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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended July 31, 2004,

OR

Commission File Number: 1-16371

IDT CORPORATION

(Exact name of registrant as specified in its charter)

520 Broad Street

Newark, New Jersey 07102

(Address of principal executive offices, including zip code)

(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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price on January 30, 2004 (the last business day of the Registrant’s most recently completed second fiscal quarter) of the Class B common stock of $21.72 and of the common stock of $21.05, as reported on the New York Stock Exchange, was approximately $1.265 billion. Shares held by each officer and director and by each person who owns 5% or more of the outstanding common stock (assuming conversion of the Registrant’s Class A common stock) or Class B common stock have been excluded from this computation, in that such persons may be deemed to be affiliates of the Registrant. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.

As of October 1, 2004, the Registrant had outstanding 67,554,116 shares of Class B common stock, $.01 par value, 9,816,988 shares of Class A common stock, $.01 par value, and 18,845,933 shares of common stock, $.01 par value. Excluded from these numbers are 1,608,290 shares of Class B common stock and 6,228,927 shares of common stock held by IDT Corporation.

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INDEX

IDT CORPORATION

ANNUAL REPORT ON FORM 10-K

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PART I

As used in this Annual Report, 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 its subsidiaries, collectively. Each reference to a fiscal year in this Annual Report refers to the fiscal year ending in the calendar year indicated (for example, fiscal 2004 refers to the fiscal year ended July 31, 2004).

Item 1. BUSINESS.

INTRODUCTION

We are a multinational telecommunications and entertainment company. Our primary telecommunications offerings are prepaid debit and rechargeable calling cards, wholesale carrier services and consumer local and long distance phone services. Our entertainment business is comprised of complementary operations and investments that enable us to acquire, develop, finance and produce animated entertainment programming and to distribute home entertainment content to the mass market. We also operate various media-related businesses including brochure distribution and radio operations.

We conduct our business primarily through the following four operating divisions:

IDT Telecom.  IDT Telecom is our largest division with revenues of $1.938 billion during fiscal 2004, representing 87% of our total consolidated revenues, and operating income of $78.4 million. IDT Telecom offers retail and wholesale telecommunications services. Our prepaid calling cards are our primary retail offering. In fiscal 2004, we expanded our consumer local and long distance phone services, and we introduced new retail products, such as “Global Access,” a calling card for cellular phone users who want to make international calls. In our prepaid calling card operations, we focus on traditionally underserved segments of the market. We offer wholesale services to other carriers, focusing on serving the world’s largest telecommunications providers. Our carrier customers include many of the largest telecommunications companies in the world.

We sell approximately 300 different prepaid and rechargeable calling cards in the United States, approximately 100 different calling cards abroad, providing telephone access to more than 230 countries and territories. Our prepaid calling cards are marketed primarily to targeted ethnic and immigrant communities in the United States, Europe and Latin America that generate high levels of international call volume. We sold approximately 373 million prepaid calling cards during fiscal 2004, generating $1.188 billion in revenues, or 53.6% of our total consolidated revenues for fiscal 2004, and 15.627 billion minutes of phone usage.

Through our prepaid solutions business we market customized retail calling cards, IDT-branded retail calling cards, promotional calling cards and corporate calling cards. Customers include Hess, ExxonMobil, Walgreens, Kroger and Sears. We are also developing new potential sources of revenue utilizing our global calling card platform and distribution network, including money transfer services, third-party advertising on calling card packaging and gift and loyalty calling card programs.

We market local and long distance phone services directly to consumers in the continental United States and in the United Kingdom. We have offered consumer long distance phone services in the United States since 1994, and, as of July 31, 2004, we had approximately 407,000 long distance customers. In August 2003, we launched bundled local and long distance phone service in the United States, marketed under the brand name America Unlimited, which we provided to approximately 280,000 customers in 13 states as of July 31, 2004. In the United Kingdom, we offer a bundled local and long distance phone service under the Toucan brand name. We launched this service in November 2003 and we had approximately 40,000 Toucan customers as of July 31, 2004.

Our wholesale services consist of carrying the telecommunications traffic of other telecommunications companies, which we refer to as “carrier’s carrier” services. In fiscal 2004, we carried 4.829 billion minutes, an increase of 25.3% over fiscal 2003, for approximately 450 other carriers.

In fiscal 2004, retail services constituted 72.9% of IDT Telecom’s revenues, with the remaining 27.1% attributable to wholesale services.

IDT Entertainment.  IDT Entertainment, which became a separate division in November 2003, operates our animation production and home entertainment distribution businesses. IDT Entertainment has recently become our second largest revenue-generating division, with fiscal 2004 revenues of $106.7 million (representing approximately 5% of our total revenues) and an operating loss of $0.6 million.

IDT Entertainment consists primarily of several animation studios and our home entertainment distribution operations. Through internally developed systems and acquired operations, we are able to acquire, develop, produce, finance and distribute animated properties for television, direct-to-video/DVD and theatrical release.

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We are currently in the early stages of production on several proprietary computer generated, or CG, animated feature films, including Yankee Irving, the last feature film directed by Christopher Reeve prior to his untimely death, and Starpoint Academy, based on a concept by Gene Roddenberry (creator of the Star Trek series).

Through our DPS Film Roman, Mainframe Entertainment, DKP Effects and Digital Production Solutions studios, we provide animation services primarily to third parties and also for our own projects. DPS Film Roman has been the animation studio for the Emmy Award winning television series, The Simpsons, for 13 years, and King of the Hill since its creation seven years ago. Mainframe Entertainment is a provider of CG animation for television and direct-to-video/DVD products such as the Spider-Man series on MTV and the Barbie DVD collection for Mattel. DKP Effects is a producer of 3-D animation and high-end, digital visual effects for feature films, television, video features and commercials.

We have purchased a minority equity interest in, and have entered into a joint venture with, Vanguard Animation, a CG animated feature film company founded by John Williams, an originating producer of the CG films Shrek and Shrek II. Vanguard’s initial production, Valiant, is the first in a series of four Vanguard-produced films to be distributed by Buena Vista International, Disney’s distribution arm. The joint venture enables us to co-produce and co-own future Vanguard properties distributed in theaters, direct-to-video/DVD and on television.

Our distribution operations, which are primarily conducted through our Anchor Bay Entertainment subsidiary, distribute videos and DVDs to mass merchants including Wal-Mart, Target, Blockbuster Video, Best Buy and Kmart, and other retail outlets. We have a significant presence in the children’s, horror and fitness genres. Anchor Bay’s library consists of approximately 3,500 owned or licensed titles, including the Thomas the Tank Engine series, which consistently ranks in the top 50 children’s video sales, the Halloween series and the Crunch fitness series.

In May 2004, we acquired Manga Entertainment, a company specializing in the production, distribution and worldwide marketing of anime for theatrical and home video/DVD releases and television broadcast. “Anime,” a form of animation developed in Japan, is derived from and styled after Japanese comic books. Manga Entertainment is one of the largest distributors of anime outside of Asia. Manga has rights to over 300 titles, including co-production of the animated sci-fi thriller Ghost in the Shell, the first and only Japanese animated film to reach No. 1 on the Billboard Top Video Sales Chart. Ghost in the Shell won awards at the 1997 World Animation Festival for Best Theatrical Film and for Best Director of a Theatrical Feature Film.

To increase our ownership of and access to brand name characters and content, we have completed several additional investments and joint ventures. We purchased a minority equity interest in Archie Comics Entertainment and have obtained the rights to co-develop and co-produce animated properties based upon selected Archie characters. We have made an investment in POW! Entertainment, a company founded by Stan Lee, the creator of Spider-Man, The Incredible Hulk and X-Men, and entered into a development agreement for six animated features based on new Stan Lee characters and ideas in which we will own all intellectual property rights. We have concluded a multi-faceted development, production and distribution agreement with Todd McFarlane Productions covering the production of animation and merchandise based on Spawn and other Todd McFarlane Productions intellectual properties.

IDT Capital.  IDT Capital, which was formerly called IDT Menlo Park and, before that, IDT Media, is our division responsible for developing, growing and, in some cases, operating our new or innovative business ideas. Many of these initiatives are in the media or communications areas. Currently, IDT Capital consists primarily of our brochure distribution and radio operations. CTM Brochure Distribution distributes travel brochures to over 10,000 racks in hotel lobbies and other tourist-related access points. Our radio operations consist of a radio station (WMET 1160AM) serving the Washington, D.C. metropolitan area. IDT Capital also operates several other developing operations, such as development and servicing of bond trading software.

Voice over IP.  Net2Phone, which operates our Voice over IP business, is a leading provider of Voice over Internet Protocol, or VoIP, communications services. Net2Phone delivers telephony solutions to businesses and consumers in over 200 countries, capitalizing on the growth, quality, flexibility and cost advantages of VoIP technologies. Net2Phone offers cable operators a fully outsourced telephony platform to deliver high-quality residential phone services to their subscribers, enabling them to compete with traditional phone companies. We have voting control of Net2Phone and an effective equity ownership of 17.6% as of July 31, 2004. Accordingly, we consolidate Net2Phone’s financial results with our own. Net2Phone’s common stock is publicly traded on the Nasdaq National Market under the symbol “NTOP.”

Our main offices are located at 520 Broad Street, Newark, New Jersey 07102. The telephone number at our headquarters is (973) 438-1000 and our Internet address is www.idt.net.

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We make available free of charge through the investor relations page of our Web site (www.idt.net/ir) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and all beneficial ownership reports on Forms 3, 4 and 5 filed by directors, officers and beneficial owners of more than 10% of our equity as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. We have adopted codes of business conduct and ethics for all of our employees, including our principal executive officer, principal financial officer and principal accounting officer. Copies of the codes of business conduct and ethics are available on our Web site.

Our Web site and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K or our other filings with the Securities and Exchange Commission.

KEY EVENTS IN OUR HISTORY

We were founded in August 1990 and were originally incorporated in New York as International Discount Telecommunications, Corp. We were renamed IDT Corporation and reincorporated in Delaware in December 1995.

We entered the telecommunications business in 1990 by introducing our international call reorigination service to capitalize on the opportunity created by the large spread between U.S.-originated and foreign-originated international long distance telephone rates.

We used the calling volume and expertise derived from our call reorigination business to enter the consumer long distance business in late 1993 by reselling long distance services of other carriers to our customers. In 1995, we began reselling access to the favorable telephone rates we received as a result of our calling volume to other long distance carriers.

We completed an initial public offering of our common stock on March 15, 1996. Our common stock was quoted on the Nasdaq National Market until February 26, 2001, when it was listed on the New York Stock Exchange, where it now trades under the symbol “IDT.C.” On May 31, 2001, we distributed a stock dividend of one share of our Class B common stock for each outstanding share of our common stock, Class A common stock and Class B common stock. On June 1, 2001, our Class B common stock was listed on the New York Stock Exchange and now trades under the symbol “IDT.”

We entered the Internet telephony market in August 1996 with our introduction of PC2Phone, the first commercial service to connect voice calls between personal computers and telephones over the Internet.

We began marketing and selling prepaid calling cards in January 1997.

In August 1999, Net2Phone, our subsidiary that runs our Voice over IP operating division, completed an initial public offering of 6.2 million shares of its common stock, and in December 1999, Net2Phone completed another offering of 3.4 million shares of its common stock. In connection with the second offering, we sold 2.2 million shares of Net2Phone common stock for proceeds of $115.0 million.

In August 2000, we completed the sale of 14.9 million shares of Net2Phone common stock to AT&T for approximately $1.1 billion in cash.

In October 2001, we created a consortium, NTOP Holdings, LLC, which as of July 31, 2004 held approximately 28.9 million shares of Net2Phone’s Class A common stock representing approximately 38.2% of Net2Phone’s outstanding capital stock and approximately 55.3% of the voting power in Net2Phone. The consortium originally consisted of IDT, AT&T and Liberty Media. On October 29, 2002, AT&T sold its interests in the consortium to us and Liberty Media.

In November 2001, we organized a new venture, Digital Production Solutions, or DPS, an animation company which uses proprietary technology to operate a global animation studio linking animators throughout the world utilizing IDT Telecom’s infrastructure.

In January 2002, we sold 4.8% of IDT Telecom to Liberty Media Corporation for $30.0 million in cash.

In September 2002, we more than doubled the size of our domestic telecommunications backbone by acquiring indefeasible rights of use, or IRUs, and related equipment from the bankrupt estate of Star Telecommunications for $0.6 million.

In December 2002, we were selected as the exclusive prepaid calling card provider to Walgreens, the nation’s largest drugstore chain.

In May 2003, we acquired a controlling interest in Film Roman, an independent animation company known for its production work on animated television programs including The Simpsons and King of the Hill.

In June 2003, we sold 5.6% of our subsidiary that operated our entertainment and media businesses to Liberty Media for $25.0 million in cash.

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In July 2003, we purchased a minority stake in Vanguard Animation, a producer of CG animated feature films, and entered into a joint venture with Vanguard to co-produce and co-own other computer generated animated films, as well as computer generated animation projects for television exhibition and/or direct-to-video/DVD distribution.

DEVELOPMENTS IN FISCAL 2004

In August 2003, we successfully launched “IDT America Unlimited,” our flat rate, unlimited local and long distance calling plan, a service now available in 13 states.

Over the course of the fiscal year, our prepaid solutions business added new and well known names to its list of private label calling card clients, including Hess, Exxon Mobil and Sears.

Over the course of fiscal 2004, we also introduced calling cards under the carrier name “Entrix Telecom, Inc.,” or “Entrix”.

In November 2003, IDT began offering consumer phone services in the United Kingdom, under the “Toucan” brand name.

In November 2003, Net2Phone issued additional shares in 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. Net2Phone received net proceeds of $58.6 million from the offering (of which $5.6 million was received from IDT).

In November 2003, we also announced the creation of our IDT Entertainment division in an effort to expand our entertainment operations.

In December 2003, we completed the acquisition of a controlling interest in Mainframe Entertainment, a creator of CG animation for feature films, television and direct-to-video/DVD products.

In December 2003, we also completed the acquisition of Anchor Bay Entertainment, a leader in distribution of home entertainment products to the mass market.

In February 2004, IDT Europe and Connect Spot teamed up to launch “isimplify,” the world’s first prepaid rechargeable voice, data and WiFi card, allowing business travelers to use one calling card to make low cost calls around the world and to access a global network of WiFi hot spots.

In March 2004, we were selected as the online calling card provider for AOL Latino.

In March 2004, IDT Entertainment acquired DKP Effects, a producer of 3-D animation and high-end, digital visual effects for feature films, television, video features and commercials.

In May 2004, IDT Entertainment acquired a minority equity interest in POW! Entertainment headed by comic book direct-to-legend Stan Lee. In addition, IDT Entertainment acquired exclusive distribution rights for all POW! Entertainment animated DVD properties. The companies also announced that they will co-produce and co-develop a minimum of six animation projects for direct-to-DVD distribution and broadcast.

In May 2004, IDT Entertainment and Todd McFarlane Productions entered into a development, production, and distribution agreement to produce animated programming and merchandise based on Spawn and other original intellectual properties of Todd McFarlane Productions. Todd McFarlane Productions is best known for its multiple Emmy-winning Spawn franchise.

In May 2004, we acquired Manga Entertainment, which distributes anime programming from its extensive library of licensed titles.

In May 2004, we also announced the reorganization of our IDT Solutions operating division, which consists of Winstar Holdings. As of October 2004, IDT Solutions no longer provides retail switched communication services. The division currently provides communication services only to select governmental customers in 14 markets. We are exploring various options for further redeploy Winstar Holdings’ assets towards providing private line fixed wireless services, wholesale back-haul services and spectrum leasing, as well as other potential opportunities for the unique conglomeration of assets.

RECENT DEVELOPMENTS

In August 2004, we launched a telephone calling card-based advertising program with Pocket Billboards. The program places print advertising on IDT prepaid calling cards and features interactive audio messages that are linked to the calling card’s voice prompt directions.

In September 2004, Hasbro selected IDT Entertainment to produce two 3D animated direct-to-video movies based on WEEBLES, Hasbro’s Playskool division’s unique toy property. The series will be distributed worldwide by Paramount Home Entertainment.

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In September 2004, Mainframe Entertainment, an IDT Entertainment company, entered into an agreement with skateboarding legend Tony Hawk to produce a computer generated animated feature for direct-to-video release.

In September 2004, IDT Telecom entered into an agreement to provide international long distance phone services to Cablevision Systems Corporation’s Optimum Voice digital voice-over-cable customers.

In September 2004, IDT Entertainment and Emmy award winner Harry Connick Jr. entered into an agreement to co-produce The Happy Elf, a one-hour 3D animated holiday special based on Connick’s original children’s song from Harry for the Holidays, his Sony/Columbia Records’ top selling holiday CD for 2003.

IDT TELECOM

Overview

Our subsidiary, IDT Telecom, provides retail and wholesale telecommunications services and products, including prepaid, rechargeable and prepaid solutions (formerly referred to as private label) calling cards, consumer phone services and wholesale carrier services.

Our telecom division generated revenues of $1.938 billion during fiscal 2004, an 18.3% increase over the $1.639 billion of revenues generated during fiscal 2003. Our telecom division’s revenues represented 87.4% of our total consolidated revenues in fiscal 2004 as compared to 89.3% in fiscal 2003. During fiscal 2004, our retail telecommunications services and products (calling cards and consumer phone services) contributed 72.9% of our telecom division’s revenues, with the remaining 27.1% attributable to wholesale carrier services. Our telecom division’s operating income increased to $78.4 million in fiscal 2004, from $63.4 million in fiscal 2003.

In fiscal 2004, we recorded revenues of $1.188 billion from sales of calling cards worldwide, and provided 15.627 billion minutes of phone service to our calling card customers. We are one of the largest providers of calling cards in the United States, where we distribute cards primarily through Union Telecard Alliance, a joint venture of which we own 51%.

We provided consumer phone services to more than 670,000 residential customers and 15,000 business customers in the United States as of July 31, 2004. In addition, as of July 31, 2004, we had approximately 450 wholesale carrier customers (i.e., other telecommunications companies that purchase our telecommunications services to terminate their traffic) located primarily in North America and Europe.

We deliver our telecommunications services over our own network, consisting of switching centers and technical staff in the United States, the United Kingdom, Hong Kong, Peru and Argentina. This network comprises core carrier switching capabilities, a global softswitch (a software-based, as opposed to hardware-based, switching platform capable of delivering next-generation services) and Voice over IP (VoIP) network, and a highly scaleable Enhanced Services Platform.

IDT owns and operates seven core carrier switches located in the United States and the United Kingdom. In the United States, we have four Nortel GSP international gateway switches and one Nortel DMS domestic carrier switch. In London, we have two Nortel GSP international gateway switches serving the United Kingdom and Europe. An international gateway switch connects networks across international borders and translates voice and signaling protocols between those used in North America, in Europe and in other areas of the world so that the networks can communicate. Our global softswitch and VoIP network is a multi-service, distributed switching platform that provides domestic and international gateway switching capabilities, support for our enhanced services applications and VoIP gateway functionality. This platform is deployed worldwide in each of our operating regions and is interconnected over IDT’s internal VoIP backbone network.

IDT’s Enhanced Services Platform provides calling card, prepaid solutions and other products and services to retail customers in over 50 languages and currencies. This platform consists of proprietary applications and software deployed worldwide on more than 230 programmable switches and integrated over a distributed network of high availability servers, routers and databases.

IDT holds indefeasible rights of use (which are leases of fiber optic cables generally considered to be more akin to ownership rights than traditional leases and referred to as IRUs) providing long-term usage of capacity on six undersea fiber-optic systems. In addition, we lease capacity, which together operate on more than seventeen different cable systems worldwide. These undersea circuits connect our U.S. facilities with our international facilities and with third-party facilities in Europe, Latin America, Asia, the Caribbean, Canada, and Africa.

Industry Overview

The international telecommunications industry is intensely competitive and is subject to frequent regulatory changes that have altered and will continue to alter how the business is conducted. We believe that the dynamic nature of the industry

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creates growth and profit potential for entrepreneurial operators such as IDT that are willing to focus on specific segments of the market and react swiftly to changes and opportunities that arise. International telephone traffic has continued to increase throughout the global economic downturn, growing substantially year after year. The increase in international traffic is mainly due to a shift towards deregulation and opening to foreign operators in many of the world’s major telecommunications markets (including Eastern Europe, Latin America, and Asia). While minutes of use have increased, the price per minute of use has generally declined due to increased competition, deregulation and excess capacity. We believe that the growth of voice and data traffic originated outside of the United States will exceed the growth in voice and data traffic originated within the United States due to the deregulation of many foreign markets and increasing access to telecommunications facilities in emerging countries and regions. Many participants in the worldwide telecommunications industry have not been able to benefit from this growth in worldwide telecommunications traffic. Many of the incumbent carriers have experienced significant declines in their revenues and profitability due to the pricing declines. IDT Telecom has continued to grow its revenues by taking advantage of new opportunities created by the industry trends.

We believe that growth in international long distance telecommunications traffic will continue to be driven by:

The Telecommunications Act of 1996 has had a profound impact on the U.S. telecommunications industry by opening local markets to competition. This deregulation commenced at the same time that the Internet began to create new streams of data traffic. This resulted in the investment of a tremendous amount of capital designed to build converged networks and additional capacity to take advantage of the technological and regulatory changes and forecasts of increased demand. New competitors took advantage of the favorable capital market environment to raise substantial amounts of debt and equity to fund their business plans. The assumptions as to growth and pricing for telecommunications needs underlying these business plans turned out to be overly optimistic and many of these companies were unable to service their debt and sought bankruptcy protection or were sold or liquidated. Because we did not increase our leverage and did not participate in the network overbuild which was prevalent in the industry, we were not affected financially as greatly as other telecommunications companies by the downturn in the industry, the capital markets or the growth projections. Nevertheless, our revenues per minute were negatively affected as industry pricing dropped significantly, due primarily to the oversupply of capacity and significantly increased competition. We were also negatively affected by the financial difficulties or bankruptcies of some of our customers.

The Telecommunications Act of 1996 established a statutory framework for opening the local markets to competition, while at the same time allowing long distance service to be offered by the incumbent local exchange carries, known as ILECs, which generally are operated by the regional bell operating companies, or RBOCs. RBOCs can now offer long distance service because they have established, to the satisfaction of the FCC, that they have opened their local market to local telephone competition. We compete with the RBOCs for consumer phone service customers. However, the increased competition also creates opportunities, as most of the RBOCs lack international networks to support their new long distance businesses, and we expect that they will, therefore, rely heavily on carrier’s carriers, such as us, to carry and arrange for termination of their international telephone traffic.

The local phone service market continues to be dominated by the RBOCs. Currently, the RBOCs’ main competitors in this market are the dominant long distance providers that have entered the market for local service, competitive local exchange carriers, or CLECs, taking advantage of the FCC’s Unbundled Network Element-Platform, generally referred to as UNE-P, prescribed by the Telecommunications Act, and others such as cable companies, that use Voice over Internet Protocol, or VoIP, technology, to provide alternative access to customers. The RBOCs have seen their local business decline during each of the last four years due to competition from other providers of local phone service, increased use of cellular phones in place of traditional land lines and greater adoption of high speed Internet access services that replaces the phone line used for dial-up Internet access. However, the RBOCs have been able to offset some of these losses by providing wireless phone service, DSL Internet service, bundling long distance with their local phone service and, in some cases, cross-selling services with satellite TV providers. Cable companies, such as Comcast, Time Warner, and Cablevision, have had success in adding phone customers by bundling VoIP phone service with their cable television offerings and high speed Internet access.

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We compete in the consumer phone service market by utilizing the UNE-P platform to provide our bundled local and long phone distance service. UNE-P allows an operator to resell the RBOC’s phone service using the RBOCs’ equipment, at wholesale rates set by the FCC. The RBOCs are currently challenging these lease rates and the UNE-P structure itself, as discussed in more detail under the heading “Business—Regulation in the United States” below. The ultimate outcome and timing of any decision on UNE-P is uncertain, but we believe that there will continue to be an opportunity for IDT to provide local and long distance phone service, using either UNE-P or a combination of our own facilities and RBOC lines to access the customers’ premises.

The large long distance providers, such as AT&T, MCI, and Sprint, have been heavily affected by competition from the RBOCs in the long distance market. These providers have seen their revenues decline due to lower pricing brought on by the increased competition and subscriber losses to the new entrants. Long distance pricing has declined due to increased competition from flat-rate offerings from providers of bundled local and long distance, wireless, and VoIP phone service. In addition, they have lost subscribers to substitute products offered by the RBOCs, wireless operators, and cable companies. The long distance providers have attempted to move into the local market to try to offset some of these revenue declines but have met with limited success. Some long distance providers, faced with increased competition for their core business customers and the uncertainty surrounding the UNE-P regulations, have chosen to discontinue their attempt to attract new residential local customers. We believe that the withdrawal of our larger competitors from this market provides us with an opportunity to expand our customer base, which has traditionally been heavily weighted towards the residential segment of the local market.

The international long distance market, particularly in less developed regions, has not been affected to the same degree by the factors plaguing the domestic long distance market because many of these markets are in the early stages of deregulation and there is, therefore, less competition and fewer opportunities for product substitution. Prices have not declined to the same extent that they have in the U.S. market because most of the cost of the call remains in the termination. In many of these foreign markets there is still only one dominant provider of telephone services, usually a post, telephone or telegraph company which is either government owned or has recently been privatized, to provide this termination. We believe that prices in most foreign markets will decline as the factors that affected the U.S. market impact these markets as well, but we expect that the prices in these markets will remain substantially above those in the United States due to other factors that will limit the number of competitors and alternative products. While we have been affected by the general decline in pricing in the market, we have also been able to benefit from the deregulation of many foreign markets by expanding our current services and by offering service in new markets.

Business Strategy

Our approach to the dynamic worldwide telecommunications industry has allowed us to grow even as many companies have endured financial difficulties. Two key concepts of our approach are:

Throughout our history, we have sought to exploit profitable niches within the telecommunications industry. This included:

Our smart-build approach refers to the incremental approach we take to expand our network — we add new facilities only when we determine that such investments are justified by existing or imminent traffic volumes. Under this approach, we usually enter a new market by leasing fiber capacity. As traffic grows, we may install a switch to increase our overall capacity and lower our cost of carrying traffic. As traffic increases further, we analyze whether purchasing bandwidth, instead of leasing, would reduce our costs by routing calls over an owned network. If our volume continues to grow, we may deploy additional switching and/or fiber capacity. Only when we believe that we have the traffic volumes to justify the fixed cost involved with a switch or owned bandwidth do we consider such an investment. This approach enables us to focus on our network costs on a per minute basis.

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The following represent key elements of our strategy to compete and grow in the telecommunications market:

IDT Telecom’s Services

Our telecom division currently provides our customers with a variety of services, including:

Retail Telecommunications Services

Prepaid Debit and Rechargeable Calling Cards

We sell prepaid debit and rechargeable calling cards under the “IDT” and “Entrix” names providing telephone access to more than 230 countries and territories. We offer rates on our calling cards that we believe are generally well below the rates for international calls offered by most of the major “brand-name,” carriers such as AT&T, MCI and Sprint. We sell more than 300 different prepaid calling cards in the United States, and more than 85 different cards abroad, with specific cards featuring favorable rates to specific areas of the world.

Our prepaid calling cards are marketed primarily to the ethnic and immigrant communities in the United States, Europe, Asia and Latin America that tend to generate high levels of international traffic. We believe that recent immigrants and members of ethnic communities tend to be heavy users of international long distance telephone service because of their desire to keep in touch with family members and friends located in their country of origin. Specifically, a large portion of our U.S. and European calling card customers are from the Hispanic community. Therefore, a significant proportion (63.1% in fiscal 2004 and 58.4% in fiscal 2003) of our international prepaid calling card minutes are terminated in Latin America. We believe that many customers typically use our prepaid calling cards as their primary means of making long distance telephone calls due to competitive rates, reliable service, the ease of monitoring and budgeting their long distance spending and the appealing variety of prepaid calling cards that we offer to different market segments.

Our prepaid calling card business is particularly strong in the Northeastern United States because of our extensive distribution network and competitive rates to countries that immigrants in the Northeastern United States prefer to call, such as Colombia, Mexico and the Dominican Republic. With the expansion of operations in Arizona, California, Florida, Georgia,

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Texas and other parts of the United States, our prepaid calling card sales in the Northeastern United States now constitute a smaller percentage of our total prepaid calling card sales in the United States. In fiscal 2004, prepaid calling card sales in the Northeastern United States were approximately 43.0% of our total prepaid calling card sales in the United States, as compared to 53% in fiscal 2003. Supporting our expansion outside of the Northeastern United States, Union Telecard, our 51%-owned distribution arm, opened offices in California and North Carolina during fiscal 2004.

The following table lists some of the major prepaid calling cards that we sell in the United States:

In Europe, we market our prepaid calling cards in the United Kingdom, the Netherlands, Spain, Germany, Belgium, France, Italy, Sweden, Switzerland, Denmark, Norway, Portugal, Austria and Greece, seeking to capitalize on the opportunity presented by the recent surge in immigration from underdeveloped countries around the globe to Europe’s developed nations. We sell approximately 100 different prepaid calling cards in Europe, with some of the major cards listed below:

We believe that there is a significant untapped market for prepaid calling cards in Latin America, where certain countries serve as regional nexuses, attracting immigrants due to stronger job markets and opportunities. Immigrants from satellite countries share the needs of their U.S. counterparts for low-cost, prepaid calling solutions to maintain contact with relatives and friends in their countries of origin. In fiscal 2002, we began distributing prepaid calling cards in Latin America by selling calling cards in Argentina, and we now sell cards in Peru, Chile, Jamaica, and Uruguay as well. In fiscal 2004, we generated $7.1 million in revenue selling calling cards in Latin America.

During fiscal 2004, we sold approximately 373 million prepaid calling cards, excluding rechargeable calling cards, worldwide, a 22% increase from the 267 million prepaid calling cards sold in fiscal 2003. The sale of these calling cards in fiscal 2004 generated $1,171 million in revenue, as compared with $1,057 million in fiscal 2003, and resulted in the completion of 15.627 billion minutes of telephone usage, as compared with 12.606 billion minutes in fiscal 2003. During fiscal 2004, sales of prepaid calling cards accounted for 60.4% of our telecom division’s total consolidated revenues, as compared to 64.5% in fiscal 2003. During fiscal 2004, we sold 81.7% of our prepaid calling cards in the United States, with the remaining 17.3% sold abroad.

Our rechargeable calling cards, marketed to business travelers, are distributed primarily through in-flight magazines and permit users to place calls from over 55 countries through international toll-free services. Accounts are automatically recharged with a credit card that the customer provides at the time of initial card activation. In fiscal 2004, revenues attributable to rechargeable calling cards were $16.6 million, or 0.9% of our telecom division’s consolidated revenues.

Combined, our prepaid and rechargeable calling cards accounted for 61.3% of our telecom division’s consolidated revenues in fiscal 2004.

We believe that the following factors have contributed to the growth of our calling card services:

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Prepaid Solutions

Our Prepaid Solutions division markets a variety of calling cards and complementary offerings, including:

We are developing new potential sources of revenue, including placing third-party advertising on calling card packaging, offering gift calling cards, and loyalty calling cards. In addition, we are leveraging the technologies built for our point of sale activation services and our retail distribution channel to develop prepaid cards that can be accepted by banking networks (particularly internationally) for ATM withdrawals and by retail stores for debit purchases. Our prepaid solutions cards accounted for revenues of $37.9 million in fiscal 2004 or 2.0% of IDT Telecom revenues.

Consumer Phone Services

We market long distance phone services directly to consumers and businesses in the 48 contiguous U.S. states, and in Washington, D.C.

In August 2003, we launched our bundled local/long distance phone service in New York and New Jersey. We currently offer the bundled local/long distance phone service in 13 states and we plan to offer bundled service in at least 20 states by the end of fiscal 2005. Our bundled local/long distance service, offered to residential customers, includes unlimited local, regional toll and long distance calling with caller ID, speed dial, call waiting and 3-way calling. In most of the states we offer this service for $39.95 per month, plus applicable taxes and surcharges. We also offer a second bundled plan providing unlimited local service with caller ID and call waiting with IDT long distance included for as low as 5 cents a minute. With either plan, competitive international rates can be added on for an additional monthly fee.

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Our long-standing five cents per minute long distance service continues to be available in the continental United States with a monthly service fee. Our rates for international calls are often lower than those charged by the major international long distance carriers.

Consumer phone services accounted for 11.6% of our telecom division’s total consolidated revenues in fiscal 2004. As of July 31, 2004, we had approximately 280,000 active customers for our bundled local/long distance plan and 407,000 customers for our metered long distance plans. The highest concentrations are in large urban areas, with the greatest number of customers located in New York, New Jersey, Pennsylvania, California, and Florida.

In providing local phone service, we rely upon the use of local lines and other network elements leased from the ILECs. As mandated by the FCC’s UNE-P provisions, ILECs are required to allow access to their local networks to competitive phone companies. UNE-P has remained the subject of intense legal and lobbying efforts by the ILECs, who seek to have the FCC or the courts overturn this provision. During 2004, the FCC left standing those rules related to UNE-P. RBOCs are aggressively seeking significant revisions to the UNE-P rules and substantial increases in the UNE-P lease rates. We have evaluated a number of scenarios and are developing contingency plans depending on the outcome of any future decision.

We are party to resale agreements with AT&T and Global Crossing pursuant to which we resell long distance services to our consumer long distance and bundled plan customers. The AT&T agreement also provides that AT&T will originate calls from our long distance customers and that the types of calls specified (international, specific area codes, etc.) will be routed to their destination on our network. The agreement gives us the flexibility to select those calls to terminate on our own network at a lower cost to us. We believe that this flexibility can increase our gross margins and provide the opportunity to market new, more aggressive plans, particularly international plans, which will generate additional revenues.

Wholesale Carrier Services

Long distance telephone calls are generally originated by the local carrier of the customer placing the call. The local carrier switches the call to the customer’s long distance carrier. The call is then routed over the lines of the long distance carrier and in some instances one or more other carriers until it reaches its destination, where it is switched to the local carrier for termination at the telephone number called. Carriers, such as IDT Telecom, that transmit all or a portion of another carrier’s traffic are said to be acting as a “carrier’s carrier.”

By utilizing our flexible, least-cost traffic routing system and capitalizing on our aggressive purchasing strategies and extensive experience in provisioning circuits, we are able to provide major carriers and niche carriers alike with rates that we believe are often lower than those traditionally available through other carriers. The dramatically reduced pricing for telephone service prevalent in the last few years adds an incentive for carriers to seek the lowest wholesale rates. We are able to offer competitive rates to our carrier customers as a result of our ability to generate a high volume of international long distance telephone traffic (aided by the volumes generated by our calling card business) and our competitive rates negotiated with foreign state-owned or state sanctioned post, telephone or telegraph companies and other carriers. Wholesale carrier sales accounted for $524.5 million of our telecom division’s revenues in fiscal 2004, representing 27.1% of our telecom division’s consolidated revenues. In fiscal 2004, we carried 4.829 billion wholesale minutes, an increase of 25.3% over fiscal 2003 when we carried 3.854 billion wholesale minutes.

In fiscal 2004, we increased the number of our direct relationships with foreign state-owned or state sanctioned post, telephone or telegraph companies, from approximately 100 to more than 120. We believe that a direct connection from one of our switches to a foreign state-owned or state sanctioned post, telephone and telegraph company both increases the quality of a call and reduces cost, which enables us to generate more traffic with higher margins to that foreign locale. During fiscal 2005, we intend to continue to vigorously expand our existing direct relationships with foreign state-owned or state sanctioned post, telephone and telegraph companies. In particular, we plan to continue to approach some of the larger foreign state-owned or state sanctioned post, telephone and telegraph companies in Asia and Africa in order to establish new direct relationships.

With prices for bandwidth in decline for the last three years many carrier’s carriers have gone out of business or exited the market, allowing us to increase our market share. We believe that there will continue to be opportunities for financially sound carriers like us, to continue to increase market share at the expense of weaker rivals.

We have broadened our wholesale carrier service offerings to include a higher priced service in which we guarantee higher quality connections. This service meets a growing need for some of our wholesale customers. We believe that this service will help us grow our revenues and increase our gross profit margins.

During fiscal 2004, we broadened our wholesale customer base by increasing our customers from 350 in July 2003 to 448 a year later. In the fourth quarter of fiscal 2004, the top 15 wholesale carrier service customers accounted for 37.7% of the

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revenues for this division, versus 43% in the fourth quarter of fiscal 2003. Our most significant wholesale carrier customers are long distance carriers. While they may vary from period to period, our five largest wholesale carrier customers accounted for 6.5% of our total consolidated revenues in fiscal 2004, compared with 4.8% in fiscal 2003.

During fiscal 2004, wholesale carrier revenues from RBOCs increased 240% over fiscal 2003. The increase in our wholesale carrier revenues from the RBOCs has been offset, to a degree, by lost revenues on the retail side of our telecommunications business due to increased competition with RBOCs for our consumer phone service customers. We expect this trend to continue, particularly in states in which we do not yet offer our own bundled local/long distance service.

This concentration of revenues increases our risk associated with non-payment by a customer. This risk, in general, has become more acute for us since the early part of fiscal 2002 as several of our customers declared bankruptcy or faced financial difficulties. We perform ongoing credit evaluations of all of our wholesale carrier customers, but historically we have not required collateral to support accounts receivable from our customers. Since 2002 we have imposed stricter credit restrictions on some of our wholesale customer, resulting, in some cases, sharply curtailing or completely ceasing sales to certain of these customers.

Additionally, just as we carry traffic for other telecom companies, we may have other carriers carry traffic for us to certain destinations if we have no facilities in such destination or if other carriers charge less than it would cost us to carry that traffic on our network. Accordingly, in some cases in which we both buy from and sell to wholesale customers, we have the right to offset amounts we owe them for carrying our traffic against amounts they owe us for carrying their traffic. We endeavor to manage our relationships to ensure that we have no outstanding fees owed to us that cannot be offset. This mitigates the risk of nonpayment on these accounts.

Wholesale Carrier Market Strategy

We intend to become a multi-faceted wholesale telecom provider offering a portfolio of services and products to the most financially stable market participants through long-term contractual relationships. In order to reach this goal, we are seeking to: