SecProbe.io

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                             [Net2Phone Letterhead]

January 14, 2005

VIA TELECOPIER AND ELECTRONIC TRANSMISSION
Larry M. Spirgel
Assistant Director
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0303

Mail Stop 0407

                  Re:  Net2Phone, Inc.
                       Form 10-K for the fiscal year ended July 31, 2004
                       Filed October 14, 2004

                       Form 10-Q for the quarter ended October 31, 2004
                       File No. 0-26763

Dear Mr. Spirgel:

         We are responding to your letter dated December 15, 2004 (the "Comment
Letter"), relating to the filings referenced above (the "Filings"). For your
convenience, we have repeated the Staff's comments below prior to our responses.

Form 10-K for the fiscal year ended July 31, 2004

Management's Discussion and Analysis of Financial Condition and Results of
Operations

   Results of Operations, Page 40

   1. It appears that your segments contribute in a disproportionate way to your
      operating results. In future filings, discuss your results of operations
      on a segment basis. Refer to Section 501.06 of the Codification of
      Financial Reporting Policies. In addition to discussing your segment
      measure of profitability, we believe that you should discuss in MD&A the
      items that reconcile your measure of segment profitability to operating
      profit on a GAAP basis, as discussed in footnote 28 of Section 501.06 of
      the Codification of Financial Reporting Policies.

     In response to the Staff's comment, we will include in future filings with
the Commission a discussion of our results of operations on a segment basis and
will include a discussion in MD&A of the items that reconcile our measure of
segment profitability to operating profit on a GAAP basis.

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   Comparison of Fiscal Years Ended July 31, 2003 and 2002

   2. Tell us the nature and amount of your "one-time connectivity reserve
      reversals," which decreased your direct cost of revenue in fiscal 2003.
      Disclose the amount of such reversals in future filings.

     We reduced our accrual reserves for connectivity-related items by a total
of $1.7 million, 3.2% of total direct cost of revenue, during fiscal 2003. The
nature of these reversals were primarily due to favorable settlements with
various carriers regarding long-standing disputes ($0.9 million) and a revision
to prior estimates of connectivity accruals based on historical experience for
resolving disputes.

     In response to the Staff's comment, we will disclose the amounts of any
such reversals in future filings with the Commission if their impact from period
to period is material.

   3. We note at page 43 that your selling, general and administrative expenses
      include amounts paid in connection with revenue-sharing arrangements.
      Describe for us the nature of your current revenue-sharing arrangements
      and tell us your basis for classifying the payments as selling, general
      and administrative expense.

     Net2Phone currently has an active revenue-sharing agreement with just one
company, Yahoo!, Inc., that results in recording of a selling expense. As
previously disclosed, under this revenue sharing agreement, Net2Phone pays to
Yahoo! a percentage of PC-to-phone gross revenue from Yahoo! subscribers as well
as revenue received by Net2Phone from users of the Yahoo! voice activated dialer
remaining after deducting certain agreed upon per minute charges earned by
Net2Phone. This arrangement resulted in only approximately $63,000 of expense in
fiscal 2004 (0.1% of total selling, general and administrative expense),
therefore, we did not mention revenue sharing agreements in our fiscal 2004 MD&A
as an element of our selling, general and administrative expense. We do not
expect revenue sharing agreements to result in significant expense going
forward. During fiscal years 2003 and 2002, Net2Phone was a party to other
revenue sharing agreements, primarily with internet service providers. These
arrangements resulted in approximately $113,000 and $326,000, respectively, of
selling, general and administrative expense in fiscal years 2003 and 2002 (0.2%
and 0.3% of total selling, general and administrative expense, respectively).
The nature of these arrangements was to provide Net2Phone with additional
opportunities to expand our customer base, add incremental distribution channels
for product sales, build brand awareness and cooperatively market our products
and services. Accordingly, management has classified the payments remitted to
these service providers as a selling expense.

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Item 9A.   Controls and Procedures

   4. We note that your chief executive officer and your chief financial officer
      concluded that your disclosure controls and procedures were "effective in
      alerting them on a timely basis to material information relating to
      Net2Phone (and its consolidated subsidiaries) required to be included in
      our reports filed or submitted under the Exchange Act." Please
      supplementally confirm that your disclosure controls and procedures are
      effective to ensure that information required to be disclosed in the
      reports that you file under the Exchange Act is recorded, processed,
      summarized and reported, within the time periods specified in the
      Commission's rules and forms and are also effective to ensure that
      information required to be disclosed in the reports that you file or
      submit under the Exchange Act is accumulated and communicated to your
      management, including your principal executive and principal financial
      officers, to allow timely decisions regarding required disclosure. See
      Rule 13a-15(e) of the Exchange Act. Please also revise your future filings
      accordingly. Alternatively, you may simply state, in future filings, that
      your disclosure controls and procedures are effective.

     We confirm that our disclosure controls and procedures are effective to
ensure that information required to be disclosed in the reports that we file
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission's rules and forms and are also
effective to ensure that information required to be disclosed in the reports
that we file or submit under the Exchange Act is accumulated and communicated to
our management, including our principal executive and principal financial
officers, to allow timely decisions regarding required disclosure. In response
to the Staff's comment, and to the extent appropriate at the time the statement
is made, we will revise our future filings with the Commission to state that our
disclosure controls and procedures are effective.

Consolidated Statements of Operations

     5.  In future filings, revise your presentation of the caption "direct cost
         of revenue (exclusive of items shown below)" to specifically indicate
         the items to which you are referring. If your caption is intended to
         refer to items other than depreciation and amortization, tell us why
         the other items are not included within "direct cost of revenue."

     The caption items excluded from direct cost of revenue are depreciation and
amortization and non-cash services provided by IDT. A portion of the non-cash
services provided by IDT are attributable to cost of revenue. However, as
discussed in our response to comment #7 below, it is not practicable for us to
differentiate the value of such services between cost of revenue and selling,
general and administrative expenses. Therefore, we specifically state on the
face of our statement of operations that the non-cash services provided by IDT
are attributable to direct cost of revenue and selling, general and
administrative. In addition, Note 2 to our July 31, 2004 financial statements
includes the following disclosure:

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              Direct Cost of Revenue
              Direct cost of revenue consists primarily of telecommunications
              costs, connectivity costs, and the cost of equipment sold to
              customers. Direct cost of revenue excludes depreciation and
              amortization and non-cash services provided by IDT.

     Finally, as we disclosed in Note 14 to our July 31, 2004 financial
statements, we believe it is not practicable for us to differentiate the value
of such services between cost of revenue and selling, general and administrative
expenses because the services provided by IDT do not individually have readily
identifiable market values, and that the variable accounting treatment (as
discussed in our response to comment #7 below) will result in different values
being ascribed to the same services from period to period.

     We have taken this approach instead of including the line item "Direct cost
of revenue (exclusive of depreciation and amortization and non-cash services
provided to IDT that are attributable to direct cost of revenue)" due to the
length of this caption. Accordingly, we believe no revisions are warranted in
future filings with the Commission.

Note 2 - Summary of Significant Accounting Policies

   Revenue Recognition

   6. We note that you recognize revenue from pre-payments for services after
      you conduct evaluations of outstanding, remaining pre-payment balances and
      determine, based on historical data, that such balances are not likely to
      be utilized. Please clarify the nature of these services and tell us the
      terms of the agreement. Tell us how you determine that it is appropriate
      to recognize revenue before you have no further obligations with respect
      to the pre-paid services. Also, describe for us the amount and nature of
      the historical transactions which you use to support your accounting
      policy.

     The nature of the services provided is primarily termination of telephone
calls. We have a variety of products and services that require prepayment of
balances, for example, prepaid calling cards, reseller accounts and some of our
internet calling accounts. The agreements in place with respect to these
products and services may include internet click-through agreements, language
printed on a calling card, or arrangements with wholesalers to establish prepaid
accounts for consumers in their market territory (typically a country) which
allow access to our communications platform.

     We track the balances in prepaid accounts and recognize revenue as balances
are used for terminating telephone calls and, if applicable, service fees are
charged or balances expire pursuant to the terms related to the product. The
cumulative remaining balances of all prepaid accounts are maintained in an
Oracle database. This database, which includes both active and inactive
accounts, is reviewed monthly. If there is usage in or payments made to an
account within the last 90 or 120 days (depending on the product), it is
classified as active.

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     We segregate the outstanding balances by the type of product and account
activity. We reconcile the balances in this database to deferred revenue in our
general ledger by reviewing historical data (i.e., usage activity) to calculate
an estimate of balances likely to be utilized. Based on this reconciliation, the
deferred revenue account may be increased or decreased as necessary to properly
reflect our liability.

     Currently, our revenue recognition policy states: "Internet telephony
service revenue, including pre-paid calling card revenue, is recognized as
service is provided, that is, as minutes are used and service charges are
levied. Pre-payments for communications services are deferred and recognized as
revenue as the communications services are provided. We also recognize revenue
from pre-payments for services after we conduct evaluations of outstanding,
remaining pre-payment balances and determine, based on historical data, that
such balances are not likely to be utilized." Since this language may not
adequately describe our review process, in future filings with the Commission we
will revise our policy to state: "Pre-payments for communications services are
deferred and recognized as revenue as the communications services are provided,
service charges are levied, or remaining balances expire. We conduct evaluations
of outstanding pre-paid balances to determine, based on historical data, whether
such balances are likely to be utilized. The balances likely to be utilized are
reconciled to our deferred revenue account and deferred revenue is increased or
decreased accordingly to properly reflect our liability."

Note 14 - Related Party Transactions

   7. Please address the following items regarding your memorandum of
      understanding with IDT:

   o  Tell us your basis in the accounting literature for applying variable
      accounting treatment to the shares that will be held in escrow to be
      released to IDT in equal annual installments.

     We followed the guidance in EITF 96-18, Accounting for Equity Instruments
That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services, in determining to apply variable accounting
treatment to the shares that will be held in escrow until they are released to
IDT. Issue 1 of EITF 96-18 states that the issuer should measure the fair value
of the equity instruments using the stock price and other measurement
assumptions as of the earlier of either of the following:

   o  The date at which a commitment for performance by the counterparty to earn
      the equity instruments is reached (a "performance commitment"); or
   o  The date at which the counterparty's performance is complete.

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     Since IDT does not have a "performance commitment", as that term is defined
in EITF 96-18, we determined that we must mark-to-market the value of the shares
earned by IDT at each quarterly reporting period until those shares, once
issued, are released from escrow (i.e., IDT's performance with respect to those
shares is complete). Therefore, since 20% of the shares vest annually over a
five-year period, that is, IDT earns 20% of the shares at the end of each annual
period (five "tranches" of shares), and IDT is providing the services to us
throughout the year, we record the expense for the services each quarter based
on the value of the shares at the end of each quarterly period on a
"tranche-by-tranche" basis. At each quarter end during each annual period, we
will record expense for the services provided by IDT based on the value of 25%
(345,000) of the shares being earned by IDT for such annual period. The value of
each tranche of shares will be fixed once the annual vesting date for each
tranche has been reached (i.e., the measurement date).

     However, since we have not yet entered into a definitive agreement with IDT
and thus have not issued the shares, we will continue to mark-to-market each
quarter the value of the shares "earned" by IDT for services rendered during the
one-year period that ended on October 29, 2004, which was the first anniversary
date of signing the Memorandum of Understanding ("MOU"), until the date a
definitive agreement is reached.

   o  We note that you have recorded a charge of $3.4 million during fiscal
      2004, which represents the market value of the 1.0 million shares that you
      may issue and subsequently release from escrow to IDT for services and
      benefits provided by IDT during fiscal 2004. Clarify for us how you will
      compensate IDT for these services and benefits if a definit