----

----

|  Nevada                                                            |  11-3618510                              |
|-------------------------------------------------------------------------|-----------------------------------------------|
| (State      or other jurisdiction ofincorporation      or organization) | (I.R.S.      EmployerIdentification      No.) |

| Title      of each class registered: | Name      of each exchange on which registered: |
|--------------------------------------|-------------------------------------------------|
| Common      Stock                    | American      Stock Exchange                    |
| Common      Stock                    | Tel      Aviv Stock Exchange                    |

----

| ·   | revise      Item 6 (Management’s Discussion and Analysis or Plan of Operation) to make      certain typographical and rounding corrections as well as changes to      conform this disclosure to the final financial statements; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | revise      Item 7 (Financial Statements) to make certain typographical and formatting      corrections, and to make certain rounding changes including in the number      of shares outstanding on a fully diluted basis used for purposes of      calculating EPS; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | revise      the Report of the Independent Registered Public Accounting Firm included      within Item 7 of the Original Report, to include the date of such report      which was inadvertently omitted;and |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | file      Exhibit 21.1, List of Subsidiaries, which was inadvertently omitted from      the Original Report. |
|--------------------|--------------------------------------------------------------------------------------------------------------|

stered Public Accounting Firm as Exhibit 23. Inaddition, updated certifications pursuant to Sections 302 and 906 of theSarbanes-Oxley Act of 2002 have been included as Exhibits 31.1, 31.2, 32.1 and32.2 to this Amendment No. 1.

----

| ITEM 6. | Management’s      Discussion and Analysis      or Plan of Operation |
|---------|---------------------------------------------------------------------------|

----

OVERVIEW

----

----

----

----

----

----

| 1.   | To      make an effort and to take all actions that are reasonably required,      subject to the law and the rules of the Tel Aviv Stock Exchange Ltd. (the      “TASE”), to list the Bonds for trading on the TASE, such that restrictions      on resale will not apply in accordance with Section 15c of the Israeli      Securities Law 5728-1968 (the “Israeli Securities Law”) on the holders of      the Bonds, no later than 12 months from the Date of    Issuance. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.   | Immediately      after the issuance the Company will apply to the TASE to list the Bonds as      a “non-tradable security” with the TASE Clearing House, at the discretion      of the Company, subject to the law and the rules of the    TASE. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.   | Starting      from the date of the Bonds’ listing for trade on the TASE, to the extent      such listing occurs, the interest rate payable for the unpaid balance of      the Bonds will be reduced by 1% (to an annual interest rate of      8%). |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.   | Until      the Bonds are listed for trade on the TASE, in the event that the rating      of the Bonds is reduced from the rating given them at their issuance - A3      by Midroog - to Baa1 (or an equivalent rating by another rating company),      the annual rate of interest on the Bonds will increase by      0.25%. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 5.   | If      the Bonds are not listed for trading within 12 months from the Date of      Issuance, any holder of the Bonds will be allowed (but not required), to      redeem his Bonds, in whole or in part, in an early    redemption. |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 6.   | In      the event that by March 31, 2008 the conditions for the release of the      proceeds of the offering by the Trustee, as set forth in the Indenture of      the Bonds, are not met, the issuance will be canceled and the Trustee will      return the proceeds of the offering to the holders of the Bonds, along      with interest at an annual rate of 9%, linked to the CPI, for the period      from the Date of Issuance until the date of the return of the proceeds as      stated.  The interest from the proceeds of the offering that      have accumulated in the trust account will be transferred to the Company.      The applicable conditions are: (i) that the Company raises an aggregate of      at least $20.0 million in equity financings (this condition has been      satisfied subject to the receipt of certain regulatory approvals); and      (ii) that the conditions (which are not related to the financing of the      acquisition) for the consummation of the NTS Acquisition have been      met. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 7.   | The      occurrence of certain events in connection with the Company may lead to      the requirement to immediately redeem the Bonds. Among those events are:      (1) customary events such as non-payment, the appointment of a liquidator      or temporary or permanent conservator, whose appointment is not canceled      within a certain period of time, the placement of a lien on substantive      assets of the Company, the realization of pledges on substantive assets of      the Company, the termination of the Company and when a bank requires      immediate repayment of a substantive amount of credit; (2) specific events      that relate to the period before the Bonds are listed for trade on the      TASE such as the reduction of the rating of the Bonds to Baa2 of Midroog      (or an equivalent rating of another rating company) or to a lower rating,      if the Company issues additional bonds in a manner that causes the current      rating of the Bonds to be reduced, if the Bonds cease to be rated for a      period greater than 30 days, if the proportion of the debt to EBITDA      increases above 4:1, if the Company ceases to control (directly and/or      indirectly) NTS Communications (for this purpose “control” has the meaning      as defined in the Israeli Securities Law) and in the event that Mr. Guy      Nissenson ceases to serve as President and CEO of the Company; (3)      additional specific events such as the payment of a dividend that will      cause the proportion of the shareholders equity to the Company’s balance      sheet to be lower than 25%. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| o   | $35,414,715      was paid in cash; and |
|---------------|----------------------------------------|

| o   | 2,366,892      shares of our common stock were issued to certain NTS Sellers who elected      to reinvest all or a portion of their allocable sale price in our Common      Stock, pursuant to the terms of the NTS Purchase Agreement. Our Board of      Directors determined, in accordance with the NTS Purchase Agreement, the      number of shares of our Common Stock to be delivered to each participating      NTS Seller by dividing the portion of such NTS Seller’s allocable sale      price that the NTS Seller elected to receive in shares of our Common Stock      by 93% of the average closing price of our Common Stock on the American      Stock Exchange for the ten consecutive trading days preceding the trading      day immediately prior to the Closing Date (i.e., $2.74). The aggregate      sales price reinvested by all such NTS Sellers was    $6,485,285. |
|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| o   | On      the closing date, NIS 15,500,000 (approximately $4,404,660) (the “First      Installment”); |
|---------------|-----------------------------------------------------------------------------------------------------------------|

| o   | By      November 20, 2008, NIS 15,500,000 (approximately $4,404,660), subject to      adjustment resulting from linkage to the Consumer Price      Index  (the “Second Installment”);and |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | By      November 1, 2009, NIS 13,000,000 (approximately $3,694,231), subject to      adjustment resulting from linkage to the Consumer Price Index (the      “Third Installment”). |
|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

|                            |   | Year      EndedDecember      31, |   |
|---------------------------------|--------|----------------------------------|--------|
|                            |   | 2007                             |   |   | 2006 |   |
| Revenues                        |   |                             | 100    | % |   |   | 100 | % |
| Cost      of Revenues           |   |                             | -44    | % |   |   | -58 | % |
| Gross      Profit               |   |                             | 56     | % |   |   | 42 | % |
| Operating      Expenses:        |   |                             |   |   |   |   |   |   |
| Research      and Development   |   |                             | 0      | % |   |   | 0 | % |
| Marketing      and Selling      |   |                             | -24    | % |   |   | -13 | % |
| General      and Administrative |   |                             | -28    | % |   |   | -26 | % |
| Non-      recurring loss        |   |                             | -6     | % |   |   | 0 | % |
| Total      Operating Expenses   |   |                             | 58     | % |   |   | -39 | % |
| Income      (loss) before Taxes |   |                             | -4     | % |   |   | 2 | % |
| Net      Income                 |   |                             | -3     | % |   |   | 2 | % |

----

----

----

----

| Date |   |   |   |
|------|--------|---|--------|
| 2008 |   | $ | 89,654 |   |
| 2009 |   | $ | 31,893 |   |

----

----

----

----

| ITEM 7. | Financial      Statements |
|---------|---------------------------|

| Xfone,      Inc. and Subsidiaries      |
|----------------------------------------|
| CONSOLIDATED      FINANCIAL STATEMENTS |
| As      of December 31, 2007      |
| CONTENTS                               |

| Report of Independent Registered Public Accounting      Firm |   |   | F-1    |   |
|--------------------------------------------------------------|--------|--------|--------|--------|
|                                                         |   |   |   |   |
| Balance Sheet                                                |   |   | F-2    |   |
|                                                         |   |   |   |   |
| Statements of Operations                                     |   |   | F-4    |   |
|                                                         |   |   |   |   |
| Statements of Changes in Shareholders'      Equity           |   |   | F-5    |   |
|                                                         |   |   |   |   |
| Statements of Cash Flows                                     |   |   | F-6    |   |
|                                                         |   |   |   |   |
| Notes      to Consolidated Financial Statements              |   |   | F-8    |   |

----

 REGISTEREDPUBLIC ACCOUNTING FIRM

----

| Xfone, Inc. and      Subsidiaries                                           |
|-----------------------------------------------------------------------------|
|                                                                        |   |   |   |   |
| BALANCE      SHEET                                                          |
|                                                                        |   |   |
|                                                                        |   | December    31, |
|                                                                        |   | 2007 |
|                                                                        |   |   |
| CURRENT      ASSETS:                                                        |   |   |
|                                                                        |   |   |
| Cash                                                                        |   | $ | 5,835,608 |   |   |
| Restricted      cash                                                        |   |   | 25,562,032 |   |   |
| Accounts      receivable, net                                               |   |   | 5,886,499 |   |   |
| Prepaid      expenses and other receivables (Note 3)                        |   |   | 3,985,307 |   |   |
|                                                                        |   |   |   |   |   |
| Totalcurrent assets                                                         |   |   | 41,269,446 |   |   |
|                                                                        |   |   |   |   |   |
| MINORITY      INTEREST                                                      |   |   | 7,190 |   |   |
|                                                                        |   |   |   |   |   |
| LONG      TERM ASSETS (including $1,753,503 of bonds issuance cost,    net) |   |   | 2,076,061 |   |   |
|                                                                        |   |   |   |   |   |
| FIXED      ASSETS, NET (NOTE 4)                                             |   |   | 5,747,758 |   |   |
|                                                                        |   |   |   |   |   |
| OTHER      ASSETS, NET (NOTE 5)                                             |   |   | 17,948,872 |   |   |
|                                                                        |   |   |   |   |   |
| Totalassets                                                                 |   | $ | 67,049,327 |   |   |
|                                                                        |

----

| Xfone,      Inc. and Subsidiaries                                                                |
|--------------------------------------------------------------------------------------------------|
|                                                                                             |   |   |   |
| BALANCE      SHEET                                                                               |
|                                                                                             |   |   |   |
|                                                                                             |   | December      31, |   |
|                                                                                             |   | 2007 |   |
|                                                                                             |   |   |   |
| CURRENT      LIABILITIES:                                                                        |   |   |   |   |
| Notes      payable - current portion (Note 7)                                                    |   | $ | 1,094,339 |   |
| Trade      payables                                                                              |   |   | 8,287,420 |   |
| Other      liabilities and accrued expenses (Note 6)                                             |   |   | 5,322,045 |   |
| Obligations      under capital leases - current portion (note 9)                                 |   |   | 89,654 |   |
|  Current      maturities of Bonds  (note 8)                                  |   |   | 3,268,476 |   |
| Total      current liabilities                                                                   |   |   | 18,061,934 |   |
|                                                                                             |   |   |   |   |
| DEFERRED      TAXES (NOTE 10)                                                                    |   |   | 1,103 |   |
|                                                                                             |   |   |   |   |
| NOTES      PAYABLE (NOTE 7)                                                                      |   |   | 1,013,808 |   |
|                                                                                             |   |   |   |   |
| BONDS      (NOTE 8)                                                                              |   |   | 22,083,892 |   |
|                                                                                             |   |   |   |   |
| OBLIGATIONS      UNDER CAPITAL LEASES (NOTE 9)                                                   |   |   | 31,893 |   |
|                                                                                             |   |   |   |   |
| SEVERANCE      PAY                                                                               |   |   | 148,600 |   |
|                                                                                             |   |   |   |   |
| Total      liabilities                                                                           |   |   | 41,341,230 |   |
|                                                                                             |   |   |   |   |
| COMMITMENTS      AND CONTINGENT LIABILITIES (NOTE 11)                                            |
|                                                                                             |   |   |   |   |
| SHAREHOLDERS'      EQUITY:                                                                       |   |   |   |   |
|                                                                                             |
| Common      stock:                                                                               |   |   |   |   |
| 75,000,000      shares authorized                                                                |   |   |   |   |
| 13,467,928      issued and outstanding                                                           |   |   | 13,468 |   |
| Contributions      in excess of par value                                                        |   |   | 26,494,985 |   |
| Foreign      currency translation adjustment                                                     |   |   | (1,564,814 | ) |
| Deferred      stock compensation                                                                 |   |   | (295,155 | ) |
| Retained      earnings                                                                           |   |   | 1,059,613 |   |
|                                                                                             |   |   |   |   |
| Total      shareholders' equity                                                                  |   |   | 25,708,097 |   |
|                                                                                             |   |   |   |   |
| Total      liabilities and shareholders' equity                                                  |   | $ | 67,049,327 |   |
|                                                                                             |   |   |   |   |
| The      accompanying notes are an integral part of these consolidated financial      statements |

----

| Xfone, Inc. and      Subsidiaries |   |
|-----------------------------------|--------|
|                              |   |   |   |   |   |   |   |
| STATEMENTS      OF OPERATIONS     |   |

|                                                       |   | Years      Ended  |       |
|------------------------------------------------------------|--------|-------------------|------------|
|                                                       |   | December      31, |       |
|                                                       |   | 2007              |       |   | 2006 |   |
|                                                       |   |              |       |   |   |   |
|                                                       |   |              |       |   |   |   |
| Revenues                                                   |   | $                 | 44,723,934 |   |   | $ | 37,914,037 |   |
| Cost      of revenues                                      |   |              | 19,626,322 |   |   |   | 21,968,998 |   |
|                                                       |   |              |       |   |   |   |   |   |
| Gross      profit                                          |   |              | 25,097,612 |   |   |   | 15,945,039 |   |
|                                                       |   |              |       |   |   |   |   |   |
| Operating      expenses:                              |   |              |       |   |   |   |   |   |
| Research      and development                              |   |              | 47,609     |   |   |   | 45,709 |   |
| Marketing      and selling                                 |   |              | 10,886,883 |   |   |   | 4,937,007 |   |
| General      and administrative                            |   |              | 12,335,759 |   |   |   | 9,927,301 |   |
| Non-      recurring loss (note      11)               |   |              | 2,856,803  |   |   |   | - |   |
|                                                       |   |              |       |   |   |   |   |   |
| Total      operating expenses                              |   |              | 26,127,054 |   |   |   | 14,910,017 |   |
|                                                       |   |              |       |   |   |   |   |   |
| Operating      profit (loss)                               |   |              | (1,029,442 | ) |   |   | 1,035,022 |   |
| Financing      expenses, net                               |   |              | (515,562   | ) |   |   | (540,688 | ) |
| Equity      in income of affiliated company                |   |              | 132,867    |   |   |   | 60,574 |   |
| Loss      from a change of holding of affiliated company   |   |              | -          |   |   |   | (58,472 | ) |
| Other      income                                          |   |              | -          |   |   |   | 84,723 |   |
|                                                       |   |              |       |   |   |   |   |   |
| Income      (loss) before minority interest and taxes      |   |              | (1,412,137 | ) |   |   | 581,159 |   |
|                                                       |   |              |       |   |   |   |   |   |
| Minority      interest                                     |   |              | (297,860   | ) |   |   | 81,802 |   |
|                                                       |   |              |       |   |   |   |   |   |
|                                                       |   |              |       |   |   |   |   |   |
| Income      (loss) before taxes                            |   |              | (1,709,997 | ) |   |   | 662,961 |   |
|                                                       |   |              |       |   |   |   |   |   |
| Income      tax benefit (expense)                          |   |              | 426,105    |   |   |   | (2,265 | ) |
|                                                       |   |              |       |   |   |   |   |   |
| Net      income (loss)                                     |   | $                 | (1,283,892 | ) |   | $ | 660,696 |   |
|                                                       |   |              |       |   |   |   |   |   |
|                                                       |   |              |       |   |   |   |   |   |
| Basic      net profit (loss) per share                     |   | $                 | (0.109     | ) |   | $ | 0.065 |   |
|                                                       |   |              |       |   |   |   |   |   |
| Diluted      net profit (loss) per share                   |   | $                 | (0.109     | ) |   | $ | 0.065 |   |
|                                                       |   |              |       |   |   |   |   |   |
| Weighted      average number of shares used for computing: |   |              |       |   |   |
| Basic      profit (loss) per share                         |   |              | 11,777,645 |   |   |   | 10,135,874 |   |
|                                                       |   |              |       |   |   |   |   |   |
| Diluted      profit (loss) per share                       |   |              | 11,777,645 |   |   |   | 10,135,874 |   |

| The      accompanying notes are an integral part of these consolidated financial      statements |   |
|--------------------------------------------------------------------------------------------------|--------|

----

| Xfone, Inc.      and Subsidiaries             |   |         |   |
|----------------------------------------------------|--------|--------------|--------|
|                                               |   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| STATEMENTS      OF CHANGES IN SHAREHOLDERS' EQUITY |   |         |   |

|                                                            |   |                                     |          |   |               |   |          |                                                     |   |   |                                                    |   |   |                                  |          |   |                   |   |                            |                                 |   |
|-----------------------------------------------------------------|--------|------------------------------------------|---------------|--------|--------------------|--------|---------------|----------------------------------------------------------|--------|--------|---------------------------------------------------------|--------|--------|---------------------------------------|---------------|--------|------------------------|--------|---------------------------------|--------------------------------------|--------|
|                                                            |   | Number      of Ordinary Shares |          |   | Share Capital |   |          | Contributions in      excess of par      value |   |   | Foreign      currency translation adjustments |   |   | Deferred Stock Compensation |          |   | Retained Earnings |   |                            | Total Shareholders' Equity |   |
| Balance      at January 1, 2006                                 |   |                                     | 8,172,671     |   |               | $      | 8,684         |                                                     |   | $      | 8,354,964                                               |   |   | $                                     | (228,043      | )      |                   | $      | -                               |                                 |   | $ | 1,682,809 |   |   | $ | 9,818,414 |   |
| Deferred      stock compensation, net                           |   |                                     | -             |   |               |   | -             |                                                     |   |   | 739,131                                                 |   |   |                                  | -             |   |                   |   | (739,131                        | )                                    |   |   | - |   |   |   | - |   |
| Amortization      of deferred compensation                      |   |                                     | -             |   |               |   | -             |                                                     |   |   | -                                                       |   |   |                                  | -             |   |                   |   | 227,738                         |                                 |   |   | - |   |   |   | 227,738 |   |
| Redemption      of stock                                        |   |                                     | (100,000      | )      |               |   | (100          | )                                                        |   |   | (269,762                                                | )      |   |                                  | -             |   |                   |   | -                               |                                 |   |   | - |   |   |   | (269,862 | ) |
| Stock      issued during the period, net of issuance expenses : |   |                                     |          |   |               |   |          |                                                     |   |   |                                                    |   |   |                                  |          |   |                   |   |                            |                                 |   |   |   |   |   |   |   |   |
| For      services                                               |   |                                     | 40,629        |   |               |   | 47            |                                                     |   |   | 27,381                                                  |   |   |                                  | -             |   |                   |   | -                               |                                 |   |   | - |   |   |   | 27,428 |   |
| For      cash                                                   |   |                                     | 663,825       |   |               |   | 709           |                                                     |   |   | 1,020,717                                               |   |   |                                  | -             |   |                   |   | -                               |                                 |   |   | - |   |   |   | 1,021,426 |   |
| For      acquisitions                                           |   |                                     | 1,544,761     |   |               |   | 1,610         |                                                     |   |   | 5,920,870                                               |   |   |                                  | -             |   |                   |   | -                               |                                 |   |   | - |   |   |   | 5,922,480 |   |
| For      loan repayment                                         |   |                                     | 831,931       |   |               |   | 204           |                                                     |   |   | 2,790,652                                               |   |   |                                  | -             |   |                   |   | -                               |                                 |   |   | - |   |   |   | 2,790,856 |   |
| Warrants      granted to consultants for services and others    |   |                                     | -             |   |               |   | -             |                                                     |   |   | 425,740                                                 |   |   |                                  | -             |   |                   |   | -                               |                                 |   |   | - |   |   |   | 425,740 |   |
| Currency      translation                                       |   |                                     | -             |   |               |   | -             |                                                     |   |   | -                                                       |   |   |                                  | (1,152,658    | )      |                   |   | -                               |                                 |   |   | - |   |   |   | (1,152,658 | ) |
| Net      income                                                 |   |                                     | -             |   |               |   | -             |                                                     |   |   | -                                                       |   |   |                                  | -             |   |                   |   | -                               |                                 |   |   | 660,696 |   |   |   | 660,696 |   |
|                                                            |   |                                     |          |   |               |   |          |                                                     |   |   |                                                    |   |   |                                  |          |   |                   |   |                            |                                 |   |   |   |   |   |   |   |   |
| Balance      at December 31, 2006                               |   |                                     | 11,153,817    |   |               | $      | 11,154        |                                                     |   | $      | 19,009,693                                              |   |   | $                                     | (1,380,701    | )      |                   | $      | (511,393                        | )                                    |   | $ | 2,343,505 |   |   | $ | 19,472,258 |   |
|                                                            |   |                                     |          |   |               |   |          |                                                     |   |   |                                                    |   |   |                                  |          |   |                   |   |                            |                                 |   |   |   |   |   |   |   |   |
| Balance      at January 1, 2007                                 |   |                                     | 11,153,817    |   |               | $      | 11,154        |                                                     |   | $      | 19,009,693                                              |   |   | $                                     | (1,380,701    | )      |                   | $      | (511,393                        | )                                    |   | $ | 2,343,505 |   |   | $ | 19,472,258 |   |
| Deferred      stock compensation, net                           |   |                                     | -             |   |               |   | -             |                                                     |   |   | -                                                       |   |   |                                  | -             |   |                   |   | -                               |                                 |   |   | - |   |   |   | - |   |
| Amortization      of deferred compensation                      |   |                                     | -             |   |               |   | -             |                                                     |   |   | -                                                       |   |   |                                  | -             |   |                   |   | 216,238                         |                                 |   |   |   |   |   |   | 216,238 |   |
| Stock      issued during the period, net oof                    |   |                                     | -        |   |               |   | -        |                                                     |   |   | -                                                  |   |   |                                  | -        |   |                   |   |  -                    |                                 |   |   | -  |   |   |   | -  |   |
|   of        issuance expenses :             |   |                                     |          |   |               |   |          |                                                     |   |   |                                                    |   |   |                                  |          |   |                   |   |                            |                                 |   |   |   |   |   |   |   |   |
| For      cash                                                   |   |                                     | 2,294,828     |   |               |   | 2,295         |                                                     |   |   | 6,489,955                                               |   |   |                                  | -             |   |                   |   |  -                         |                                 |   |   | - |   |   |   | 6,492,250 |   |
| For      acquisitions                                      |   |                                     | 20,026        |   |               |   | 20            |                                                     |   |   | (20                                                     | )      |   |                                  | -             |   |                   |   |  -                         |                                 |   |   | - |   |   |   | - |   |
| Exercise      of options options                                |   |                                     | 6,300         |   |               |   | 6             |                                                     |   |   | 22,044                                                  |   |   |                                  | -        |   |                   |   |  -                    |                                 |   |   | -  |   |   |   | 22,050 |   |
| Shares      cancelled                                           |   |                                     | (7,043)  |   |               |   | (7)      |                                                     |   |   |  7                                                 |   |   |                                  | -        |   |                   |   |          -  |                                 |   |   | -  |   |   |   | -  |   |
| Fair      value of warrants granted to bonds holders            |   |                                     | -        |   |               |   | -        |                                                     |   |   | 973,306                                                 |   |   |                                  | -        |   |                   |   | -                               |                                 |   |   | -  |   |   |   | 973,306 |   |
| Currency      translation                                       |   |                                     | -             |   |               |   | -             |                                                     |   |   | -                                                       |   |   |                                  | (184,113      | )      |                   |   | -                               |                                 |   |   | - |   |   |   | (184,113 | ) |
| Net      loss                                                   |   |                                     | -   |   |               |   | -   |                                                     |   |   | -                                             |   |   |                                  | -   |   |                   |   |        -              |                                 |   |   | (1,283,892 | ) |   |   | (1,283,892 | ) |
|                                                            |   |                                     |          |   |               |   |          |                                                     |   |   |                                                    |   |   |                                  |          |   |                   |   |                            |                                 |   |   |   |   |   |   |   |   |
| Balance      at December 31, 2007                               |   |                                     | 13,467,928    |   |               | $      | 13,468        |                                                     |   | $      | 26,494,985                                              |   |   | $                                     | (1,564,814    | )      |                   | $      | (295,155                        | )                                    |   | $ | 1,059,613 |   |   | $ | 25,708,097 |   |
|                                                            |   |                                     |          |   |               |   |          |                                                     |   |   |                                                    |   |   |                                  |          |   |                   |   |                            |                                 |   |   |   |   |   |   |   |   |
|                                                            |   |                                     |          |   |               |   |          |                                                     |   |   |                                                    |   |   |                                  |          |   |                   |   |                            |                                 |   |   |   |   |   |   |   |   |

----

| Xfone, Inc. and Subsidiaries                                                                                               |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                       |   |   |   |   |   |   |
| STATEMENTS      OF CASH FLOWS                                                                                              |   |
|                                                                                                                       |   |   |   |   |   |   |
|                                                                                                                       |   | Years      Ended |   |
|                                                                                                                       |   | December      31 , |   |
|                                                                                                                       |   | 2007 |   |   | 2006 |   |
| Cash      flow from operating activities:                                                                                  |   |   |   |   |   |   |
| Net      income (loss)                                                                                                     |   | $ | (1,283,892 | ) |   | $ | 660,696 |   |
| Adjustments      required to reconcile net income                                                                          |   |   |   |   |   |   |   |   |
| to      net cash provided by (used in)                                                                                     |   |   |   |   |   |   |   |   |
| operating      activities:                                                                                                 |   |   |   |   |   |   |   |   |
| Depreciation      and amortization                                                                                         |   |   | 1,211,798 |   |   |   | 1,092,085 |   |
| Compensation  in      connection with the issuance of warrants and options issued for      professional services |   |   | 216,238 |   |   |   | 255,166 |   |
| Minority      interest                                                                                                     |   |   | 297,860 |   |   |   | (81,802 | ) |
| Currency      differences on convertible notes and loans                                                                   |   |   | - |   |   |   | 368 |   |
| Loss      from a change of holding of affiliated company                                                                   |   |   | - |   |   |   | 58,472 |   |
| Changes      in earnings of equity investments                                                                             |   |   | (132,868 | ) |   |   | (60,574 | ) |
| Decrease      (increase) in account receivables                                                                            |   |   | 2,796,353 |   |   |   | (1,335,519 | ) |
| Decrease      (increase) in long term assets                                                                               |   |   | 373,258 |   |   |   | - |   |
| Decrease      (increase) in other receivables                                                                              |   |   | (1,703,548 | ) |   |   | 771,517 |   |
| Decrease      in shareholder loans receivable                                                                              |   |   | - |   |   |   | 242,847 |   |
| Increase      (decrease) in trade payables                                                                                 |   |   | 663,601 |   |   |   | (1,305,973 | ) |
| Increase      (decrease) in other liabilities and accrued expenses                                                         |   |   | 2,523,797 |   |   |   | (390,947 | ) |
| Increase      (decrease) in severance pay                                                                                  |   |   | 57,160 |   |   |   | 63,305 |   |
| Decrease      in deferred taxes                                                                                            |   |   | (180,026 | ) |   |   | (51,657 | ) |
|                                                                                                                       |   |   |   |   |   |   |   |   |
| Net      cash provided by (used in) operating activities                                                                   |   |   | 4,839,731 |   |   |   | (82,016 | ) |
|                                                                                                                       |   |   |   |   |   |   |   |   |
| Cash      flow from investing activities:                                                                                  |   |   |   |   |   |   |   |   |
| Investment      in short- term deposit                                                                                     |   |   | (24,998,173 | ) |   |   | - |   |
| Purchase      of other assets                                                                                              |   |   | - |   |   |   | (1,258 | ) |
| Purchase      of equipment                                                                                                 |   |   | (1,322,908 | ) |   |   | (871,998 | ) |
| Change      in prepaid acquisition costs                                                                                   |   |   | (479,502 | ) |   |   | - |   |
| Change      in long- term receivables                                                                                      |   |   | - |   |   |   | (106,254 | ) |
| Acquisition      of EBI                                                                                                    |   |   | - |   |   |   | (99,372 | ) |
| Acquisition      of Canufly                                                                                                |   |   | - |   |   |   | (506,684 | ) |
| Acquisition      of I-55 Internet Services                                                                                 |   |   | - |   |   |   | (104,560 | ) |
| Acquisition      of I-55 Telecommunications                                                                                |   |   | - |   |   |   | (30,196 | ) |
| Net      cash acquired from the acquisition of Equitalk                                                                    |   |   | - |   |   |   | 146,878 |   |
| Net      cash acquired from the acquisition of Story Telecom                                                               |   |   | - |   |   |   | 65,579 |   |
| Net      cash acquired from the acquisition of Auracall                                                                    |   |   | (612,607 | ) |   |   | - |   |
|  Net      cash (used in) investing activities                                                                         |   |   | (27,413,190 | ) |   |   | (1,507,865 | ) |

----

| Xfone,      Inc. and Subsidiaries                                                                |               |
|--------------------------------------------------------------------------------------------------|--------------------|
|                                                                                             |               |   |   |   |
| STATEMENTS      OF CASH FLOWS (Continued)                                                        |               |
|                                                                                             |               |   |   |   |
|                                                                                             | Years    Ended     |   |
|                                                                                             | December 31      , |   |
|                                                                                             | 2007               |   | 2006 |   |
|                                                                                             |               |   |   |   |
| Cash flow from financing      activities:                                                        |               |   |   |   |   |   |
| Repayment      of long term loans from banks and others                                          |               |   | (1,051,079 | ) |   |   | (2,544,945 | ) |
| Increase      in capital lease obligation                                                        |               |   | (105,968 | ) |   |   | 52,511 |   |
| Increase      (decrease) in short-term bank credit, net                                          |               |   | (1,821,597 | ) |   |   | 240,647 |   |
| Proceeds      from long term loans from banks                                               |               |   | 199,437 |   |   |   | 307,412 |   |
| Repayment      of convertible notes                                                              |               |   | - |   |   |   | (623,812 | ) |
| Issuance      of bonds, net of issuance expenses                                                 |               |   | 22,821,827 |   |   |   | - |   |
| Proceeds      from exercise of options                                                           |               |   | 22,050 |   |   |   | - |   |
| Proceeds      from issuance of shares and detachable warrants, net of issuance      expenses     |               |   | 7,465,555 |   |   |   | 751,564 |   |
| Net      cash provided by (used in) financing activities                                         |               |   | 27,530,225 |   |   |   | (1,816,623 | ) |
|                                                                                             |               |   |   |   |   |   |   |   |
| Effect      of exchange rate changes on cash and cash equivalents                           |               |   | (339,550 | ) |   |   | (262,660 | ) |
| Net      increase (decrease) in cash and cash equivalents                                   |               |   | 4,617,216 |   |   |   | (3,669,164 | ) |
|                                                                                             |               |   |   |   |   |   |   |   |
| Cash      and cash equivalents at the beginning of year                                          |               |   | 1,218,392 |   |   |   | 4,887,556 |   |
| Cash      and cash equivalents at the end of year                                                |               | $ | 5,835,608 |   |   | $ | 1,218,392 |   |
|                                                                                             |               |   |   |   |   |   |   |   |
| The      accompanying notes are an integral part of these consolidated financial      statements |

----

| Supplemental disclosure of non cash investing and      financing activities:                      |   |   |         |   |
|---------------------------------------------------------------------------------------------------|--------|--------|--------------|--------|
|                                                                                              |   |   |         |   |   |   |
| Cash      paid for:                                                                               |   |   |         |   |   |   |
|                                                                                              |   |   |         |   |   |   |
| Interest      paid                                                                                |   | $      | 129,308      |   |   | $ | 290,404 |   |
|                                                                                              |   |   |         |   |   |   |   |   |
| Tax      paid                                                                                     |   | $      | 986          |   |   | $ | 111,859 |   |
|                                                                                              |   |   |         |   |   |   |   |   |
| Acquisition      of EBI                                                                           |   | $      | -            |   |   | $ | 176,326 |   |
|                                                                                              |   |   |         |   |   |   |   |   |
| Acquisition      of Canufly                                                                       |   | $      | -            |   |   | $ | 354,412 |   |
|                                                                                              |   |   |         |   |   |   |   |   |
| Acquisition      of I-55 Internet Services                                                        |   | $      | -            |   |   | $ | 3,195,299 |   |
|                                                                                              |   |   |         |   |   |   |   |   |
| Acquisition      of I-55 Telecommunication                                                        |   | $      | -            |   |   | $ | 818,513 |   |
|                                                                                              |   |   |         |   |   |   |   |   |
| Acquisition      of Equitalk                                                                      |   | $      | -            |   |   | $ | 279,475 |   |
|                                                                                              |   |   |         |   |   |   |   |   |
| Purchase      of fixed assets                                                                     |   | $      | 830,000      |   |   | $ | - |   |
|                                                                                              |   |   |         |   |   |   |   |   |
|  Purchase      of fixed assets via capital lease                                             |   | $      | 26,510  |   |   | $ | -  |   |
|                                                                                              |   |   |         |   |   |   |   |   |
| Capitalization      of finance expenses related with acquisition costs of NTS      Communications |   | $      | 213,179      |   |   | $ | - |   |
|                                                                                              |   |   |         |   |   |   |   |   |

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

|   | A. | Xfone,      Inc. ("Xfone") was      incorporated in Nevada, U.S.A. in September 2000 and is a provider of      voice, video and data telecommunications services, including: local, long      distance and international telephony services; prepaid and postpaid      calling cards; cellular services; Internet services; messaging services      (Email/Fax Broadcast, Email2Fax and Cyber-Number); and reselling      opportunities, with operations in the United States, the United      Kingdom and Israel. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ·   | Swiftnet      Limited ("Swiftnet") - wholly      owned U.K. subsidiary. |
|--------|--------------------|-------------------------------------------------------------------------|

|   | ·   | Equitalk.co.uk      Limited ("Equitalk") - wholly      owned U.K. subsidiary. |
|--------|--------------------|-------------------------------------------------------------------------------|

|   | ·   | Auracall      Limited ("Auracall") - wholly owned U.K. subsidiary of      Swiftnet. |
|--------|--------------------|-------------------------------------------------------------------------------------|

|   | ·   | Xfone      USA, Inc. and its two wholly owned subsidiaries, eXpeTel Communications,      Inc. and Gulf Coast Utilities, Inc. (collectively, " Xfone USA ") - wholly      owned U.S. subsidiary. |
|--------|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ·   | Story      Telecom, Inc. and its wholly owned U.K. subsidiary, Story Telecom Limited      (collectively, " Story      Telecom ") - majority owned U.S. subsidiary, in which Xfone holds a      69.6% ownership share. |
|--------|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ·   | Xfone      018 Ltd. ("Xfone      018") - majority owned Israeli subsidiary in which Xfone holds a      69% ownership share. |
|--------|--------------------|-----------------------------------------------------------------------------------------------------------------------------|

|   | B. | On      January 1, 2006, Xfone USA, Inc., entered into an Agreement with EBI Comm,      Inc. (“EBI”), a privately held Internet Service Provider, to purchase the      assets of EBI. EBI provided a full range of Internet access options for      both commercial and residential customers in north Mississippi. Based in      Columbus, Mississippi, EBI's services included Dial-up, DSL, T1 Dedicated      Access and Web Hosting. The customer base, numbering approximately 1,500      Internet users, is largely concentrated in the Golden Triangle area, which      includes Columbus, West Point and Starkville, Mississippi. The acquisition      was structured as an asset purchase, providing for Xfone USA to pay EBI      total consideration equal to 50% of the monthly collected revenue from the      customer base during the first 12 months, beginning January 2006. Acquired      assets include the customer base and customer lists, trademarks and all      related intellectual property, fixed assets and all account receivables.      Xfone USA paid a total consideration for this acquisition in the amount of      $85,699 in monthly payments of $10,000 until paid in full, and made the      first of such payments on June 1, 2007 and final payment on January 25,      2008. Payment for this acquisition was recorded as other      assets. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| EBI      Comm, Inc.                          |   |   |    |
|----------------------------------------------|--------|--------|---------|
| Current      assets, excluding cash acquired |   | $      | -       |   |
| Total      assets acquired                   |   |   | -       |   |
|                                         |   |   |    |   |
| Total      liabilities                       |   |   | 176,326 |   |
| Net      liabilities assumed                 |   | $      | 176,326 |   |
|                                         |   |   |    |   |
| Purchase      price:                         |   |   |    |   |
| Cash      paid                               |   | $      | 85,698  |   |
| Acquisition      costs                       |   |   | 13,674  |   |
|                                         |   | $      | 99,372  |   |
|                                         |   |   |    |   |
| Goodwill                                     |   | $      | 275,698 |   |

----

| Xfone,      Inc. and Subsidiaries                                               |   |
|---------------------------------------------------------------------------------|--------|
|                                                                            |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007           |   |
|  Note      1 - Organization      and Nature of Business (Cont.)  |   |
|                                                                            | C.     | On      January 10, 2006 (effective as of January 1, 2006), Xfone USA, Inc.,      entered into an Asset Purchase Agreement with Canufly.net, Inc.      (“Canufly.net”), an Internet Service Provider based in Vicksburg,      Mississippi, and its principal shareholder, Mr. Michael Nassour.      Canufly.net provided residential and business customers with high-speed      Internet services and utilized the facilities-based network of Xfone USA,      as an alternative to BellSouth, to provide Internet connectivity to its      customers. Canufly.net also provided Internet services through a small      wireless application in certain areas in Vicksburg, Mississippi. The      transaction was closed on January 24, 2006. Xfone agreed to pay a total      purchase price of up to $710,633, payable as follows: (i) $185,000 in cash      payable in twelve equal monthly payments, the first installment was paid      at closing, and as of December 31, 2006, the entire amount was paid in      full and in accordance with the Asset Purchase Agreement; (ii) $255,633 in      cash, paid at closing, to pay off the loan with the B&K Bank;      (iii) 33,768 restricted shares of common stock and 24,053 warrants      exercisable at $2.98 per share for a period of five years were issued to      the shareholders of Canufly.net during May 2006. Following the closing in      2006 and due to the satisfaction of certain earnout provisions in the      Asset Purchase Agreement Xfone issued in March 2007 additional 20,026      restricted shares of common stock and 14,364 warrants exercisable at $2.98      per share for a period of five years to the shareholders of      Canufly.net. |

|  Canufly.net,      Inc.                  |   |   |    |
|----------------------------------------------------|--------|--------|---------|
| Current      assets, excluding cash acquired       |   | $      | -       |   |
| Fixed      assets                                  |   |   | 36,753  |   |
| Total      assets acquired                         |   |   | 36,753  |   |
|                                               |   |   |    |   |
| Current      liabilities                           |   |   | -       |   |
| Long-term      liabilities                         |   |   | -       |   |
| Total      liabilities                             |   |   | -       |   |
| Net      assets assumed                            |   | $      | 36,753  |   |
|                                               |   |   |    |   |
| Purchase      price:                               |   |   |    |   |
| Cash      acquired or commitment in cash, net      |   | $      | 495,524 |   |
| Acquisition      costs                             |   |   | 11,160  |   |
| Fair      market value of stock and warrant issued |   |   | 193,951 |   |
| Total                                              |   |   | 700,635 |   |
|                                               |   |   |    |   |
| Goodwill                                           |   | $      | 663,882 |   |
|                                               |   |   |    |   |

|   | D. | On      May 10, 2006, Xfone, Story Telecom, Inc., Story Telecom Limited, Story      Telecom (Ireland) Limited, Nir Davison, and Trecastle Holdings Limited, a      company controlled by Mr. Davison, entered into the Stock Purchase      Agreement. Pursuant to the Stock Purchase Agreement, Xfone increased its      ownership interest in Story Telecom from 39.2% to 69.6% in a cash      transaction valued at $1,200,000. $900,000 of the total consideration was      applied to payables owed by Story Telecom to Xfone and its subsidiary      Swiftnet Limited for back-end telecommunications services. The      balance of $300,000 was paid to Story Telecom, to be used as working      capital. Story Telecom, Inc., a telecommunication service provider,      operated in the United Kingdom through its two wholly owned subsidiaries,      Story Telecom Limited and Story Telecom (Ireland) Limited (which was      dissolved on February 23, 2007). Story Telecom operates as a division of      Xfone's operations in the United Kingdom. The stock purchase pursuant to      the Stock Purchase Agreement was completed on May 16,      2006.  (See Note 18). Pursuant      to the above-mentioned Stock Purchase Agreement, at certain dates and      provided Story Telecom meets certain business and financial covenants, Nir      Davison and Trecastle Holdings Limited shall have the option to sell to      the Company all of their shares in Story Telecom for U.S. $450,000 in      cash, or equivalent in the Company's common stock (to be decided by the      Company). In addition, at certain dates and provided Story Telecom meets      certain business and financial covenants, the Company shall have the      option to buy from Nir Davison and Trecastle Holdings Limited all of their      shares in Story Telecom for U.S. $900,000 in cash, or equivalent in the      Company's common stock (to be decided by the Company). The Stock Purchase      Agreement further provides that upon request from Story Telecom, and      provided certain conditions are met, the Company shall provide all      consents necessary to make Story Telecom a publicly traded company through      a distribution of its shares as a dividend to the shareholders of the      Company, or a similar transaction. If the Company will fail to provide all      necessary consents it shall have to buy from Nir Davison and Trecastle      Holdings Limited all their shares of Story Telecom for $1,000,000, paid      70% in the Company's shares, valued at market price on an average of 30      trading days, and 30% in cash. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

| Story      Telecom, Inc.                     |   |   |      |
|----------------------------------------------|--------|--------|-----------|
|                                         |   |   |      |
| Current      assets, excluding cash acquired |   | $      | 710,194   |   |
| Fixed      assets                            |   |   | 2,200     |   |
| Other      assets                            |   |   | -         |   |
| Total      assets acquired                   |   |   | 712,394   |   |
|                                         |   |   |      |   |
| Current      liabilities                     |   |   | 3,541,719 |   |
| Long-term      liabilities                   |   |   | -         |   |
| Total      liabilities                       |   |   | 3,541,719 |   |
| Net      liabilities assumed                 |   | $      | 2,829,325 |   |
|                                         |   |   |      |   |
| Purchase      price:                         |   |   |      |   |
| Cash      acquired, net                      |   | $      | (65,579   |   |
| Acquisition      costs                       |   |   | -         |   |
| Total                                        |   | $      | (65,579   |   |
|                                         |   |   |      |   |
| Goodwill                                     |   | $      | 2,690,786 |   |
| Trade      name                              |   | $      | 72,960    |   |

|   | E. | As      of May 10, 2006 the Company had a £1,010,030 receivable from Global VOIP      Services Limited ("Global VOIP"), an Irish company which provided telecom      services. Story Telecom, Inc. and/or its subsidiaries owed £1,010,030 to      Global VOIP. In separate agreements, subsequent to the May 10,      2006 Stock Purchase Agreement, Story Telecom, Inc and/or its subsidiaries      were assigned the £1,010,030 receivable and payable on Global      VOIP's books. The assignment of Global VOIP's receivable and payable      resulted in a non-cash transaction that removed Globe VOIP's receivable      from the books of the Company and results in inter-company receivables and      payables that eliminate in consolidation. There is no income      statement effect to thesetransactions. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

|   | F. | On      May 25, 2006, Xfone and the shareholders of Equitalk.co.uk Limited, a      privately held telephone company based in the United Kingdom ("Equitalk")      entered into an Agreement relating to the sale and purchase of Equitalk      (the "Equitalk Agreement"). The Equitalk Agreement provided for Xfone to      acquire Equitalk in a restricted common stock and warrant transaction      valued at $1,650,000. The acquisition was completed on July 3, 2006,      and on that date Equitalk became Xfone's wholly owned subsidiary. In      conjunction with the completion of the acquisition and in exchange for all      of the capital stock of Equitalk, Xfone issued a total of 402,192      restricted shares of its common stock and a total of 281,872 warrants      exercisable at $3.025 per share for a period of five years. Founded in      December 1999, Equitalk, a VC-financed company, was the first fully      automated e-telco in the United Kingdom. Equitalk provides both      residential and business customers with low-cost IDA and CPS voice      services, broadband andteleconferencing. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Equitalk.co.uk      Limited                        |   |   |      |
|----------------------------------------------------|--------|--------|-----------|
|                                               |   |   |      |
| Current      assets, excluding cash acquired       |   | $      | 276,442   |   |
| Fixed      assets                                  |   |   | 4,251     |   |
| Other      assets                                  |   |   | -         |   |
| Total      assets acquired                         |   |   | 280,693   |   |
|                                               |   |   |      |   |
| Current      liabilities                           |   |   | 446,478   |   |
| Long-term      liabilities                         |   |   | 141,200   |   |
| Total      liabilities                             |   |   | 587,678   |   |
| Net      liabilities assumed                       |   | $      | (306,985  |   |
|                                               |   |   |      |   |
| Purchase      price:                               |   |   |      |   |
| Cash      acquired, net                            |   | $      | (155,030  |   |
| Acquisition      costs                             |   |   | 13,875    |   |
| Fair      market value of stock and warrant issued |   |   | 1,420,567 |   |
| Total                                              |   | $      | 1,279,412 |   |
|                                               |   |   |      |   |
| Goodwill                                           |   | $      | 1,395,513 |   |
| Customer      relations                            |   | $      | $190,884  |   |

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

|   | G. | On      August 15, 2007, the Company, Swiftnet, and the majority shareholder of      Auracall Limited ("Majority Shareholder") entered into a definitive Share      Purchase Agreement, pursuant to which Swiftnet purchased from the Majority      Shareholder the 67.5% equity interest in Auracall, thereby increasing      Swiftnet’s ownership interest in Auracall from 32.5% to 100%. The purchase      price for the shares was £810,918 (approximately $1,616,158), payable      as follows: £500,000 (approximately $996,500) was paid in cash upon      signing of the Share Purchase Agreement, and the remaining £304,000, plus      interest of £6,918 (approximately $619,658), was payable in monthly      installments which commenced in September 2007 and       continued through March 2008. In connection with the acquisition,      Auracall and Swiftnet entered into an Inter-Company Loan Agreement,      pursuant to which Auracall agreed to lend Swiftnet £850,000 (approximately      $1,694,050) for the sole purpose of and in connection with Swiftnet’s      acquisition of the Auracall shares.  The loan is unsecured,      bears interest at a rate of 5% per annum, and is to be repaid in five      years, but may be repaid earlier without charge or penalty.  |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Auracall      Limited                        |   |   |            |
|----------------------------------------------|--------|--------|-----------------|
| Current      assets, excluding cash acquired |   | $      | 875,510         |   |
| Fixed      assets                            |   |   | 30,051          |   |
| Total      assets acquired                   |   |   | 905,561         |   |
|                                         |   |   |            |   |
| Current      liabilities                     |   |   | 1,018,229  |   |
|                                         |   |   |            |   |
| Net      liabilities assumed                 |   |   | (112,668        | )  |
|                                         |   |   |            |   |
| Acquired      net assets (67.5%)             |   |   | (76,051         | )  |
|                                         |   |   |            |   |
| Purchase      price:                         |   |   |            |   |
| Cash      acquired, net                      |   |   | 233,541         |   |
| Deferred      liabilities                    |   |   | 604,158         |   |
| Acquisition      costs                       |   |   | 140,900         |   |
|                                         |   |   | 978,599         |   |
|                                         |   |   |            |   |
| Goodwill                                     |   | $      | 1,054,650       |   |
|                                         |   |   |            |   |

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

|   | A. | Principles of      Consolidation and Basis of Financial Statement      Presentation |
|--------|----|-------------------------------------------------------------------------------------|

|   | B. | Foreign      Currency      Translation |
|--------|----|----------------------------------------|

|   | C. | Restricted cash |
|--------|----|----------------------|

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

|   | D. | Accounts      Receivable |
|--------|----|--------------------------|

|   | E. | Fixed      Assets |
|--------|----|-------------------|

|                                |   | Useful      Life |               |
|-------------------------------------|--------|------------------|--------------------|
| Communication      equipment        |   |             | 10      years      |   |
| Equipment      held under lease     |   |             | 4  years |   |
| Office      furniture and equipment |   |             | 4-14      years    |   |
| Development      costs              |   |             | 3      years       |   |
| Computer      equipment             |   |             | 3-4      years     |   |
| Motor      vehicles                 |   |             | 4      years       |   |
| Building      and plant             |   |             | 4-14      years    |   |

----

|   | F. | Other      Intangible      Assets |
|--------|----|-----------------------------------|

|   | G. | Long-Lived      Assets |
|--------|----|------------------------|

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

|   | H. | Revenue      Recognition |
|--------|----|--------------------------|

|   | I. | Use of      Estimates |
|--------|----|-----------------------|

|   | J. | Earnings Per      Share |
|--------|----|-------------------------|

|   | K. | Income      Taxes |
|--------|----|-------------------|

|   | L. | Stock-Based      Compensation |
|--------|----|-------------------------------|

|   | M. | Goodwill and      Indefinite-Lived Purchased Intangible  Assets |
|--------|----|-----------------------------------------------------------------|

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

|   | N. | Reclassification |
|--------|----|------------------|

|   | O. | Recent      AccountingPronouncements |
|--------|----|--------------------------------------|

|                      |   |   |      |
|--------------------------------|--------|--------|-----------|
|                           |   |   |      |
|                           |   |   |      |
| Deferred      taxes            |   | $      | 430,876   |   |
| Prepaid      acquisition costs |   |   | 692,681   |   |
| Accrued      income            |   |   | 280,364   |   |
| Prepaid      expenses          |   |   | 1,453,910 |   |
| Tax      authorities           |   |   | 331,105   |   |
| Other      receivables         |   |   | 796,371   |   |
|                           |   |   |      |   |
|                           |   | $      | 3,985,307 |   |

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

|                                    |   |   |      |
|-----------------------------------------|--------|--------|-----------|
|                                    |   |        |      |
|                                    |   |   |      |
| Cost                                    |   |   |      |   |
| Communication      equipment            |   | $      | 5,214,315 |   |
| Equipment      held under capital lease |   |   | 103,392   |   |
| Office      furniture and equipment     |   |   | 2,121,971 |   |
| Development      costs                  |   |   | 781,614   |   |
| Computer      equipment                 |   |   | 686,955   |   |
| Motor      vehicles                     |   |   | 179,041   |   |
| Building      and plant                 |   |   | 685,730   |   |
|                                    |   |   | 9,773,018 |   |
|                                    |   |   |      |   |
| Accumulated      Depreciation           |   |   |      |   |
| Communication      equipment            |   |   | 1,372,233 |   |
| Equipment      held under capital lease |   |   | 24,267    |   |
| Office      furniture and equipment     |   |   | 1,690,335 |   |
| Development      costs                  |   |   | 344,800   |   |
| Computer      equipment                 |   |   | 414,712   |   |
| Motor      vehicles                     |   |   | 30,324    |   |
| Building      and Plant            |   |   | 148,589   |   |
|                                    |   |   | 4,025,260 |   |
|                                    |   |   |      |   |
|                                    |   | $      | 5,747,758 |   |

|                           |   |   |       |
|--------------------------------|--------|--------|------------|
|                           |   |   |       |
|                           |   |   |       |
| Cost:                          |   |   |       |   |
| Goodwill                       |   | $      | 16,872,088 |   |
| Customer      relations        |   |   | 982,448    |   |
| Trade      name                |   |   | 73,478     |   |
| License                        |   |   | 330,365    |   |
|                           |   |   | 18,258,379 |   |
|                           |   |   |       |   |
| Accumulated      amortization: |   |   |       |   |
| Customer      relations        |   |   | 232,475    |   |
| Trade      name                |   |   | 17,145     |   |
| License                        |   |   | 59,887     |   |
|                           |   |   | 309,507    |   |
|                           |   |   |       |   |
| Other      assets, net         |   | $      | 17,948,872 |   |

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

|                         |   |   |
|------------------------------|--------|--------|
|                         |        |   |
|                         |   |   |
|                         |   |   |
| Corporate      taxes         |   | $      | 62,648 |   |
| Government      authorities  |   |   | 372,156 |   |
| Payroll      and other taxes |   |   | 94,232 |   |
| Accrued      expense (1)     |   |   | 4,495,861 |   |
| Others                       |   |   | 297,148 |   |
|                         |   |   |   |   |
|                         |   | $      | 5,322,045 |   |

|                                                                            | Annual      Interest                     |   |    |      |
|---------------------------------------------------------------------------------|------------------------------------------|--------|---------|-----------|
|                                                                            | rate                                     |   |    |      |
|                                                                            |                                     |   |    |      |
| Convertible      note (1)                                                       | Prime      + 1.5%                        |   | $  | 623,643   |   |
| Note      payable to others, due on demand, monthly interest payments      only | 5%      - 7%                             |   |    | 327,587   |   |
| Bank      loans                                                                 | 0%                                       |   |    | 50,120    |   |
| Loans      payable over 5 years                                                 | Prime      + 1.0%                        |   |    | 615,041   |   |
| Loan      (2)                                                                   | Israeli      Consumer Price Index + 4.0% |   |    | 491,756   |   |
|                                                                            |                                     |   |    | 2,108,147 |   |
|                                                                            |                                     |   |    |      |   |
| less      current portion                                                       |                                     |   |    | 1,094,339 |   |
|                                                                            |                                     |   |    |      |   |
| Long      term portion                                                          |                                     |   | $       | 1,013,808 |   |
|                                                                            |                                     |   |    |      |   |

| 1.   | On      September 27, 2005, a Securities Purchase Agreement (the "Securities      Purchase Agreement") was entered for a $2,000,000 financial transaction by      and among the Company, Xfone USA, Inc., eXpeTel Communications, Inc., Gulf      Coast Utilities, Inc. and Laurus Master Fund, Ltd. The investment, which      took the form of a Convertible Term Note secured by the Company's United      States assets, has a 3 year term and bears interest at a rate equal to      prime plus 1.5% per annum. The Term Note is convertible, under certain      conditions, into shares of the Company's common stock at an initial      conversion price equal to $3.48 per share. In conjunction with this      financial transaction, we issued to Laurus Master Fund 157,500 warrants      which are exercisable at $3.80 per share for a period of five years. The      closing of the financial transaction was on September 28, 2005. The      Securities Purchase Agreement provides that for so long as twenty five      percent (25%) of the principal amount of the Term Note is outstanding, the      Company, without the prior written consent of Laurus Master Fund, shall      not, and shall not permit any of the Subsidiaries (as defined in the      Securities Purchase Agreement) to directly or indirectly declare or pay      any dividends, other than dividends paid to the Company or any of its      wholly-owned Subsidiaries.  |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.   | According      to the agreement between the Company, Xfone 018 Ltd. and our 26% minority      interest partner in Xfone 018 (the “Minority Partner”), the Minority      Partner provided in the fourth quarter of 2004, a shareholder loan of      approximately $400,000 to Xfone 018 (the “Minority Partner Loan”). The      Minority Partner Loan is payable after four years with annual interest of      4% and linkage to the Israeli consumer price index. As of December      31, 2007, the balance of the Minority Partner Loan is 1,891,293 NIS      ($491,756). |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

|   |   |   |      |
|--------|--------|--------|-----------|
| Year   |   |   |      |   |
| 2008   |   | $      | 1,094,339 |   |
| 2009   |   |   | 325,607   |   |
| 2010   |   |   | 134,307   |   |
| 2011   |   |   | 553,894   |   |
|   |   |   |      |   |
|   |   | $      | 2,108,147 |   |

|   | A. | Issuance      of Bonds |
|--------|----|------------------------|

|                                               |   |   |       |
|----------------------------------------------------|--------|--------|------------|
| Bonds      Series A  (1)            |   | $      | 24,588,726 |   |
| Stock      Purchase Warrants  (2)   |   |   | 973,306    |   |
| Total                                              |   | $      | 25,562,032 |   |
|                                               |   |   |       |   |

| (1)   | As      of December 31, 2007, the outstanding balance increased by $763,642 due to      interest accrued, linkage to the CPI and effect of the exchange rate of      the new Israeli Shekel. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)   | Presented      as part of shareholders' equity.                                                                                                                                              |

| 2008                                            |   | $      | 89,654  |   |
|-------------------------------------------------|--------|--------|---------|--------|
| 2009                                            |   |   | 31,893  |   |
|                                            |   |   |    |   |
| Total                                           |   | $      | 121,547 |   |
|                                            |   |   |    |   |
|                                            |   |   |    |   |
| Total      minimum lease payments               |   | $      | 136,274 |   |
| Less:      amount representing interest         |   |   | (14,727 | )      |
|                                            |   |   |    |   |
| Present      value of net minimum lease payment |   | $      | 121,547 |   |

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

|                                           |   |   |    |
|------------------------------------------------|--------|--------|---------|
|                                           |   |   |    |
| Deferred      Tax Liabilities:                 |   |   |    |
| Accelerated      tax write off of fixed assets |   | $      | 1,103   |   |
|                                           |   |   |    |   |
| Deferred      Tax Assets:                      |   |   |    |   |
| Carry      forward losses                      |   |   | 363,768 |   |
| Accrued      vacation and severance pay        |   |   | 67,108  |   |
|                                           |   |   |    |   |
|                                           |   |   |    |   |
| Net      deferred taxes liabilities            |   | $      | 429,773 |   |

|                                                                                                            |   |   |     |
|-----------------------------------------------------------------------------------------------------------------|--------|--------|----------|
| Income      tax computed at statutory rate                                                                      |   | $      | (628,809 | ) |
|                                                                                                            |   |   |     |   |
| Effect      of tax authority adjustments                                                                        |   |   | 35,642   |   |
| Current      income (losses) for which no deferred tax expense (benefit) has been      recorded                 |   |   | 39,860   |   |
| Difference      between income reported for tax purposes and income for financial      reporting purposes - net |   |   | 30,073   |   |
| Deferred      taxes on losses (utilization of losses)                                                           |   |   | (506,877 | ) |
| Taxes      on losses for which a valuation allowance was not provided                                           |   |   | 603,686  |   |
| Taxes      in respect of prior years                                                                            |   |   | 320      |   |
| Provision      for income taxes                                                                                 |   | $      | (426,105 | ) |

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

|         | A. | The      holders of common stock are entitled to one vote for each share held of      record on all matters submitted to a vote of the stockholders. The common      stock has no pre-emptive or conversion rights or other subscription      rights. There are no sinking fund provisions applicable to the common      stock.                                                                                                                                                                                                                                                                                                                        |
|--------------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    | B. | On      March 28, 2006, Xfone issued to Gersten Savage, LLP 755 restricted shares      of its common stock as consideration for legal services with a value of      £1,480 ($2,900).                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         | C. | On      March 28, 2006, Xfone issued to Oberon Securities, LLC 30,144 shares of      its common stock pursuant to that certain Letter Agreement dated November      15, 2005, between Xfone and Oberon Securities with a value of £54,302      ($106,378).                                                                                                                                                                                                                                                                                                                                                                                        |
|         | D. | On      March 31, 2006, and in conjunction with a Letter Agreement dated October      10, 2005 with MCG Capital Corporation, a major creditor of I-55 Internet      Services, Xfone issued to MCG Capital 667,998 shares of its common stock,      valued at fair value of $2,010,006, in return for retiring its loan      with I-55 Internet Services.                                                                                                                                                                                                                                                                                          |
|         | E. | On      April 6, 2006, Xfone sold 80,000 restricted shares of its common stock,      20,000 warrants exercisable at $3.00 per share, and 20,000 warrants      exercisable at $3.25 per share to Mercantile Discount-Provident Funds. The      warrants are exercisable for a period of 5 years. The total value of the      shares and warrants is £110,072 ($215,630).                                                                                                                                                                                                                                                                           |
|         | F. | On      April 6, 2006, Xfone sold 90,000 restricted shares of its common stock,      22,500 warrants exercisable at $3.00 per share, and 22,500 warrants      exercisable at $3.25 per share to Hadar Insurance Company Ltd. The      warrants are exercisable for a period of 5 years. The total value of the      shares and warrants is £123,831 ($242,584).                                                                                                                                                                                                                                                                                   |
|         | G. | On      April 6, 2006, Xfone sold 110,000 restricted shares of its common stock,      27,500 warrants exercisable at $3.00 per share, and 27,500 warrants      exercisable at $3.25 per share to the Israeli Phoenix Assurance Company      Ltd. The warrants are exercisable for a period of 5 years. The total value      of the shares and warrants is £151,348 ($296,492).                                                                                                                                                                                                                                                                    |
|         | H. | On      April 6, 2006, Xfone sold 44,000 restricted shares of its common stock,      11,000 warrants exercisable at $3.00 per share, and 11,000 warrants      exercisable at $3.25 per share to Gaon Gemel Ltd. The warrants are      exercisable for a period of 5 years. The total value of the shares and      warrants is £60,539 ($118,597).                                                                                                                                                                                                                                                                                                 |
|         | I. | During      May 2006, and in conjunction with a January 10, 2006 Asset Purchase      Agreement by and among Xfone USA, Inc. and Canufly.net, Inc., Xfone issued      to the shareholders of Canufly.net 33,768 restricted shares of its common      stock and 24,053 warrants, exercisable at $2.98 per share for a period of      five years. The total value of the shares and warrants is £60,752      ($112,330).                                                                                                                                                                                                                        |
|         | J. | On      May 10, 2006, Xfone issued in exchange for services 25,000 warrants      exercisable at $4.00 per share, 25,000 warrants exercisable at $4.50 per      share, 25,000 warrants exercisable at $5.00 per share, and 25,000 warrants      exercisable at $5.50 per share to Elite Financial Communications Group,      LLC. The term of the warrants shall expire at the later of: (i) 36 months      from the day of grant; (ii) 6 months after the underlying shares are      effective.                                                                                                                                                        |
|         | K. | During      May 2006, and in conjunction with the merger that consummated on March 31,      2006, Xfone issued to the shareholders of I-55 Internet Services, Inc.      789,863 restricted shares of its common stock valued at $2,380,178 and      603,939 warrants valued at $1,284,722, based on the Black Scholes      option-pricing model. The warrants are convertible on a one to one basis      into restricted shares of Xfone's common stock at an exercise price of      $3.31 per share, and have a term of five years.                                                                                                              |
|         | L. | During      May 2006, and in conjunction with the merger that consummated on March 31,      2006, Xfone issued to the sole shareholder of I-55 Telecommunications,      LLC. 223,702 restricted shares of its common stock valued at $671,687 and      79,029 warrants valued at $166,667, based on the Black Scholes      option-pricing model. The warrants are convertible on a one to one basis      into restricted shares of Xfone's common stock at an exercise price of      $3.38 per share, and have a term of five years.                                                                                                                   |
|         | M. | During      May 2006, and in conjunction with Agreements to Purchase Promissory Notes      dated October 31, 2005 / February 3, 2006 with certain creditors of I-55      Telecommunications, LLC, Xfone issued to the creditors of I-55      Telecommunications 163,933 restricted shares of its common stock and      81,968 warrants at a total value of $492,220, in return for retiring their      individual loans with I-55 Telecommunications. The warrants are      convertible on a one to one basis into restricted shares of Xfone's common      stock at an exercise price of $3.38 per share, and have a term of five      years.    |
|         | N. | On      May 30, 2006, Xfone issued 2,736 restricted shares of its common stock to      Elite Financial Communications Group, LLC in exchange for services. The      value of the shares is £4,955($9,707).                                                                                                                                                                                                                                                                                                                                                                                                                                             |

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

|   | O. | On      June 28, 2006, Xfone cancelled 5,000 restricted shares of its common stock      which were issued in 2000 to Ofer Weisglass. The shares were issued to Mr.      Weisglass in return for services; however Mr. Weisglass failed to provide      the services to Xfone.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | P. | On      July 3 2006, Xfone issued to Preiskel & Co LLP 5,236 restricted shares      of its common stock as consideration for legal services. The value of the      shares is £7,500 ($1,469).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | Q. | On      July 5, 2006, and in conjunction with the acquisition that was completed      on July 3, 2006, Xfone issued to the shareholders of Equitalk.co.uk      Limited a total of 402,192 restricted shares of its common stock and a      total of 281,872 warrants exercisable at $3.025 per share for a period of      five years. The total value of the shares and warrants is £717,167      ($1,404,930).                                                                                                                                                                                                                                                                                                                                                           |
|   | R. | On      July 11, 2006, and in conjunction with a March 10, 2005 Employment      Agreement between Xfone USA, Inc. and Wade Spooner, its President and      Chief Executive Officer at that time, Xfone issued to Mr. Spooner an      “Acquisition Bonus” of 32,390 warrants. Xfone was advised by AMEX that the      approval of the shareholders of Xfone is required in order to allow the      issuance and listing of the shares underlying said warrants. The required      approval was obtained on December 28, 2006. The warrants are convertible      on a one to one basis into restricted shares of Xfone's common stock at an      exercise price of $3.285, and have a term of five years. The value of the      warrants is £11,010 ($21,569).  |
|   | S. | On      July 11, 2006, and in conjunction with a March 10, 2005 Employment      Agreement between Xfone USA, Inc. and Ted Parsons, its Vice President and      Chief Marketing Officer, Xfone issued to Mr. Parsons an “Acquisition      Bonus” of 16,195 warrants. Xfone was advised by AMEX that the approval of      the shareholders of Xfone is required in order to allow the issuance and      listing of the shares underlying said warrants. The required approval was      obtained on December 28, 2006. The warrants are convertible on a one to      one basis into restricted shares of Xfone's common stock at an exercise      price of $3.285, and have a term of five years. The value of the warrants      is £5,506 ($10,785).            |
|   | T. | On      July 11, 2006, and in conjunction with a Letter Agreement dated June 15,      2006 between Xfone and Oberon Securities, LLC, Xfone issued to Oberon      Securities 243,100 warrants at an exercise price of $2.86 and 37,200      warrants at an exercise price of $3.34. The warrants are convertible on a      one to one basis into restricted shares of Xfone's common stock, and have      a term of five years. The value of the warrants is £180,140      ($352,895).                                                                                                                                                                                                                                                                                     |
|   | U. | On      July 11, 2006, and in conjunction with a June 19, 2006 Securities Purchase      Agreement Xfone issued to several investors an aggregate of 172,415      warrants. The warrants are convertible on a one to one basis into      restricted shares of Xfone's common stock, at an exercise price of $3.40,      and have a term of five years. The value of the warrants is £91,186      ($178,633).                                                                                                                                                                                                                                                                                                                                                               |
|   | V. | On      September 5, 2006, and in conjunction with a June 19, 2006 Securities      Purchase Agreement Xfone issued to several investors an aggregate of      344,825 restricted shares of common stock. The value of the shares is      £531,163 ($1,040,549).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | W. | On      September 19, 2006, and in conjunction with a Letter Agreement dated June      15, 2006 between Xfone and Oberon Securities, LLC, Xfone issued to Oberon      Securities 90,000 restricted shares of common stock. The value of the      shares is £119,512 ($234,124).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | X. | On      September 19, 2006, and pursuant to the Service Agreement dated December      6, 2005, that was terminated on August 28, 2006, Xfone cancelled 64,360 of      the 100,000 warrants which were issued to Elite Financial Communications      Group, LLC on May 10, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | Y. | On      November 1, 2006, Xfone issued 6,994 restricted shares of its common stock      to Elite Financial Communications Group, LLC in exchange for services. The      value of the shares is £9,044 ($17,717).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | Z. | On      November 20, 2006, Xfone issued in exchange for services 36,000 warrants      exercisable at $3.50 per share, 36,000 warrants exercisable at $4.00 per      share, and 36,000 warrants exercisable at $4.50 per share to Institutional      Marketing Services, Inc. The warrants have a term of five years. In the      event Xfone elects early termination of its agreement with Institutional      Marketing Services, then any warrants that have not yet reached their      vesting date will be cancelled. The value of the warrants is      £27,341($53,561).                                                                                                                                                                                             |

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

|   | AA.    | On      November 27, 2006, Xfone issued in exchange for services 117,676 warrants      exercisable at $3.50 per share to Crestview Capital Master, LLC. The      warrants have a term of five years and shall vest as follows: 29,419      warrants immediately, 29,419 warrants on February 10, 2007, 29,419      warrants on May 10, 2007, and 29,419 warrants on August 10, 2007. The      value of the warrants is £89,662 ($175,648).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | BB.    | On      December 26, 2006, and in conjunction with a December 25, 2006 oral stock      purchase agreement, Xfone repurchased from Abraham Keinan, its Chairman of      the Board, 100,000 restricted shares of its common stock at a price of      $2.70 per share (market price at that day was $2.80 per share). The      100,000 shares were returned to Xfone for cancellation. The Agreement was      approved by all non-interested members of the Board of Directors,      following a review and discussion by Xfone's Audit    Committee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | CC.    | On      January 16, 2007, and in conjunction with a December 24, 2006 Securities      Purchase Agreement the Company issued an aggregate of 172,414 warrants to      Halman-Aldubi Provident Funds Ltd. and Halman-Aldubi Pension Funds Ltd.      The warrants are exercisable on a one to one basis into restricted shares      of our common stock, at an exercise price of $3.40, and have a term of      five years. On      February 1, 2007, and in conjunction with a December 24, 2006 Securities      Purchase Agreement the Company issued an aggregate of 344,828 restricted      shares of our common stock, at a purchase price of $2.90 per share, to      Halman-Aldubi Provident Funds Ltd. and Halman-Aldubi Pension Funds      Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | DD.    | On      March 20, 2007, following the closing of the acquisition of the assets of      Canufly.net in 2006, and due to the satisfaction of certain earn out      provisions in the Asset Purchase Agreement, the Company issued to the      shareholders of Canufly.net additional 20,026 restricted shares of common      stock and 14,364 warrants exercisable at $2.98 per share for a period of      five years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | EE.    | On      October 23, 2007, the Company entered into Subscription Agreements with 15      investors affiliated with Gagnon Securities, Inc. which agreed to      purchase an aggregate of 1,000,000 shares of the Company's common stock at      a price of $3.00 per share, for a total subscription amount of      $3,000,000. The 1,000,000 shares were issued on November 6,      2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | FF.    | On      November 4, 2007, the Company entered into Subscription Agreements with:      (i) XFN - RLSI Investments, LLC, an entity affiliated with Richard L.      Scott Investments, LLC, a U.S. institutional investor, which agreed to      purchase 250,000 shares of the Company's common stock at a price of      $3.00 per share, for a total subscription amount of $750,000; and (ii)      certain Israeli institutional investors, which agreed to purchase an      aggregate of 700,000 shares of the Company's common stock, at a price      of $3.00 per share, for a total subscription amount of $2,100,000 . The      950,000 shares were issued on November 13, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | GG.    | In      conjunction with the consummation of the merger and in exchange for all of      the capital stock of I-55 Telecommunications, LLC, the Company issued      a total of 223,702 shares of common stock valued at $671,687 and 79,029      warrants exercisable for a period of five years into shares of common      stock, with an exercise price of $3.38 (the “Xfone Stock and Warrant      Consideration”). A portion of the Xfone Stock and Warrant Consideration      issued at closing was placed in an escrow. The Company determined a breach      of the representations and warranties in the Merger Agreement resulting      from the failure of I-55 Telecommunications to disclose the liability due      and payable to the Louisiana Universal Service Fund (“LA USF”)      through the period of October 2005, at which time Xfone USA undertook the      management role of I-55 Telecommunications. Pursuant to Section 1(g) of      the Escrow Agreement dated as of March 31, 2006 by and among Xfone      USA, the Escrow Agent, and the President and Sole Member of I-55      Telecommunications, and in accordance with Article 6.02 of the Merger      Agreement, Xfone USA notified the other parties that it believed that it      had suffered a loss of $30,626 pursuant to the provisions of Article 6.02      of the Merger Agreement dated as of August 26, 2005. Having not received      any response from the President and Sole Member of I-55      Telecommunications, nor from his counsel, on October 15, 2007, and after      the allotted response time allowed, Xfone USA instructed the Escrow Agent      (Trustmark National Bank) to deliver from the Escrow Fund of the President      and Sole Member of I-55 Telecommunications, to the Company, 7,043 shares      of Common Stock and 4,838 Xfone Stock Warrants. The 7,043 shares of Common      Stock and 4,838 Xfone Stock Warrants were returned to the Company for      cancellation on October 31, 2007.  |
|   | HH.    | On      February 26, 2008, the Company completed the issuance of 800,000 Units (as      defined below) to XFN-RLSI Investments, LLC, an entity affiliated with      Richard L. Scott Investments, LLC, a U.S. institutional investor, and      500,000 Units to certain investors affiliated with or who are customers of      Gagnon Securities LLC, pursuant to Subscription Agreements entered into      with each of the investors on December 13, 2007.  Each “Unit”      consists of two shares of the Company’s Common Stock and one warrant to      purchase one share of Common Stock, exercisable for a period of five years      from the date of issuance at an exercise price of $3.10 per      share.  The Units were sold at a price of $6.20 per Unit, for an      aggregate purchase price of $8,060,000, which was held in escrow for the      benefit of the Company pending the receipt by the Company of approvals      from the American Stock Exchange and the Tel Aviv Stock Exchange for the      listing of the shares (including those underlying the warrants), as well      as the closing of the acquisition of NTS (see also note 18).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

|                                                                  |   | Number      of warrants |      |   | Weighted      average exercise price |   |
|-----------------------------------------------------------------------|--------|-------------------------|-----------|--------|--------------------------------------|--------|
| Warrants outstanding      at the beginning of the year           |   |                    | 4,622,219 |   |                                 | $      | 3.91 |   |
| Granted                                                               |   |                    | 1,486,778 |   |                                 | $      | 3.13 |   |
| Forfeited                                                             |   |                    | (4,838    | )      |                                 | $      | 3.38 |   |
| Warrants outstanding      and exercisable at the end of the year |   |                    | 6,104,159 |   |                                 | $      | 3.72 |   |

|         | A.     | In      November 2004, Xfone's board of directors approved the adoption of the      principal items forming Xfone's 2004 stock option plan (The “2004 Plan”)      for the benefit of employees, officers, directors, consultants and      subcontractors of the Company including its subsidiaries. The 2004      Plan was approved by a special meeting of shareholders on March 13, 2006.      The purpose of the 2004 Plan is to enable the Company to attract and      retain the best available personnel for positions of substantial      responsibility, to provide an incentive to such persons presently engaged      with the Company and to promote the success of the Company business. The      2004 Plan will provides for the grant of options an aggregate of 5,500,000      shares of Xfone's common stock. The 2004 Plan is administered by the      board that determines the persons to whom options are granted, the number      of options that are granted, the number of shares to be covered by each      option, the options may be exercised and whether the options is an      incentive or non-statutory option. |
|--------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|         | B.     | At      November 24, 2004 3,200,000 options were granted under the 2004 Plan      according to the following terms: Option exercise price - $3.50, vesting      date - 12 month from the date of grant, expiration date - 5 years from the      vesting date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|         | C.     | On      February 6, 2005, Xfone's board of directors approved a grant to employees      of 730,000 options under and subject to the 2004 Plan according to the      following terms: Option exercise price of $3.50; Vesting Date  - the      vesting of the options will be over a period of 4 years as follows: 25% of      the options are vested after a year from the Date of Grant. Thereafter,      1/16 of the options are vested every 3 months for the following 3 years;      Expiration Date      -  5.5 years from the Grant Date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|         | D.     | On      November 13, 2005, Xfone's Board of Directors ratified the grant      of 600,000 options to Wade Spooner and 300,000 options to Ted      Parsons on March 10, 2005, under the 2004 Plan, pursuant to the terms      described in their March 10, 2005 employment agreements. The stock options      provided for a five (5) year term from the vesting date, a strike price      that is 10% above the closing price of the Company's common stock on the      date of issue of the Options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|    | E.     | On      June 8, 2005, Xfone's board of directors approved a grant to Xfone's Chief      Financial Officer, of 300,000 options under and subject to the 2004 Plan      of Xfone according to the following terms: Option exercise price of $3.50;      Vesting Date  -  the      vesting of the options will be over a period of 4 years as follows: 25% of      the options are vested after a year from the Date of Grant. Thereafter,      1/16 of the options are vested every 3 months for the following 3 years;      Expiration Date  - 5.5 years      from the grant date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|    | F.     | On      July 11, 2006, and in conjunction with a July 3, 2006 Service Agreement      between Xfone, Swiftnet Limited and John Mark Burton, the Managing      Director of Xfone's UK based subsidiaries, Xfone's Board of Directors      approved the grant of 300,000 options, under and subject to its 2004 Plan,      to Mr. Burton. The options are convertible on a one to one basis into      restricted shares of Xfone's common stock, at an exercise price of $3.50,      and have a term of ten years. The vesting of the options will be over a      period of 4 years as follows: 75,000 options are vested on July 3, 2007.      Thereafter, 18,750 options are vested every 3 months for the following 3      years.                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|    | G.     | On      October 30, 2006, Xfone's Board of Directors approved a grant of 25,000      options to Itzhak Almog under and subject to Xfone's 2004 Plan. The      options were granted according to the following terms: Date of Grant -      October 30, 2006; Option exercise price - $3.50; Vesting Date - 12 months      from the Date of Grant; Expiration Date - 5 years from the Vesting      Date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

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| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

|   | H.     | On      June 5, 2007, the Company’s Board of Directors approved a grant of 20,000      options to Israel Singer, and a grant of 20,000 options to Morris Mansour.      The options were granted under and subject to the Company’s 2004 Stock      Option Plan with the following terms: Date of Grant - June 5, 2007;      Exercise Price - $3.50 per share; Vesting Date - 12 months from the Date      of Grant; Expiration Date - 5 years from the Vesting  Date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | I.     | On      June 5, 2007, the Company’s Board of Directors approved a grant of 200,000      options to Brian Acosta under the Company’s 2004 Plan. The options are      granted under the following terms: Date of Grant - June 5, 2007; Exercise      Price - $3.146 per share; Vesting Date - (a) 25,000 options on March 31,      2009; (b) 50,000 options on March 31, 2010; and (c) 125,000 options on      March 31, 2011; Expiration Date - 5 years from the Vesting Date;      Termination - in the event of termination of employment prior to the      completion of Mr. Acosta’s second year of employment with Xfone USA, then      175,000 of the aforementioned options shall automatically terminate; in      the event of termination of employment during Mr. Acosta’s third year of      employment with Xfone USA, then 125,000 of the aforementioned options      shall automatically terminate. Mr. Acosta is the Chief Technical Officer      of our subsidiary, Xfone USA.                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | J.     | On      June 5, 2007, the Company’s Board of Directors approved a grant of 200,000      options to Hunter McAllister under the Company’s 2004 Plan. The options      are granted under the following terms: Date of Grant - June 5, 2007; Exercise      Price - $3.146 per      share; Vesting Date - (a) 25,000 options on      March 31, 2009; (b) 50,000 options on March 31, 2010; and (c) 125,000      options on March 31, 2011; Expiration Date - 5 years from the      Vesting Date; Termination - in the event of      termination of employment prior to the completion of Mr. McAllister’s      second year of employment with Xfone USA, then 175,000 of the      aforementioned options shall automatically terminate; in the event of      termination of employment during Mr. McAllister’s third year of employment      with Xfone USA, then 125,000 of the aforementioned options shall      automatically terminate. Mr. McAllister is the Vice President Business      Development of our subsidiary, Xfone USA.                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | K.     | On      October 28, 2007, our Board of Directors adopted and approved the      Company’s 2007 Stock Incentive Plan (the "2007 Plan") which is designated      for the benefit of employees, directors, and consultants of the Company      and its affiliates. The 2007 Plan was approved on December 17, 2007, at an      Annual Meeting of shareholders of the Company. The 2007 Plan authorizes      the issuance of awards for up to a total of 8,000,000 shares of our common      stock underlying such awards.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | L.     | On      August 26, 2007, the Company entered into a contractual obligation to      grant the General Manager of Xfone 018 the following number of options to      purchase shares of the Company’s common stock under the 2007 plan, (the      “Plan”):(1) Within      30 days of adoption of the Plan, the Company will grant options to      purchase 300,000 shares of Common Stock, at an exercise price of $3.50 per      share, of which (i) options to purchase 75,000 shares will vest on August      26, 2008,; and (ii) options to purchase 18,750 shares will be vest at the      end of every 3 month period thereafter.(2) At      the end of each calendar year between 2008 and 2011, and upon the      achievement by Xfone 018 100% of its Targets for each such year, the      General Manager of Xfone 018 will be granted options to purchase 25,000      shares of the Company’s Common Stock under the Plan, for an exercise price      of $3.50 per share, which will be exercisable 30 days after the Company      publishes its annual financial statements for such      year. The      options will expire 120 days after termination of employment with Xfone      018. |

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| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

|                                                  |   | Number      of options |      |   | Weighted      average exercise price |   |
|-------------------------------------------------------|--------|------------------------|-----------|--------|--------------------------------------|--------|
| Options      outstanding at the beginning of the year |   |                   | 5,350,000 |   |                                 | $      | 3.69 |   |
| Granted      (a)                                      |   |                   | 740,000   |   |                                 | $      | 3.31 |   |
| Exercised                                             |   |                   | (6,300    | )      |                                 | $      | 3.50 |   |
| Forfeited                                             |   |                   | (368,700  | )      |                                 | $      | 3.50 |   |
| Options      outstanding at the end of the year       |   |                   | 5,715,000 |   |                                 | $      | 3.65 |   |
|                                                  |   |                   |      |   |                                 |   |   |   |
| Options      vested and exercisable                   |   |                   | 3,689,063 |   |                                 | $      | 3.50 |   |
|                                                  |   |                   |      |   |                                 |   |   |   |
| Weighted      average fair value of options granted   |   |                   |      |   |                                 | $      | 1.13 |   |

|                 | Options      vested and exercisable |
|----------------------|-------------------------------------|
| Range      price ($) | Number      of options              | Weighted      average remaining contractual life (years) | Weighted      average exercise price |
|                 |                                |   |   |
| 3.50                 | 3,689,063                           | 4.8 | $3.02 |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | Year      Ended December 31 , 2007 |        |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|-------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | Weighted      Average              |        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | Income                             |        |  Shares |   | Per      Share |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                               |        |    |   | Amounts |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                               |        |    |   |   |   |
| Net      Income                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | $                                  | (1,283,892) |   |   |   |   |   |   |
| Basic      EPS:                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                               |        |   |   |   |   |   |   |
| Income      available to common stockholders                                                                                                                                                                                                                                                                                                                                                                                                                    |   | $                                  | (1,283,892) |   | 11,777,645 |   | $ | (0.109) |   |
| Effect      of dilutive securities:                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                               |        |   |   |   |   |   |   |
| Options      and      warrants                                                                          (*) |   |                               | -           |   | - |   |   |   |   |
| Diluted      EPS:                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                               |        |   |   |   |   |   |   |
| Income      available to common stockholders                                                                                                                                                                                                                                                                                                                                                                                                                    |   | $                                  | (1,283,892) |   | 11,777,645 |   | $ | (0.109) |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   | Year      Ended December 31 , 2006 |    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|------------------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   | Weighted      Average              |    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   | Income                             |    |  Shares |   | Per      Share |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |                               |    |    |   | Amounts |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |                               |    |    |   |   |   |
| Net      Income                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   | $                                  | 660,696 |   |   |   |   |   |   |
| Basic      EPS:                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |                               |    |   |   |   |   |   |   |
| Income      available to common stockholders                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   | $                                  | 660,696 |   | 10,135,874 |   | $ | 0.065 |   |
| Effect      of dilutive securities:                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |                               |    |   |   |   |   |   |   |
| Options      and      warrants                                                                          (*) |   | -      |                               | -       |   |   | - |   |
| Diluted      EPS:                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |                               |    |   |   |   |   |   |   |
| Income      available to common stockholders                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   | $                                  | 660,696 |   | 10,135,874 |   | $ | 0.065 |   |

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| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

|                                         |   | Years      ended        |      |
|----------------------------------------------|--------|-------------------------|-----------|
|                                         |   | December       31, |      |
|                                         |   | 2007                    |      |   | 2006 |   |
|                                         |   |                    |      |   |   |   |
| Campbeltown      Business Ltd.:              |   |                    |      |   |   |   |
|                                         |   |                    |      |   |   |   |
| Fees                                         |   | $                       | 4,302     |   |   | $ | 163,381 |   |
| Accrued      Expenses                        |   |                    | -         |   |   |   | 13,615 |   |
|                                         |   |                    |      |   |   |   |   |   |
| Vision      Consultants Limited:             |   |                    |      |   |   |   |   |   |
|                                         |   |                    |      |   |   |   |   |   |
| Fees                                         |   |                    | -         |   |   |   | 163,381 |   |
| Accrued      expenses                        |   |                    | -         |   |   |   | - |   |
|                                         |   |                    |      |   |   |   |   |   |
| Abraham      Keinan                          |   |                    |      |   |   |   |   |   |
|                                         |   |                    |      |   |   |   |   |   |
| Fees                                         |   |                    | 254,350   |   |   |   | 100,710 |   |
| Accrued      expenses                        |   |                    | 20,050    |   |   |   | 11,568 |   |
|                                         |   |                    |      |   |   |   |   |   |
| Guy      Nissensson                          |   |                    |      |   |   |   |   |   |
|                                         |   |                    |      |   |   |   |   |   |
|  Fees                                   |   |                    | 242,490   |   |   |   | - |   |
| Accrued      expenses                        |   |                    | 20,050    |   |   |   | - |   |
|                                         |   |                    |      |   |   |   |   |   |
| Story      Telecom Limited:                  |   |                    |      |   |   |   |   |   |
|                                         |   |                    |      |   |   |   |   |   |
| Revenues      (*)                            |   |                    | -         |   |   |   | 2,883,942 |   |
| Commissions      (*)                         |   |                    | -         |   |   |   | 312,300 |   |
|                                         |   |                    |      |   |   |   |   |   |
| Auracall      Limited:                       |   |                    |      |   |   |   |   |   |
|                                         |   |                    |      |   |   |   |   |   |
| Related      revenues (*)                    |   |                    | 3,324,726 |   |   |   | 1,501,092 |   |
| Commissions      (*)                         |   |                    | 417,907   |   |   |   | 1,061,259 |   |
| Due      (to) from Auracall (net)**          |   |                    |      |   |   |   | (142,633 | )  |
| Short-term      loan from Auracall Limited** |   |                    |      |   |   |   | 47,016 |   |
|                                         |   |                    |      |   |   |   |   |   |
| Dionysos      Investments (1999) Limited:    |   |                    |      |   |   |   |   |   |
| Fees                                         |   |                    | 183,363   |   |   |   | 70,524 |   |
| Accrued      Expenses                        |   |                    | 146,542   |   |   |   | 5,877 |   |
|                                         |   |                    |      |   |   |   |   |   |
| Balance:                                     |   |                    |      |   |   |   |   |   |
| Guy      Nissenson                           |   |                    | -         |   |   |   | (22,611 | ) |
| Abraham      Keinan                          |   |                    | (7,205    | ) |   |   | (62,670 | ) |

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

| A. | The      Company leases its facilities in the UK, USA and Israel under operating      lease agreement, which will expire in 2009 through 2012. The minimum lease      payments under non-cancelable operating leases are as    follows: |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Year      ended December 31, |   |   |      |
|------------------------------|--------|--------|-----------|
|                         |   |   |      |   |
| 2008                         |   | $      | 365,649   |   |
| 2009                         |   |   | 280,805   |   |
| 2010                         |   |   | 193,257   |   |
| 2011                         |   |   | 178,935   |   |
| 2012                         |   |   | 118,612   |   |
|                         |   |   | 1,137,258 |   |

| B. | Pursuant      to a Company’s Board of Directors’ resolution dated December 25, 2006, on      March 28, 2007, the Company and Mr. Keinan entered into a consulting      agreement, to be effective as of January 1, 2007 (the “Keinan Consulting      Agreement”).The      Keinan Consulting Agreement provides that Mr. Keinan shall render the      Company advisory, consulting and other services in relation to the      business and operations of the Company (excluding its business and      operations in the United Kingdom).In      consideration of the performance of the Services pursuant to the Keinan      Consulting Agreement, the Company shall pay Mr. Keinan a monthly fee of      £10,000 ($21,044) (the “Fee”). Mr. Keinan shall invoice the Company at the      end of each calendar month and the Company shall make the monthly payment      immediately upon receiving suchinvoice". |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| C. | Pursuant      to a Company’s Board of Directors’ resolution dated December 25, 2006, on      March 28, 2007, the Company and Mr. Nissenson entered into a consulting      agreement, to be effective as of January 1, 2007 (the “Nissenson      Consulting Agreement”).The      Nissenson Consulting Agreement provides that Mr. Nissenson shall render      the Company advisory, consulting and other services in relation to the      business and operations of the Company (excluding its business and      operations in the United Kingdom).In      consideration of the performance of the Services pursuant to the Nissenson      Consulting Agreement, the Company shall pay Mr. Nissenson a monthly fee of      £10,000 ($21,044) (the “Fee”). Mr. Nissenson shall invoice the Company at      the end of each calendar month and the Company shall make the monthly      payment immediately upon receiving suchinvoice. |
|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

|   | · | Abraham      Keinan confirmed that all his businesses activities and initiatives in the      field of telecommunications are conducted through Swiftnet, and would      continue for at least 18 months after the conclusion of this      transaction.                                                                                                                                                                                                                                                                        |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | Campbeltown      Business declared that it is not involved in any business that competes      with Swiftnet and would not be involved in such business at least for 18      months after this transaction is concluded.                                                                                                                                                                                                                                                                                                       |
|   | · | Campbeltown      Business would invest $100,000 in Swiftnet, in exchange for 20% of the      total issued shares of Swiftnet;                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | · | Campbeltown      Business would also receive 5% of the Company's issued and outstanding      shares following the Company's acquisition with Swiftnet. In June 2000,      Campbeltown Business invested the $100,000 in Swiftnet. Xfone acquired      Swiftnet and Campbeltown received 720,336 shares of the Company's common      stock for its 20% interest in Swiftnet.                                                                                                                                                   |
|   | · | Swiftnet      and Abraham Keinan would guarantee that Campbeltown Business' 20% interest      in the outstanding shares of Swiftnet would be exchanged for at least 10%      of the Company's outstanding shares and that Campbeltown Business would      have in total at least 15% of the Company's total issued shares after the      Company's acquisition occurred.                                                                                                                                                      |
|   | · | Campbeltown      Business would have the right to nominate 33% of the members of the      Company's board of directors and Swiftnet's board of directors. When      Campbeltown Business ownership in the Company's common stock was less than      7%, Campbeltown Business would have the right to nominate only 20% of the      Company's board members but always at least one member. In the case that      Campbeltown Business ownership in the Company's common stock was less than      2%, this right would expire. |
|   | · | Campbeltown      Business would have the right to nominate a vice president in Swiftnet.      Mr. Guy Nissenson was nominated as of the time of the June 19, 2000      agreement. If for any reason Guy Nissenson will leave his position,      Campbeltown Business and Abraham Keinan will agree on another nominee. The      Vice President will be employed with suitable  conditions.                                                                                                                                    |
|   | · | Campbeltown      Business will have the right to participate under the same terms and      conditions in any investment or transaction that involve equity rights in      Swiftnet or us conducted by Abraham Keinan at the relative ownership      portion.                                                                                                                                                                                                                                                                  |
|   | · | Keinan      and Campbeltown Business have signed a right of first refusal agreement      for the sale of their shares.                                                                                                                                                                                                                                                                                                                                                                                                        |   |

| D. | Mr.      Haim Nissenson, father of Mr. Guy Nissenson, our President, Chief      Executive Officer, and Director, is the Managing Director of Dionysos      Investments. Dionysos Investments is owned and controlled by certain      members of the Nissenson family, other than Mr. Guy Nissenson. On February      8, 2007, pursuant to the recommendations of the Audit Committee of the      Company and the resolutions of its Board of Directors dated December 25,      2006, and February 4, 2007, the Company and Dionysos Investments entered      into a First Amendment to the of the Dionysos Investments Consulting      Agreement from earlier date. As a result, Dionysos Investments will be      compensated by the Company for the Services provided to the Company in the      amount of GBP 8,000 ($16,876) per month, beginning on January 1, 2007 and      will entitled for a success fee for any future investments in the Company      made by Israeli investors during fiscal year 2007, provided such      investments were a direct or indirect result of the Services provided to      the Company. The success fee will be equal to 0.5% (half percent) of the      gross proceeds of such investments. On January 28, 2008, in accordance      with the recommendation of the Audit Committee and in recognition of and      following the successful efforts of Dionysos in raising capital for the      Company in Israel during the Company’s 2007 fiscal year, the Board of      Directors of the Company approved and confirmed by resolution the      engagement of Dionysos to serve as the Company’s consultant for the fiscal      year ended December 31, 2008 at the same level of compensation which was      agreed to and paid for the fiscal year ended December 31,      2007. |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| E. | The      Company has commission agreements with various agents that are entitled to      commission of approximately 5%-12% of the total sale amount less any bad      debts. |
|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | A. | Certain      Telecommunication operators act as collection channels for the Company. In      2007 the Company had two major collection channels, one in the U.K. and      one in Israel. Collections through these channels accounted to      approximately 22% and 6% of the Company's total revenues in 2007,      respectively, and 18% and 5% of the Company's total revenues in      2006, respectively. With respect to collection of monies for the      Company, these Telecommunication operators are not deemed to be customers      of the Company.   |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

|   | B. | Approximately,      25%, 20% and 7% of the Company's purchases are from three suppliers for      the year ended December 31, 2007, and 31%, 28%, 5% are from three      suppliers for the year ended December 31,2006. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                           |   | Years      Ended  |                    |
|------------------------------------------------|--------|-------------------|-------------------------|
|                                           |   | December      31, |                    |
|                                           |   | 2007              |                    |   | 2006 |   |
| Revenues:                                      |   |              |                    |   |   |   |
| United      Kingdom                            |   | $                 | 24,263,610              |   |   | $ | 16,951,119 |   |
| United      States                             |   |              | 12,290,891              |   |   |   | 15,474,206 |   |
| Israel                                         |   |              | 8,169,433               |   |   |   | 5,488,712 |   |
|                                           |   |              |                    |   |   |   |   |   |
| Total      revenues                            |   |              | 44,723,934              |   |   |   | 37,914,037 |   |
|                                           |   |              |                    |   |   |   |   |   |
| Cost      of revenues                          |   |              |                    |   |   |   |   |   |
| United      Kingdom                            |   |              | 10,696,915              |   |   |   | 11,834,466 |   |
| United      States                             |   |              | 5,904,797               |   |   |   | 7,684,708 |   |
| Israel                                         |   |              | 3,024,610               |   |   |   | 2,449,824 |   |
|                                           |   |              |                    |   |   |   |   |   |
| Total      cost of revenues                    |   |              | 19,626,322              |   |   |   | 21,968,998 |   |
|                                           |   |              |                    |   |   |   |   |   |
| Direct      Gross Profit:                      |   |              |                    |   |   |   |   |   |
| United      Kingdom                            |   |              | 13,566,695              |   |   |   | 5,116,653 |   |
| United      States                             |   |              | 6,386,094               |   |   |   | 7,789,497 |   |
| Israel                                         |   |              | 5,144,823               |   |   |   | 3,038,889 |   |
|                                           |   |              |                    |   |   |   |   |   |
|                                           |   |              | 25,097,612              |   |   |   | 15,945,039 |   |
|                                           |   |              |                    |   |   |   |   |   |
| Operating      expenses:                       |   |              |                    |   |   |   |   |   |
| United      Kingdom                            |   |              | 12,556,993              |   |   |   | 3,582,173 |   |
| United      States                             |   |              | *       6,466,501  |   |   |   | *       6,658,270 |   |
| Israel                                         |   |              | 2,963,461               |   |   |   | 3,209,436 |   |
|                                           |   |              |                    |   |   |   |   |   |
|                                           |   |              | *       21,986,955 |   |   |   | *       13,449,879 |   |
|                                           |   |              |                    |   |   |   |   |   |
| Operating      Profit:                         |   |              |                    |   |   |   |   |   |
| United      Kingdom                            |   |              | 1,009,702               |   |   |   | 1,534,480 |   |
| United      States                             |   |              | *       (80,407    | ) |   |   | *       1,131,227 |   |
| Israel                                         |   |              | 2,181,362               |   |   |   | (170,547 | ) |
|                                           |   |              |                    |   |   |   |   |   |
|                                           |   |              | *       3,110,657  |   |   |   | *       2,495,160 |   |
|                                           |   |              |                    |   |   |   |   |   |
| Non-      recurring loss                       |   |              | 2,856,803               |   |   |   | - |   |
|                                           |   |              |                    |   |   |   |   |   |
| Expenses      related to Headquarter in the US |   |              | *       1,283,296  |   |   |   | *       1,460,138 |   |
|                                           |   |              |                    |   |   |   |   |   |
| Operating      Income (Loss)                   |   | $                 | (1,029,442              | ) |   | $ | 1,035,022 |   |

|   | (*)      Amounts were reclassified in order to present segment information without      the effect of expenses related to operating a Headquarters in the      US. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

| o   | On      the closing date, NIS 15,500,000 (approximately $4,404,660) (the “First      Installment”); |
|---------------|-----------------------------------------------------------------------------------------------------------------|

| o   | By      November 20, 2008, NIS 15,500,000 (approximately $4,404,660), subject to      adjustment resulting from linkage to the Consumer Price      Index  (the “Second Installment”);and |
|---------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| o   | By      November 1, 2009, NIS 13,000,000 (approximately $3,694,231), subject to      adjustment resulting from linkage to the Consumer Price Index (the      “Third Installment”). |
|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Xfone,      Inc. and Subsidiaries                                     |   |
|-----------------------------------------------------------------------|--------|
|                                                                  |   |    |   |   |   |   |   |
| NOTES      TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER      31, 2007 |   |

----

|  Exhibit      Number |  Description                                                                                                                                                                                                                                                                                                                                              |
|---------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.                        | Agreement      and plan of reorganization dated September 20, 2000, between the Company      and Swiftnet Limited. (1)                                                                                                                                                                                                                                         |
| 3.1                       | Articles      of Incorporation of the Company.(1)                                                                                                                                                                                                                                                                                                              |
| 3.2a                      | Bylaws      of the Company.(1)                                                                                                                                                                                                                                                                                                                                 |
| 3.2b                      | Amended      Bylaws of the Company.(4)                                                                                                                                                                                                                                                                                                                         |
| 3.3                       | Memorandum      of Association of Swiftnet Limited.(1)                                                                                                                                                                                                                                                                                                         |
| 3.4                       | Articles      of Association of Swiftnet Limited.(1)                                                                                                                                                                                                                                                                                                           |
| 3.6                       | Bylaws      of Xfone USA, Inc.(7)                                                                                                                                                                                                                                                                                                                              |
| 3.8.                      | Amended      and Restated Bylaws of the Company dated March 12,    2006.(22)                                                                                                                                                                                                                                                                                   |
| 3.9                       | Reamended      and Restated Bylaws of the Company dated February 5,    2007.(32)                                                                                                                                                                                                                                                                               |
| 4.                        | Specimen      Stock Certificate.(1)                                                                                                                                                                                                                                                                                                                            |
| 5.                        | Opinion      of Gersten Savage LLP.(30) (21.1)                                                                                                                                                                                                                                                                                                                 |
| 10.1                      | Agreement      dated May 11, 2000, between Swiftnet Limited and Guy      Nissenson.(1)                                                                                                                                                                                                                                                                         |
| 10.2                      | Employment      Agreement dated January 1, 2000 with Bosmat Houston.(1)                                                                                                                                                                                                                                                                                        |
| 10.3                      | Loan      Agreement dated August 5, 2000, with Swiftnet Limited, Guy Nissenson, and      Nissim Levy.(1)                                                                                                                                                                                                                                                       |
| 10.4                      | Promissory      Note dated September 29, 2000, between the Company and Abraham      Keinan.(1)                                                                                                                                                                                                                                                                 |
| 10.5                      | Stock      Purchase Agreement dated June 19, 2000, between Swiftnet Limited, Abraham      Keinan, and Campbeltown Business Ltd. (1)                                                                                                                                                                                                                            |
| 10.6                      | Consulting      Agreement dated May 11, 2000 between Swiftnet Limited and Campbeltown      Business Ltd.(1)                                                                                                                                                                                                                                                    |
| 10.7                      | Agreement      dated July 30, 2001, with Campbeltown Business Ltd.(1)                                                                                                                                                                                                                                                                                          |
| 10.8                      | Contract      dated June 20, 1998, with WorldCom InternationalLtd.(1)                                                                                                                                                                                                                                                                                          |
| 10.9                      | Contract      dated April 11, 2000, with VoiceNet Inc.(1)                                                                                                                                                                                                                                                                                                      |
| 10.10                     | Contract      dated April 25, 2000, with InTouchUK.com Ltd.(1)                                                                                                                                                                                                                                                                                                 |
| 10.11                     | Letter      of Understanding dated July 30, 2001, from Campbeltown Business Ltd. to      the Company.(2)                                                                                                                                                                                                                                                       |
| 10.12                     | Agreement      dated April 6, 2000, between Adar International, Inc./Mr. Sidney J. Golub      and Swiftnet Limited. (2)                                                                                                                                                                                                                                        |
| 10.13                     | Lease      Agreement dated December 4, 1991, between Elmtree Investments Ltd. and      Swiftnet Limited.(2)                                                                                                                                                                                                                                                    |
| 10.14                     | Lease      Agreement dated October 8, 2001, between Postwick Property Holdings      Limited and Swiftnet Limited. (2)                                                                                                                                                                                                                                          |
| 10.15                     | Agreement      dated September 30, 2002, between the Company, Swiftnet Limited., and Nir      Davison.(5)                                                                                                                                                                                                                                                      |
| 10.16                     | As      to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy, Warrant      A, Warrant B and Registration Rights Agreement of Selling Shareholders      Platinum Partners Value Arbitrage Fund LP, Countrywide Partners LLC and      WEC Partners LLC. (6)                                                                                         |
| 10.17                     | As      to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy, Warrant      A, Warrant B and Registration Rights Agreement of Selling Shareholders      Simon Langbart, Robert Langbart, Arik Ecker, Zwi Ecker, Michael Derman,      Errol Derman, Yuval Haim Sobel, Zvi Sobel, Tenram Investment Ltd.,      Michael Zinn, Michael Weiss. (6) |
| 10.18                     | As      to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy, Warrant      A, Warrant B and Registration Rights Agreement of Selling Shareholders      Southridge Partners LP and Southshore Capital Fund Ltd.  (6)                                                                                                                               |
| 10.19                     | As      to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy, Warrant      A, Warrant B and Registration Rights Agreement of Selling Shareholders      Crestview Capital Master LLC. (6)                                                                                                                                                          |
| 10.20                     | As      to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy, Warrant      A, Warrant B and Registration Rights Agreement of Selling Shareholders      Adam Breslawsky, Oded Levy, Michael Epstein, Steven Frank, Joshua Lobel,      Joshua Kazan and The Oberon Group LLC.(6)                                                                    |

----

| 10.21   | Newco      (Auracall Limited) Formation Agreement.(6)                                                                                                                                                                                                    |
|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.22   | Agreement      with ITXC Corporation.(6)                                                                                                                                                                                                                 |
| 10.23   | Agreement      with Teleglobe International.(6)                                                                                                                                                                                                          |
| 10.23.1 | Amendment      to Agreement with Teleglobe International.(6)                                                                                                                                                                                             |
| 10.24   | Agreement      with British Telecommunications.(6)                                                                                                                                                                                                       |
| 10.25   | Agreement      with Easyair Limited (OpenAir).(6)                                                                                                                                                                                                        |
| 10.26   | Agreement      with Worldnet.(6)                                                                                                                                                                                                                         |
| 10.27   | Agreement      with Portfolio PR.(6)                                                                                                                                                                                                                     |
| 10.28   | Agreement      with Stern and Company.(6)                                                                                                                                                                                                                |
| 10.29   | Letter      to the Company dated December 31, 2003, from Abraham      Keinan.(6)                                                                                                                                                                         |
| 10.30   | Agreement      between Swiftnet Limited and Dan Kirschner.(8)                                                                                                                                                                                            |
| 10.31   | Agreement      and Plan of Merger.(7)                                                                                                                                                                                                                    |
| 10.32   | Escrow      Agreement.(7)                                                                                                                                                                                                                                |
| 10.33   | Release      Agreement.(7)                                                                                                                                                                                                                               |
| 10.34   | Employment      Agreement date March 10, 2005, between Xfone USA, Inc. and Wade      Spooner.(7)                                                                                                                                                         |
| 10.35   | Employment      Agreement date March 10, 2005, between Xfone USA, Inc. and Ted      Parsons.(7)                                                                                                                                                          |
| 10.36   | First      Amendment to Agreement and Plan of Merger (to acquire WS Telecom,      Inc.).(11)                                                                                                                                                             |
| 10.37   | Finders      Agreement with The Oberon Group, LLC.(11)                                                                                                                                                                                                   |
| 10.38   | Agreement      with The Oberon Group, LLC.(11)                                                                                                                                                                                                           |
| 10.39   | Management      Agreement between WS Telecom, Inc. and Xfone USA,  Inc.(8)                                                                                                                                                                               |
| 10.40   | Engagement      Letter to Tommy R. Ferguson, Confidentiality Agreement, and Executive      Inventions Agreement dated August 19, 2004. (11)                                                                                                              |
| 10.41   | Voting      Agreement dated September 28, 2004.(11)                                                                                                                                                                                                      |
| 10.42   | Novation      Agreement executed September 27, 2004.(11)                                                                                                                                                                                                 |
| 10.43   | Novation      Agreement executed September 28, 2004.(11)                                                                                                                                                                                                 |
| 10.44   | Investment      Agreement dated August 26, 2004, with IlanShoshani.(12)                                                                                                                                                                                  |
| 10.44.1 | Addendum      and Clarification to the Investment Agreement with Ilan Shoshani dated      September 13, 2004. (12)                                                                                                                                       |
| 10.45   | Agreement      dated November 16, 2004, with Elite Financial Communications      Group.(13)                                                                                                                                                              |
| 10.46   | Financial      Services and Business Development Consulting Agreement dated November 18,      2004, with Dionysos Investments (1999) Ltd. (13)                                                                                                           |
| 10.47   | Agreement      and Plan of Merger to acquire I-55 Internet Services, Inc. dated August      18, 2005.(14)                                                                                                                                                |
| 10.48   | Agreement      and Plan of Merger to acquire I-55 Telecommunications, LLC dated August      26, 2005.(15)                                                                                                                                                |
| 10.49   | Securities      Purchase Agreement, dated September 27, 2005, by and between the Company      and Laurus Master Fund, Ltd. (16)                                                                                                                          |
| 10.50   | Secured      Convertible Term Note, dated September 27, 2005, by the Company in favor      of Laurus Master Fund, Ltd.; Adjustment Provision Waiver Agreement, dated      September 27, 2005, by and between the Company and Laurus Fund, Ltd.      (16) |
| 10.51   | Common      Stock Purchase Warrant, dated September 27, 2005, by the Company in favor      of Laurus Master Fund, Ltd. (16)                                                                                                                              |
| 10.52   | Registration      Rights Agreement, dated September 27, 2005, by and between the Company and      Laurus Master Fund, Ltd. (16)                                                                                                                          |
| 10.53   | Master      Security Agreement, dated September 27, 2005, by and between the Company,      Xfone USA, Inc., eXpeTel Communications, Inc., Gulf Coast Utilities, Inc.,      and Laurus Master Fund, Ltd. (16)                                             |
| 10.54   | Stock      Pledge Agreement, dated September 27, 2005, by and between the Company,      Xfone USA, Inc., and Laurus Master Fund, Ltd.  (16)                                                                                                              |

----

| 10.55 | Subsidiary      Guarantee dated September 27, 2005, by Xfone USA, Inc., eXpeTel      Communications, Inc. and Gulf Coast Utilities, Inc. in favor of Laurus      Master Fund, Ltd. (16)                                                                                                                           |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.56 | Funds      Escrow Agreement, dated September 27, 2005, by and between the Company,      Laurus Master Fund, Ltd. and Loeb & Loeb LLP; Disbursement Letter,      dated September 27, 2005. (16)                                                                                                                |
| 10.57 | Incremental      Funding Side Letter, dated September 27, 2005, by and between the Company      and Laurus Master Fund, Ltd. (16)                                                                                                                                                                                 |
| 10.58 | Securities      Purchase Agreement dated September 28, 2005, by and between the Company      and Crestview Capital Mater, LLC, Burlingame Equity Investors, LP,      Burlingame Equity Investors II, LP, Burlingame Equity Investors      (Offshore), Ltd., and Mercantile Discount - Provident Funds.      (16)  |
| 10.59 | Registration      Rights Agreement, dated September 28, 2005, by and between the Company and      Crestview Capital Mater, LLC, Burlingame Equity Investors, LP, Burlingame      Equity Investors II, LP, Burlingame Equity Investors (Offshore), Ltd., and      Mercantile Discount - Provident Funds. (16)      |
| 10.60 | Common      Stock Purchase Warrant, dated September 28, 2005, by the Company in favor      of the Crestview Capital Mater, LLC, Burlingame Equity Investors, LP,      Burlingame Equity Investors II, LP, Burlingame Equity Investors      (Offshore), Ltd., and Mercantile Discount - Provident Funds.      (16) |
| 10.61 | Escrow      Agreement, dated September 28, 2005, by and between the Company, the      Purchasers and Feldman Weinstein LLP. (16)                                                                                                                                                                                  |
| 10.62 | Management      Agreement dated October 11, 2005.(17)                                                                                                                                                                                                                                                             |
| 10.63 | First      Amendment to Agreement and Plan of Merger (to acquire I-55 Internet      Services, Inc.), dated October 10, 2005. (17)                                                                                                                                                                                 |
| 10.64 | Letter      Agreement with MCG Capital Corporation dated October 10,      2005.(17)                                                                                                                                                                                                                               |
| 10.65 | Securities      Purchase Agreement, dated November 23, 2005, between the Company and      Mercantile Discount - Provident Funds, Hadar Insurance Company Ltd., The      Israeli Phoenix Assurance Company Ltd. and Gaon Gemel Ltd.      (18)                                                                      |
| 10.66 | Registration      Rights Agreement, dated November 23, 2005, between the Company and      Mercantile Discount - Provident Funds, Hadar Insurance Company Ltd., The      Israeli Phoenix Assurance Company Ltd. and Gaon Gemel Ltd.      (18)                                                                      |
| 10.67 | Common      Stock Purchase Warrant, dated November 23, 2005, by the Company in favor      of Mercantile Discount - Provident Funds, Hadar Insurance Company Ltd.,      The Israeli Phoenix Assurance Company Ltd. and Gaon Gemel Ltd.      (18)                                                                   |
| 10.68 | Escrow      Agreement, dated November 23, 2005, between the Company, the Escrow Agent,      and Mercantile Discount - Provident Funds, Hadar Insurance Company Ltd.,      The Israeli Phoenix Assurance Company Ltd. and Gaon Gemel Ltd.      (18)                                                                |
| 10.69 | Management      Agreement with I-55 Telecommunications, LLC dated October 12,      2005.(19)                                                                                                                                                                                                                      |
| 10.70 | Agreement      - General Terms and Conditions with EBI Comm, Inc., dated January 1,      2006.(21)                                                                                                                                                                                                                |
| 10.71 | Asset      Purchase Agreement with Canufly.net, Inc., dated January 10,      2006.(21)                                                                                                                                                                                                                            |
| 10.72 | Stock      Purchase Agreement dated May 10, 2006, by and among the Company, Story      Telecom, Inc., Story Telecom Limited, Story Telecom (Ireland) Limited, Nir      Davison, and Trecastle Holdings Limited. (23)                                                                                              |
| 10.73 | Agreement      dated May 25, 2006, by and among the Company and the shareholders of      Equitalk.co.uk Limited. (24)                                                                                                                                                                                             |
| 10.74 | Securities      Purchase Agreement, dated June 19, 2006, by and between the Company and      the Purchasers. (25)                                                                                                                                                                                                 |
| 10.75 | Registration      Rights Agreement, dated June 19, 2006, by and between the Company and the      Purchasers. (25)                                                                                                                                                                                                 |
| 10.76 | Common      Stock Purchase Warrant, dated June 19, 2006, by the Company in favor of      the Purchasers.(25)                                                                                                                                                                                                      |
| 10.77 | Escrow      Agreement, dated June 19, 2006, by and between the Company, the Escrow      Agent, and the Purchasers. (25)                                                                                                                                                                                           |
| 10.78 | Form      of Indemnification Agreement between the Company and its Directors and      Officers.(27)                                                                                                                                                                                                               |
| 10.79 | Agreement      to Purchase Promissory Note dated October 31, 2005, with Randall Wade      James Tricou.(27)                                                                                                                                                                                                       |
| 10.80 | Agreement      to Purchase Promissory Note dated October 31, 2005, with Rene Tricou -      Tricou Construction. (27)                                                                                                                                                                                              |
| 10.81 | Agreement      to Purchase Promissory Note dated October 31, 2005, with Rene Tricou - Bon      Aire Estates. (27)                                                                                                                                                                                                 |
| 10.82 | Agreement      to Purchase Promissory Note dated October 31, 2005, with Rene Tricou - Bon      Aire Utility. (27)                                                                                                                                                                                                 |
| 10.83 | Agreement      to Purchase Promissory Note dated February 3, 2006, with Danny      Acosta.(27)                                                                                                                                                                                                                    |
| 10.84 | Letter      Agreement dated November 15, 2005, with Oberon Securities,      LLC.(27)                                                                                                                                                                                                                              |
| 10.85 | Letter      Agreement dated June 15, 2006, with Oberon Securities,      LLC.(27)                                                                                                                                                                                                                                  |
| 10.86 | Second      Amendment to Agreement and Plan of Merger (to acquire WS Telecom, Inc.),      dated June 28, 2006. (27)                                                                                                                                                                                               |
| 10.87 | General      Contract for Services dated January 1, 2005, by and between the Company      and Swiftnet Limited. (27)                                                                                                                                                                                              |
| 10.88 | Service      Agreement dated December 6, 2005, by and between the Company and Elite      Financial Communications Group, LLC.(27)                                                                                                                                                                                 |

----

| 10.89    | Agreement      for Market Making in Securities dated July 31, 2006, by and between the      Company and Excellence Nessuah Stock Exchange Services Ltd.      (27)                                                                                              |
|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.90    | Shareholders      Loan Agreement, dated September 27, 2006, by and between Auracall Limited,      Swiftnet Limited, and Dan Kirschner. (28)                                                                                                                    |
| 10.91    | Service      Agreement, dated November 7, 2006, by and between the Company and      Institutional Marketing Services, Inc. (28)                                                                                                                                |
| 10.92    | Consultancy      Agreement, dated November 20, 2006, by and between the Company and      Crestview Capital Partners, LLP. (29)                                                                                                                                 |
| 10.93    | Agreement      dated December 24, 2006, by and between the Company, Halman-Aldubi      Provident Funds Ltd., and Halman-Aldubi Pension Funds Ltd. [translation      from Hebrew]. (31)                                                                         |
| 10.94    | First      Amendment to Financial Services and Business Development Consulting      Agreement dated February 8, 2007, by and between the Company and Dionysos      Investments (1999) Ltd. (33)                                                                |
| 10.95    | Agreement      dated February 8, 2007, by and between the Company, Swiftnet Limited,      Campbeltown Business, Ltd., and Mr. Abraham Keinan.(33)                                                                                                              |
| 10.96    | First      Amendment to General Contract for Services, dated March 14, 2007, by and      between the Company and Swiftnet Limited. (34)                                                                                                                        |
| 10.97    | Employment      Agreement, dated March 28, 2007, between Swiftnet Limited and Abraham      Keinan.(34)                                                                                                                                                         |
| 10.98    | Consulting      Agreement, dated March 28, 2007, between the Company and Abraham      Keinan. (34)                                                                                                                                                        |
| 10.99    | Employment      Agreement, dated March 28, 2007, between Swiftnet Limited and Guy      Nissenson.(34)                                                                                                                                                          |
| 10.100   | Consulting      Agreement, dated March 28, 2007, between the Company and Guy      Nissenson.(34)                                                                                                                                                               |
| 10.101   | Settlement      Agreement and Release dated May 31, 2007, by and among Embarq Logistics,      Inc, Xfone USA, Inc. and the Company. (35)                                                                                                                       |
| 10.102   | Promissory      Note dated May 31, 2007, by Xfone USA, Inc.(35)                                                                                                                                                                                                |
| 10.103   | Parent      Guarantee dated as of May 31, 2007 by the Company in favor of Embarq      Logistics, Inc.(35)                                                                                                                                                      |
| 10.104   | Share      Purchase Agreement dated August 15, 2007, by and between Dan Kirschner, as      Seller, Swiftnet Limited, as Buyer, and Xfone, Inc.(36)                                                                                                             |
| 10.105   | Inter-Company      Loan Agreement dated August 15, 2007, by and between Auracall Limited, as      Lender, and Swiftnet Limited, as Borrower. (36)                                                                                                              |
| 10.106   | Stock      Purchase Agreement dated August [20], 2007, by and among the Company, NTS      Communications, Inc., and the Shareholders of NTS Communications, Inc.      (37)                                                                                     |
| 10.107   | Letter      of Joint Venture dated June 15, 2007, by and among the Company and NTS      Holdings, Inc.(37)                                                                                                                                                     |
| 10.107.1 | Form      of Free Cash Flow Participation Agreement to be Entered into between the      Company and NTS Holdings, Inc. Upon Consummation of the Acquisition.      (37)                                                                                         |
| 10.107.2 | Form      of Employment Agreement to be entered into between NTS Communications,      Inc. and Barbara Baldwin upon Consummation of the Acquisition.      (37)                                                                                                 |
| 10.107.3 | Form      of Employment Agreement to be entered into between NTS Communications,      Inc. and Jerry Hoover upon Consummation of the Acquisition.      (37)                                                                                                    |
| 10.107.4 | Form      of Employment Agreement to be entered into between NTS Communications,      Inc. and Brad Worthington upon Consummation of the Acquisition.      (37)                                                                                                |
| 10.108   | Employment      Contract signed on August 26, 2007, by and between the Company’s Israeli      based Subsidiary Xfone 018 ltd. and Roni Haliva. (38)                                                                                                      |
| 10.109   | Subscription      Agreement for the Purchase of Shares of Common Stock of the Company Dated      October 23, 2007. (39)                                                                                                                                        |
| 10.110   | Subscription      Agreement for the Purchase of Shares of Common Stock of the Company Dated      November 1, 2007. (41)                                                                                                                                        |
| 10.111   | Form      of Subscription Agreement for the Purchase of Units Consisting of Two      Shares of Common Stock and One Common Stock Purchase Warrant.      (42)                                                                                                   |
| 10.112   | Form      of Common Stock Purchase Warrant.(42)                                                                                                                                                                                                                |
| 10.113   | First      Amendment to Stock Purchase Agreement.(43)                                                                                                                                                                                                          |
| 10.114.1 | Employment      agreement dated as of February 26, 2008, by and among NTS      Communications, Inc. and Barbara Baldwin. (44)                                                                                                                             |
| 10.114.2 | Employment      agreement dated as of February 26, 2008, by and among NTS      Communications, Inc. and Jerry Hoover. (44)                                                                                                                                |
| 10.114.3 | Employment      agreement dated as of February 26, 2008, by and among NTS      Communications, Inc. and Brad Worthington .(44)                                                                                                                            |
| 10.115   | Free      cash flow participation agreement dated as of February 26, 2008, by and      among Xfone, Inc. and NTS Holdings, Inc. (44)                                                                                                                           |
| 10.116   | Escrow      agreement dated as of February 26, 2008, by and among Xfone, Inc., Chris      Chelette, Robert Healea and Kevin Buxkemper the NTS shareholders      representatives, and Trustmark National Bank, as Escrow Agent.      (44)                       |
| 10.117   | Release,      effective as of February 26, 2008, entered into by each of Barbara      Baldwin, Jerry Hoover and Brad Worthington (44)                                                                                                                     |
| 10.118   | Noncompetition,      nondisclosure and nonsolicitation agreement dated as of February 26, 2008,      by and among Xfone, Inc., Telephone Electronics Corporation, Joseph D.      Fail, Chris Chelette, Robert Healea, Joey Garner, and Walter Frank.      (44) |

----

| 10.119 | Second      amendment to stock purchase agreement entered into by each of      February 26, 2008 by and among Xfone, Inc., NTS Communications, Inc. and      Chris Chelette, Robert Healea and Kevin Buxkemper, as the NTS      shareholders representatives. (44) |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.120 | Modification      of Financial Consulting Agreement between Xfone, Inc. and Oberon      Securities, LLC in connection with NTS Communications Transaction.      (45)                                                                                                         |
| 10.121 | Fees      Due to Oberon Securities, LLC from Xfone, Inc. in connection with services      provided in conjunction with the acquisition of NTS Communications, Inc.      (45)                                                                                                 |
| 10.122 | Agreement      of Principles dated March 17, 2008 by and between Xfone 018 Ltd. and Tiv      Taam Holdings 1 Ltd. [Free Translation from Hebrew].  (46)                                                                                                                      |
| 10.123 | Compromise      Agreement dated March 25, 2008, between Xfone, Inc., Story Telecom, Inc.,      Story Telecom Limited, Trecastle Holdings Limited and Nir Davison.      (47)                                                                                                  |
| 10.124 | Securities      Purchase Agreement dated March 25, 2008, between Xfone, Inc., Trecastle      Holdings Limited and Nir Davison. (47)                                                                                                                                          |
| 16.1   | Letter      dated January 31, 2006 from Chaifetz & Schreiber, P.C. to the      Securities and Exchange Commission. (20)                                                                                                                                                  |
| 21.1   | List      of Subsidiaries (Amended as of March 31, 2008)                                                                                                                                                                                                                     |
| 23     | Consent      of Stark, Winter, Schenkein & Co., LLP                                                                                                                                                                                                                      |
| 23.1   | Consent      of Chaifetz & Schreiber, P.C.(30) (22.1)                                                                                                                                                                                                               |
| 23.2   | Consent      of Gersten Savage LLP - incorporated in the legal opinion filed as Exhibit      5.                                                                                                                                                                              |
| 23.3   | Consent      of Postlethwaite & Netterville, APAC dated February 7,      2006.(21.1)                                                                                                                                                                                     |
| 23.4   | Consent      of Postlethwaite & Netterville, APAC dated February 7,      2006.(21.1)                                                                                                                                                                                     |
| 31.1   | Certification      pursuant to section 302 of the Sarbanes - Oxley Act of    2002.                                                                                                                                                                                           |
| 31.2   | Certification      pursuant to section 302 of the Sarbanes - Oxley Act of    2002.                                                                                                                                                                                           |
| 32.1   | Certification      of Officer pursuant to section 906 of the Sarbanes - Oxley Act of      2002.                                                                                                                                                                              |
| 32.2   | Certification      of Officer pursuant to section 906 of the Sarbanes - Oxley Act of      2002.                                                                                                                                                                              |

| (1)    | Denotes      previously filed exhibits: filed on August 10, 2001 with Xfone, Inc.’s      SB-2 registration statement.                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| (2)    | Denotes      previously filed exhibits: filed on October 16, 2001 with Xfone, Inc.’s      SB-2/Amendment 1 registration statement.            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (4)    | Denotes      previously filed exhibit: filed on December 5, 2002 with Xfone, Inc.’s      Form 8-K.                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (5)    | Denotes      previously filed exhibit: filed on March 3, 2003 with Xfone, Inc.’s      SB-2/Post Effective Amendment 2 registration statement. |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (6)    | Denotes      previously filed exhibit: filed on April 15, 2004 with Xfone’s, Inc. SB-2      Amendment 1 Registration Statement.               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (7)    | Denotes      previously filed exhibit: filed on June 1, 2004 with Xfone, Inc.’s Form      8-K.                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (8)    | Denotes      previously filed exhibit: filed on June 7, 2004 with Xfone, Inc.’s      SB-2/Amendment 2 Registration Statement.                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (9)    | Denotes      previously filed exhibit: filed on August 11, 2004 with Xfone’s, Inc. SB-2      Amendment 3 Registration Statement.              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (10)   | Denotes      previously filed exhibit: filed on September 13, 2004 with Xfone’s, Inc.      SB-2 Amendment 4 Registration Statement.           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (11)   | Denotes      previously filed exhibits: filed on October 4, 2004 with Xfone, Inc.’s      Form 8-K                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (12)   | Denotes      previously filed exhibits: filed on November 29, 2004 with Xfone, Inc.’s      Form 8-K.                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (13)   | Denotes      previously filed exhibits; filed on March 31, 2005 with Xfone, Inc.’s Form      10-KSB.                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (14)   | Denotes      previously filed exhibit: filed on August 22, 2005 with Xfone, Inc.’s Form      8-K.                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (15)   | Denotes      previously filed exhibit: filed on August 31, 2005 with Xfone, Inc.’s Form      8-K.                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (16)   | Denotes      previously filed exhibits: filed on October 3, 2005 with Xfone, Inc.’s      Form 8-K.                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (17)   | Denotes      previously filed exhibits: filed on October 11, 2005 with Xfone, Inc.’s      Form 8-K/A #1.                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (18)   | Denotes      previously filed exhibits: filed on November 29, 2005 with Xfone, Inc.’s      Form 8-K.                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (19)   | Denotes      previously filed exhibit: filed on January 23, 2006 with Xfone, Inc.’s      Form 8-K/A #3.                                       |   |   |
| (20)   | Denotes      previously filed exhibit: filed on January 31, 2006 with Xfone, Inc.’s      Form 8-K/A #1.                                       |   |   |
| (21)   | Denotes      previously filed exhibit: filed on January 31, 2006 with Xfone, Inc.’s      Form 8-K.                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (21.1) | Denotes      previously filed exhibits: filed on February 7, 2006 with Xfone, Inc.’s      Form SB-2 Amendment 3.                              |
| (22)   | Denotes      previously filed exhibit: filed on March 15, 2006 with Xfone, Inc.’s Form      8-K.                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

| (22.1)     | Denotes      previously filed exhibit: filed on March 31, 2006 with Xfone, Inc.’s Form      10-KSB.     |   |   |   |   |   |   |
|------------|---------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| (23)       | Denotes      previously filed exhibit: filed on May 16, 2006 with Xfone, Inc.’s Form      8-K.          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (24)       | Denotes      previously filed exhibit: filed on May 30, 2006 with Xfone, Inc.’s Form      8-K.          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (25)       | Denotes      previously filed exhibits: filed on June 20, 2006 with Xfone, Inc.’s Form      8-K.        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (26)       | [Reserved.]                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (27)       | Denotes      previously filed exhibits: filed on July 31, 2006 with Xfone, Inc.’s Form      8-K.        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (28)       | Denotes      previously filed exhibits: filed on November 14, 2006 with Xfone, Inc.’s      Form 10-QSB. |   |
| (29)       | Denotes      previously filed exhibit: filed on November 22, 2006 with Xfone, Inc.’s      Form 8-K.     |   |   |   |   |   |   |   |
| (30)       | Denotes      previously filed exhibits: filed on November 30, 2006 with Xfone, Inc.’s      Form SB-2.   |   |   |   |
| (31)       | Denotes      previously filed exhibit: filed on December 28, 2006 with Xfone, Inc.’s      Form 8-K.     |   |   |   |   |   |   |   |   |
| (32)       | Denotes      previously filed exhibit: filed on February 5, 2007 with Xfone, Inc.’s      Form 8-K.      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (33)       | Denotes      previously filed exhibits: filed on February 8, 2007 with Xfone, Inc.’s      Form 8-K.     |   |   |   |   |   |   |   |   |   |   |   |   |
| (34)       | Denotes      previously filed exhibits; filed on March 30, 2007 with Xfone, Inc.’s Form      10-KSB.    |   |   |   |   |
| (35)       | Denotes      previously filed exhibits: filed on May 31, 2007 with Xfone, Inc.’s Form      8-K.         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (36)       | Denotes      previously filed exhibits: filed on August 15, 2007 with Xfone, Inc.’s      Form 8-K.      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (37)       | Denotes      previously filed exhibits: filed on August 22, 2007 with Xfone, Inc.’s      Form 8-K.      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (38)       | Denotes      previously filed exhibit: filed on August 27, 2007 with Xfone, Inc.’s Form      8-K.       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (39)       | Denotes      previously filed exhibit: filed on October 23, 2007 with Xfone, Inc.’s      Form 8-K.      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (40)       | Denotes      previously filed exhibit: filed on October 25, 2007 with Xfone, Inc.’s      Form 8-K.      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (41)       | Denotes      previously filed exhibit: filed on November 5, 2007 with Xfone, Inc.’s      Form 8-K.      |   |   |   |   |   |   |   |   |   |   |
| (42)       | Denotes      previously filed exhibits: filed on December 14, 2007 with Xfone, Inc.’s      Form 8-K.    |   |   |   |   |   |
| (43)       | Denotes      previously filed exhibit: filed on February 14, 2008 with Xfone, Inc.’s      Form 8-K.     |   |   |   |   |   |   |   |   |   |   |   |
| (44)       | Denotes      previously filed exhibits: filed on February 26, 2008 with Xfone, Inc.’s      Form 8-K.    |   |   |   |   |   |   |   |   |   |
| (45)       | Denotes      previously filed exhibits: filed on March 6, 2008 with Xfone, Inc.’s Form      8-K.        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (46)       | Denotes      previously filed exhibit: filed on March 17, 2008 with Xfone, Inc.’s Form      8-K.        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|  (47) | Denotes      previously filed exhibits: filed on March 25 with Xfone, Inc.’s Form      8-K.             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

|                      | XFONE,      INC. |                                                 |
|---------------------------|------------------|------------------------------------------------------|
|                      |             |                                                 |   |
| Date:      April 15, 2008 | By:              | /s/ Guy      Nissenson                          |   |
|                      |             | Guy      Nissenson                                   |   |
|                      |             | President,      Chief Executive Officer and Director |   |
|                      |             |                                                 |   |

|  Signature         |  Title                                                                         |  Date          |
|-------------------------|-------------------------------------------------------------------------------------|---------------------|
|                    |                                                                                |                |
| /s/      Abraham Keinan | Chairman      of the Board                                                          | April      15, 2008 |
| Abraham      Keinan     |                                                                                |                |
|                    |                                                                                |                |
| /s/Guy      Nissenson   | President,      Chief Executive Officer, and Director                               | April      15, 2008 |
| Guy      Nissenson      |                                                                                |                |
|                    |                                                                                |                |
| /s/      Itzhak Almog   | Director      and Chairman of the Audit Committee and the Nominating      Committee | April      15, 2008 |
| Itzhak      Almog       |                                                                                |                |
|                    |                                                                                |                |
| /s/Eyal      J. Harish  | Director                                                                            | April      15, 2008 |
| Eyal      J. Harish     |                                                                                |                |
|                    |                                                                                |                |
| /s/      Israel Singer  | Director      and member of the Audit Committee                                     | April      15, 2008 |
| Israel      Singer      |                                                                                |                |
|                    |                                                                                |                |
| /s/      Niv Krikov     | Treasurer,      Chief Financial Officer, and Principal Accounting Officer           | April      15, 2008 |
| Niv      Krikov         |                                                                                |                |

----