 million.

In connection with the May 2004 restructuring, IDT Solutions has further reduced its workforce to approximately 57 employees as of January 31, 2005.

Real estate network and connectivity reductions

In connection with the first quarter of fiscal 2004 restructuring plan, which aimed to reduce IDT Solutions’ network of provision-ready buildings down from approximately 3,000 buildings to 2,200 buildings, the Company recorded during the three and six months ended January 31, 2004, real estate network reduction charges totaling $1.8 million and connectivity reduction charges totaling $1.1 million.

As part of the May 2004 restructuring, the Company further terminated leases and related connectivity on approximately 2,110 buildings on IDT Solutions’ network. As of January 31, 2005, approximately 90 buildings remained on IDT Solutions’ network. During the three and six months ended January 31, 2005, the Company recorded real estate network reduction charges of $0.8 million and $0.9 million and connectivity reduction charges of $6.8 million and $7.9 million, respectively.

Although the Company does not anticipate any additional connectivity reduction restructuring charges going forward, it does expect to incur additional costs relating to the early termination of real estate network leases. However, as of January 31, 2005, the Company had not yet negotiated the early termination on the majority of such leases. In addition, during fiscal 2004, the Company stopped paying rent on many of IDT Solutions’ real

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IDT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

estate leases due to the ongoing New York and New Jersey Building Owners and Managers Association (“BOMA”) litigations, as described in the Company’s Annual Report on Form 10-K for the year ended July 31, 2004, but continue to accrue for such amounts. On January 25, 2005, the New York BOMA litigation filed in the United States District Court, Southern District of New York, was dismissed. On or about February 18, 2005, the Company filed a notice of appeal to the United States Court of Appeals for the Second Circuit. Pending the ultimate outcome of the remaining New Jersey BOMA litigation and the Company’s appeal related to the New York BOMA litigation, the Company may not be required to pay all or any amounts due under such lease agreements.

Reserve summary

The following table summarizes the remaining reserve balances related to restructuring and impairment charges:

Note 10—Legal Proceedings and Contingencies

Legal proceedings in which the Company is involved are more fully described in the Company’s Annual Report on Form 10-K for the year ended July 31, 2004. The following discussion is limited to material recent developments, if any, concerning the Company’s legal proceedings since the end of the prior fiscal quarter and should be read in conjunction with the Company’s Annual Report and the Company’s Quarterly Report on Form 10-Q for the three months ended October 31, 2004. Unless otherwise indicated in this Report or the Quarterly Report for the three months ended October 31, 2004, all legal proceedings discussed in that Annual Report remain outstanding.

With respect to the complaint the Company filed against Telefonica S.A., Terra Networks, S.A., Terra Networks, U.S.A., and Lycos, Inc., on March 2, 2005, Judge Linares granted in part and denied in part, Telefonica S.A.’s motion to dismiss for lack of personal jurisdiction. Judge Linares also ordered limited discovery. In addition, on March 8, 2005, Judge Linares issued an opinion and an order: (a) granting the Company’s motion to dismiss Terra’s First, Second, Third, Fourth and Fifth Counterclaims, leaving only Count Six of Terra’s Counterclaim for breach of contract remaining; (b) granting the Company’s motion for summary judgment related to Count One of Terra’s Third Amended Complaint, which relates to the Company’s claim that Terra breached the Termination Agreement and failed to issue and then deliver 3.75 million Terra shares to the Company in a timely manner, thereby requiring Terra to issue an additional 0.25 million shares; and (c) denying Terra’s motion for summary judgment related to Counts I through VIII of the Company’s Third Amended Complaint. The Company’s expert has valued the additional 0.25 million shares at between $6.8 million and $26.9 million.

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IDT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

With respect to the action commenced by the Company against Tyco, on February 1, 2005, the Court denied all parties’ pending motions that were previously described in the Company’s Annual Report on Form 10-K for the year ended July 31, 2004.

IDT Telecom

With respect to the MDL Action, during a mediation session on January 17, 2005, the parties reached a settlement in principle of this action and are working to finalize the settlement documents, which require court approval.

With respect to the petition filed by plaintiff, Powell Palmares, plaintiff dismissed the entire case without prejudice against all defendants, including the Company.

As more fully described in the Company’s Annual Report on Form 10-K for the year ended July 31, 2004, in the Intellectual Property section, with respect to the Katz matter, on February 16, 2005, Katz filed a motion to dismiss the Company’s complaint based upon lack of controversy, which the Company will be opposing.

Winstar

On or about December 16, 2004, Lucent Technologies, Inc. (“Lucent”) filed a complaint in the United States District Court, District of New Jersey, against the Company. Lucent alleges, among other things, that the Company—either directly or via an alter ego theory—acquired a number of Lucent 5ESS switches (the “Switches”) from the bankruptcy estate of debtor, Winstar Communications, Inc. and its subsidiaries, and operated the Switches without any licenses to utilize Lucent’s proprietary software to operate the Switches. Lucent is claiming: (a) copyright infringement; (b) conversion; (c) conspiracy to commit conversion; (d) fraudulent conveyance; and (e) quasi-contract. Lucent seeks, among other things, a preliminary and permanent injunction enjoining the Company from copying, transferring, distributing, or disposing of the Lucent 5ESS software; an award of damages in an amount not less than $51 million and punitive damages. The Company is preparing a response to Lucent’s complaint and intends to include in such response significant counterclaims against Lucent.

The Company is subject to other legal proceedings, which have arisen in the ordinary course of business and have not been finally adjudicated. Although there can be no assurances in this regard, in the opinion of the Company’s management, such proceedings will not have a material adverse effect on the Company’s results of operations, cash flows, or its financial condition.

Note 11—Recently Issued Accounting Standard Not Yet Adopted

On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004) (“SFAS No. 123(R)”), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

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IDT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company expects to adopt SFAS No. 123(R) on August 1, 2005. SFAS No. 123(R) permits the Company to adopt its requirements using one of two methods:

1. A “modified prospective” method in which compensation cost is recognized beginning with the August 1, 2005 adoption date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after August 1, 2005 and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to August 1, 2005 that remain unvested on the adoption date.

2. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

The company plans to adopt SFAS No. 123(R) using the modified prospective method.

As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognizes no compensation cost on grants of employee stock options. Accordingly, the adoption of SFAS No. 123(R) may have a significant impact on the Company’s results of operations, although it will have no impact on its overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income (loss) and earnings (loss) share in Note 2 to our condensed consolidated financial statements. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement is not anticipated to be material since the Company does not currently recognize a benefit of excess tax deductions because of federal and state net operating loss carryforwards available to offset future U.S. federal and state taxable income.

Note 12—American Jobs Creation Act

On October 22, 2004 the American Jobs Creation Act (the “Act”) was signed into law. The Act includes a deduction of 85 percent of certain foreign earnings that are repatriated, as defined in the Act. As of January 31, 2005, the Company has the potential to repatriate up to $500 million of foreign earnings. The Company is in the process of evaluating the effects of the Act, and at this time, cannot predict an estimated completion date of any decision that it may make in regards to the Act. Accordingly, the Company cannot estimate the amount of taxes that may be payable on the eventual distribution of these earnings.

Note 13—Arbitration Award

As more fully described in the Company’s Annual Report on Form 10-K for the year ended July 31, 2004, in May 2001 the Company filed a statement of claim against Telefonica International, S.A. with the American Arbitration Association. During the second quarter of fiscal 2004, the Company was awarded by the Arbitrator $21.6 million, and recorded the receipt of such proceeds in “other income.”

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The following information should be read in conjunction with the accompanying condensed consolidated financial statements and the associated notes thereto of this Quarterly Report, and the audited consolidated financial statements and the notes thereto and our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended July 31, 2004, as filed with the U.S. Securities and Exchange Commission.

As used below, unless the context otherwise requires, the terms “the Company,” “IDT,” “we,” “us,” and “our” refer to IDT Corporation, a Delaware corporation, its predecessor, International Discount Telecommunications, Corp., a New York corporation, and their subsidiaries, collectively.

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including the notes to the condensed consolidated financial statements, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words “believes,” “anticipates,” “expects,” “plans,” “intends,” and similar words and phrases. Such forward-looking statements include, among other things, our plans to develop and market new products and services, improve our financial performance, enter new customer and geographic markets, expand our European consumer phone services business, develop our animation and entertainment businesses and the possible outcome of our litigation. Such forward-looking statements also include our expectations concerning factors affecting the markets for our products, such as changes in the U.S. and the international regulatory environment and the demand for telecommunications services. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results projected in any forward-looking statement. These risks and uncertainties include, but are not limited to, those risks discussed in this report. In addition to the factors specifically noted in the forward-looking statements, other important factors that could result in those differences include, but are not limited to, the fact that: each of our telecommunications business lines is highly sensitive to declining prices, which may adversely affect our revenues and margins; because our prepaid calling cards generate the bulk of our revenues, our growth is substantially dependent upon continuing growth in that area, and we face significant competition; we may not be able to obtain sufficient or cost-effective termination capacity to particular destinations to keep up with our growth; our customers, particularly our wholesale carrier customers, could experience financial difficulties which could adversely affect our revenues and profitability if we experience difficulties in collecting our receivables; the termination of our carrier agreements with foreign partners or our inability to enter into carrier agreements in the future could materially and adversely affect our ability to compete in foreign countries, which could reduce our revenues and profits; our revenues and our growth will suffer if our distributors and sales representatives, particularly Union Telecard Alliance, LLC, fail to effectively market and distribute our prepaid calling card products and other services; increased competition in the consumer and business telephone market, particularly from the regional bell operating companies, or RBOCs, and cable operators, could limit or reverse our growth in that area; we rely on a few major customers in realizing our home entertainment video distribution revenues and a reduction in our business with these customers could have an adverse effect on us; a significant portion of our home entertainment video distribution revenues comes from a small number of titles. A loss of our rights to these titles, or our failure to replace them when our rights expire, could significantly harm our home entertainment video distribution business; the success of IDT Entertainment may depend on audience acceptance of our computer generated (“CG”) animated feature films, which is extremely difficult to predict and therefore inherently risky; animated films are expensive to produce and the uncertainties inherent in their production could result in the expenditure of significant amounts on films that are canceled or significantly delayed, which would adversely affect our revenues and financial condition; piracy, including digital and Internet piracy, may decrease revenues received from the exploitation of our entertainment products; Net2Phone has never been profitable; Net2Phone is pursuing

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new streams of revenue, including a cable telephony business, which it has not attempted to generate before and which may not be profitable; pricing pressures and increased use of VoIP technology may lessen Net2Phone’s competitive pricing advantage; Net2Phone has and plans to increasingly depend on its international operations, which subject it to unpredictable regulatory, economic and political environments; we have incurred significant losses since our inception, which could cause the trading price of our stock to decline; our growth strategy depends, in part, on our acquiring complementary businesses and assets and expanding our existing operations, which we may be unable to do; our revenues may be adversely affected if we fail to protect our proprietary technology or enhance or develop new technologies; we may be subject to claims of infringement of intellectual property rights of others; federal, state, local and international government regulations, including the recent FCC rule changes and litigation finding in the United States discussed below, may reduce our ability to provide services or make our business less profitable; we may become subject to increased price competition from other carriers due to federal regulatory changes in determining international settlement rates; federal and state regulations may be passed that could harm Net2Phone’s business; holders of our Class B common stock have significantly less voting power than holders of our Class A common stock and our common stock; IDT is controlled by its principal stockholder, which limits the ability of other stockholders to affect the management of IDT; and other factors and risks set forth in our Annual Report on Form 10-K for fiscal 2004 and our other filings with the Securities and Exchange Commission. The forward-looking statements are made as of the date of this report and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth herein and the other information set forth from time to time in our reports filed with the United States Securities and Exchange Commission pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including our Annual Report on Form 10-K for fiscal 2004.

Overview

General

We are a multinational telecommunications, entertainment and technology company. Our primary telecommunications offerings are prepaid and rechargeable calling cards, wholesale carrier services, consumer local and long distance phone services, VoIP and cable telephony services, and wireless cellular services to individuals and businesses. Our entertainment business is comprised of complementary operations and investments that enable us to acquire, develop, finance and produce animated and live-action entertainment programming and to distribute filmed entertainment content to the mass market. We also operate various other businesses, including brochure distribution, software development, call center services and radio broadcasting operations, and new technology ventures.

Outlook

Since our inception, we have derived the majority of our revenues from IDT Telecom’s businesses, consisting primarily of our Retail Telecommunications Services segment, which markets prepaid and rechargeable calling cards and consumer phone services, and our Wholesale Telecommunications Services segment, which markets wholesale carrier services. These businesses have accounted for the bulk of our operating expenses as well (excluding restructuring and impairment charges). In the six months ended January 31, 2005, IDT Telecom’s revenues accounted for 87.3% of our total revenues, compared to 88.0% in the six months ended January 31, 2004.

For fiscal 2005, we anticipate revenue growth in our Retail Telecommunications Services segment, while we anticipate revenues from our Wholesale Telecommunications Services segment to remain flat. We anticipate that the growth in our retail businesses will be driven by a continued increase in the number of active consumer phone services customers in Europe, as well as continued growth in our U.S. and non-U.S. calling card businesses and anticipated growth in our prepaid solutions business. We believe that the Retail Telecommunications Services segment will continue to account for 70% to 80% of IDT Telecom’s total revenues for fiscal 2005.

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The future growth of our U.S.-based consumer phone services business will be largely dependent upon our ability to access our customer’s premises at a favorable cost. Competitive carriers such as IDT previously had access to a customer’s premises (local loop) as well as switching capabilities at a regulated wholesale cost per customer. However, in December 2004, the Federal Communications Commission (“FCC”) adopted new rules related to the incumbent local exchange carriers’ (ILECs) obligation to make these network elements available to competitors, as well as the price at which this access must be offered. Under the new rules, which became effective March 11, 2005, ILECs are no longer obligated to offer unbundled switching for mass market customers, and thus no longer required to offer UNE-P (Unbundled Network Element Platform). In addition, effective March 11, 2005, competitive local exchange carriers (“CLECs”) are not able to order new UNEs for which they are not eligible under the new rules. Also, during a twelve-month transition period, that began on March 11, 2005, for UNE-P, ILECs may charge a one dollar surcharge per line per month. After the twelve-month transition period, the rates will be negotiated based on Total Service Resale (TSR), which is provided by ILECs to CLECs at a price based on the retail tariff price, minus a fixed percentage discount. These restrictions relating to our access to these network elements will have a materially negative effect upon our ability to offer local phone services in the United States. We may not be able to pass along such cost increases to our customers, resulting in reduced margins in this business. We have temporarily suspended the marketing and advertising of our bundled service to new customers in the United States and may have to discontinue such marketing and advertising on a permanent basis, as it might become uneconomical to do so. However, we continue to negotiate with the ILECs, with the intent of signing long-term commercial arrangements, which will allow us to continue to grow this business.

In February 2005, the FCC ruled on a request by AT&T to declare that certain prepaid calling cards offered by AT&T are not subject to access charges imposed by local telephone companies, and that revenues from those cards are not subject to assessment for Universal Service Fund (“USF”) contributions. The FCC rejected AT&T’s request, and determined that the AT&T prepaid cards were subject to access charges and USF contributions. Its decision was limited to a particular type of card, described by AT&T in its request, in which all callers heard a prerecorded advertisement before using the prepaid card to make telephone calls. IDT’s compliance with applicable rules and regulations has never been predicated on the exemption sought by AT&T. Therefore, we believe our calling card business is not directly affected by this FCC decision. In its decision, the FCC also noted that AT&T offers a variety of newer prepaid card services not described in its original request, and it commenced a rulemaking to consider more broadly the extent to which these and other types of calling card services may be subject to access charges and USF contributions. It is possible that this rulemaking could have a material adverse effect on some of our prepaid card services, depending on what service characteristics the FCC finds determinative in applying access charges and USF obligations, but we cannot predict either the timing or the substance of any new rules the FCC may adopt.

The worldwide telecommunications industry has been characterized in recent years by excess network capacity, which has led to intense price competition, resulting in a significant decline in both our average per-minute price realizations and our average per-minute termination costs. During the six months ended January 31, 2005, our average price realization was $0.0751 per minute, down 11.0% from $0.0843 per minute in the six months ended January 31, 2004, while our average per-minute termination cost dropped 11.9% to $0.0635 in the six months ended January 31, 2005, from $0.0721 in the six months ended January 31, 2004. Average price realization represents the average revenue per minute we recognize on the minutes that we sell within our calling card and wholesale carrier businesses. It excludes minutes of use related to our consumer phone services business, which are not carried over our own network. Our average termination cost per minute represents our average direct cost of revenues per minute that we buy in order to terminate calls related to our calling card and wholesale carrier businesses. These costs exclude minutes of use for our consumer phone services business, which are not carried over our own network.

In both the retail services and wholesale carrier businesses, our competitors have continued to aggressively price their services. This has led to continued erosion in pricing power, both in our retail and wholesale markets, and we have generally had to pass along our per-minute cost savings to our customers in the form of lower prices. Therefore, although IDT Telecom’s minutes of use have been increasing substantially, IDT Telecom’s

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revenues have increased at a much slower rate. We have seen continued declines in our overall per-minute price realizations through the first half of 2005, primarily due to lower wholesale carrier per-minute price realizations. We expect to see some further price declines throughout the remainder of fiscal 2005, as the markets in which we compete have generally remained competitive.

We have also acquired various businesses within our IDT Entertainment segment. As a result of the acquisitions of Anchor Bay Entertainment and Mainframe Entertainment in December 2003, DKP Effects in March 2004, and Manga Entertainment in June 2004, IDT Entertainment reported revenues of $101.5 million in the six months ended January 31, 2005, a substantial increase over revenues of $35.2 million generated in the six months ended January 31, 2004. We expect to report substantial revenue growth for fiscal 2005, as the above fiscal 2004 acquisitions will be consolidated, for the first time, for a full year in fiscal 2005. We expect fiscal 2005 revenues approaching $200 million for IDT Entertainment. We also anticipate that IDT Entertainment will continue to incur significant costs relating to its existing and new businesses. IDT Entertainment’s strategy for growth is twofold: production of proprietary computer generated, or CG, animated films to be released theatrically, and continued investment in original productions and new video licenses for retail distribution. Although we expect to derive significant benefits from equity stakes in our proprietary productions, revenues in the near term will be primarily generated by our licensing and video distribution business and by production service contract work.

Our Voice over IP segment, consisting mostly of our interest in Net2Phone, provides cable operators with a solution through which they can offer their cable subscribers residential phone services. Net2Phone expects its cable telephony business to represent an increasing portion of its revenues in future years. Net2Phone expects to incur significant costs and capital expenditures to fund the expected growth of this business.

On December 15, 2004, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), which was consummated on March 8, 2005, with certain subsidiaries of Liberty Media. Pursuant to the Merger Agreement, we acquired all of Liberty Media’s direct and indirect interests in Net2Phone, with a fair market value of $59.4 million, in exchange for 3.75 million shares of our Class B common stock, with an equal fair market value. Liberty Media’s interests in Net2Phone consisted of 1.25 million shares of common stock of Net2Phone and membership interests in NTOP Holdings, LLC. NTOP Holdings is a consortium formed in October 2001 to hold 28.9 million shares of Class A common stock of Net2Phone. IDT now owns all of the interests in NTOP Holdings, and through this transaction, IDT has increased its effective equity interest in Net2Phone to approximately 40.9% and its aggregate voting power in Net2Phone to approximately 57.0%.

We have also developed various businesses within our IDT Capital segment, which generated revenues of $13.8 million in the six months ended January 31, 2005. During the six months ended January 31, 2005, IDT Capital incurred $6.4 million in operating losses. We anticipate that IDT Capital will continue to incur significant costs relating to its existing and new businesses. The timing and magnitude of revenues and/or operating profits from IDT Capital’s new businesses remains uncertain.

On May 12, 2004, we announced a restructuring of our IDT Solutions segment, which entailed a substantial de-emphasis of IDT Solutions’ CLEC business, by ceasing the provision of retail switched communications services to commercial customers. Such discontinuation of services has now been completed, except that IDT Solutions currently continues to provide services to select governmental customers in 14 markets.

Critical Accounting Policies

Our condensed consolidated financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles. Preparing condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in Note 1 to the July 31, 2004 consolidated financial statements included in our Form 10-K for fiscal 2004. Critical accounting policies are those that require application of management’s most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies for us include revenue recognition, cost recognition, allowance for doubtful accounts, goodwill, and valuation of long-lived and intangible assets. For additional discussion of our critical accounting policies, see our Management’s Discussion & Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for fiscal 2004.

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Three Months Ended January 31, 2005 Compared to Three Months Ended January 31, 2004

Results of Operations

We evaluate the performance of our operating business segments based primarily on income (loss) from operations. Accordingly, certain items, such as interest income and expense, other income and expense, minority interests, and provision for income taxes are properly not reflected in the operating business segments discussions, but are only reflected in our Consolidated discussion.

Consolidated

Revenues. Revenues increased 15.5%, from $527.0 million in the three months ended January 31, 2004 to $608.9 million in the three months ended January 31, 2005. The increase is mainly due to a 17.5% increase in IDT Telecom revenues and the inclusion of revenues from companies acquired by IDT Entertainment in fiscal 2004, partially offset by a decrease in IDT Solutions revenues. The growth in IDT Telecom revenues primarily resulted from the growth in consumer phone services and calling cards. IDT Telecom grew minutes of use by 17.9% (excluding minutes related to our consumer phone services business, which are not carried over our own network), from 4.887 billion in the three months ended January 31, 2004 to 5.761 billion in the three months ended January 31, 2005, which outweighed the effect of a decline in the average revenue per-minute.

Direct Cost of Revenues. Direct cost of revenues increased 13.0%, from $396.1 million in the three months ended January 31, 2004 to $447.5 million in the three months ended January 31, 2005. The increase is due primarily to the growth in our telecommunications minutes of use and the inclusion of cost of revenues from companies acquired by IDT Entertainment in fiscal 2004, partially offset by a decrease in IDT Solutions cost of revenues. As a percentage of total revenues, direct costs decreased from 75.2% in the three months ended January 31, 2004 to 73.5% in the three months ended January 31, 2005. This decrease in direct costs as a percentage of total revenues is due to a shift in the consolidated revenue mix toward higher margin revenues, as well as improved margins at both IDT Telecom and IDT Entertainment.

Selling, General and Administrative. Selling, general and administrative expenses increased 23.9%, from $116.0 million in the three months ended January 31, 2004 to $143.8 million in the three months ended January 31, 2005. This increase included approximately $8.7 million in non-recurring legal expenses relating to pending litigation settlements. Absent these expenses, selling, general and administrative expenses for the quarter would have amounted to $135.1 million, 16.5% higher than in the year ago period. The increase is primarily due to the growth of our consumer phone services business in both the United States and the United Kingdom, ongoing geographic expansion, investments in the development of new businesses and services in both the United States and abroad, the inclusion of selling, general and administrative expenses from companies acquired by IDT Entertainment in fiscal 2004, and the increase in costs to support the expanded operations of IDT Entertainment, partially offset by a decrease in selling, general and administrative expenses at IDT Solutions. As a percentage of total revenues, selling, general and administrative expenses increased from 22.0% in the three months ended January 31, 2004 to 23.6% in the three months ended January 31, 2005.

Depreciation and Amortization. Depreciation and amortization expense increased 12.2%, from $25.2 million in the three months ended January 31, 2004 to $28.3 million in the three months ended January 31, 2005. The increase is primarily due to our higher fixed asset base during fiscal 2005, reflecting the expansion of our telecommunications network infrastructure and facilities, and the inclusion of depreciation and amortization from companies acquired by IDT Entertainment in fiscal 2004, partially offset by a decrease in depreciation and amortization expense at IDT Solutions. As a percentage of revenues, depreciation and amortization expense decreased from 4.8% in the three months ended January 31, 2004 to 4.6% in the three months ended January 31, 2005, as revenues grew at a faster rate than did depreciation and amortization.

Non-cash Compensation. Non-cash compensation charges increased from $5.0 million in the three months ended January 31, 2004 to $5.1 million in the three months ended January 31, 2005. Refer to the respective segment sections for a full discussion.

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Restructuring and Impairment Charges. Restructuring and impairment charges increased from $0.8 million in the three months ended January 31, 2004 to $8.8 million in the three months ended January 31, 2005. Refer to the respective section of the IDT Solutions and Voice over IP segments for a full discussion.

Loss from Operations. Loss from operations increased from $16.2 million in the three months ended January 31, 2004 to $24.6 million in the three months ended January 31, 2005. The year-over-year increase in operating loss is primarily due to decreased income from operations at IDT Telecom, as a result of the $8.7 million in non-recurring legal expenses discussed above.

Interest. Net interest income increased from $4.8 million in the three months ended January 31, 2004 to $5.4 million in the three months ended January 31, 2005. The increase is due primarily to higher market interest rate returns in the second fiscal quarter of 2005 compared to the second fiscal quarter of 2004.

Other Income. Other income was $32.3 million in the three months ended January 31, 2004, compared to $5.8 million in the three months ended January 31, 2005. Other income for the three months ended January 31, 2005 consisted mostly of net realized gains from the sale of marketable securities and investments.