UNITED STATES SECURITIES
AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-KSB

ANNUAL REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2004

COMMISSION FILE NUMBER
333-67232

XFONE, INC. (Name of
small business issuer in its charter)

|Nevada                                                             | 11-3618510                          
|------------------------------------------------------------------ | ------------------------------------
|(State or other jurisdiction   
 of incorporation or organization) | (I.R.S. Employer
Identification No.)

c/o Swiftnet Ltd.
Britannia House960 High Road London, United Kingdom
N12 9RY(Address of principal executive offices) (Zip Code)

011.44.845.1087777(Registrants
telephone number, including area code)

Registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and has been subject to such filing requirements for the past 90
days.

Check if there is no disclosure of
delinquent filers in response to Item 405 of Regulation S-B is not contained in this form,
and no disclosure will be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [X]

The aggregate market value of the voting and non-voting common equity held
by non-affiliates was $5,706,156 as determined by the closing price of $3.05
on March 30, 2005.

The issuers revenues for its
most recent fiscal year were 11,330,116 United Kingdom Pounds ($21,867,124).

As of March 30, 2005, there were
6,220,871 shares of our common stock issued and outstanding.

We have incorporated by reference,
our Form SB-2 Registration Statement and all amendments thereto.

Transitional Small
Business Disclosure Format (Check one): Yes [ ] No [X]

-1-

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XFONE, INC.

INDEX

|                                                                   |    
|------------------------------------------------------------------ | ---
|Part I                                                             |    
|Item 1.  Description of Business                                   | 3  
|Item 2.  Description of Property                                   | 24 
|Item 3.  Legal Proceedings                                         | 24 
|Item 4.  Submission of Matters to a Vote of Security Holders       | 26 
|Part II                                                           
|Item 5.  Market for Common Equity and Related Stockholder Matters  | 26 
|Item 6.  Management's Discussion and Analysis or Plan of Operation | 42 
|Item 7.  Financial Statements                                      | F-1
|Item 8.  Changes in and Disagreements with Accountants            
|and Financial Disclosure                                           | 50 
|Item 8A. Controls and Procedures                                   | 50 
|Item 8B. Other Information                                         | 50 
|Part III                                                          
|Item 9.  Directors, Executive Officers, Promoters and Control     
|Persons; Compliance with Section 16(a) of the Exchange Act         | 51 
|Item 10. Executive Compensation                                    | 54 
|Item 11. Security Ownership of Certain Beneficial Owners and      
|Management and Related Stockholder Matters                         | 58 
|Item 12. Certain Relationships and Related Transactions            | 61 
|Item 13. Exhibits                                                  | 66 
|Item 14. Principal Accountant Fees and Services                    | 69 

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PART I.

ITEM 1. DESCRIPTION OF BUSINESS.

BUSINESS

We are a holding company provider of
international voice and data communications services with operations in the United States,
United Kingdom and Israel that offers a wide range of services that include: local, long
distance and international telephone services, prepaid and postpaid calling cards;
cellular services; VOIP services; reselling opportunities; and email and fax broadcasting
services. We serve customers in 75 countries across Europe, Australia, North America,
South America, Asia and Africa. As of December 31, 2004, approximately 75% of our revenues
were derived from our customers located in the United Kingdom; however, due to a
consummated merger that we have with a United States based entity as of March 10, 2005,
and our telecom license to conduct business in Israel and launch of international
telecommunication services since the middle of December 2004, we expect that this
percentage will decrease due to more of our business being conducted in the United States
and Israel.

On October 4, 2000, we acquired
Swiftnet Limited which had a business plan to provide comprehensive telecommunication
services and products by integrating new and old products, services and ideas through one
website. Swiftnet was incorporated in 1990 under the laws of the United Kingdom. Until
1999, the main revenues for Swiftnet were derived from messaging and fax broadcast
services. During the year 2000, Swiftnet shifted its business focus and our focus has
remained in telephony voice services offering comprehensive support packages to resellers
and new services. Utilizing automation and proprietary software packages, Swiftnets
strategy is to grow without the need of heavy investments and with lower expenses for
operations and registration of new customers. Swiftnet is our wholly owned subsidiary.

On April 15, 2004, we established an
Israel based subsidiary, Xfone Communication Ltd. On July 4, 2004 the Ministry of
Communications of the State of Israel granted Xfone Communication a license to provide
international telecom services in Israel. We started providing services in Israel through
Xfone Communication as of December 2004. On March 24, 2005 the subsidiary changed its name
to Xfone 018 Ltd. The subsidiary is owned 69% by us, 26% by Newcall Ltd., and 5% by Margo
Sport Ltd.

On May 28, 2004, we established Xfone
USA, Inc. which was incorporated in the State of Mississippi especially for the purpose of
becoming the surviving corporation upon the consummation of the merger with WS Telecom,
Inc. We are the sole shareholder of Xfone USA, Inc.

On May 28, 2004, we entered into an
agreement and plan of merger to acquire WS Telecom Inc., a Mississippi corporation, and
its two wholly owned subsidiaries, eXpeTel Communications, Inc. and Gulf Coast Utilities,
Inc. through the merger of WS Telecom with and into our wholly owned subsidiary Xfone USA,
Inc. This agreement and plan of merger was consummated on March 10, 2005. Headquartered in
Jackson, Mississippi, WS Telecom (d/b/a/ eXpeTel) is a telecommunications service provider
that owns and operates its own facilities-based, telecommunications switching system.
eXpeTel provides residential and business customers with high quality local and long
distance services, as well as cable television and high speed Internet services to planned
and multi-dwelling apartment communities in Mississippi, Alabama, Louisiana, Florida and
Georgia. eXpeTels integrated multi-media services, combining digital voice, data and
video over third-generation broadband infrastructure, are available to customers on a
single itemized bill.

On July 1, 2004, XFONE USA entered
into a management agreement with eXpeTel which provided that Xfone USA provide management
services to eXpeTel pending the consummation of the merger. The management agreement
provided that all revenues generated from eXpeTels business operations will be
assigned and transferred to Xfone USA. The term of the management agreement commenced on
July 1, 2004 and continued until the consummation of the merger on March 10, 2005.

Our Principal Services and their
Markets:

Although we have our own switches
which connect to other telephone operators, our long distance voice and data
communications services require the services of other telephone operators that operate
switches that are electronic devices that receive calls from customers on one side and
move them on to their destination on the other side. We use the network switching and
transport facilities of long distance providers in which calls are transferred either by
more established large telephone operators or smaller telephone operators. The more
established large telephone operators typically provide a better quality of
communications, such as better sound, less interference, and less sudden disconnections.
However, the large telephone operators are more expensive compared with small telephone
operators that have lower cost prices, but typically less service quality in these areas.

In the United States and United
Kingdom we operate a live customer service center that operates 24 hours a day, 7 days a
week. Our customer service center in Israel operates 24 hours a day, 6 days a week.

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In 2004, we provided through our
United Kingdom operations the following telecommunication services:

| |  | Indirect telephone service: Using a four digit access code we resell telephone services
provided by other carriers or through the use of our own platform. This four digit access
code is used so that that people in Great Britain can dial in order to reach certain other
carriers. This enables us to take calls originated by customers and route them to
different destinations.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | PIN access using 0800 free numbers: Using 0800 free numbers and PIN access codes for
client identification, our customers can call from almost any phone, including British
Telecom pay phones, to access our platform and make calls to any destination.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Mobile access using 0800 free numbers: This service is similar to our PIN access service
but uses mobile telephone devices. The identification of the client is automatic and PIN
identifier numbers are not required.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Email to Facsimile service: Our Email2Fax service allows customers with an Internet Email
account to send facsimiles at a discounted cost. The email arrives at our Internet server
that we send via facsimile through high-speed facsimile modems to the proper destination.
We issue a confirmation every 15 minutes indicating: (a) all successful or failed
facsimile transmissions; and (b) a complete list of transmissions, including date and time
of delivery, destination number, pages, duration, subject, and answerback of the
transmission. Email2Fax will send a facsimile based on a pre-defined table of retries. If
a facsimile does not go through within the pre-defined time, Email2Fax will cancel the
facsimile and a report of the failed transmission will be included in the next status
report.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Print to Facsimile service: Similar to our Email2Fax service, anyone with Windows 95 / XP
and an Internet browser will be able to utilize our Print2Fax service to send a facsimile
through their printer driver, usually at a discounted cost. Using any Windows application
that supports printing, the user selects the printer driver to receive a dialog box that
allows entry of: (a) the recipient name and fax number (including multiple recipients,
sent directly To or copied CC; (b) the senders name; and (c)
the subject.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Facsimile to Email or Cyber Number: This service allows the user to receive facsimile
messages directly to an email address through the use of a personal identification number.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Facsimile Broadcast: This service enables our business customers to quickly send thousands
of facsimiles to various destinations.
| | - | ---------------------------------------------------------------------------------------------------------------------------------

| |  | Nodal Services: This service enables our business customers to use a small platform
located in their respective country, to establish their own messaging services within that
country, including sending and receiving customer facsimiles.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Auracall: This is a service that was introduced in approximately March 2002, which permits
any individual with a British Telecom line to make international calls at a lower cost and
without prepayment for setting up an account with another carrier. The Auracall service
can be accessed by any business or residential user through our website at
www.auracall.com. When customers need to make an international or national call they can
dial the appropriate designed number for that country and save on calling rates over the
current British Telecommunications published rates by gaining access to our switch and
providing savings on a per minute basis.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Story Telecom: Initiates, markets and distributes prepaid calling cards that are served by
our switch and systems. Story supplies the prepaid calling cards to retail stores through
its network of dealers. The calling card enables the holder to call anywhere in the world
by dialing a toll free number from any telephone that routes the holders call to our
Interactive Voice Response System that automatically asks for the holders private
pin code, validates the code dialed by the customer, and tells the credit balance of the
card. The holder is then instructed to dial to his or her desired destination, at which
time our Interactive Voice Response System tells the holder how long he or she can speak
according to the balance on the card and what the cost per minute is. The holder of the
card can use the card repeatedly until the balance is zero.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | International Toll Free Calling Card Service: We began offering international toll free
calling card service in approximately June 2002 from the United States, Canada, France,
Germany, Greece, Israel, Chile, Columbia, Japan, Thailand, Hong Kong, Indonesia,
Australia, New Zealand, Belgium, Netherlands, Austria, Italy, Switzerland, Spain, Poland,
Hungary, Ireland, Norway, Philippines, South Korea and Sweden.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Internet Based Customer Service and Billing Interface: In June 2002, we completed the
creation of our Internet based customer service and billing interface at www.xfone.com,
which includes on-line registration, full account control, and payment and billing
functions and information retrieval.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2004, our new database, which is the core of our client maintenance and billing system,
became fully operational. This new database gives us daily access to sales and
profitability per client and enable us to check carrier rates on a daily basis.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Carrier Pre Select Service: British Telecom is our main local service provider that
manages our local telecom related infrastructure, which represents the lines from our
customers to our switch. Therefore, when a customer dials 00 for international
access, the call, by default, is channeled through British Telecom, and the customer pays
British Telecom for that call. Prior to offering our Carrier Pre-Select Service, the
customer would have to dial a special four digit code in order that British Telecom would
address the call to our switch. Because many businesses and customers prefer not to dial a
special code, we either programmed the customers switchboard or installed a special
add on box so that when dialing 00", it dials our four digit code. This need
for this process was eliminated for customers that choose to register for our pre select
service offered to our existing as well as our new customers without any additional
charge. We initiated this service in October 2003. With this service, we instruct our main
local service provider, British Telecom, to route the customers telephone number
when the customer dials 00 to our switch, so to Swiftnet, which allows
customers to route their telephone calls through a carrier without dialing a special 4
digit access code, and without our having to program an existing switchboard or install a
smart box. For instance, if our customers want to dial the United States, they can dial
the standard 011, rather than having to also dial a special 4 digit access code.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Residential
Packages: In 2004 we launched our new inclusive residential packages where clients are
able to make unlimited calls to United Kingdom landlines for a fixed monthly payment.
With this residential package, clients have a choice, with different monthly payments, to
have these unlimited calls at the evening and weekend only, or also including daytime.
United Kingdom national calls, especially during the evening and weekend, have a very low
cost to us, and in monetary terms represent a small portion of an average phone bill. The
major cost of a typical bill comprises calls to mobiles, calls to non-geographic numbers
(0845 and 0870), and international calls, for which we will of course charge our normal
rates.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Connections
to the Vodafone Network: For the last two years, we have offered our clients mobile
connections to the network of O2", a provider of mobile services, where we
bill clients mobile calls on the same bill as their fixed line calls. In 2004, we
also started offering our clients mobile connections to the network of Vodafone,
another provider of mobile services.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Discontinued Service:

From approximately 1990 until January
2002, we offered an Email2telex service which allowed a user with an Internet email
account to send telexes to anywhere in the world at a discounted cost. In January 2002, we
discontinued offering this service due to low demand.

Our Platforms:

A platform  generally  could be any personal  computer  with  telecommunications applications, such as calling cards
and transferring call applications. In the United Kingdom, we operate the following
platforms in our business:

| |  | Telesis
 Switch  that  enables us to  interconnect  with other                   telephone
carriers;
| | - | ----------------------------------------------------------------------------------------------------

| |  | Calling
cards and prepay platforms that enable us to use voice                   prompts and to
accept pin  numbers;  and
| | - | -------------------------------------------------------------------------------------------------------------------------

| |  | Messaging platform that manages facsimile broadcasts and messaging applications.
| | - | --------------------------------------------------------------------------------

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Revenues:

In 2004, our revenues were derived
from the following:

| |  | 52% from our telephone minute billing plus messaging services, including facsimile, nodal
and e-mail related services.
| | - | ----------------------------------------------------------------------------------------------------------------------

| |  | 44%
from our calling cards services; and
| | - | ----------------------------------------

| |  | 4%
from our mobile phone services.
| | - | ----------------------------------

Discount Telephone Rates:

As indicated below, some of our
services in the United Kingdom offer discount rates compared to some other telecom
operators, such as United Kingdoms largest telecom operator, British Telecom. For
instance:

| |  | For a call from the United Kingdom to the United States, we charge 3 United Kingdom pence
per minute while British Telecom charges 17.8 to 20.1 United Kingdom pence per minute;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | For a call from the United Kingdom to Australia, we charge 3 United Kingdom pence per
minute while British Telecom charges 33.3 to 41.7 United Kingdom pence per minute.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This information was obtained from
our website at www.xfone.com and British Telecoms website at www.serviceview.bt.com.
We have many competitors, however, that also offer discounted rates.

Our Customers:

In 2004 we had four major types of
customers:

| |  | Residential  These customers either must dial a four digit access code or acquire a
box that dials automatically.
| | - | ------------------------------------------------------------------------------------------------------------------

| |  | Commercial  Smaller businesses are treated the same as residential customers. Larger
businesses have the need for a Private Branch Exchange Unit, otherwise known as a PBX
Unit, which is a centralized answering and calling System also known as a switchboard. We
program the PBX Unit of our customers so that all of their calls are routed to us
directly, and to save the customer the need to dial a four digit access code.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Government Agencies  Includes the United Nations World Economic Forum, the Argentine
Embassy, and the Israeli Embassy.
| | - | -----------------------------------------------------------------------------------------------------------------------

| |  | Resellers, such as WorldNet and VSAT  We provide them with our telephone and
messaging services for a wholesale price. For WorldNet, we also supply the billing system.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our Billing Practices:

In the United Kingdom we charge our
customers based on usage by full or partial minutes. Our rates vary with distance,
duration, time, and type of call, but are not dependent upon the facilities selected for
the call transmission. The standard terms for our regular telephone customers require that
payments are due 21 days from the date of the invoice. Our suppliers standard terms
are payment within 30 days from invoice date; however, some new suppliers ask for shorter
payment terms.

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Divisions:

In 2004 we operated the following
divisions:

| |  | Partner Division  Our Partner Division operates as a separate profit center by
attempting to recruit new resellers and agents to market our products and services and to
provide support and guidance to resellers and agents.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Operations Division  Our Operations Division provides the following operational
functions to our business: (a) 24 hour/7 day a week technical support; (b) inter-company
network; (c) hardware and software installations; and (d) operating switch and other
platforms.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Administration Division  Our Administration Division provides the billing,
collection, credit control, and customer support aspects of our business.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Research and Development  The function of our Research and Development Division is
to develop and improve our billing system, switch and telephony platforms, websites and
special projects.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Retail  Our Retail Division is responsible our marketing and selling campaigns that
target potential and existing retail customers.
| | - | ------------------------------------------------------------------------------------------------------------------------------------

Geographic Markets:

Our primary geographic markets are
the United States, the United Kingdom and Israel. We also have customers in Angola,
Australia, Austria, Bangladesh, Belgium, Benin, Brazil, Bulgaria, Congo, Croatia, Cyprus,
Czech Republic, Denmark, Egypt, Finland, France, Germany, Gibraltar, Greece, Guinea, Hong
Kong, India, Indonesia, Iran, Irish Republic, Italy, Ivory Coast, Japan, North Korea,
South Korea, Kuwait, Latvia, Lebanon, Liberia, Lithuania, Malawi, Malaysia, Maldives
Isles, Mauritius, Nepal, Netherlands, New Zealand, Niger, Nigeria, Norway, Oman, Pakistan,
Panama, Philippines, Poland, Portugal, Qatar, Russia, Saudi Arabia, Sierra Leone,
Singapore, Slovak Republic, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Taiwan,
Tanzania, Thailand, Togo, Turkey, U.A.E, Uganda, and Vietnam.

Our Distribution and Marketing
Methods:

In 2004 we used the following
distribution methods to market our services:

| |  | We actively recruited independent contractor agents and resellers who purchase telephone
traffic directly from us at an approximately 25% discount, and who then resell this
telephone traffic to their customers at a mark-up according to their own price lists;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
used direct marketing,  primarily by facsimile broadcasts                   and newspaper
advertisements;
| | - | ------------------------------------------------------------------------------------------------------------

| |  | We utilized agents that sell our services directly to customers at our established prices;
these agents receive a commission of approximately 10% of the total sale amount less any
bad debts;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We
attended telecommunications trade shows in the United Kingdom                   to
promote our services;
| | - | -----------------------------------------------------------------------------------------------------------

| |  | We utilized the Internet as an additional distribution channel for our services. We
utilized Xfone.com as our brand name for our new e-commerce telecommunications operations.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In the United Kingdom we do not have
in-house sales personnel.

Future Business Plans for
2005  United Kingdom

Our future business plans for 2005
include possibly accelerating our program of recruiting resellers and agents, promoting
additional services, purchasing new equipment and technology, attempting to negotiate
lower rates with carriers, upgrading our database, and creating new marketing initiatives.

-7-

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Recruitment

We plan to accelerate our program of
recruiting resellers and agents during 2005, as follows:

| |  | advertising
in telecoms trade publications;
| | - | -------------------------------------------

| |  | an on-going targeted email campaign supported by telephone marketing by our in-house staff
to potential re-sellers who have been identified as ideal candidates to become reseller
partners;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | should our reseller base increase, we will employ account managers whose job will be to
manage their own group of newly recruited resellers; account managers will receive a fixed
salary and performance related bonuses and will report to our Director of Sales and
Marketing; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | senior sales personnel will be recruited to sell our fixed line and mobile services to the
corporate market; we will emphasize to potential corporate clients, our combination of low
cost high quality fixed line telephony together with a range of competitively priced
mobile price plans.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Wholesale Line Rental

We are now able to take over British
Telecoms BT line, which is the telephone line supplied by British Telecom that
connects the client with the national telephone network. We purchase the BT line at
wholesale rates and then resell the line to our clients. We will bill our customers with
one bill for their telephone line and their calls. This gives us complete control of the
client, who only has one place to go to order additional lines and services, as well as
calls. This also gives us the opportunity to offer bundled packages which for a fixed
amount per month will offer line rental, a mobile phone handset, and inclusive mobile and
fixed line minutes.

There are two additional advantages
in offering line rental:

| |  | Line rental agreements are for a minimum of 12 months, which obligate our clients to this
length of time in connection with the fees that we charge for their telephone calls; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | As we will own the line, we can terminate service for clients if they are late in paying
their bills, so we have greater leverage in ensuring that clients pay on time.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

Carriers and Negotiating
Lower Rates

Our increased sales in 2004 have
enabled us to negotiate significantly lower rates with the carriers we use to carry our
international call traffic, which gives us the opportunity to increase our margins or
offer significant reductions to secure deals with major clients. If our sales increase, we
will continue to negotiate for lower rates.

Material Agreements:

RESELLER AGREEMENTS

The following agreements represent
our principal reseller agreements in 2004.

Worldnet Reseller
Services Agreement

Our wholly owned subsidiary,
Swiftnet, Ltd., has a March 8, 2000 reseller agreement with Worldnet Global
Communications, Ltd., which is located in London, United Kingdom. In this agreement,
Worldnet agrees to sell the telecommunications services supplied by Swiftnet and to use
its best endeavors to promote Swiftnets services, but agrees not to refer directly
or indirectly to Swiftnet or use any of Swiftnets trade names or literature or hold
it out to be in any way connection to Swiftnet. The agreement further provides that
Swiftnet reserves the right to reject any customer and the right to use any carrier and/or
subcontractor to perform some or all of its obligations. Swiftnet may without prejudice
terminate the agreement immediately by serving written notice to the reseller if Worldnet
becomes Insolvent or fails to make any payment when due under the agreement after having
received 7 days written notice to do so from Swiftnet. Worldnet may terminate this
agreement immediately by serving written notice on Swiftnet if Swiftnet becomes Insolvent
or its license is revoked or altered so that it is not permitted by law to provide the
services.

-8-

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Story Telecom Ltd.
Agreement

Our subsidiary, Swiftnet, owns a 40%
interest in Story Telecom Ltd. This 40% interest was conveyed to Swiftnet in accordance
with the terms of a September 30, 2002 agreement. The parties to the agreement, us,
Swiftnet, and Mr. Nir Davison who is the Managing Director of Story Telecom, Ltd, agreed
to establish a joint business to develop, sell, market, and distribute telecommunications
products bearing the name of Story Telecom Ltd.

Under the agreement, Swiftnet will
supply Story Telecom Ltd. with:

| | (a) | Cost plus 6% prices (to cover certain costs) with the base cost plus percentage
          for the first three months of operations at 4%;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Its technological backbone, which includes Swiftnets hardware and software
          capabilities, including its switch and billing system;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | Technical help service (24 Hours/7 Days a week); and
| | --- | ----------------------------------------------------

| | (d) | Use of relevant software and hardware, including switch, billing, and an
          Interactive Voice Response System. An Interactive Voice Response System is a
          voice recognition system that allows the customer to listen to the amount of
          minutes remaining on an individuals calling card and dial a desired
          telephone number without the need for an operator.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under the agreement, Nir Davison will
supply Story Telecom Ltd. with the following:

| | (a) | Marketing and sales;
| | --- | --------------------

| | (b) | Distribution channels; and
| | --- | --------------------------

| | (c) | Management in which Nir Davison will function as the Managing Director of Story
          Telecom Ltd.
| | --- | ------------------------------------------------------------------------------------------------------

In addition, the agreement provides
that Nir Davison will have the right to receive options to purchase our shares of common
stock if by September 2003, the Story Telecom project meets the sales and profit formula
specified in paragraph 28 of the agreement. Because Story Telecom failed to meet the sales
and profit criteria, on September 30, 2003, the right for the options was cancelled.

Separate and apart from this
agreement, because Story Telecom achieved growth since its inception, which has enabled us
to attain certain achievements in our business plan, our Board of Directors issued a
resolution on September 3, 2003 which provided that we or our major shareholders, Mr.
Keinan, who is our Chairman of the Board, Vision Consultants, an affiliated entity, and
Campbeltown Business Ltd., also an affiliated entity, in order to provide an incentive to
Mr. Davison and to enhance his loyalty to us, will grant him options to purchase 500,000
shares of common stock. The September 3, 2003 resolution further provides that these major
shareholders have the first right to sell to Mr. Davison their own shares or a portion of
them at the same terms, rather than our issuing such shares. Immediately after the
September 3, 2003 resolution was passed, the major shareholders, Vision Consulting and/or
Abraham Keinan and/or Campbeltown Business, Ltd., notified Mr. Davison and us that they
decided to exercise their first right by granting Mr. Davison the options to purchase the
500,000 shares from their own shares of our common stock. Therefore, as of the date of
this notice we were no longer under the obligation to grant an option or issue shares of
common stock to Mr. Davison under this resolution.

Newco Agreement

Our wholly owned subsidiary,
Swiftnet, Ltd., has an October 16, 2001 agreement titled Formation of Newco
which became Auracall Limited. The agreement provides that Dr. Nissim Levy and Swiftnet,
will establish a company, Newco, for the purpose of developing telecommunication business
based on non-geographic numbers, which are identified in the agreement as using Swiftnet
premium numbers bands for customers to call international or national destinations paying
British Telecom directly while British Telecom pays Newco through Swiftnet. Swiftnet
premium numbers bands are special numbers, such as 0870 that Switftnet can
provide for Auracalls customers to call international or national destinations in
which such customers pay British Telecom directly while British Telecom pays Swiftnet and
Swiftnet pays Auracall. The agreement further provides that:

| | a) | The first stage of the budget for the company will not exceed 100,000 United
          Kingdom pounds;
| | -- | ------------------------------------------------------------------------------------------------------

| | b) | Dr. Levy will finance by way of a loan, 75% of the ongoing expenses for 100% of
          the shares in Auracall;
| | -- | -----------------------------------------------------------------------------------------------------------------

| | c) | Swiftnet will finance by way of a loan, 25% of the ongoing expenses and provide
          cost plus prices as well as management advice and technical support, for an
          option to be exercised at any time to receive 50% of the shares of Newco or in
          case of a dilution, to receive the same amount of shares as Dr. Levy;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d) | Newco will repay the loans only from net profits. In case Swiftnet does not
          exercise its options, it will be entitled to management fees equal to the monies
          that Dr. Levy will be entitled to receive from Newco. Once the loans are repaid,
          Swiftnet and Dr. Levy (or assignees) will be entitled to the exact same amounts
          as a fee/profit share.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e) | Newco will receive 10% of the paid turnover of customers that it will introduce
          to Swiftnet, except for mobile phones where the percentage will be 7.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f) | Newco will have the right to sell other services and products that Swiftnet
          offers or will offer in the future for the beset wholesale price available.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

-9-

---

In May 2002, Swiftnet exercised its
option to receive 50% of the shares of Auracall and both Swiftnet and Dr. Levy agreed to
give 5% of Auracalls shares to Mr. Kirschner; therefore, the shares of Auracall were
allocated as follows:

| | (a) | Swiftnet, Ltd  475 shares, representing 47.5% of Auracalls shares;
| | --- | --------------------------------------------------------------------

| | (b) | Dr. Nissim Levy  475 shares, representing 47.5% of Auracalls shares;
          and
| | --- | ------------------------------------------------------------------------------------

| | (c) | Dan Kirschner, acting as Auracalls Managing Director  50 shares,
          representing 5.0% of Auracalls shares.
| | --- | --------------------------------------------------------------------------------------------------------------------

In practice, Dr. Levy, and Swiftnet
each provided a loan to Auracall to the level of about 45,000 and 15,000 United Kingdom
pounds, respectively.

Agreement between Dan Kirschner and
Swiftnet, Ltd.

On August 21, 2003, Dan Kirschner,
the Managing Director of Auracall, Ltd. completed an agreement with Swiftnet providing
that Swiftnet will not object that Dr. Nissim Levy will sell all of his shares in Auracall
to Mr. Kirschner once the current agreement between Swiftnet and Dr. Levy concerning the
payout of profits to cover debt/investments and other conditions are fulfilled.

Kirschner and Swiftnet agreed to
accept the following conditions which were affirmed in the original agreement between Dr.
Levy and Swiftnet:

| | a) | Any increase in Auracalls budget will require the approval of Kirscher and
          Swiftnet;
| | -- | -----------------------------------------------------------------------------------------------

| | b) | Swiftnet will provide cost plus prices as well as management advice and
          technical support. Swiftnet will sell the service to Auracall and will be
          responsible for the technical side. Swiftnet undertakes to exhibit to Auracall
          all licenses, price lists, or other permissions/documents necessary for the
          operation of its business;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c) | Any decision about payments of loans, dividends, salaries, grants or similar
          expenses will have to be decided by the board of directors with veto rights to
          both sides;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d) | Auracall will receive ten percent of the paid turnover of customers that it will
          introduce to Swiftnet, except for mobile phones where the percentage will be
          seven;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e) | Auracall will have the right to sell other services and products that Swiftnet
          offers or will offer in the future for the best wholesale price available;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f) | Auracalls board of directors will be comprised of 4 members: 2 nominated
          by Swiftnet and 2 by Mr. Kirschner;
| | -- | -----------------------------------------------------------------------------------------------------------------------

| | g) | Auracall will operate according to an agreed business plan and decide on each
          investment and expense based on the viability of the opportunity; and
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h) | Both parties will make available their contacts, connections and influence for
          the success of Auracall.
| | -- | -----------------------------------------------------------------------------------------------------------------

The agreement further provides that
once the current agreement between Swiftnet and Dr. Levy concerning the payout of profits
to cover debt/investments is fulfilled, Kirschners salary will be reinstated to
50,000 pounds and Swiftnet will receive 24,000 pounds as management/consultancy fees.
Further salary/fees will be agreed together mutually.

The agreement further provides that
as a bonus, Auracall will issue to Mr. Kirschner further shares from treasury to the level
that Mr. Kirschner will hold 67.5% of Auracall and Swiftnet will hold only 32.5% of
Auracall.

This bonus is subject to the
following pre-conditions:

| | (a) | Mr. Kirschner will purchase from Dr. Levy his shares of Auracall.
| | --- | -----------------------------------------------------------------

| | (b) | Mr. Kirschner will still act as Auracalls Managing Director.
| | --- | -------------------------------------------------------------

| | (c) | Mr. Kirschner will hold no less than 40% of Auracalls shares.
| | --- | --------------------------------------------------------------

| | (d) | Auracall will reach a monthly turnover of 150,000 pounds within two years from
          the date that the arrangement between Swiftnet and Dr. Levy will be finalized.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

-10-

---

The agreement between Mr. Kirschner
and Swiftnet also provides that it will take effect only after the arrangement between Mr.
Kirschner and Dr. Levy will be finalized.

In January 2004, Dr. Levy sold all of
his 475 shares to Mr. Dan Kirschner. Therefore, Mr. Kirschner now owns 52.5% of
Auracalls shares and Swiftnet owns 47.5% of Auracalls shares.

SUPPLIER AGREEMENTS

The following represent material
supplier agreements:

Wholesale Master Services Agreement
with WorldCom International, Ltd.

Swiftnet has a 1998 agreement with
Worldcom International, Ltd. in which Worldcom provides telephone connection services to
Swiftnet as its customer. Such services are provided by Swiftnet providing Worldcom with
service orders in the form proscribed by Worldcom. Swiftnet is required to pay the
invoices submitted by Worldcom to Swiftnet within one month. Swiftnet is prohibited under
the agreement with: (a) referring to Worldcom in any marketing or services literature,
unless it obtains the written consent of Worldcom; (b) purport to act on behalf of or
represent itself as acting on behalf of Worldcom; or (c) seek to resell the services of
Worldcom to other Worldcom customers. Our agreement with WorldCom International, Ltd. may
be terminated by either party with thirty days notice. In addition, the contract may be
terminated immediately if either other party has committed a material breach of the
agreement that is incapable of remedy. Any breach capable of remedy must becorrected
within 15 days. We do not have an exclusive agreement with WorldCom International, Ltd.;
Worldcom International, Ltd. provides these same services to our competitors.

Open Air Agreement

Swiftnet had an April 2, 2003
agreement with Easyair Limited which is located in London, United Kingdom, and is
otherwise known as Openair. In this agreement, OpenAir agrees to sell and Swiftnet agrees
to purchase goods and services that Swiftnet orders according to OpenAirs price
list. In practice, this price list has changed on a daily or weekly basis. OpenAir
reserves the right, by written notice to Swiftnet, to increase the price of goods or
services to reflect any increase in OpenAirs cost. Swiftnet is required to pay
OpenAirs invoices within 45 days of the date of the invoice. If Swiftnet fails to
pay the invoice within that 45 day period, OpenAir may charge Swiftnet interest on the
outstanding amount at 4% per annum of the Yorkshire Bank Plc base rate and may suspend
delivery of goods and services. The agreement further provides that Swiftnet is required
to perform certain obligations to OpenAir, including: (a) use its reasonable endeavors to
promote the resale of goods and services to customers; (b) conform and adhere to
OpenAirs manual for the soliciting and processing of orders from customers; (c)
inform OpenAir of any changes in Swiftnets ownership or organization or methods of
doing business which might affect the performance of or financial ability to comply with
Swiftnets obligations under the agreement; and (d) cooperate fully with OpenAir to
resolve any complaints from customers. Swiftnet and OpenAir are required to use their best
endeavors to keep secret and confidential all confidential information. The terms of the
agreement is one year and continues thereafter unless written notice is provided. This
agreement was terminated by OpenAir on November 2004, of due to change in ownership.

British
Telecommunications Agreement

Swiftnet has an August 8, 2000
agreement with British Telecommunications, a public limited company registered in the
United Kingdom. This agreement provides that British Telecommunications, as a Schedule 2
Public Operator, which permits it to sell local and national telephone connection
services, will connect its systems to our operator system to furnish us with telecom
related services and facilities. We are required to pay to British Telecommunications
charges specified in their carrier price list. If Swiftnet or British Telecommunications
are in receipt of any confidential information regarding the other party, such information
is required to be kept confidential.

Teleglobe International
Agreement

Swiftnet has a May 13, 1996 agreement
with Teleglobe International (United Kingdom) Ltd., a company located in London, England.
In this agreement, Swiftnet and Teleglobe agree to connect and keep connected their
respective telecommunication systems allowing Swiftnet to convey international outbound
calls via Teleglobe. Teleglobe agrees to convey calls received from Swiftnets
telecommunications system to the telephone number called or to another telecommunications
system connected to Teleglobes system. The term of the agreement is for an initial
term of 6 months and continues in effect unless terminated in writing by Swiftnet or
Teleglobe by giving notice of not less than 6 months. The rates payable by Swiftnet to
Teleglobe may vary upon thirty days written notice to Swiftnet. The billing of the
services is based on the total call seconds per month per destination. Teleglobe and
Swiftnet are required to keep in confidence all confidential information. Teleglobe and
Swiftnet may terminate the agreement without prejudice to the other party by written
notice in the case of a material breach of the agreement, any license of either party is
revoked or is terminated, or if there is an arrangement or composition with creditors
generally or by a court application or bankruptcy order.

-11-

---

On October 10, 2004, we entered into
a guaranty agreement with Teleglobe. This guaranty agreement provides that we shall
guaranty all obligations Swiftnet has to Teleglobe under the May 13, 1996 agreement.

ITXC Corporation Services
Agreement

Swiftnet has a February 20, 2003
agreement with ITXC Corporation, a Delaware corporation, in which ITXC at its sole cost,
is required to purchase and furnish to Swiftnet equipment necessary to assist it in the
performance of Switfnets telecom services, including IP telephony gateways. ITXC is
also required under the agreement to provide Swiftnet with remote management, maintenance,
operation and support of the ITXC equipment. ITXC is required to route subscribers
Internet Telephony to be routed over ITXC.net. The current ITXC prices for exchange rates
are to be provided by Swiftnet by written notice and ITXS has the sole discretion in
setting the rates.

Swiftnet is responsible under the
agreement to provide all end-user or caller related services to its subscribers, such as
billing, collections and customer care and is required to independently operate gateways
for use by its subscribers and charge its subscribers such rates as Swiftnet deems
appropriate. Swiftnet is required to pay for the services furnished by ITXC in connection
with the equipment or as otherwise provided in the agreement. Swiftnet is required to meet
a minimum monthly commitment of 75,000 minutes of use per month and if it fails to achieve
this monthly requirement, Swiftnet is required to pay ITXC a monthly service charge in the
amount of $1,000. The agreement further provides that title to the equipment will remain
with ITXC. The term of the agreement is 1 year with successive 90 days terms renewed
automatically.

Energis Communications
Ltd. Agreement

On November 30, 2004, Swiftnet Ltd.
entered into an agreement for Energis Communications Ltd. to provide services to Swiftnet.
In turn, we have agreed to guarantee the obligations of Swiftnet to Energis by executing a
Deed of Guarantee on January 21, 2005 whereby we are liable in full for all amounts owed
by Swiftnet to Energis for services provided.

CONSULTING AGREEMENT

Stern & Company
Consulting Agreement

On January 9, 2004, we executed an
agreement with Stern and Company, a business consultant, to provide us with the following
services: (a) become familiar with our business and operations and review and analyze our
formal and informal strategic, marketing, financial and business plans; and (b) advise us
in strategic planning matters and assist in the implementation of short and long term
strategic planning initiatives to enhance and accelerate the commercialization of our
business objectives. The term of the agreement is 6 months from the date of acceptance by
us. In return for the services furnished by Stern and Company to us, we agree to issue
Stern and Company: (a) 17,500 shares of our common stock; (b) 17,500 warrants at $3.50
which expire 10 days after our commencement of trading on NASDAQ small cap or the AMEX;
(c) 17,500 warrants at $5.50 which expire in 5 years. As further provided in the
agreement, the shares and warrant shares have anti-dilution provisions, piggy-back
registration rights and cashless exercise rights.

PUBLIC RELATIONS AND
INVESTOR RELATIONS AGREEMENTS

Portfolio PR Agreement

On December 23, 2003,  we executed an agreement  with  Portfolio  PR, Inc.,  to provide us with public relations and
investor relations services. On April 23, 2004, we canceled our agreement with Portfolio
PR Inc. for cause. In July 2004, Portfolio PR agreed to receive from us a
total of $14,209.09 in cash and 3,000 shares of our Common stock as total and final
consideration and further agreed that we would have no further obligation to pay it any
additional cash, shares, warrants, or any other consideration in connection with this
agreement.

Elite Financial
Communications Group Agreement

On November 16, 2004, we executed an
agreement with Elite Financial Communications Group, LLC to provide us with public
relations and investor relations services. Elite has been compensated by us in cash and/or
stock and is receiving compensation that includes $90,000 payable in monthly installments
of $7,500, subject to increase to $10,000 per month, upon us becoming listed on a major
U.S. exchange. In addition, Elite is entitled to receive a warrant to purchase up to
125,000 common shares of our common stock exercisable as follows: 62,500 common shares
exercisable at $5.10 per share and 62,500 common shares exercisable at $6.80 per share.
The common shares underlying the warrants are restricted pursuant to Rule 144 and are
subject to piggyback registration rights for resale by Elite on the first applicable
Registration statement filed by us with the U.S. Securities and Exchange Commission. The
term of this agreement is for twelve months. However, we retain the right to terminate
this agreement at any time and for any reason, at our sole discretion.

-12-

---

FINDERS AGREEMENT

November 24, 2003 Agreement with The
Oberon Group, LLC.

We have a November 24, 2003 Finders
Agreement with The Oberon Group, LLC, which is identified in the agreement as a
Finder. The agreement provides that in consideration for The Oberon Group
introducing an investor to us which culminates in the execution of a partial
acquisition/investment/financing agreement, we agree to compensate it with a cash fee
equal to 8% of the total transaction value in cash as well as 8% of the total transaction
value in warrants priced at 100% of the market at closing. The term of the agreement is 6
months and will be automatically renewed for continuous consecutive terms, unless either
party sends a written notice with a 60 day notice period, indicating the intent to
terminate the agreement.

September 28, 2004
Novation Agreement

On September 28, 2004, we entered
into an agreement with The Oberon Group and Dragonfly Capital Partners, LLC, a North
Carolina limited liability company registered as a broker-dealer with the National
Association of Security Dealers and the Securities and Exchange Commission. The agreement
provides that all of Oberon Groups rights and obligations under the November 24,
2003 agreement we had with The Oberon Group, as described immediately above, are
transferred to Dragonfly Capital Partners. The agreement further provides that we and The
Oberon Group mutually release each other from obligations arising from the November 24,
2003 agreement and that Dragonfly Capital Partners agrees to perform the duties under the
original November 24, 2003 agreement as if it had been a party to that agreement.

We and the Oberon Group entered into
the September 28, 2004 Novation Agreement in order that the principals of The Oberon Group
who became associated with the registered broker-dealer, Dragonfly Capital Partners, could
provide finder services to us through a registered broker dealer.

FINANCIAL CONSULTING
AGREEMENT

February 12, 2004
Agreement with The Oberon Group, LLC

We have a February 12, 2004 agreement
with The Oberon Group, LLC, which is not an NASD registered broker dealer, which provides
that The Oberon Group will assist us in exploring, structuring, and negotiating financial
alternatives, particularly in the United States, such as acquisitions, mergers, or
otherwise. Aggregate consideration is defined in the agreement as the total amount of cash
and the fair market value on the date that is five days prior to the consummation of the
transaction of all other property paid or payable directly or indirectly to us or a
counter party or any of its security holders in connection with a transaction.

The agreement provides that we agree
to pay The Oberon Group an initial retainer fee of $60,000 in cash for a 6 month period
ending August 12, 2004, which is payable upon the signing of the agreement. Instead of
receiving the $60,000 payment and upon The Oberon Groups request, on February 12,
2004, The Oberon Group purchased 20,000 restricted shares of our common stock, 20,000 A
warrants, and 20,000 B warrants. Thereafter, we agree to pay The Oberon Group a monthly
retainer payment of: (a) $5,000 per month in cash, the first such payment of which
commences on March 1, 2004; and (b) 1,500 five year warrants with a strike price of $5.50
per share. Additionally, the agreement provides that in conjunction with any transaction
with any United States counter party, we agree to pay The Oberon Group: (a) 7% of the
first $1 million of aggregate consideration; plus (b) 6% of the 2nd $1 million of
aggregate consideration; plus (c) 5% of the 3rd $1 million of aggregate consideration;
plus (d) 4% of the fourth $1 million of aggregate consideration; plus (e) 3% of the
remaining aggregate consideration. The agreement further provides that for any given
transaction, the consideration paid to The Oberon Group will mirror the consideration paid
to any seller. For instance, if The Oberon Group is due a fee of $120,000 and the
consideration paid to the seller in a transaction is 1/3 cash, 1/3 debt (with an 8% annual
coupon and a 2 year maturity) and 1/3 in our common stock, then Oberon Groups fee
will be $40,000 cash, $40,000 debt (with an 8% annual coupon and a 2 year maturity) and
$40,000 in our common stock.

-13-

---

In addition, upon closing of a
transaction, we will issue The Oberon Group, or its assigns, a warrant, valid for five
years post closing, entitling its holder to purchase a total of: (a) 7% of the first $1
million of aggregate consideration; plus (b) 6% of the second $1 million of aggregate
consideration; plus (c) 5% of any additional aggregate consideration. The warrants will
have an exercise price equal to the market price of our common stock shares on the date of
closing of the transaction. Any common stock shares throughout the agreement of any shares
underlying the warrants throughout this agreement will entitle their holder to one-time
piggyback registration rights. All warrants may be exchanged without the payment of any
additional consideration for our stock based upon the values of the warrant and the stock
at the time of the exchange.

The agreement further provides that
for any revenues paid to us from parties introduced by The Oberon Group to us during the
period of three years from the entry into the first agreement or purchase order with such
third party, The Oberon Group will receive 1.5% of such revenues, which is referred to in
the agreement as a referral fee. Such referrals will include any revenues
derived from the sale of products or services to such parties, any revenues derived from
the sale of our product or services through the sales force of such parties, or any
revenues derived by us from joint selling efforts with such parties to a third party.

The agreement also contains other
standard terms and conditions.

September 27, 2004
Novation Agreement

On September 27, 2004, we entered
into an agreement with The Oberon Group and Dragonfly Capital Partners, LLC, a North
Carolina limited liability company registered as a broker-dealer with the National
Association of Security Dealers and the Securities and Exchange Commission. The agreement
provides that all of Oberon Groups rights and obligations under the February 12,
2004 agreement with us as described above are transferred to Dragonfly Capital Partners.
The agreement further provides that The Oberon Group and we mutually release each other
from obligations arising from the February 12, 2004 agreement and that Dragonfly Capital
Partners agrees to perform the duties under the original February 12, 2004 agreement as if
it had been a party to that agreement.

February 18, 2005
Assignment Notice

On February 18, 2005, Dragonfly
Capital Partners assigned all of its rights and obligations under the September 27, 2004
agreement to Oberon Securities, LLC, and Oberon Securities accepted such assignment.
Oberon Securities is an SEC-registered broker-dealer which was approved for membership in
NASD, Inc. as of January 24, 2005.

AGREEMENT AND PLAN OF
ACQUISITION

On May 28, 2004, we entered into an
Agreement to acquire WS Telecom Inc., a Mississippi corporation, through the statutory
merger of WS Telecom, Inc. with and into our wholly owned subsidiary Xfone USA, Inc.
Headquartered in Jackson, Mississippi, WS Telecom (d/b/a/eXpeTel) is a telecommunications
service provider that owns and operates its own facilities-based, telecommunications
switching system. eXpeTel provides residential and business customers with high quality
local and long distance services, as well as cable television and high speed Internet
services to planned and multi-dwelling apartment communities in Mississippi, Alabama,
Louisiana, Florida and Georgia. eXpeTels integrated multi-media services, combining
digital voice, data and video over third-generation broadband infrastructure, are
available to customers on a single itemized bill.

For the purposes of the acquisition,
WS Telecom, Inc. includes its wholly owned subsidiaries eXpeTel Communications, Inc. and
Gulf Coast Utilities, Inc. The terms and conditions of the Agreement provide that:

| | 1) | all of WS Telecoms issued and outstanding capital stock will be acquired
          and converted into the right to receive from us certain shares of our restricted
          common stock and warrants convertible into shares of our common stock;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | we will issue a number of shares of our restricted common stock with an agreed
          market value of $2,200,000, which will be determined using the weighted average
          price of our common stock for the ten trading days preceding the trading day
          immediately prior to the date we and WS Telecom Inc. enter into a Management
          Operating Agreement;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | the weighted average price of our common stock, as referred to in 2) immediately
          above, will in no event be less than $3.30 per share or greater than $4.30 per
          share;
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | we will issue a number of warrants with a value of $1,300,000, the value of
          which will be calculated as of the date we and WS Telecom Inc. enter into a
          Management Operating Agreement, assuming 90% volatility of the underlying share
          of common stock of the Registrant in accordance with the Black Scholes option
           pricing model;
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5) | each share of WS Telecom, Inc.s Preferred Stock issued and outstanding
          immediately prior to the effective time of the Acquisition will be canceled and
          extinguished and be converted automatically into the right to receive upon
          surrender of certificate(s) representing WS Telecom, Inc.s Preferred
          Stock, as follows: (i) an amount of our stock consideration equal to the product
          of our stock consideration times 28.6% divided by total of WS Telecom,
          Inc.s Preferred Stock; and (ii) an amount of our warrant consideration
          equal to the product of WS Telecom, Inc.s warrant consideration times
          28.6% divided by the total of WS Telecom, Inc.s Preferred Stock;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-14-

---

| | 6) | each share of WS Telecom, Inc.s common stock issued and outstanding
          immediately prior to the effective time of the Acquisition will be canceled and
          extinguished and be converted automatically into the right to receive upon
          surrender of certificate(s) representing MS Telecom, Incs common stock, as
          follows: (i) an amount of our stock consideration equal to the product of the
          Our stock consideration times 71.4% divided by the total of WS Telecom,
          Inc.s common stock; and (ii) an amount of our warrant consideration equal
          to the product of our warrant consideration times 71.4% divided by the total of
          MS Telecom, Inc.s common stock;
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 7) | completion of the Acquisition is subject to certain conditions, including: (a)
          approval of the Agreement and the Acquisition by shareholders; (b) receipt of
          regulatory approvals; and (c) certain other customary conditions; and
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 8) | concurrent with the execution of the Agreement and as material inducements to us
          and WS Telecom, Inc. as the acquired company, the following agreements will be
          entered into, the terms of which are described below: (a) employment agreement
          between Xfone USA, Inc. and Wade Spooner; (b) employment agreement between Xfone
          USA, Inc. and Ted Parsons; and (c) escrow agreement among us, Xfone USA, Inc.,
          Wade Spooner, Ted Parsons, and the escrow agent.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Employment Agreement
between Xfone, USA, Inc. and Wade Spooner

The employment agreement between
Xfone, USA, Inc. and Wade Spooner, as an executive of WS Telecom, provides that Xfone USA,
Inc., otherwise known as Employer in the employment agreement, will pay Wade
Spooner: (a) $192,000 for the first year of his employment; (b) $197,760 for the second
year of his employment; and (c) 203,693 for the third year of his employment.

The employment agreement further
provides that Wade Spooner will be eligible to earn additional incentive compensation, for
Employment Years 1, 2, and 3, as set forth below:

| |  | Employment Year 1. Employer shall pay the Executive within 90 days of the end of
Employment Year 1 Incentive Compensation equal to the greater of the following: (i)
$100,000 if during Employment Year 1, Net Sales Revenue of the Employer exceed by
$2,000,000 or more the Net Sales Revenue for the twelve month period prior to the
Effective Date and there is at least $150,000 of Pre-Tax Income for Employment Year 1; OR
(ii) $200,000 if during Employment Year 1, Net Sales Revenue of the Employer exceed by
$4,000,000 or more the Net Sales Revenue for the twelve month period prior to the
Effective Date and there is at least $400,000 of Pre-Tax Income for Employment Year 1; OR
(iii) an amount equal to one-third (1/3) of the Excess Profit for Employment Year 1 if
during Employment Year 1 the Net Sales Revenue (excluding Net Sales Revenue attributable
to acquisitions occurring on and after the Effective Date) of the Employer exceed by
$7,000,000 or more the Net Sales Revenue for the twelve month period prior to the
Effective Date.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Employment Year 2. Employer shall pay the Executive within 90 days of the end of
Employment Year 2 Incentive Compensation equal to the greater of the following: (i)
$200,000 if during Employment Year 2, Net Sales Revenue of the Employer exceed by
$4,000,000 or more the Net Sales Revenue for Employment Year 1 and there is at least
$400,000 of Pre-Tax Income for Employment Year 2; OR (ii) an amount equal to one-third
(1/3) of the Excess Profit for Employment Year 2 if during Employment Year 2 the Net Sales
Revenue of the Employer exceed by $7,000,000 or more the Net Sales Revenue for Employment
Year 1.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Employment Year 3. The Employer shall pay the Executive within 90 days of the end of
Employment Year 3 Incentive Compensation equal to the following: (i) An amount equal to
one-third (1/3) of the Excess Profit for Employment Year 3 if during Employment Year 3 the
Net Sales Revenue of the Employer exceed by $7,000,000 or more the Net Sales Revenue for
Employment Year 2.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The employment agreement further
provides that on the first business day of Employment Year 1, Wade Spooner will be granted
and issued options for 600,000 shares of our restricted common stock, of which: (a)
100,000 will be attributable to Employment Year 1; (b) 200,000 will be attributable to
Employment Year 2; and (c) 300,000 of which shall be attributable to Employment Year 3.
The options will vest as follows: (a) options for 100,000 shares of the our restricted
common Stock will vest 3 years from the grant date; (b) options for 200,000 shares of our
restricted common stock will vest 4 years from the grant date; and (c) options for 300,000
shares of our common stock will vest 5 years from the grant date. The stock options will
provide for a five (5) year term from the vesting date, a strike price that is 10% above
the closing price of the Registrants common stock on the date of issue of the
Options.

The employment agreement further
provides that for any acquisition of an existing business made by Employer during the
Employment Period, then Wade Spooner will receive upon closing of the acquisition warrants
for our restricted common stock with a value equal to 1.333% of the Aggregate Transaction
Consideration of the acquisition. The value of the warrants shall be calculated one day
prior to the closing of the acquisition assuming a 90% volatility of our underlying common
stock pursuant to the Black Scholes option  pricing model and shall vest six months
from the date of issue. The warrants shall be convertible on a one-to-one basis into
common stock with a term of five years, a strike price that is 10% above the closing price
of the Parent Common Stock one day prior to the closing date of the acquisition

-15-

---

In the event of any Executive
Termination Without Cause, the Executive agrees to pay as liquidated damages to the
Employer an amount equal as follows:

| | (a) | If the Executive Termination Without Cause occurs during Employment Year 1, then
          the Executive shall immediately pay to the Employer an amount equal to
          $1,329,000.00.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | If the Executive Termination Without Cause occurs during Employment Year 2, then
          the Executive shall immediately pay to the Employer an amount equal to
          $886,000.00.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | If the Executive Termination Without Cause occurs during Employment Year 3, then
          the Executive shall immediately pay to the Employer an amount equal to
          $443,000.00.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Employment Agreement
Between Xfone, USA, Inc. and Ted Parsons

The employment agreement between
Xfone, USA, Inc. and Ted Parsons, as an executive of WS Telecom, provides that Xfone USA,
Inc., otherwise known as Employer in the employment agreement, will pay Ted
Parsons: (a) $100,800 for the first year of his employment; (b) $103,825 for the second
year of his employment; and (c) $106,940 for the third year of his employment. The
employment agreement further provides that Ted Parsons will be eligible to earn additional
incentive compensation, for Employment Years 1, 2, and 3, as set forth below:

| |  | Employment Year 1. Employer shall pay the Executive within 90 days of the end of
Employment Year 1 Incentive Compensation equal to the greater of the following: (i)
$50,000 if during Employment Year 1, Net Sales Revenue of the Employer exceed by
$2,000,000 or more the Net Sales Revenue for the twelve month period prior to the
Effective Date and there is at least $150,000 of Pre-Tax Income for Employment Year 1; OR
(ii) $100,000 if during Employment Year 1, Net Sales Revenue (excluding Net Sales Revenue
attributable to acquisitions occurring on and after the Effective Date) of the Employer
exceed by $4,000,000 or more the Net Sales Revenue for the twelve month period prior to
the Effective Date and there is at least $400,000 of Pre-Tax Income for Employment Year 1;
OR (iii) an amount equal to one-sixth (1/6) of the Excess Profit for Employment Year 1 if
during Employment Year 1 the Net Sales Revenue (excluding Net Sales Revenue attributable
to acquisitions occurring on and after the Effective Date) of the Employer exceed by
$7,000,000 or more the Net Sales Revenue for the twelve month period prior to the
Effective Date.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Employment Year 2. Employer shall pay the Executive within 90 days of the end of
Employment Year 2 Incentive Compensation equal to the greater of the following: (i)
$100,000 if during Employment Year 2, Net Sales Revenue of the Employer exceed by
$4,000,000 or more the Net Sales Revenue for Employment Year 1 and there is at least
$400,000 of Pre-Tax Income for Employment Year 2; OR (ii) an amount equal to one-sixth
(1/6) of the Excess Profit for Employment Year 2 if during Employment Year 2 the Net Sales
Revenue of the Employer exceed by $7,000,000 or more the Net Sales Revenue for Employment
Year 1.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Employment Year 3. The Employer shall pay the Executive within 90 days of the end of
Employment Year 3 Incentive Compensation equal to the following: (i) An amount equal to
one-sixth (1/6) of the Excess Profit for Employment Year 3 if during Employment Year 3 the
Net Sales Revenue of the Employer exceed by $7,000,000 or more the Net Sales Revenue for
Employment Year 2.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The employment agreement further
provides that on the first business day of Employment Year 1, Ted Parsons will be granted
and issued options for 300,000 shares of our restricted common stock, of which: (a) 50,000
will be attributable to Employment Year 1; (b) 100,000 will be attributable to Employment
Year 2; and (c) 150,000 of which shall be attributable to Employment Year 3. The options
will vest as follows: (a) options for 50,000 shares of the Our restricted common Stock
will vest 3 years from the grant date; (b) options for 100,000 shares of our restricted
common stock will vest 4 years from the grant date; and (c) options for 150,000 shares of
our common stock will vest 5 years from the grant date. The stock options will provide for
a five (5) year term from the vesting date, a strike price that is 10% above the closing
price of our common stock on the date of issue of the Options.

The employment agreement further
provides that for any acquisition of an existing business made by Employer during the
Employment Period, then Ted Parsons will receive upon closing of the acquisition warrants
for our restricted common stock with a value equal to 0.666% of the Aggregate Transaction
Consideration of the acquisition. The value of the warrants shall be calculated one day
prior to the closing of the acquisition assuming a 90% volatility of our underlying common
stock pursuant to the Black Scholes option  pricing model and shall vest six months
from the date of issue. The warrants shall be convertible on a one-to-one basis into
common stock with a term of five years, a strike price that is 10% above the closing price
of the Parent Common Stock one day prior to the closing date of the acquisition

-16-

---

In the event of any Executive
Termination Without Cause, the Executive agrees to pay as liquidated damages to the
Employer an amount equal as follows:

| | (a) | If the Executive Termination Without Cause occurs during Employment Year 1, then
          the Executive shall immediately pay to the Employer an amount equal to $171,000.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | If the Executive Termination Without Cause occurs during Employment Year 2, then
          the Executive shall immediately pay to the Employer an amount equal to $114,000.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | If the Executive Termination Without Cause occurs during Employment Year 3, then
          the Executive shall immediately pay to the Employer an amount equal to $57,000.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Although the original Agreement and
Plan of Merger with eXpeTel was entered into on May 28, 2004, completion of the merger was
subject to satisfaction of certain conditions and regulatory approvals, including
arranging for the transfer of the right and assignment of an existing Interconnection
Agreement between eXpeTel and BellSouth Telecommunications to XFONE USA. An
Interconnection Agreement provides the terms and conditions under which a competitive
telecommunications carrier, such as eXpeTel / XFONE USA carrier can lease unbundled
network elements of an incumbent carrier, such as Bellsouth. These unbundled network
elements can be used to attach XFONE USAs customers to its facilities for providing
dial tone, features and routing calls.

Following a lengthy dispute with
BellSouth over the assignment of the Interconnection Agreement, XFONE USA and eXpeTel
sought an order from the Mississippi Public Service Commission (PSC) to require BellSouth
to provide its consent for reassignment. On March 9, 2005, the PSC issued the order
mandating that upon consummation of the merger of XFONE USA and eXpeTel, the
Interconnection Agreement in its entirety would be deemed assigned and approved as
between XFONE USA, Inc. and BellSouth Telecommunications, Inc. as if XFONE USA, Inc. had
itself entered into the Interconnection Agreement.

The merger was consummated on March
10, 2005, and the since than the combined companies operate under the name XFONE
USA, Inc.

Upon the assignment of the existing
Interconnection Agreement between WS Telecom, Inc. and BellSouth Telecommunications, Inc.
to Xfone USA, Inc., and consummation of the merger on March 10, 2005, we, the ultimate
parent company and our subsidiaries Swiftnet Ltd. and Xfone Communication Ltd. (which
changed its name to Xfone 018 Ltd.), individually and/or jointly, agreed to guarantee all
undisputed debts owing to BellSouth Telecommunications, Inc. by Xfone USA, Inc. in
accordance with the assigned Interconnection Agreement. The guarantee was given on
December 16, 2004 and became effective upon the consummation of the merger on March
10, 2005.

Management Agreement with
WS Telecom

In conjunction with the merger agreement
between WS Telecom and our subsidiary, Xfone USA, Inc., Xfone USA, Inc. has a July 1, 2004
agreement with WS Telecom and its subsidiaries, eXpeTel Communications, Inc. and Gulf
Coast Utilities, and Ted Parsons and Wade Spooner. Ted Parsons and Wade Spooner are
identified in the agreement as guarantors and they jointly and severally,
unconditionally guarantee the prompt payment when due of certain manager loans described
below. The agreement provides that WS Telecom; hires and appoints Xfone USA as Manager to
be responsible for the operation and management of all of WS Telecoms business
operations, including:

| |  | Personnel  Supervising the current employees and independent contractors of WS
Telecom with the Manager having the authority to hire, discharge and direct personnel for
the conduct of the business;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Accounting
- Supervision and  administration of all accounting                   and the maintenance
of all books and records for the business;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------

| |  | Contracts  Maintain all existing contracts necessary for the operation of the
business and the authority to enter into or renew contract in WS Telecoms name;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Policies
 and  procedures  -  Preparation  of all policies and                   procedures for
the operation of the business; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| |  | Budgets  Preparation of all operating, capital or other budgets.
| | - | -----------------------------------------------------------------

-17-

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In consideration of these management
services, WS Telecom assigns and transfer to the Manager, Xfone, USA, Inc., all revenues
generated from the operations of the business and the Manager agrees to pay from the
revenues the normal operating, maintenance, administrative and similar expenses of the
business. Further, WS Telecom designates the Manager as the controlling party of the
current operating accounts of the business. In addition, the Manager in its discretion,
will have the right to make advances or loans to WS Telecom payable on demand (or if no
demand payable in equal quarterly installments of principal and interest) for an amount up
to $500,000, with interest at 7% per annum from the date advanced until paid for the
payment of any amounts due during the term of the management agreement under any of the
special liabilities defined in the management agreement. WS Telecom grants to
the Manager a security interest in all of the assets of WS Telecom, Inc. and its
subsidiaries, eXpeTel Communications, Inc. and Gulf Coast Utilities, Inc.

The Management Agreement with WS
Telecom terminated upon the consummation of the merger on March 10, 2005.

Ilan Shoshani Investment
Agreement

On November 23, 2004, Mr. Ilan
Shoshani provided our Israeli based subsidiary, Xfone Communication Ltd., recently renamed
to Xfone 018 Ltd. (the Subsidiary) with a 10,000,000 New Israeli Shekel bank
guarantee as part of the steps required to fulfill the investment agreement signed on
August 26, 2004 and the addendum and clarification to the investment agreement dated
September 13, 2004 between us, the Subsidiary and Mr. Shoshani. Such agreements were also
dependent on approval of the Ministry of Communications of the State of Israel, which came
on November 8, 2004.

Pursuant to the agreements, Mr.
Shoshani was obligated to secure the replacement of the bank guarantee, which was provided
to the State of Israel by the Subsidiary in accordance with Regulation 22 of the
International Operators Regulations, with another bank guarantee that will conform to all
the provisions and terms of the International Operators Regulations and the
Subsidiarys license, and shall be to the complete satisfaction of the Ministry of
Communications of the State of Israel. The agreements provide that the costs involved in
the issuance of the bank guarantee (commission and stamp duty) will be paid by the
Subsidiary.

Pursuant to the agreements, Mr.
Shoshani was obligated to extend a shareholder loan to the Subsidiary for the New Israeli
Shekel equivalent of the sum of $400,000. The agreements provide that the shareholder loan
of Mr. Shoshani shall be given for a period of four years, save if otherwise agreed by the
parties to the agreements, at an annual rate of interest of 4% and linked to the Israeli
Consumer Price Index. The full amount of the shareholder loan of Mr. Shoshani was
deposited in an escrow account.

We have made financial commitments
under the agreements as well.

In return for the replacement of the
bank guarantee and the grant of the shareholder loan of Mr. Shoshani, the Subsidiary and
we undertook to ensure that 26% of the Subsidiarys shares will be transferred and
registered in the name of a person and/or company as determined by Mr. Shoshani. In
addition, the Subsidiary and we undertook to ensure that Mr. Shoshani will be appointed as
a director of the Subsidiary.

On November 24, 2004, Mr. Ilan
Shoshani was elected as a director of the Subsidiary.

On
November 24, 2004,  the board of directors of the  Subsidiary  approved that shares held
by H.S.N.  Communication  Investments  Ltd.,  representing  26% ownership of the
 Subsidiary be  transferred  to Newcall  Ltd., a company owned  by Mr.  Shoshani  and
 his  wife.

The full amount of the shareholder
loan of Mr. Shoshani was transferred from the escrow account to the Subsidiarys
account on December 20,2004.

According to the agreements, we are
required upon request to make a shareholders loan to the Subsidiary. As such  we have
passed in two stages, $100,000 each, during the month of March 2005 a total of $200,000 as
a four years loan with annual interest of 4% and linked to the consumer price index.

Giora Spigel Agreement

Pursuant to a verbal agreement
between Mr. Giora Spigel and us, the board of directors of the Subsidiary approved on
November 24, 2004, subject to the approval of the Ministry of Communications of the State
of Israel, that shares held by us, representing 5% ownership of the Subsidiary, will be
transferred to Margo Sport Ltd., a company owned by Mr. Spigel and his wife. Presently,
Margo Sport Ltd. holds 20% of H.S.N. Communication Investments Ltd.

-18-

---

Upon approval of the Ministry of
Communications of the State of Israel, such verbal agreement was evidenced by a share
transfer deed as required by the Israel Company Law  1999.

Mr.
          Giora Spigel is a director of the Subsidiary and holds the position of Vice
          President Business Development with the Subsidiary.

The Subsidiary is currently owned 69%
by us, 26% by Newcall Ltd., and 5% by Margo Sport Ltd.

SELLING SHAREHOLDER
RELATED AGREEMENTS

In connection with our
January/February 2004 private placement, we entered into the following agreements with the
Selling Shareholders:

| |  | Shares
and Warrant Purchase Agreement;
| | - | --------------------------------------

| |  | Registration
Rights Agreement;
| | - | ------------------------------

| |  | Warrant
A Agreement; and
| | - | ------------------------

| |  | Warrant
B Agreement
| | - | -------------------

These agreements contain standard
representations and warranties by us to the selling shareholders. Additionally, each
selling shareholder that purchased our common stock was required to sign an Irrevocable
Proxy which appointed our Chief Executive Officer, Guy Nissenson, as proxy for each
selling shareholder, and which grants to our Chief Executive Officer an aggregate of
969,237 shares that he may vote for the selling shareholders. These agreements further
provide, as follows:

Shares and Warrant
Purchase Agreement

In connection with a private
placement we conducted during January and February 2004, we sold to the selling
shareholders an aggregate of 969,237 shares of our common stock at a purchase price of
$3.00 per share. Each selling shareholder who purchased common stock was also granted one
Warrant A and one Warrant B for each share of common stock purchased. This agreement also
provides for the following under A-C below:

A. Successors and Assigns

We may not assign the common stock
purchase agreement, or any of our rights or obligations under the agreement without the
prior written consent of the Purchasers. The Purchasers may assign any or all of its
rights under the common stock purchase agreement to any party. Accordingly, the assignee
will have the benefit of the provisions of the common stock purchase agreement that are
intended to protect Purchaser until the underlying common stock may lawfully be resold to
the public in compliance with applicable securities laws.

B. Governing Law

The Shares and Warrant Purchase
Agreement, and the related transaction documents, are governed by the internal laws of the
State of New York, and all legal proceedings in connection with the common stock purchase
agreement must be commenced exclusively in the state and federal courts sitting in the
City of New York. Thus, all questions concerning the validity, enforcement and
interpretation of the common stock purchase agreement and the related transaction
documents, will be determined by reference to New York law.

C. Liquidated Damages

This agreement provides for varying
terms which vary based upon the negotiations we conducted with each respective selling
shareholders, as described below under A and B:

-19-

---

A.    
          Legend Removal Failure  We agreed to remove the restrictive legends on the
          selling shareholder certificates in compliance with state and federal laws. The
          penalties vary among the selling shareholders, but are either:

| |  | Within 12 months of the purchase date, if we fail to cause the legend to be removed as of
the 14th business day after the selling shareholder has made a request for the legend
removal, the selling shareholder may require us to pay him or her an amount equal to 130%
of his purchase price for all or a portion of the shares and warrant shares he or she
purchased;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Within 24 months of the purchase date, if we fail to remove the restrictive legend after 3
trading days following delivery of the certificate to either our transfer agent or to us
(the Legend Removal Date), the shareholder may require us to pay him either: (i) $10 per
trading day per $1000 worth of purchased shares and/or warrant shares, the worth being
based upon the stocks closing price on the Legend Removal Date, and after 5 trading
days, $20 per trading day per $1000 worth of purchased shares and/or warrant shares; or
(ii) an amount equal to 130% of his purchase price for all or a portion of the shares and
warrant shares he purchased.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

B.    
          Rights of Participation in Additional Financing  We may be required to
          allow selling shareholders the right to participate in any subsequent financings
          that we may offer. The terms vary as to the maximum percentage of the financings
          in which each selling shareholder may participate, and, if our subsequent
          financing has the effect of issuing shares below the $3.00 per share price paid
          by the selling shareholders, we may be required to adjust the selling
          shareholders purchase price to that same lower price.

Registration Rights
Agreement

This agreement obligates us to
register the common stock acquired by the selling shareholders and contains certain mutual
indemnification provisions indemnifying us and the selling shareholders and any officers,
directors, agents and employees associated with us or the selling shareholders.

In addition, this agreement provides
that if our registration statement is not effective within a certain period of time, we
will have to issue additional shares to the selling shareholders as liquidated damages.
Because our registration statement was declared effective only on November 12, 2004, we
issued to our selling shareholders on November 17, 2004, a total of 109,716 additional
shares of our common stock. Save for the liquidated damages described here and above we
are not subject to any additional penalties under the terms of these selling shareholders
agreements.

Warrant A Agreement

This agreement provides that each
Warrant A grants the shareholder the right to purchase our common stock at a price of
$5.50 per share. The Warrant A is exercisable until five years after the purchase date,
which is January or February 2009.

Warrant B Agreement

This agreement provides that each
Warrant B grants the shareholder the right to purchase our common stock at a price of
$3.50 per share. The Warrant B is exercisable until the earlier of: (i) 10 days after our
registration statement is effective or 10 days after the Companys common stock is
traded on the NASDAQ Small Cap or the American Stock Exchange; or (ii) the date that is
375 days following the date of the purchase date. All Warrants B expired on November 22,
2004.

Related Issues

In addition, we issued the following
for services rendered to us: (a) 17,500 shares, Warrants A to purchase 17,500 shares of
our common stock and Warrants B to purchase 17,500 shares of our common stock to Stern and
Company in exchange for business consulting type services rendered to us; and (b)100,000
Warrants A to Hamilton, Lehrer & Dargan, P.A. for legal services rendered to us; (c)
In connection with our January/February 2004 private placement of securities we utilized
the assistance of The Oberon Group, LLC as a finder. The Oberon Group is a limited
liability company registered in New York, which is owned, managed and controlled by Adam
Breslawsky, a selling shareholder, Elad Epstein and Nicole Schmidt. On February 11, 2004,
we paid The Oberon Group a total of $162,800 as a finders fee and on February 26, 2004 we
granted to The Oberon Group Warrants A to purchase 50,000 shares of our common stock for
its finder services. The Warrants A are and the Warrants B were exercisable at the same
prices and under the same term as described above.

Any shares of common stock covered by
this agreement which qualify for sale pursuant to Rule 144 under the Securities Act, as
amended, may be sold under Rule 144 rather than pursuant to this prospectus.

-20-

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VOTING AGREEMENT

On September 28, 2004, Abraham
Keinan, the Chairman of our Board of Directors, Guy Nissenson, our President/Chief
Executive Officer/Director, and Campbeltown Business Ltd., a related party consultant,
entered into a Voting Agreement which provides as follows:

| | 1) | each of the parties to the Voting Agreement agree to vote any shares of our
          common stock controlled by the parties only in such manner as previously agreed
          by all parties;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | In the event of any disagreement regarding the manner of voting, a party to the
          agreement will not vote any shares, unless all the parties have settled the
          disagreement;
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | The agreement applies to any and all of our common stock that is currently
          owned, directly or indirectly, by any party to the agreement and to any of our
          common stock in which any party to the agreement has voting power, directly or
          indirectly;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | If any additional of our shares of common stock are at any time during the term
          of the agreement issued to a party to the agreement, such shares will be voted
          in accordance with the other terms to this agreement;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5) | The agreement applies to any and all of our common stock which will be issued
          upon exercise of any options and/or warrants;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------

| | 6) | The term of the Voting Agreement is ten years.
| | -- | ----------------------------------------------

Competitive Business
Conditions

The communications and information
services industry is highly competitive and varied. We have only approximately 0.3% of the
market share of the United Kingdom based long distance and international telecom market,
based on our revenues of $18,764,479 (approximately 9.7 million United Kingdom pounds)
during 2004, compared with a $4.1 billion long distance and international telecom market
in the United Kingdom (approximately 2.3 billion United Kingdom pounds), according to the
United Kingdom regulatory oversight of these companies, the Office of Communications
 United Kingdom, otherwise known as Ofcam, the website of which may be accessed at
www.ofcom.org.uk. Many of our existing and potential competitors, including approximately
160 licensed telecom carriers in the United Kingdom, have greater financial, personnel,
marketing, customer bases and other financial resources significantly greater than ours.
Our competitors include:

| |  | Large
regional carriers in the United Kingdom such as British             Telecom;
| | - | ----------------------------------------------------------------------------------

| |  | Other
regional carriers in the United Kingdom such as OneTel,             Telediscount, Alpha,
and Primus;
| | - | ----------------------------------------------------------------------------------------------------------

| |  | Smaller
regional carriers such as Quip.com;
| | - | -------------------------------------------

| |  | Wireless
telecommunications providers such as Vodafone, T-Mobile,             and Orange; and
| | - | ---------------------------------------------------------------------------------------------

| |  | International
carriers.
| | - | -----------------------

Many of our competitors have the
flexibility to introduce new service and pricing options that may be more attractive to
our existing as well as our future potential customers. As a result: (a) these competitors
have greater growth and profit potential than us; (b) competition may adversely affect our
telecommunications related market share; (c) our competition may lead to a decrease in the
rate at which we add new customers; and (d) price competition or promotional incentives
offered by our competitors may lead to decreases in the rates that we charge, which may
adversely affect our potential profitability.

We will attempt to overcome the
competitive advantages of our competitors by:

| |  | Enhancing
 our personal  contact with our  customers and local                   agents;
| | - | ----------------------------------------------------------------------------------------

| |  | Providing
 our  customers  with the option to control  and see                   their account over
the Internet;
| | - | -----------------------------------------------------------------------------------------------------------------

| |  | Negotiating
volume discounts with our underlying carriers; and
| | - | --------------------------------------------------------------

| |  | Increasing
our ability to direct customer call traffic over the transmission networks of more than
one carrier.
| | - | ---------------------------------------------------------------------------------------------------------------

-21-

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Principal Suppliers:

In 2004 our principal suppliers of
telephone routing and switching services according to the percentage that each provided
were:

| |  | Teleglobe
International  35%
| | - | -----------------------------

| |  | British
Telecommunications  24%
| | - | --------------------------------

| |  | Worldcom
-- 20%
| | - | ---------------

| |  | ITXC
Corporation -- 15%
| | - | -----------------------

Dependence on Major
Customers:

During 2004, there were two customers
that accounted for more than 10% of our revenues: (a) our affiliate, Story Telecom,
represented approximately 44% of our total revenues; and (b) British Telecom represented
approximately 22% of our total revenues. Collectively, the United Kingdom accounts for
approximately 75% of our revenues.

Patents and trademarks:

On January 9, 2004, we received
notification from the Trademarks Registry Office of Great Britain that as of August 8,
2003, our trademark, Xfone, was registered by that government agency.

On December 29, 2004, Xfone USA
received notice of publication from the United States Patent and Trademark Office
identifying that its trademark application for eXpeTel appears to be entitled
for registration. If no opposition is filed within the specified time, a registration may
be issued.

We do not have any  other  patents
 or trademarks,  nor have we filed any other applications for patents or trademarks.

Regulatory Matters and
licenses:

In 1996, our subsidiary, Swiftnet,
Ltd., was granted a license to operate a telecommunications system from the Secretary of
State for Trade and Industry of the United Kingdom. The license may be revoked by this
agency upon thirty days notice in the event of certain conditions such as misconduct or
breach of various telecommunications laws.

We are affected by regulations
introduced by Secretary of State for Trade and Industry of the United Kingdom. Since the
break up of the United Kingdom telecommunications duopoly consisting of British Telecom
and Mercury in 1991 it has been the stated goal of Secretary of State for Trade and
Industry to create a competitive marketplace. Secretary of State for Trade and Industry
has imposed mandatory rate reductions on British Telecom in the past, which are expected
to continue for the near future. We do not believe that any regulations introduced by
Secretary of State for Trade and Industry will interfere with or substantially hurt our
business.

On April 15, 2004, we established an
Israel based subsidiary, Xfone Communication Ltd., recently renamed to Xfone 018 Ltd. On
July 4, 2004 the Ministry of Communications of the State of Israel granted Xfone
Communication Ltd. a license to provide international telecom services in Israel. The
license may be revoked by this agency in the event of certain conditions such as breach of
telecommunication laws and regulations or breach of certain provisions of the license.

Xfone USA is licensed as a
Competitive Local Exchange Company and an Inter-exchange Carrier to provide local
telephone and long distance services in the states of Alabama, Florida, Georgia, Louisiana
and Mississippi. Internet and data services provided by Xfone USA are not regulated
services.

On March 9, 2005, the
Mississippi Public Service Commission (Commission) issued an Order
opening a Generic Change of Law Proceeding (Commission Proceeding) to consider
amendments to existing Interconnection Agreements between BellSouth Telecommunications,
Inc. and all Competitive Local Exchange Carriers (CLECs) in Mississippi. 
As an interested party and a CLEC, Xfone USA, Inc. petitioned and was granted permission
to intervene in the Commission Proceeding for regulatory purposes. Subsequently,
BellSouth sued the Commission in federal district court alleging that
the Proceeding was preempted by federal law (the Federal
Proceeding).  On March 22, 2005, Xfone USA, Inc. filed a motion to intervene
in the Federal Proceeding to support the Commissions regulatory
jurisdiction over the subject Interconnection Agreements.  The issues presented in
both the Commission Proceeding and the Federal Proceeding are regulatory in nature and do
not involve monetary damages.

-22-

---

As of March 10, 2005, and upon
consummation of the merger of WS Telecom, a Mississippi based telecom operator, with and
into our wholly owned subsidiary, Xfone USA, Inc., we become subject to applicable US
state and federal telecommunications laws and regulations. Compliance with such laws will
involve higher costs than we had in Europe during 2004.

Our business operates in at least 75
countries, all of which have different regulations, standards and controls related to
licensing, telecommunications, import/export, currency and trade. We believe that we are
in substantial compliance with these laws and regulations.

Cost of Compliance with
Environmental Laws

We currently have no costs associated
with compliance with environmental regulations. We do not anticipate any future costs
associated with environmental compliance; however, there can be no assurance that we will
not incur such costs in the future.

Research and Development:

Other than developing and expanding
our telecommunications applications and our website, we do not intend to undertake any
significant research and development activities. During fiscal year 2003 we spent 44,553
UKP $79,304 US on research and development. During fiscal year 2004, we spent 25,945 UKP
$50,074 on research and development.

Employees:

As of March 30, 2005, we have 72
full-time employees. 32 employees in the United States, 15 employees in the United Kingdom
and 25 employees is Israel.

REPORTS TO SECURITY
HOLDERS

We are subject to the informational
requirements of the Securities Exchange Act of 1934. Accordingly, we file annual,
quarterly and other reports and information with the Securities and Exchange Commission.
You may read and copy these reports in Washington, D.C. Our filings are also available to
the public from commercial document retrieval services and the Internet world wide website
maintained by the Securities and Exchange Commission at www.sec.gov.

-23-

---

ITEM 2. DESCRIPTION OF
PROPERTY.

Our corporate headquarters are located at 960 High Road, London N12 9RY -
United Kingdom. This 3,000 square foot facility has seven offices, one board
room,  one computer room, one operation room that controls the computer
room, entrance hall,  main hall, accounting, secretarial and administration
and 2 kitchens. Our office is  located on the fifth floor of a six floor
building with a concierge, two elevators  and parking facilities. Our
premises were leased on a 5 year term, which was due to expire on December
12, 2001. The yearly lease payments are approximately 15,900 UK
Pound ($30,687). On December 20, 2002, we renewed our lease for a period of
10 years, with a five year cancellation option. Our current  lease expires
on December 20, 2012. The yearly lease payments have been  increased to
24,000 UK Pound ($46,320).

Our subsidiary in Israel,  Xfone 018
Ltd., is located at 1 Haodem  Street, Petach  Tikva,  Israel. This  334 square meter facility
 has eight offices, one board room, one computer room, one operation room that controls
the computer room,  open space with costumer  service  stations, accounting,  secretarial
 and  administration, one  kitchen,  entrance hall and main hall.  Our office is located
on the third  floor of a four floor building with an elevator and parking  facilities.
 Our premises were leased on a five year term which is due to expire  on August 1, 2009.
 However,  we have the option to extend the term of the lease for an additional five year
period,  subject to a prior notice to be given no later than June 1, 2009. The lease
 payments for the first 30 months are $1,670.00 per month. The  lease  payments for  the 31-48
months are $2,004.00 per month. The lease  payments for the  49-60 months are $2,171.00
per month. The  lease  payments for the 61-72 months are $2,338.00 per month. The lease
 payments for the 73-84 months are $2,505.00 per month. The lease  payments from  the 85 month
are $2,672.00 per month. We  also pay $50 a month per each parking and we presently  use
four parking  spaces.  Xfone,  inc. is guarantor to the lease. In addition, we have two
switches which are located at two different locations in Israel. we are renting the cages
in which our switches are located.

The headquarters of our subsidiary,
 Xfone USA are located at 2506 Lakeland Drive,  Flowood,  Mississippi,  39232.  This 7,500
square foot facility has ten offices, one large open area fitted  with work  stations for
 provisioning,  billing and network  operations,  another large area fitted with work
stations for customer  service  and one board room,  one computer room,  reception area,
 accounting,  secretarial and administration and 2 kitchens.  Xfone USA's office spaces
are located on the first,  fourth and fifth floors of a six floor  building  with two
 elevators and parking  facilities.  Its premises  were leased on a 3 year term,  which is
due to  expire in December,  2007.  The yearly lease  payments are  approximately
 $104,000.

Our offices are in good condition
and are sufficient to conduct our operations.

We do not own any property nor do we
have any plans to acquire any property in the future. We do not intend to renovate,
 improve or develop any properties.  We are not subject to competitive  conditions  for
property and currently  have no property to insure.  We have no policy with respect to
 investments  in real estate or interests in real estate and no policy with respect to
investments in real estate  mortgages.  We have no policy with respect to  investments
 in securities of or interests in persons  primarily  engaged in real estate activities.

ITEM 3. LEGAL PROCEEDINGS.

MG Telecom Ltd.

In August 2002, we filed a summary
procedure lawsuit in the court of Tel - Aviv, Israel against MG Telecom Ltd. and its
Chief Executive  Officer,  Mr. Avner Shur. In this lawsuit, we allege an unpaid  debt due
to us in the amount of $50,000  from MG Telecom  for  services  rendered  by us to MG
 Telecom.  The debt arose from an  agreement  between us and MG Telecom, a provider of
calling card services,  in which traffic  originating from MG Telecom calling cards was
delivered through our system in London,  England.  Mr. Shur signed a personal  guarantee
 agreement to secure MG Telecom's  obligations  under the  agreement.  During  October
 2002,  Mr. Shur filed a request for leave to defend.  The court has not rendered a
judgment in the matter and we are unable to determine  the future  disposition  of this
matter.  The court  session for the hearing of the  evidence was  scheduled  for February
24, 2004, but postponed to March 22, 2004, at which time an  evidentiary  hearing was
held. An additional  evidentiary  hearing will be held on September 6, 2004. A third
evidentiary hearing was held on December 6, 2004. Each party is currently requested to
provide the court with a written brief of his case.

-24-

---

Ryfcom Ltd.

In July 2001 we filed a lawsuit in
the court of Petach - Tikva,  Israel against Ryfcom,  Ltd., a former provider of calling
card services,  and its Chief  Executive  Officer,  Mr. Paltiel Porat. In this lawsuit,
 we allege an unpaid debt due to us in the amount of $107,528 from Ryfcom for services
 rendered by us. The debt arose from an agreement between us and Ryfcom, in which traffic
 originating from Ryfcom calling cards was delivered through our system in London. Mr.
Porat signed a personal  guarantee  agreement to secure the all of Ryfcom's  obligations
 under our agreement with Ryfcom.  Before the judgment,  Mr. Paltiel repaid the amount of
approximately  $15,000.  On January 6, 2003, the court of Petach Tikva, rendered a
judgment in favor of us. According to the judgment Mr. Paltiel has to repay the remainder
of the money,  approximately  $92,000, plus the court fee that was paid by us of
 approximately  $1,500,  plus expenses in the amount of $9,300.  All amounts are linked
until fully paid by the Israeli Consumer Price Index. Mr. Paltiel failed to comply with
the January 6, 2003 judgment and as a result  thereof we filed on May 17, 2004 with the
court a request to send Mr.  Paltiel a warning that his failure to satisfy the January 6,
2003 judgment will result in Mr. Paltiel being declared insolvent. We are still awaiting
the court's decision.

BellSouth Telecommunications, Inc.

In October,  2004 our subsidiary,
 Xfone USA, Inc., filed a joint petition together with WS Telecom,  Inc. d/b/a eXpeTel
 Communications ("eXpeTel")  before the Mississippi Public Service Commission
("Commission"). The joint petition requested that the Commission require  BellSouth
Telecommunications,  Inc. ("BellSouth"), the Regional Bell Operating Company and
Incumbent Local Exchange  Carrier, to  consent to the assignment of eXpeTel's  current
 interconnection  agreement with BellSouth from eXpeTel to Xfone USA, Inc. in connection
with the merger of eXpeTel into Xfone USA,  Inc.   BellSouth  filed its answer to the
joint  petition,  alleging that  BellSouth was entitled to additional  security  prior to
the assignment of the agreement. We, Xfone USA, Inc. and eXpeTel were of the opinion that
no additional security was required under the terms of the agreement.

The matter was  heard on  December
15, 2004 before the Commission.  The Commission  entered its Order on March 9, 2005.  The
Commission's  Order: 1) ruled that neither eXpeTel nor Xfone were  required to post any
 additional security;  2) ordered  BellSouth  to  consent forthwith  to the  assignment
 of the  interconnection  agreement;  and 3) assigned  the interconnection agreement to
Xfone USA, Inc. upon consummation of the merger between Xfone USA, Inc. and eXpeTel.

On December 1, 2004, eXpeTel filed
before the Commission a formal complaint against BellSouth for  expedited relief, for
negotiations, or in the alternative,  for final resolution of disputes.  This complaint
seeks credits to eXpeTel's  account with BellSouth in the total amount  of $386,292.40.
  eXpeTel alleges that these charges were improperly billed by BellSouth to eXpeTel's
account.   BellSouth has filed its answer to eXpeTel's  complaint denying that the
charges were improperly billed.  The matter is tentatively  scheduled for hearing before
the Commission on April 19, 2005, unless the parties negotiate a settlement prior to that
time.

Other than the above,  we are not a
party to any material  pending legal  proceeding,  nor is any of our property the subject
of such a legal  proceeding.  However,  we may become subject to dispute and litigation
in the ordinary course of our business.  None of these matters,  in the opinion of our
management,  is material or likely to result in a material effect on us based upon
information available at this time.

No officer,  director,  or persons
 nominated  for such  positions,  promoter or significant  employee  has been  involved
 in legal  proceedings  that  would be material to an evaluation of our management.

-25-

---

Our directors,  executive officers
and control persons have not been involved in any of the following events during the past
five years:

1.
any bankruptcy  petition filed by or against any business of which such person was a
general  partner  or  executive  officer  either at the time of the bankruptcy or within
two years prior to that time;

2.
any  conviction in a criminal  proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses);

3.
being  subject  to any order,  judgment,  or decree,  not  subsequently reversed,
 suspended  or  vacated,  of  any  court  of  competent  jurisdiction, permanently or
temporarily enjoining,  barring, suspending or otherwise limiting his involvement in any
type of business, securities or banking activities; or

4.
 being  found  by  a  court  of  competent  jurisdiction  (in  a  civil action),the
 Commission  or the  Commodity  Futures  Trading  Commission to have violated a federal
or state  securities or commodities law, and the judgment has not been reversed,
suspended, or vacated.

ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS.

On November 23, 2004, by written
 shareholders  consent to action  without  meeting of over 90% of the voting group of
common  shares,  we elected two new  independent  directors, Mr. Arye Czertok (64 years
old), Esquire and Mr. Aviu Ben-Horrin (56 years old).

PART II.

ITEM 5. MARKET FOR COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS.

Below is the market
 information  pertaining  to the range of the high and low bid  information  of our
common stock for each quarter since our common stock has been quoted on the OTC Bulletin
Board.  Our common stock is quoted under the symbol XFNE on the OTC Bulletin Board and on
the Berlin  (Germany) Stock Exchange.  The quotations  reflect  inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual transactions.

|2004           | Low | High
|-------------- | --- | ----
|Fourth Quarter |     |     
|Third Quarter  |     |     
|Second Quarter |     |     
|First Quarter  |     |     

|2003           | Low | High
|-------------- | --- | ----
|Fourth Quarter |     |     
|Third Quarter  |     |     
|Second Quarter |     |     
|First Quarter  |     |     

The source of the above information
is www.OTCBB.com Data Products, Historical Data Service.

-26-

---

There is a limited trading market for
our common stock. There is no assurance that a regular trading market for our common stock
will develop, or if developed will be sustained. A shareholder in all likelihood,
therefore, will not be able to resell their securities should he or she desire to do so
when eligible for public resales. Furthermore, it is unlikely that a lending institution
will accept our securities as pledged collateral for loans unless a regular trading market
develops.

PENNY STOCK
CONSIDERATIONS.

Our Shares are penny
stocks as that term is generally defined in the Securities Exchange Act of 1934 as
equity securities with a price of less than $5.00. Our shares are subject to rules that
impose sales practice and disclosure requirements on broker-dealers who engage in certain
transactions involving a penny stock.

Under the penny stock regulations, a
broker-dealer selling a penny stock to anyone other than an established customer or
accredited investor must make a special suitability determination regarding
the purchaser and must receive the purchasers written consent to the transaction
prior to the sale, unless the broker-dealer is otherwise exempt. Generally, an individual
with a net worth in excess of $1,000,000 or annual income exceeding $200,000 individually
or $300,000 together with his or her spouse is considered an accredited investor.

In addition, under the penny stock
regulations the broker-dealer is required to:

| | o | Deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared
by the Securities and Exchange Commission relating to the penny stock market, unless the
broker-dealer or the transaction is otherwise exempt;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Disclose commission payable to the broker-dealer and its registered representatives and
current bid and offer quotations for the securities;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| | o | Send monthly statements disclosing recent price information pertaining to the penny stock
held in a customers account, the accounts value and information regarding the
limited market in penny stocks.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o | Make a special written determination that the penny stock is a suitable investment for the
purchaser and receive the purchasers written agreement to the transaction, prior to
conducting any penny stock transaction in the customers account.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Because of these regulations,
broker-dealers may encounter difficulties in their attempt to sell shares of our common
stock, which may affect the ability of shareholders to sell their shares in the secondary
market and have the effect of reducing the level of trading activity in the secondary
market. These additional sales practice and disclosure requirements could impede the sale
of our securities. In addition, the liquidity for our securities may be adversely
affected, with a corresponding decrease in the price of our securities. Our shares are
subject to such penny stock rules and our shareholders will, in all likelihood, find it
difficult to sell their securities.

AMEX APPLICATION

We sent an application to the AMEX on
October 25, 2004, and is supplying information on an on-going basis to the AMEX for a
possible listing. Following recent achievements and financial results, our officers and
members of our Board of Directors have recommended that we apply for a higher tier
exchange.

HOLDERS.

At March 30, 2005, there were 198
holders of record of our common stock. We have one class of common stock outstanding.

-27-

---

DIVIDENDS.

On December 19, 2002, we declared our
first cash dividend in the amount of $0.02 per common share. The cash dividend was payable
on January 15, 2003 to our common stockholders of record at the close of business on
December 31, 2002. On December 30, 2003, we declared a cash dividend of $.03 per shares on
our common stock for all shareholders of record of our common stock at the close of
business on December 31, 2003. We paid this dividend on February 16, 2004.

Apart from this dividend, we have not
declared any cash dividends on our common stock since our inception and we do not
anticipate at the present time paying further dividends in the foreseeable future.
Currently, we plan to retain future earnings, if any, for use in our business. Any
decisions as to future payment of dividends will depend on our earnings and financial
position and such other factors, as the Board of Directors deems relevant.

Securities Authorized for Issuance
under Equity Compensation Plans.

On November 24, 2004, our board of directors
approved and adopted the principal items forming our 2004 Stock Option Plan (the
Plan) which is presently being drafted for the benefit of employees, officers,
directors, consultants and subcontractors of the Registrant including its subsidiaries.
The purpose of the Plan is to enable the Registrant to attract and retain the best
available personnel for positions of substantial responsibility, to provide an incentive
to such persons presently engaged with the Registrant, and to promote the success of our
business. Because the plan is multinational there are various complex tax and accounting
issues that need to be resolved before formal distribution.

An aggregate of 5,500,000 shares of
our common stock will be subject to the Plan. The Plan will provide for the grant of
options to acquire common shares of the Registrant. Stock options granted under the Plan
will include:

|(a) | Stock options that qualify under Section 422 of the Internal Revenue Code of
                    1986, as amended (the Code), which will be referred to in this Plan
                    as Incentive Stock Options;
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Stock options that qualify under Section 102(b) of the Israeli Tax Ordinance
                    (New Version) 1961, as amended and the rules and regulations promulgated there
                    under (the Ordinance), which will be referred to in this Plan as
                    Section 102(b) Options; and
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Stock options that do not qualify under Section 422 of the Code nor under
                    Section 102(b) of the Ordinance, which will be referred to in this Plan as
                    Non-Qualified Stock Options.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-28-

---

The Plan is administered by our board
of directors. The board of directors 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 exercise price, the period of each option, the times at which options may be
exercised and whether the option is an incentive or non-statutory option. Options are
exercisable in accordance with the terms of an option agreement entered into following the
time of grant.

The Plan shall continue in effect
until the date which is ten years from the date of its adoption by the board of directors,
subject to earlier termination by the board of directors. The board of directors may
terminate or suspend the Plan at any time.

In the November 24, 2004 board of
directors meeting the Registrant approved that the following directors will be granted
options under the Plan according to the following terms:

|NAME OF
THE OPTIONEE | DATE OF
GRANT | NUMBER OF
OPTIONS
GRANTED | PRICE
PER
SHARE | VESTING DATE | EXPIRATION
DATE
|-------------------- | ------------- | ------------------------- | --------------- | ------------ | ---------------
|Abraham Keinan       |               |                           | 24.11.04        |              |                
|                     |               |                           |                 |              |                
|                     |               |                           |                 |              |                
|                     |               |                           |                 |              |                
|Guy Nisenson         |               |                           | 24.11.04        |              |                
|                     |               |                           |                 |              |                
|                     |               |                           |                 |              |                
|                     |               |                           |                 |              |                
|Eyal J. Harish       |               |                           | 24.11.04        |              |                
|                     |               |                           |                 |              |                
|                     |               |                           |                 |              |                
|                     |               |                           |                 |              |                
|Shemer S. Schwartz   |               |                           | 24.11.04        |              |                
|                     |               |                           |                 |              |                
|                     |               |                           |                 |              |                
|                     |               |                           |                 |              |                
|Arye Czertok         |               |                           | 24.11.04        |              |                
|                     |               |                           |                 |              |                
|                     |               |                           |                 |              |                
|                     |               |                           |                 |              |                
|Aviu Ben-Horrin      |               |                           | 24.11.04        |              |                
|                     |               |                           |                 |              |                
|                     |               |                           |                 |              |                
|                     |               |                           |                 |              |                

Further, the board of directors
approved a pool of additional 2,300,000 options from the 5,500,000 options under the Plan.
It was noted that the Registrant has contractual obligations to grant options to certain
present and future employees and the pool will be used for this purpose as well.

-29-

---

On February 6, 2005 (Date of
the Grant)we granted to certain employees a total of 730,000 options. subject to the
principles of our 2004 stock option plan and according to the following terms: The
Vesting Date 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 for all abovementioned options is 5.5 years from the Date of Grant. The
following employees were granted options:

|Name of the Optionee | Date of Grant | Number of Options
granted | Price per Share | Vesting date \ period
|-------------------- | ------------- | ------------------------- | --------------- | ---------------------
|Tommy R. Ferguson    |               |                           | 6.2.05          |                      
|                     |               |                           |                 |                      
|Bradley Marcus       |               |                           | 6.2.05          |                      
|                     |               |                           |                 |                      
|Aggelos Kikiras      |               |                           | 6.2.05          |                      
|                     |               |                           |                 |                      
|Nick Matsoukis       |               |                           | 6.2.05          |                      
|                     |               |                           |                 |                      
|Bosmat Houston       |               |                           | 6.2.05          |                      
|                     |               |                           |                 |                      
|Rafael Dick          |               |                           | 6.2.05          |                      
|                     |               |                           |                 |                      
|Alon Reisser         |               |                           | 6.2.05          |                      
|                     |               |                           |                 |                      

RECENT SALES OF
UNREGISTERED SECURITIES

On August 21, 2003, we issued 400,000
options to acquire shares of our restricted common stock to Abraham Keinan. These options
were issued to Abraham Keinan for services rendered by Abraham Keinan as the Chairman of
our Board of Directors. These options are exercisable at a price of $0.475 per share. Each
option is convertible into one (1) share of stock. These options vested immediately and
expire on August 21, 2008. We relied upon Section 4(2) of the Act for the offers and sales
to Abraham Keinan. We believed that Section 4(2) was available because the offer and sale
did not involve a public offering. On March 1, 2004, our Board of Directors cancelled
these options. This cancellation was in accordance with our August 21, 2003 board
resolution signed by all members of the Board of Directors, including Messrs Keinan and
Nissenson, the proposed recipients of the options, which states that the options are
cancelable at the sole discretion of Xfone for a period not exceeding 210 days from the
date these options are granted.

On August 21, 2003, we issued 200,000
options to acquire shares of our restricted common stock to Guy Nissenson. These options
were issued to Guy Nissenson for services rendered by Mr. Nissenson as our President and
Principal Executive Officer. These options are exercisable at a price of $0.475 per share.
Each option is convertible into one (1) share of stock. These options vested immediately
and expire on August 21, 2008. We relied upon Section 4(2) of the Act for the offers and
sales to Guy Nissenson. We believed that Section 4(2) was available because the offer and
sale did not involve a public offering. On March 1, 2004, our Board of Directors cancelled
these options. This cancellation was in accordance with our August 21, 2003 board
resolution signed by all members of the Board of Directors, including Messrs Keinan and
Nissenson, the proposed recipients of the options, which states that the options are
cancelable at the sole discretion of Xfone for a period not exceeding 210 days from the
date these options are granted.

On September 30, 2002 we entered into
an agreement with Nir Davison. Nir Davison had the option to our shares of common stock 12
months after the September 30, 2002 agreement, if the Story Telecom project generated a
sufficient amount of sales and profits according to a specified formula in the agreement;
however, the project failed to meet the profits criteria and on September 30, 2003 the
right for the options was cancelled.

-30-

---

Separate and apart from this
agreement, because Story Telecom achieved growth since its inception, which has enabled us
to attain certain achievements in our business plan, our Board of Directors issued a
resolution on September 3, 2003 which provided that we or our major shareholders, Mr.
Keinan, who is our Chairman of the Board, Vision Consultants, an affiliated entity, and
Campbeltown Business Ltd., also an affiliated entity, in order to provide an incentive to
Mr. Davison and to enhance his loyalty to us, will grant him options to purchase 500,000
shares of common stock. The September 3, 2003 resolution further provides that these major
shareholders have the first right to sell to Mr. Davison their own shares or a portion of
them at the same terms, rather than our issuing such shares. Immediately after the
September 3, 2003 resolution was passed, the major shareholders, Vision Consulting and/or
Abraham Keinan and/or Campbeltown Business, Ltd., notified Mr. Davison and us that they
decided to exercise their first right by granting Mr. Davison the options to purchase the
500,000 shares from their own shares of our common stock. Therefore, as of the date of
this notice we were no longer under the obligation to grant an option or issue shares of
common stock to Mr. Davison under this resolution.

On January 1, 2004, we granted the
following warrants to Portfolio PR, a New York corporation owned and controlled by Paul
Holm, in exchange for services: (a) 50,000 warrants to purchase 50,000 shares of our
common stock at an exercise price of $6.00 per share; and (b) 50,000 warrants to purchase
50,000 shares of our common stock at an exercise price of $10 per share. The warrants
expire on January 1, 2005. We relied upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933. We believed Section 4(2) was available
because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | Mr. Holm had a preexisting relationship with Guy Nissenson, our Principal
          Executive Officer and President.
|--- | --------------------------------------------------------------------------------------------------------------------

In conjunction with this agreement,
from January 2004 to April 2004, we paid Portfolio PR, Inc. $7,000 but we made not stock
issuances to Portfolio PR, Inc. In addition, Portfolio PR, Inc. did not exercise any
warrants. On April 23, 2004, we cancelled the agreement with Portfolio PR, Inc. for
cause. In July 2004, Portfolio PR, Inc. agreed to receive from us additional
$7,209.09 in cash and 3,000 shares of our common stock as total and final consideration
and further agreed that we would have no further obligation to pay it any additional cash,
shares, warrants, or other consideration in connection with this agreement.

On January 9, 2004, we granted 17,500
restricted shares of our common stock, 17,500 Warrants A, and 17,500 Warrants B to Stern
& Company, a limited liability company registered in New York which is owned, managed
and controlled by Shai Stern, in exchange for strategic planning related services. Each
Warrant A is exercisable into one share of common stock at an exercise price of $5.50 per
share. Each Warrant B is exercisable into one share of common stock at an exercise price
of $3.50 per share. We agreed to register the 17,500 shares of common stock, the 17,500
shares underlying the Warrants A and the 17,500 shares underlying the Warrants B. The
Warrants A are exercisable at any time before January 9, 2009. The Warrants B expired on
November 22, 2004. We relied upon the exemption from registration provided by Section 4(2)
of the Securities Act of 1933. We believed Section 4(2) was available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | Stern and Company had a preexisting relationship with Guy Nissenson, our
          Principal Executive Officer and President.
|--- | -----------------------------------------------------------------------------------------------------------------------------

-31-

---

On January 9, 2004, we sold 16,667
restricted shares of our common stock, 16,667 Warrants A, and 16,667 Warrants B to WEC
Partners, LLC, a Delaware limited liability company owned and controlled by Ethan
Benovitz, Daniel Saks, and Jaime Hartman, in exchange for $50,000. Each Warrant A is
exercisable into one share of common stock at an exercise price of $5.50 per share. Each
Warrant B is exercisable into one share of common stock at an exercise price of $3.50 per
share. We agreed to register the 16,667 shares of common stock, the 16,667 shares
underlying the Warrants A and the 16,667 shares underlying the Warrants B. The Warrants A
are exercisable at any time before January 9, 2009. The Warrants B expired on November 22,
2004. We relied upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. We believed Section 4(2) was available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | WEC Partners had a preexisting relationship with Guy Nissenson, our Principal
          Executive Officer and President.
|--- | ------------------------------------------------------------------------------------------------------------------------

On January 9, 2004, in exchange for
$300,000, we sold 100,000 restricted shares of our common stock, 100,000 Warrants A, and
100,000 Warrants B to Platinum Partners Value Arbitrage, a Cayman Islands based limited
partnership; Mark Nordlicht is the Managing Member of Platinum Management LLC, the General
Partner of this limited partnership, which is a limited liability company registered in
new York. Each Warrant A is exercisable into one share of common stock at an exercise
price of $5.50 per share. Each Warrant B is exercisable into one share of common stock at
an exercise price of $3.50 per share. We agreed to register the 100,000 shares of common
stock, the 100,000 shares underlying the Warrants A and the 100,000 shares underlying the
Warrants B. The Warrants A are exercisable at any time before January 9, 2009. The
Warrants B expired on November 22, 2004. We relied upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933. We believed Section 4(2) was
available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | Platinum Management LLC had a preexisting relationship with Guy Nissenson, our
          Principal Executive Officer and President.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

-32-

---

On January 9, 2004, we sold 50,000
restricted shares of our common stock, 50,000 Warrants A, and 50,000 Warrants B to
Countrywide Partners, LLC, a Delaware limited liability company owned, managed, and
controlled by Harry Adler, in exchange for $150,000. Each Warrant A is exercisable into
one share of common stock at an exercise price of $5.50 per share. Each Warrant B is
exercisable into one share of common stock at an exercise price of $3.50 per share. We
agreed to register the 50,000 shares of common stock, the 50,000 shares underlying the
Warrants A and the 50,000 shares underlying the Warrants B. The Warrants A are exercisable
at any time before January 9, 2009. expired on November 22, 2004. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of 1933. We
believed Section 4(2) was available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | Countrywide Partners had a preexisting relationship with Guy Nissenson, our
          Principal Executive Officer and President.
|--- | --------------------------------------------------------------------------------------------------------------------------------

On January 15, 2004, we sold 5,000
restricted shares of our common stock, 5,000 Warrants A, and 5,000 Warrants B to Arik
Ecker in exchange for $15,000. Each Warrant A is exercisable into one share of common
stock at an exercise price of $5.50 per share. Each Warrant B is exercisable into one
share of common stock at an exercise price of $3.50 per share. We agreed to register the
5,000 shares of common stock, the 5,000 shares underlying the Warrants A and the 5,000
shares underlying the Warrants B. The Warrants A are exercisable at any time before
January 15, 2009. The Warrants B expired on November 22, 2004. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of 1933. We
believed Section 4(2) was available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | Arik Ecker had a preexisting relationship with Guy Nissenson, our Principal
          Executive Officer and President.
|--- | ----------------------------------------------------------------------------------------------------------------------

On January 15, 2004, we sold 8,500
restricted shares of our common stock, 8,500 Warrants A, and 8,500 Warrants B to Zwi Ecker
in exchange for $25,500. Each Warrant A is exercisable into one share of common stock at
an exercise price of $5.50 per share. Each Warrant B is exercisable into one share of
common stock at an exercise price of $3.50 per share. We agreed to register the 8,500
shares of common stock, the 8,500 shares underlying the Warrants A and the 8,500 shares
underlying the Warrants B. The Warrants A are exercisable at any time before January 15,
2009. The Warrants B expired on November 22, 2004. We relied upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933. We believed Section
4(2) was available because:

-33-

---

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | Zwi Ecker had a preexisting relationship with Guy Nissenson, our Principal
          Executive Officer and President.
|--- | ---------------------------------------------------------------------------------------------------------------------

On January 15, 2004, we sold 13,000
restricted shares of our common stock, 13,000 Warrants A, and 13,000 Warrants B to Simon
Langbart in exchange for $39,000. Each Warrant A is exercisable into one share of common
stock at an exercise price of $5.50 per share. Each Warrant B is exercisable into one
share of common stock at an exercise price of $3.50 per share. We agreed to register the
13,000 shares of common stock, the 13,000 shares underlying the Warrants A and the 13,000
shares underlying the Warrants B. The Warrants A are exercisable at any time before
January 15, 2009. The Warrants B expired on November 22, 2004. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of 1933. We
believed Section 4(2) was available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | Simon Langbart had a preexisting relationship with Guy Nissenson, our Principal
          Executive Officer and President.
|--- | --------------------------------------------------------------------------------------------------------------------------

On January 15, 2004, we sold 5,000
restricted shares of our common stock, 5,000 Warrants A, and 5,000 Warrants B to Robert
Langbart in exchange for $15,000. Each Warrant A is exercisable into one share of common
stock at an exercise price of $5.50 per share. Each Warrant B is exercisable into one
share of common stock at an exercise price of $3.50 per share. We agreed to register the
5,000 shares of common stock, the 5,000 shares underlying the Warrants A and the 5,000
shares underlying the Warrants B. The Warrants A are exercisable at any time before
January 15, 2009. The Warrants B expired on November 22, 2004. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of 1933. We
believed Section 4(2) was available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | Robert Langbart had a preexisting relationship with Guy Nissenson, our
          Principal Executive Officer and President.
|--- | ---------------------------------------------------------------------------------------------------------------------------

-34-

---

On January 15, 2004, we sold 3,000
restricted shares of our common stock, 3,000 Warrants A, and 3,000 Warrants B to Michael
Derman in exchange for $9,000. Each Warrant A is exercisable into one share of common
stock at an exercise price of $5.50 per share. Each Warrant B is exercisable into one
share of common stock at an exercise price of $3.50 per share. We agreed to register the
3,000 shares ofcommon stock, the 3,000 shares underlying the Warrants A and the 3,000
shares underlying the Warrants B. The Warrants A are exercisable at any time before
January 15, 2009. The Warrants B expired on November 22, 2004. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of 1933. We
believed Section 4(2) was available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | Michael Derman had a preexisting relationship with Guy Nissenson, our Principal
          Executive Officer and President.
|--- | --------------------------------------------------------------------------------------------------------------------------

On January 15, 2004, we sold 7,000
restricted shares of our common stock, 7,000 Warrants A, and 7,000 Warrants B to Errol
Derman in exchange for $21,000. Each Warrant A is exercisable into one share of common
stock at an exercise price of $5.50 per share. Each Warrant B is exercisable into one
share of common stock at an exercise price of $3.50 per share. We agreed to register the
7,000 shares of common stock, the 7,000 shares underlying the Warrants A and the 7,000
shares underlying the Warrants B. The Warrants A are exercisable at any time before
January 15, 2009. The Warrants B expired on November 22, 2004. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of 1933. We
believed Section 4(2) was available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | Errol Derman had a preexisting relationship with Guy Nissenson, our Principal
          Executive Officer and President.
|--- | ------------------------------------------------------------------------------------------------------------------------

On January 15, 2004, we sold 8,000
restricted shares of our common stock, 8,000 Warrants A, and 8,000 Warrants B to Yuval
Haim Sobel in exchange for $24,000. Each Warrant A is exercisable into one share of common
stock at an exercise price of $5.50 per share. Each Warrant B is exercisable into one
share of common stock at an exercise price of $3.50 per share. We agreed to register the
8,000 shares of common stock, the 8,000 shares underlying the Warrants A and the 8,000
shares underlying the Warrants B. The Warrants A are exercisable at any time before
January 15, 2009. The Warrants B expired on November 22, 2004. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of 1933. We
believed Section 4(2) was available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | Yuval Haim Sobel had a preexisting relationship with Guy Nissenson, our
          Principal Executive Officer and President.
|--- | ----------------------------------------------------------------------------------------------------------------------------

-35-

---

On January 15, 2004, we sold 8,000
restricted shares of our common stock, 8,000 Warrants A, and 8,000 Warrants B to Zvi Sobel
in exchange for $24,000. Each Warrant A is exercisable into one share of common stock at
an exercise price of $5.50 per share. Each Warrant B is exercisable into one share of
common stock at an exercise price of $3.50 per share. We agreed to register the 8,000
shares of common stock, the 8,000 shares underlying the Warrants A and the 8,000 shares
underlying the Warrants B. The Warrants A are exercisable at any time before January 15,
2009. The Warrants B are exercisable until the earlier of 10 days after this registration
statement is effective or 10 days after our common stock is traded on the NASDAQ Small Cap
or the American Stock Exchange or up until the date that is 375 expired on November 22,
2004. We believed Section 4(2) was available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | Zvi Sobel had a preexisting relationship with Guy Nissenson, our Principal
          Executive Officer and President.
|--- | ---------------------------------------------------------------------------------------------------------------------

On January 15, 2004, we sold 8,400
restricted shares of our common stock, 8,400 Warrants A, and 8,400 Warrants B to Tenram
Investments, Ltd. in exchange for $25,200. Each Warrant A is exercisable into one share of
common stock at an exercise price of $5.50 per share. Each Warrant B is exercisable into
one share of common stock at an exercise price of $3.50 per share. We agreed to register
the 8,400 shares of common stock, the 8,400 shares underlying the Warrants A and the 8,400
shares underlying the Warrants B. The Warrants A are exercisable at any time before
January 15, 2009. The Warrants B expired on November 22, 2004. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of 1933. We
believed Section 4(2) was available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | Tenram Investments, Ltd. had a preexisting relationship with Guy Nissenson, our
          Principal Executive Officer and President.
|--- | ------------------------------------------------------------------------------------------------------------------------------------

On January 15, 2004, we sold 10,000
restricted shares of our common stock, 10,000 Warrants A, and 10,000 Warrants B to Michael
Zinn in exchange for $30,000. Each Warrant A is exercisable into one share of common stock
at an exercise price of $5.50 per share. Each Warrant B is exercisable into one share of
common stock at an exercise price of $3.50 per share. We agreed to register the 10,000
shares of common stock, the 10,000 shares underlying the Warrants A and the 10,000 shares
underlying the Warrants B. The Warrants A are exercisable at any time before January 15,
2009. The Warrants B expired on November 22, 2004. We relied upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933. We believed Section
4(2) was available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | Michael Zinn had a preexisting relationship with Guy Nissenson, our Principal
          Executive Officer and President.
|--- | ------------------------------------------------------------------------------------------------------------------------

-36-

---

On January 22, 2004, we granted
100,000 Warrants A to Hamilton, Lehrer & Dargan, P.A. in exchange for legal services
rendered to us. Each Warrant A is exercisable into one share of common stock at an
exercise price of $5.50 per share. We agreed to register the 100,000 shares of common
stock underlying the Warrants A. The Warrants A are exercisable at any time before
January/February 2009. We relied upon the exemption from registration provided by Section
4(2) of the Securities Act of 1933. We believed Section 4(2) was available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | Hamilton, Lehrer & Dargan, P.A. had a preexisting relationship with Guy
          Nissenson, our Principal Executive Officer and President.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

On January 25, 2004, we sold 20,000
restricted shares of our common stock, 20,000 Warrants A, and 20,000 Warrants B to Michael
Weiss in exchange for $60,000. Each Warrant A is exercisable into one share of common
stock at an exercise price of $5.50 per share. Each Warrant B is exercisable into one
share of common stock at an exercise price of $3.50 per share. We agreed to register the
20,000 shares of common stock, the 20,000 shares underlying the Warrants A and the 20,000
shares underlying the Warrants B. The Warrants A are exercisable at any time before
January 25, 2009. The Warrants B expired on November 22, 2004. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of 1933. We
believed Section 4(2) was available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | Michael Weiss had a preexisting relationship with Guy Nissenson, our Principal
          Executive Officer and President.
|--- | -------------------------------------------------------------------------------------------------------------------------

On January 30, 2004, we sold 16,667
restricted shares of our common stock, 16,667 A Warrants, and 16,667 B Warrants to Oded
Levy in exchange for $50,000. Each A Warrant is exercisable into one share of common stock
at an exercise price of $5.50 per share. Each B Warrant is exercisable into one share of
common stock at an exercise price of $3.50 per share. We agreed to register the 16,667
shares of common stock, the 16,667 shares underlying the A Warrants and the 16,667 shares
underlying the B Warrants. The A Warrants are exercisable at any time before January 30,
2009. The B Warrants expired on November 22, 2004. We paid a finders fee in the amount of
$4,000 to Oberon Group, LLC, a limited liability company registered in New York, which is
owned, managed and controlled by Adam Breslawsky, in connection with the sale. We relied
upon the exemption from registration provided by Section 4(2) of the Securities Act of
1933. We believed Section 4(2) was available because:

-37-

---

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment.
|---- | ------------------------------------------------------------------------------------------------------------

On January 30, 2004, we sold 66,667
restricted shares of our common stock, 66,667 A Warrants, and 66,667 B Warrants to
Southridge Partners, LP, a limited partnership registered in Delaware, in exchange for
$200,000. Stephen Nicks is the President of the limited partnerships general
partner, Southridge Capital Management. Each A Warrant is exercisable into one share of
common stock at an exercise price of $5.50 per share. Each B Warrant is exercisable into
one share of common stock at an exercise price of $3.50 per share. We agreed to register
the 66,667 shares of common stock, the 66,667 shares underlying the A Warrants and the
66,667 shares underlying the B Warrants. The A Warrants are exercisable at any time before
January 30, 2009. The B Warrants expired on November 22, 2004. We paid a finders fee in
the amount of $16,000 to Oberon Group, LLC, a limited liability company registered in New
York, which is owned, managed and controlled by Adam Breslawsky, in connection with the
sale. We relied upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. We believed Section 4(2) was available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | Southridge Partners, LP had a preexisting relationship with Guy Nissenson, our
          Principal Executive Officer and President.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

On January 30, 2004,we sold 5,000
restricted shares of our common stock, 5,000 A Warrants, and 5,000 B Warrants to Adam
Breslawsky in exchange for $15,000. Each A Warrant is exercisable into one share of common
stock at an exercise price of $5.50 per share. Each B Warrant is exercisable into one
share of common stock at an exercise price of $3.50 per share. We agreed to register the
5,000 shares of common stock, the 5,000 shares underlying the A Warrants and the 5,000
shares underlying the B Warrants. The A Warrants are exercisable at any time before
January 30, 2009. The B Warrants expired on November 22, 2004. We paid a finders fee in
the amount of $1,200 to Oberon Group, LLC, a limited liability company registered in New
York, which is owned, managed and controlled by Adam Breslawsky, in connection with the
sale. We relied upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. We believed Section 4(2) was available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | Adam Breslawsky had a preexisting relationship with Guy Nissenson, our
          Principal Executive Officer and President.
|--- | ---------------------------------------------------------------------------------------------------------------------------

On January 30, 2004, we sold 6,667
restricted shares of our common stock, 6,667 Warrants A, and 6,667 Warrants B to Michael
Epstein in exchange for $20,000. Each Warrant A is exercisable into one share of common
stock at an exercise price of $5.50 per share. Each Warrant B is exercisable into one
share of common stock at an exercise price of $3.50 per share. We agreed to register the
6,667 shares of common stock, the 6,667 shares underlying the Warrants A and the 6,667
shares underlying the Warrants B. The Warrants A are exercisable at any time before
January 30, 2009. The Warrants B expired on November 22, 2004. We paid a finders fee in
the amount of $1,600 to Oberon Group, LLC, a limited liability company registered in New
York, which is owned, managed and controlled by Adam Breslawsky, in connection with the
sale. We relied upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. We believed Section 4(2) was available because:

-38-

---

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment
|---- | -----------------------------------------------------------------------------------------------------------

On January 30, 2004, we sold 13,334
restricted shares of our common stock, 13,334 Warrants A, and 13,334 Warrants B to Stephen
Frank in exchange for $40,000. Each Warrant A is exercisable into one share of common
stock at an exercise price of $5.50 per share. Each Warrant B is exercisable into one
share of common stock at an exercise price of $3.50 per share. We agreed to register the
13,334 shares of common stock, the 13,334 shares underlying the Warrants A and the 13,334
shares underlying the Warrants B. The Warrants A are exercisable at any time before
January 30, 2009. The Warrants B expired on November 22, 2004. We paid a finders fee in
the amount of $3,200 to Oberon Group, LLC, a limited liability company registered in New
York, which is owned, managed and controlled by Adam Breslawsky, in connection with the
sale. We relied upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. We believed Section 4(2) was available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment.
|---- | ------------------------------------------------------------------------------------------------------------

On January 30, 2004, we sold 66,667
restricted shares of our common stock, 66,667 Warrants A, and 66,667 Warrants B to
Southshore Capital Fund LTD, a Cayman Islands corporation, in exchange for $200,000.
Navigator Management is the Corporate Director of Southshore Capital Fund, Ltd. and the
Director and control person of Navigator Management is David Sims. Each Warrant A is
exercisable into one share of common stock at an exercise price of $5.50 per share. Each
Warrant B is exercisable into one share of common stock at an exercise price of $3.50 per
share. We agreed to register the 66,667 shares of common stock, the 66,667 shares
underlying the Warrants A and the 66,667 shares underlying the Warrants B. The Warrants A
are exercisable at any time before January 30, 2009. The Warrants B expired on November
22, 2004. We paid a finders fee in the amount of $16,000 to Oberon Group, LLC, a limited
liability company registered in New York, which is owned, managed and controlled by Adam
Breslawsky, in connection with the sale. We relied upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933. We believed Section 4(2) was
available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment
|---- | -----------------------------------------------------------------------------------------------------------

On February 2, 2004, we sold 500,000
restricted shares of our common stock, 500,000 Warrants A, and 500,000 Warrants B to
Crestview Capital Master, LLC, a limited liability company registered in Delaware which is
controlled by Richard Levy and Stuart Flink, in exchange for $1,500,000. Each Warrant A is
exercisable into one share of common stock at an exercise price of $5.50 per share. Each
Warrant B is exercisable into one share of common stock at an exercise price of $3.50 per
share. We agreed to register the 500,000 shares of common stock, the 500,000 shares
underlying the Warrants A and the 500,000 shares underlying the Warrants B. The Warrants A
are exercisable at any time before February 2, 2009. The Warrants B expired on November
22, 2004. We paid a finders fee in the amount of $120,000 to Oberon Group, LLC, a limited
liability company registered in New York, which is owned, managed and controlled by Adam
Breslawsky, in connection with the sale. We relied upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933. We believed Section 4(2) was
available because:

-39-

---

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment.
|---- | ------------------------------------------------------------------------------------------------------------

On February 11, 2004, we sold 3,334
restricted shares of our common stock, 3,334 Warrants A, and 3,334 Warrants B to Joshua
Lobel in exchange for $10,000. Each Warrant A is exercisable into one share of common
stock at an exercise price of $5.50 per share. Each Warrant B is exercisable into one
share of common stock at an exercise price of $3.50 per share. We agreed to register the
3,334 shares of common stock, the 3,334 shares underlying the Warrants A and the 3,334
shares underlying the Warrants B. The Warrants A are exercisable at any time before
February 11, 2009. The Warrants B expired on November 22, 2004. We paid a finders fee in
the amount of $800 in connection with the sale. We relied upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933. We believed Section
4(2) was available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | Joshua Lobel had a preexisting relationship with Guy Nissenson, our Principal
          Executive Officer and President.
|--- | ------------------------------------------------------------------------------------------------------------------------

On February 11, 2004, we sold 8,334
restricted shares of our common stock, 8,334 Warrants A, and 8,334 Warrants B to Joshua
Kazam in exchange for $25,000. Each Warrant A is exercisable into one share of common
stock at an exercise price of $5.50 per share. Each Warrant B is exercisable into one
share of common stock at an exercise price of $3.50 per share. We agreed to register the
8,334 shares of common stock, the 8,334 shares underlying the Warrants A and the 8,334
shares underlying the Warrants B. The Warrants A are exercisable at any time before
February 11, 2009. The Warrants B expired on November 22, 2004. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of 1933. We
believed Section 4(2) was available because:

-40-

---

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | Joshua Kazam had a preexisting relationship with Guy Nissenson, our Principal
          Executive Officer and President.
|--- | ------------------------------------------------------------------------------------------------------------------------

On February 12, 2004, we sold 20,000
restricted shares of our common stock, 20,000 Warrants A, and 20,000 Warrants B to The
Oberon Group, LLC, a limited liability company registered in New York, which is owned,
managed and controlled by Adam Breslawsky, in exchange for $60,000. Each Warrant A is
exercisable into one share of common stock at an exercise price of $5.50 per share. Each
Warrant B is exercisable into one share of common stock at an exercise price of $3.50 per
share. We agreed to register the 20,000 shares of common stock, the 20,000 shares
underlying the Warrants A and the 20,000 shares underlying the Warrants B. The Warrants A
are exercisable at any time before February 12, 2009. The Warrants B expired on November
22, 2004. We relied upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. We believed Section 4(2) was available because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | the Oberon Group, LLC had a preexisting relationship with Guy Nissenson, our
          Principal Executive Officer and President.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

During February 2004, we granted
50,000 Warrants A to The Oberon Group, LLC., a limited liability company registered in New
York, in exchange for services rendered to us. Each Warrant A is exercisable into one
share of common stock at an exercise price of $5.50 per share. We agreed to register the
50,000 shares of common stock underlying the Warrants A. The Warrants A are exercisable at
any time before February 2009. We relied upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933. We believed Section 4(2) was available
because:

|i. | the offer and sale did not involve a public offering;
|-- | -----------------------------------------------------

|ii. | all certificates were marked with restrictive legends;
|--- | ------------------------------------------------------

|iii. | each investor represented they were sophisticated enough to evaluate the merits
          of the investment; and
|---- | ----------------------------------------------------------------------------------------------------------------

|iv. | the Oberon Group had a preexisting relationship with Guy Nissenson, our
          Principal Executive Officer and President.
|--- | ----------------------------------------------------------------------------------------------------------------------------

-41-

---

In connection with our
January/February 2004 private placement, we entered into agreements with selling
shareholders which subject us to possible monetary penalties if we fail to remove the
restrictive legends on the selling shareholders certificates when the shares
represented by the certificates are eligible for resale. In addition, if we conduct other
financing where we sell shares of our common stock at prices of less than $3.00 per share,
we may be required to adjust the selling shareholders purchase price to the any
lower price by issuing the selling shareholders additional shares of our common stock.
Additionally, there are certain provisions in our agreements with selling shareholders
that provide if our registration statement is not effective within a certain period of
time, we will have to issue additional shares to them. Because our registration statement
was declared effective only on November 12, 2004, we issued to our selling shareholders on
November 17, 2004, a total of 109,716 additional shares of our common stock as liquidated
damages. We are not subject to any additional penalties under the terms of these selling
shareholders agreements.

Until May 2004, we issued 76,905
restricted shares of our common stock to WorldNet Global Communications Ltd. WorldNet
Global Communication Ltd. had a pre-existing relationship with us as a reseller of our
telecommunications services.

ITEM 6. MANAGEMENTS DISCUSSION
AND ANALYSIS OR PLAN OF OPERATION.

DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides
information that we believe is relevant to our financial condition and results of
operations and should be read in conjunction with our financial statements and related
notes appearing elsewhere in this Form 10-KSB. This discussion contains forward-looking
statements based on our current expectations, assumptions, and estimates. The words or
phrases believe, expect, may, anticipates,
or similar expressions are intended to identify forward-looking statements.
Actual results could differ materially from those projected in the forward-looking
statements as a result of a number of risks and uncertainties pertaining to our business.
The terms we, our or us are used in this discussion refer to
Xfone, Inc. Statements made herein are as of the date of the filing of this Form 10-KSB
with the Securities and Exchange Commission and should not be relied upon as of any
subsequent date. Unless otherwise required by applicable law, we do not undertake, and we
specifically disclaim any obligation, to update any forward-looking statements to reflect
occurrences, developments, unanticipated events or circumstances after the date of such
statement.

# Overview.

We are a holding company providing
international voice and data communications services provider with operations in the
United States, United Kingdom and Israel, and offers a wide range of services, which
include: local, long distance and international telephone services, prepaid and postpaid
calling cards; cellular services; VOIP services; reselling opportunities; and email and
fax broadcasting services. The Company serves customers in 75 countries across Europe,
Australia, North America, South America, Asia and Africa.

On October 4, 2000, we acquired
Swiftnet which had a business plan to provide comprehensive telecommunication services and
products by integrating new and old products, services and ideas through one website.
Swiftnet was incorporated in 1991 under the laws of the United Kingdom. Until 1999, the
main revenues for Swiftnet were derived from messaging and fax broadcast services. During
the year 2000, Swiftnet shifted its business focus and our focus has remained on telephony
voice services offering comprehensive support packages to resellers and new services.
Utilizing automation and proprietary software packages, Swiftnets strategy is to
grow without the need of heavy investments and with lower expenses for operations and
registration of new customers.

On April 15, 2004, we established an
Israel based subsidiary, Xfone Communication Ltd. On July 4, 2004 the Ministry of
Communications of the State of Israel granted Xfone Communication a license to provide
international telecom services in Israel. We started providing services in Israel through
Xfone Communication as of December 2004.

-42-

---

On May 28, 2004, we entered into an
agreement to acquire WS Telecom Inc., a Mississippi corporation, and its two wholly owned
subsidiaries, eXpeTel Communications, Inc. and Gulf Coast Utilities, through the merger of
WS Telecom into our wholly owned subsidiary Xfone USA, Inc. On July 1, 2004, XFONE USA
entered into a management agreement with eXpeTel which provided that Xfone USA provide
management services to eXpeTel pending the consummation of the merger. The management
agreement provided that all revenues generated from eXpeTels business operations
will be assigned and transferred to Xfone USA. The term of the Agreement commenced on July
1, 2004 and continued until the consummation of the merger on March 10, 2005.
Headquartered in Jackson, Mississippi, eXpeTel is a telecommunications service provider
that owns and operates its own facilities-based, telecommunications switching system.
eXpeTel provides residential and business customers with high quality local and long
distance services, as well as cable television and high speed Internet services to planned
and multi-dwelling apartment communities in Mississippi, Alabama, Louisiana, Florida and
Georgia. eXpeTels integrated multi-media services, combining digital voice, data and
video over third-generation broadband infrastructure, are available to customers on a
single itemized bill.

Our future business plans include the
attempt to grow in each market where we operate by promoting additional services and
creating new marketing initiatives. We shall continue to look for suitable acquisitions of
businesses and companies and implement our business model that is based on automation,
relatively low capital investments and low operational costs. We shall purchase and
develop new equipment and technology and attempt to negotiate lower rates with carriers.

As of December 31, 2004 approximately 75% of our revenues were derived from our customers located in the United Kingdom. Our
integrated revenue approach led to revenue from each source as described below and is
partially driven by the activities of other revenue sources. Our revenues are dependent
upon the following factors:

| |  | Price
competition in telephone rates;
| | - | -------------------------------------

| |  | Demand
for our services;
| | - | ------------------------

| |  | Individual
economic conditions in our markets
| | - | ---------------------------------------------

| |  | Our
ability to market our services
| | - | ----------------------------------

We have four major types of
customers:

| |  | Residential
 These customers either must dial a special 4 digit code to access our switch or
acquire a box that dials automatically.
| | - | -------------------------------------------------------------------------------------------------------------------------------------

| |  | Commercial
 Smaller business are treated the same as residential customers. Larger businesses PBX
(Telephony system) units are programmed to dial the 4 digit code automatically.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Governmental
agencies  Includes the United NationsWorld Economic Forum, the Argentine Embassy
and the Israeli Embassy.
| | - | -----------------------------------------------------------------------------------------------------------------------

| |  | Resellers,
such as WorldNet  We provide them with our telephone and messaging services for a
wholesale price, calling cards are treated by resellers . For WorldNet we also provide
the billing system.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-43-

---

During fiscal year 2004 our revenues
are derived from the following:

| |  | 52%
from our telephone minute billing plus messaging services, including facsimile, nodal,
and e-mail related services, as compared with 55% in fiscal year 2003.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 4
%  from our mobile phone services as compared with 7% for fiscal year 2003.
| | - | -----------------------------------------------------------------------------

| |  | 44%
from calling cards as compared with 38% for fiscal year 2003.
| | - | -----------------------------------------------------------------

Our future business plans for the
years 2005 and 2006 include the attempt to grow in each market where we operate by
promoting additional services and creating new marketing initiatives. We shall continue to
look for suitable acquisitions of businesses and companies and implement our business
model that is based on automation, relatively low capital investments and low operational
costs. We shall purchase and develop new equipment and technology and attempt to negotiate
lower rates with carriers.

In our major subsidiary Swiftnet we
shall continue to provide same kind of services with some new billing alternatives to try
and to attract more customers, to stronger the connection with our registered customers
and to enable easy usage of our services to non registered users.

In our Israeli subsidiary we plan to
focus our marketing efforts towards specific segments of the population such as the new
immigrants providing them with attractive prices to their Original homeland, we intend to
approach the business market by independent agents and with Original equipment
manufacturers so we keep part of marketing efforts as variable cost. In the USA we plan to
continue to provide the same kind services, we shall look for acquisition of local
businesses and integrate the traffic through our switch and infrastructure.

# Financial Information
 Percentage of Revenues

|                           | Year ended December 31 |  |        | 
|-------------------------- | ---------------------- |  | ------ | 
|
|Revenues                   |                        |  | 100.0  | 
|Cost of Revenues           |                        |  | -70.53 | 
|Gross Profit               |                        |  | 29.47% | 
|Operating Expenses:        |                        | 
|Research and Development   |                        |  | -0.23% | 
|Marketing and Selling      |                        |  | -14.35 | 
|General and Administrative |                        |  | -13.89 | 
|Total Operating Expenses   |                        |  | -28.47 | 
|Income before Taxes        |                        |  | 0.63%  | 
|Net Income                 |                        |  | 0.35   | 

-44-

---

# Years ended December 31,
2004 and 2003

# Consolidated Statement
of Operations

Revenues.    
          Revenues for the year ended December 31, 2004 increased 56% to £11,330,116
          from £7,282,181 for the same period in 2003. The increase in our Revenues
          is primarily attributable to the revenues that derive from the usage of calling
          cards sold by our affiliate, Story Telecom and to the revenues that generated
          eXpetel in the USA.

All traffic generated by the Story
Telecom calling cards is delivered through our systems.

The breakdown of our revenues for the
year ended December 31, 2004 is reflected in the table below:

Amounts in UK sterling

|                                 | 2004       | 2003     
|-------------------------------- | ---------- | ---------
|Telephone and messaging services | 5,930,541  | 3,996,732
|Mobile phones                    | 480,451    | 503,475  
|Calling Cards                    | 4,919,124  | 2,781,924
|Total                            | 11,332,116 | 7,282,184

Because both have similar economic
characteristics, such as prices that we charge and the nature of the services, we have
combined residential and commercial customers as one segment.

The following table reflects a
breakdown of our Revenues according to cost of revenues characteristics and major
resellers:

|                                | 2004        | 2003      
|------------------------------- | ----------- | ----------
|Regular telephony voice service |             |           
|and others:                     | £5,861,345  | £4,015,448
|Story Telecom                   | £4,778,564  | £2,715,231
|WorldNet                        | £698,832    | £551,502  
|Total Revenues                  | £11,330,116 | £7,282,181

Story telecom contributed 42% of our
revenues for the year ended December 31, 2004 as compared with 37% for the same period of
2003. The 1,845,897 (45%) growth in the regular telephony services is mainly attributable
to 1,598,344 UKP revenues that was generated in the new US market. As we started
operations in Israel only in December 2004 only 9,244 UKP have been Recorded as revenues
from the Israeli market.

-45-

---

For the year ended  December 31, 2004 approximately 8% of our revenues  were generated by our affiliated entity,
Auracall, as compared with approximately  4.4% for the same period of 2003.

We believe that during the year 2005
our new subsidiaries in Israel and the US will generate a greater part of our revenues and
will have a major contribution to our expected growth.

In Swiftnet same type of services and  customers  will continue to generate most of our
Revenues. We will offer some new services and billing alternatives to stronger the
connection with our registered customers and to enable easy usage of our services to non
registered users. Our agreement with resellers can be terminated within a relatively short
notice of 7-60 days. Our largest non affiliated reseller is Worldnet that generated
approximately 6% of our Revenues in 2004, Worldnet can terminate the agreement with a 7
days notice, which would adversely affect our Revenues. We have approximately 20
additional active resellers, none of which generated more that 3% of our annual revenues.
We anticipate that Worldnet will continue to contribute approximately the same amount of
UK Pounds to our Revenues.

Cost of Revenues. Cost of
revenues consists primarily of traffic time purchased from telephone companies and other
related charges. Cost of revenues increased 56% to £7,991,375 for the year ended
December 31, 2004, from (pound) 4,468,420 for the year ended December 31, 2003,
representing 70.5% and 61.4% of the total revenues for the year ended December 31, 2004
and December 31, 2003, respectively. The increase in the cost of revenues as a percentage
of revenues is attributable to the increase of our revenues that derive from the Story
Telecom project that currently focuses on Calling Cards services. The Story Telecom
Project, which accounts for approximately 42% of our Revenues in the year ended December
31, 2004 and 36% in the year ended December 31, 2003, our cost of revenues as a percentage
of revenues related to Story Telecom project is approximately 94% and for Worldnet is 55%,
while the cost of revenues as a percentage of the rest of our revenues was 52% for the
year ended December 31, 2004 and 36% for the year ended December 31, 2003. This increase
of the cost of revenues as a percentage of revenues for non Story Telecom related revenues
is mainly attributable to the 55% cost of revenues in our new US market.

Cost of revenues breakdown:

|                                      | 2004       | 2003      
|------------------------------------- | ---------- | ----------
|Regular Telephony Services and others | 2,398,938  | 1,603,774 
|Story Telecom                         | 4,508,079  | 2,561,320 
|Worldnet                              | 384,358    | 303,326   
|Total:                                | £7,991,375 | £4,468,420

Cost of Revenues attributable to our
affiliated entity, Auracall, Ltd. were approximately 3.2% of the total cost of revenues
for the year ended December 31, 2004 as compared with approximately 2.8% for the year
ended December 31, 2003.

Cost of revenues attributable to
Story Telecom accounted for 56% of our total cost of revenues for the year ended December
31, 2004 and 2003.

-46-

---

Should revenues that derive from the
Story Telecom calling cards , Worldnet and Xfone USA grow faster than our other business
segments, our Cost of Revenues as a percentage of Revenues will continue to increase. If
market conditions, such as lower prices proposed by competitors in the market, forces us
to lower the prices that we charge our customers, our cost of revenues as percentage of
revenues will increase.

Research and Development.
Research and development expenses were £25,945 and £44,553 for the year ended
December 31, 2004 and 2003, respectively. These expenses consist of labor costs of our
research and development manager and other related costs. Main developments relate to the
maintenance of the Xfone web site and its interconnections, the upgrade of software for
our telephone platforms, billing systems, messaging services and the resellers support
package.

Marketing and Selling
Expenses. Marketing and selling expenses increased to £1,626,288 from
£1,091,012 for the year ended December 31, 2004 and 2003, respectively. Marketing
and selling expenses as percentage of revenues were 14.4% and 15% for the year ended
December 31, 2004 and 2003, respectively. Marketing expenses consist of salaries of
related personnel, commissions related activities, including commissions for agents that
promote, through our customer British Telecom, the usage of non geographical numbers
similar to 1-800 or 1-900 with no specific geographical place. The marketing and selling
expenses include £ 30,623 that were incurred by our Israeli subsidiary that started
operation in December 2004. For the year ended December 31, 2004 we paid commissions to
our affiliated company Auracall in the amount of UKP496,822. For year ended December 31,
2003 commissions paid to Auracall amounted to UKP171,234 The increase in the percentage of
total commissions is attributable to growth in the Revenues generated by Auracall.

General and Administrative
Expenses. General and administrative expenses increased to £ 1,573,726
from £1,011,829 for the year ended December 31, 2004 from £ for the
year ended December 31, 2003. As a percentage of
revenues, general and administrative expenses kept the level of 13.9% for the year ended
December 31, 2004 compared to 13.9% for the year ended December 31, 2003. The increase in
our general and administrative expenses is mainly attributable to: (a) expenses in the
amount of £ incurred by our Israeli subsidiary in the process of establishing
the company and its operations, and (b) expenses incurred in the US.

Our bad debt increased by £
15,801 to £ 125,333, most of the bad debt allowance is attributable to two of our
customers having filed for bankruptcy during 2002.

Financing Expenses. Financing
expenses, net, increased to £ 83,403 for the year ended December 31,
2004 from £44,284 for the year ended December 31, 2003.

Equity in income of affiliated
company. Equity income from Auracall amounted to £ 20,885 reflecting our 47.5%
portion in our affiliated company Auracall.

Income before Taxes. Income
before taxes for the year ended December 31, 2004 decreased by 89% to £71,392 from
£637,901 for the year ended December 31, 2003. The decrease of the income before
taxes is attributable primarily to the decrease in our gross profit margin from 39% to
29.5% and to app £ 100,000 incurred in the establishment of our Israeli subsidiary.

Taxes on Income. United
Kingdom companies are usually subject to income tax at the corporate rate of 20%-30%.
Taxes on income for the year ended December 31, 2004, amounted to £ 31,518 which
represents 44% of the income before taxes as compared with £216,456 for the year
ended December 31, 2002 that represents 34% of the income before taxes. The increase in
the percentage of taxes on such income before taxes is attributable primarily to the
income that derived from of our US activity.

Net Income. Net income for the
year ended December 31, 2004 was £ 39,874 as compared to £421,445 for the year
ended December 31, 2003.

-47-

---

# Earning per share

The earning per share of common stock
for the year ended December 31, 2004 was £ 0.007 for basic 5,998,252 weighted
average shares and £ 0.005 for diluted 8,632,950 shares. Earning per share for the
year ended December 31, 2003 £0.08 for the basic weighted average 5,089,286 shares
and £0.08 for diluted number of shares.

# Balance Sheet

Current Assets. Current assets
amounted to £ 3,886,034 as of December 30, 2004 as compared to £2,635,846 as of
December 31, 2003. This increase in our current assets is mainly attributable to the
growth of £1,007,624 in the account receivables. Our cash positions for December 31,
2004 were £ 797,097 compared with £ 977,008 for year ended December 31, 2003.
As of December 31, 2004 48% of our account receivables relate to our affiliated company,
Story Telecom as compared with 34% for December 31, 2003. The 48% of our receivables is
due to the fact that 42% of our revenues are generated by Story Telecom.

We provided Story Telecom a
shareholder loan that balanced £15,960 and £14,725 for years ended December
31, 2003 and 2002 respectively.

As of December 31, 2004 we owe to our
Affiliated Auracall for commissions Related to revenues generated for us by
Auracall.

Loan to Shareholder. Loan to
the shareholder, Mr. Keinan our Chairman of the Board of Directors amounted to £
247,931 as of December 31, 2004, as compared to £286,736 as of December 31, 2003. The
decrease represents a repayment of £38,805. Out of the total amount, £123,695
are classified as current assets as Mr. Keinan agreed with the company to repay this
amount during fiscal year 2005 and the remaining 123,966 during fiscal year 2005.

Fixed assets. Fixed assets
after accumulated depreciation increased to £ 1,255,293 as of December 31, 2004 as
compared with £421,715 as of December 31, 2003. Growth in fixed assets reflects our
£ 644,552 investments in equipment and systems in our new Israeli subsidiary.

Current Liabilities. As of
December 31, 2004, current liabilities increased to £2,479,429 as
compared with £2,174,283 as of December 31, 2003.

The
increase in our current liabilities results mainly from an increase of £397,938 in
our trade payables attributable to the growth in our revenues.

# Liquidity and Capital
resources.

Cash as of December 31, 2004 amounted
to £ 797,097 as compared with £977,008 for the year ended December 31, 2003 a
decrease of £179,911.

Net cash used by operating activities
for the Twelve month ended December 31, 2004 was £1,011,980. The cash used by
operating activities was mainly attributable to the £1,485,537 increase in our trade
and other receivables.

During fiscal year 2004 we used
£693,721 for the purchase of capital equipment and other assets and additional
£ 187,357 for the repayment of capital lease obligations. Our capital investments
are primarily for the purchase of equipment and software for services that we provide or
intend to provide.

-48-

---

Capital lease obligations: We are
lessee of switching and telecom equipment under capital leases expiring in various years
through 2007, the minimum lease payments are:

|                 |         
|---------------- | --------
|Fiscal year 2005 | £164,079
|Fiscal year 2006 | 117,961 
|Fiscal year 2007 | 33,674  

In the fiscal year 2005 we may
procure additional equipment to enhance our capacity in the UK, Israel and the US for the
amount of app £300,000. In case that we manage to establish or acquire an operation
in a new country, we anticipate an investment of approximately £600,000 in
equipment, infrastructure and software.

We shall continue to finance our
operations and fund the current commitments for capital expenditures mainly from the cash
provided from operating activities. During January and February 2004 we completed a
private placement in which we raised gross proceeds that amounted to $2,907,711. Net new
cash proceeds of the Financing, approximately $2.3 million are used and are expected to be
used for general working capital and investment in equipment and for providing working
capital to our US and Israeli subsidiaries.

On April 15, 2004, we established an Israel based subsidiary, Xfone Communication Ltd. We own now 69%% of Xfone Communication. On
July 4, 2004 the Ministry of Communications of the state of Israel granted Xfone Communication a license to provide international
telecom services in Israel. We started providing services in Israel through Xfone Communication by December, 2004.

On May 28, 2004, we entered into an
agreement to acquire WS Telecom Inc., a Mississippi corporation, and its two wholly owned
subsidiaries, eXpeTel Communications, Inc. and Gulf Coast Utilities, through the merger of
WS Telecom into our wholly owned subsidiary Xfone USA, Inc. We anticipate that this
acquisition will require approximately $1,000,000 for working capital.

On July 1, 2004, we entered into a
management agreement which provides that Xfone USA will provide management services to WS
Telecom pending the consummation of the merger. The management agreement provides that all
revenues generated from WS Telecoms business operations will be assigned and
transferred to Xfone USA.

Our Israel based subsidiary, Xfone
Communication Ltd., received a credit facility from Bank Hapoalim B.M. in Israel to
finance its activities. The credit facility includes a 10 Million NIS (New Israeli Shekel)(approx £1.2M)
Bank Guarantee in favor of the Government of Israel, a revolving credit line of 1 million
NIS and an on call short term credit line of 850,000 NIS (approx £100,000. In addition, the bank made
available for Xfone Communication a long term facility of 3,150,000 NIS (approx £380,000) to procure
equipment. As of November 12, 2004, we secured the credit facility with, a floating charge
on Xfone Communications assets, a fixed charge on Xfone Communications switch
and a personal collateral by Mr.Keinan. In addition, we, Swiftnet Limited and H.S.N.
Communication Investments Ltd. issued a Letter of Guarantee, unlimited in amount, in favor
of the bank, guaranteeing all debt and indebtedness of Xfone Communication towards the
bank.

As of December 31, 2004 we used the
Bank Guarantee and approximately £500,000.

We believe that our future cash flow
from operations together with our current cash will be sufficient to finance our operation
activities through the years 2005 and 2006.

We will consider raising additional
capital through a public or private placement to fund possible acquisitions and business
development activities and for working capital.

# Impact of Inflation and
Currency Fluctuations.

As of December 31, 2004 our main functional  currency  remains the U.K.  Pound, we do business also with U.S. Dollars.
Following the acquisition of our US subsidiary we shall have a bigger part of our business
in US Dollars. In addition we started to do business in Israel with the Israeli currency.
App 50% of the direct Traffic costs in Israel are in UKP and the rest in NIS (New Israeli
Shekel)

Most of our revenues and current
assets are in British Pounds, the long-term liabilities and loan to a shareholder are all in U.K. Pounds
and US Dollars. Major part of our cash is in U.S. Dollars.

Our cost of revenues is in British
Pounds and Dollars, App 50% of the direct Traffic costs in Israel are in UKP and the rest
in NIS (New Israeli Shekel).

Most of our liabilities, operating
and financing expenses are in U.K. Pounds. The remainder of the assets, liabilities,
revenues and expenditures are in U.S. Dollars and New Israeli Shekels. We anticipate that
during 2005 the British Pound will be the main functional currency although the portion of
Dollars and New Israeli Shekel will be bigger.

A devaluation of the British Pound or
the NIS in relation to the U.S. Dollar will have the effect of decreasing the Dollar value
of all assets or liabilities that are in British Pounds or NIS.

Conversely, any increase in the value
of the U.K. Pound in relation to the Dollar has the effect of increasing the Dollar value
of all U.K. Pounds assets and the Dollar amounts of any U.K. liabilities and expenses.

Inflation in any of the countries
where we operate would affect our operational results if we shall not be able to match our
Revenues with growing expenses caused by inflation.

If rate of inflation will cause a
raise in salaries or other expenses and the market conditions will not allow us to raise
prices proportionally, it will have a negative effect on the value of our assets and on
our potential profitability.

-49-

---

ITEM 7. FINANCIAL
STATEMENTS

---

# Xfone, Inc. and
Subsidiaries

---

# CONSOLIDATED FINANCIAL
STATEMENTS

# December 31, 2004

---

---

# Xfone, Inc. and
Subsidiaries

---

# CONSOLIDATED FINANCIAL
STATEMENTSDECEMBER 31, 2004

# CONTENTS

|                                             | PAGE      
|-------------------------------------------- | ----------
|REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM  | F-1       
|Balance Sheet                                | F-2 - F-3 
|Statements of Operations                     | F- 4      
|Statement of Changes in Shareholders' Equity | F-5       
|Statements of Cash Flows                     | F-6 - F-7 
|Notes to Consolidated Financial Statements   | F-8 - F-37

---

REPORT OF REGISTERED
PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Shareholders of

Xfone, Inc.

We have audited the accompanying
consolidated balance sheet ofXfone, Inc. and subsidiaries (the
Company) as of December 31, 2004, and the related consolidated statements of
operations, shareholders equity, and cash flows for each of the two years in the
period ended December 31, 2004. These financial statements are the responsibility of
the Companys management.  Our responsibility is to express an opinion on the
financial statements and financial statement schedules based on our audits We conducted
our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States).  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement.  The Company is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances but not for the purpose of expressing
an opinion on the effectiveness of the Companys internal control over financial
reporting.  Accordingly, we express no such opinion.  An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial statement
presentation.  We believe that our audits provided a reasonable basis for our
opinion.

In our opinion, such consolidated
financial statements present fairly, in all material respects, the financial position of
Xfone, Inc. and subsidiaries as of December 31, 2004, and the results of their
operations and their cash flows for each of the two years in the period ended December 31,
2004, in conformity with accounting principles generally accepted in the United States of
America.

| |  | Chaifetz & Schreiber, P.C.BY: /s/ Chaifetz & Schreiber, P.C.
Chaifetz & Schreiber, P.C.21 Harbor Park Drive N.
Port Washington, NY 11050
March 31, 2005
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-1

---

# Xfone, Inc. and
Subsidiaries

# CONSOLIDATED BALANCE
SHEET

|                                    | December 31,
2004 | December 31,
2004
Convenience translation into U.S.$
|----------------------------------- | ----------------- | ----------------------------------------------------
|Current assets                      |                   |                                                     
|Cash                                |                   |                                                     
|Accounts receivable, net            |                   |                                                     
|Prepaid expenses, other receivables |                   |                                                     
|Loan to shareholder                 |                   |                                                     
|                                    |                   |                                                     
|Total Current Assets                |                   |                                                     
|                                    |                   |                                                     
|Loan to shareholder                 |                   |                                                     
|                                    |                   |                                                     
|Investments                         |                   |                                                     
|                                    |                   |                                                     
|Fixed assets                        |                   |                                                     
|Cost                                |                   |                                                     
|Less - accumulated depreciation     |                   |                                                     
|                                    |                   |                                                     
|Total fixed assets                  |                   |                                                     
|                                    |                   |                                                     
|Other assets                        |                   |                                                     
|                                    |                   |                                                     
|Total assets                        |                   |                                                     
|                                    |                   |                                                     

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

F-2

# Xfone, Inc. and
Subsidiaries

# CONSOLIDATED BALANCE
SHEET

|                                                            | December 31,
2004 | December 31,
2004
Convenience translation into U.S.$
|----------------------------------------------------------- | ----------------- | ----------------------------------------------------
|Current liabilities                                         |                   |                                                     
|Notes payable - current portion                             |                   |                                                     
|Trade payables                                              |                   |                                                     
|Other liabilities and accrued expenses                      |                   |                                                     
|Obligations under capital leases - current portion          |                   |                                                     
|                                                            |                   |                                                     
|Total current liabilities                                   |                   |                                                     
|Deferred taxes                                              |                   |                                                     
|Notes payable                                               |                   |                                                     
|Obligation under capital leases                             |                   |                                                     
|                                                            |                   |                                                     
|Total liabilities                                           |                   |                                                     
|                                                            |                   |                                                     
|Commitments and Contingencies                               |                   |                                                     
|Shareholders' equity                                        |                   |                                                     
|Preferred stock - 50,000,000 shares authorized, none issued |                   |                                                     
|Common stock:                                               |                   |                                                     
|25,000,000 shares authorized,(pound).0006896 par value;     |                   |                                                     
|6,220,871 issued and outstanding                            |                   |                                                     
|Foreign currency translation adjustment                     |                   |                                                     
|Contributions in excess of par value                        |                   |                                                     
|Retained earnings                                           |                   |                                                     
|                                                            |                   |                                                     
|Total shareholders' equity                                  |                   |                                                     
|                                                            |                   |                                                     
|Total liabilities and shareholders' equity                  |                   |                                                     
|                                                            |                   |                                                     

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

F-3

# Xfone, Inc. and
Subsidiaries

# CONSOLIDATED
STATEMENTS OF OPERATIONS

|                                       | Years Ended
December 31, | Years Ended
December 31,
|-------------------------------------- | ------------------------ | ------------------------
|
|
|Revenues                               |                          |                         
|Cost of revenues                       |                          |                         
|                                       |                          |                         
|Gross profit                           |                          |                         
|                                       |                          |                         
|Operating expenses:                    |                          |                         
|Research and development               |                          |                         
|Marketing and selling                  |                          |                         
|General and administrative             |                          |                         
|                                       |                          |                         
|Total operating expenses               |                          |                         
|                                       |                          |                         
|Operating profit                       |                          |                         
|Financing expenses - net               |                          |                         
|Other income                           |                          |                         
|                                       |                          |                         
|Income before taxes                    |                          |                         
|Equity in income of affiliated company |                          |                         
|                                       |                          |                         
|Income before taxes                    |                          |                         
|Taxes on income                        |                          |                         
|                                       |                          |                         
|Net income                             |                          |                         
|                                       |                          |                         
|Ernings Per Share:                     |                          |                         
|Basic                                  |                          |                         
|                                       |                          |                         
|Diluted                                |                          |                         
|                                       |                          |                         

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

F-4

# Xfone, Inc. and
Subsidiaries

# CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

|                                    | Number of
Ordinary
Shares | Share
Capital | Contributions
in excess of
par value | Foreign Currency
translation
adjustments | Retained
Earnings | Total
Shareholders'
Equity
|----------------------------------- | ------------------------- | ------------- | ------------------------------------ | ---------------------------------------- | ----------------- | --------------------------
|Balance at January 1, 2003          |                           |               |                                      | 5,060,889                                |                   | £                         
|Issuance of shares                  |                           |               |                                      | 56,795                                   |                   |                           
|Net income                          |                           |               |                                      | --                                       |                   |                           
|Dividend payable                    |                           |               |                                      | --                                       |                   |                           
|                                    |                           |               |                                      |                                          |                   |                           
|                                    |                           |               |                                      |                                          |                   |                           
|Balance at December 31, 2003        |                           |               |                                      | 5,117,684                                |                   | £                         
|                                    |                           |               |                                      |                                          |                   |                           
|Balance at January 1, 2004          |                           |               |                                      | 5,117,684                                |                   | £                         
|Issuance of shares                  |                           |               |                                      | 1,103,187                                |                   |                           
|Currency translation                |                           |               |                                      | --                                       |                   |                           
|Net income                          |                           |               |                                      | --                                       |                   |                           
|Dividend payable                    |                           |               |                                      | --                                       |                   |                           
|                                    |                           |               |                                      |                                          |                   |                           
|                                    |                           |               |                                      |                                          |                   |                           
|Balance at December 31, 2004        |                           |               |                                      | 6,220,871                                |                   | £                         
|                                    |                           |               |                                      |                                          |                   |                           
|Convenience translation into U.S.$: |                           |              
|Balance at January 1, 2004          |                           |               |                                      | 5,117,684                                |                   | $                         
|Issuance of shares                  |                           |               |                                      | 1,103,187                                |                   |                           
|Currency translation                |                           |               |                                      | --                                       |                   |                           
|Net income                          |                           |               |                                      | --                                       |                   |                           
|Change of currency rates            |                           |               |                                      | --                                       |                   |                           
|Dividend payable                    |                           |               |                                      | --                                       |                   |                           
|                                    |                           |               |                                      |                                          |                   |                           
|Balance at December 31, 2004        |                           |               |                                      | 6,220,871                                |                   | $                         
|                                    |                           |               |                                      |                                          |                   |                           

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

F-5

# Xfone, Inc. and
Subsidiaries

# CONSOLIDATED
STATEMENTS OF CASH FLOWS

|                                                    | Years Ended
December 31, | Years Ended
December 31,
|--------------------------------------------------- | ------------------------ | ------------------------
|
|
|Cash flow from operating activities                 |                          |                         
|Net income                                          |                          |                         
|Adjustments to reconcile net income to net          |                          |                         
|cash (used in) provided by operating activities     |                          |                         
|                                                    |                          |                         
|Net cash (used in) provided by operating activities |                          |                         
|                                                    |                          |                         
|Cash flow from investing activities                 |                          |                         
|Purchase of other assets                            |                          |                         
|Purchase of equipment                               |                          |                         
|Proceeds from sale of fixed assets                  |                          |                         
|                                                    |                          |                         
|Net cash used in investing activities               |                          |                         
|                                                    |                          |                         
|Cash flow from financing activities                 |                          |                         
|Proceeds from long term loans from banks and others |                          |                         
|Repayment of capital lease obligation               |                          |                         
|Proceeds from issuance of common stock              |                          |                         
|Dividend paid                                       |                          |                         
|                                                    |                          |                         
|Net cash provided by (used in) financing activities |                          |                         
|                                                    |                          |                         
|Net (decrease) increase in cash                     |                          |                         
|Cash, beginning of year                             |                          |                         
|                                                    |                          |                         
|Cash, at end of year                                |                          |                         
|                                                    |                          |                         
|Supplemental disclosures of cash flow information:  |                          |                         
|Net cash paid during the year for:                  |                          |                         
|Income taxes                                        |                          |                         
|                                                    |                          |                         
|Interest                                            |                          |                         
|                                                    |                          |                         

Supplemental Schedule of
Noncash Investing and Financing Activities:
 For the year ended December 31:

|                                                  | 2004 | 2003 | 2004 | 2003   
|------------------------------------------------- | ---- | ---- | ---- | -------
|
|Acquired equipment under capital lease obligation |      |      | £    | 319,953
|Issuance of  shares of common stock for           |      |     
|Compensation for professional services            |      |      |      | --     
|Number of shares                                  |      |      |      | 37,500 
|Amount                                            |      |      | £    | 60,120 

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

F-6

# Xfone, Inc. and
Subsidiaries

# CONSOLIDATED
STATEMENTS OF CASH FLOWS (Contd.)

|                                       | Years Ended
December 31, | Years Ended
December 31,
|-------------------------------------- | ------------------------ | ------------------------
|
|
|Depreciation and amortization          |                          |                         
|Bad debt expense                       |                          |                         
|Stock issued for professional services |                          |                         
|                                       |                          |                         
|                                       |                          |                         
|                                       |                          |                         
|Changes in assets and liabilities:     |                          |                         
|Increase in trade receivables          |                          |                         
|Increase in other receivables          |                          |                         
|Decrease in shareholder loans          |                          |                         
|Equity in earnings of investments      |                          |                         
|Decrease in trade payables             |                          |                         
|Decrease (increase) in other payables  |                          |                         
|Increase (decrease) in deferred taxes  |                          |                         
|                                       |                          |                         
|                                       |                          |                         
|                                       |                          |                         
|Total adjustments                      |                          |                         
|                                       |                          |                         

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

F-7

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

Note 1 
Organization and Nature of Business

| | A. | Xfone,
Inc. (Xfone) was incorporated in Nevada, U.S.A. in September,
               2000 and is a provider of long distance voice and data telecommunications
               services, primarily in the United Kingdom.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Company s
holdings in subsidiaries are as follows: 

Swiftnet Limited (Swiftnet)  wholly
owned U.K. subsidiary 

Xfone
U.S.A. Inc. (Xfone U.S.A.) located in Mississippi  wholly owned
subsidiary. 

                  Xfone 018 Ltd. formerly Xfone Communication Ltd., and Israeli company ("Xfone Israel") - in which the Company holds
                  a 74% ownership share.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Company
entered into an agreement to acquire WS Telecom Inc. a Mississippi corporation, that
provides telecommunication services in the southeastern United States. Xfone U.S.A. is
managing WS Telecom Inc. under a management agreement (see Note 19). The financial
statements consolidate the operations of Xfone, Swiftnet Limited, Xfone Israel and Xfone
U.S.A.  (collectively the Company).
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | The
financial statements of the Company have been prepared in Sterling                (£)
since this is the currency of the prime economic                environment, the U.K., in
which the operations of the Company are conducted.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | The financial
statements have been translated into U.S. dollars using the rate           of exchange of
the U.S. dollar at December 31, 2004. The translation was made           solely for the
convenience of the readers. It should be noted that the £          figures do not
necessarily represent the current cost amounts of the various           elements
presented and that the translated U.S. dollar figures should not be           construed
as a representation that the £ currency amounts actually           represented, or
could be converted into, U.S. dollars. The representative rate           of exchange of
the £ at December 31, 2004 was £1 = 1.93 U.S.$.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-8

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 2  Significant
Accounting Policies

| |  | The financial
statements are prepared in accordance with generally accepted accounting principles in
the United States of America. The significant accounting policies followed in the
preparation of the financial statements, applied on a consistent basis, are as follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | The consolidated
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America (GAAP) and include the accounts of the
Company and its wholly-owned subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A | minority
interest in the loss of a subsidiary will cease to be recorded when its respective
equity interest is reduced to zero and below. Such unrecorded minority losses will only
be recorded as the respective subsidiarys future profits exceed cumulative
unrecorded losses.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Accounts
Receivable
| | -- | -------------------

| |  | Accounts receivable
are recorded at net realizable value consisting of the carrying amount less the allowance
for uncollectible accounts.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------

| |  | The Company
uses the allowance method to account for uncollectible accounts receivable balances.
Under the allowance method, an estimate of uncollectible customer balances is made using
factors such as the credit quality of the customer and the economic conditions in the
market. Accounts are considered past due once the unpaid balance is 90 days or more
outstanding, unless payment terms are extended. When an account balance is past due and
attempts have been made to collect the receivable through legal or other means, the
amount is considered uncollectible and is written off against the allowance balance.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | At December
31, 2004 the accounts receivable are presented net of an allowance for doubtful accounts
of £268,326.
| |  | -----------------------------------------------------------------------------------------------------------------

| | C. | Investments
| | -- | -----------

| |  | Investments in
affiliates over which we have a significant influence, but not a controlling interest,
are accounted for using the equity method of accounting. All equity investments are
periodically reviewed to determine if declines in fair value below cost basis are other
than temporary. If the decline in fair value is determined to be other than temporary, an
impairment loss is recorded and the investment is written down to a new carrying value.
In case of losses the equity of such investments is reduced to zero.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-9

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 2  Significant
Accounting Policies (Cont.)

| | D. | Equipment
| | -- | ---------

| |  | Equipment is
stated at cost. Depreciation is calculated by the declining balance method over the
estimated useful lives of the assets. Annual rates of depreciation are as follows:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        | Method | Useful Life
|----------------------- | ------ | -----------
|Switching equipment     |        |            
|Machinery and equipment |        |            
|Furniture and fixtures  |        |            
|Motor vehicles          |        |            

| | E. | Other
  Intangible Assets
| | -- | -------------------------

| |  | Other intangible
assets with determinable lives consist of license for communication services and are
amortized over the 20 year term of the license.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | Long-Lived
Assets
| | -- | -----------------

| |  | We periodically
evaluate the recoverability of the carrying amount of long-lived assets (including
property, plant and equipment, and intangible assets with determinable lives) whenever
event or changes in circumstances indicate that the carrying amount of an asset may not
be fully recoverable. We evaluate events or changes in circumstances based on a number of
factors including operating results, business plans and forecasts, general and industry
trends and, economic projections and anticipated cash flows. An impairment, if any, is
assessed when the undiscounted expected future cash flows derived from an asset are less
than its carrying amount. Impairment losses are measured as the amount by which the
carrying value of an asset exceeds its fair value and are recognized in earnings. We also
continually evaluate the estimated useful lives of all long-lived assets and periodically
revise such estimates based on current events.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. | Revenue
Recognition
| | -- | -------------------

| |  | The Companys
source of revenues results from charges to customers for the call minutes they use while
on the Companys telecommunications system. Such revenues are recognized at the time
this service is rendered. Amounts prepaid by customers are deferred and recorded as a
liability and then recorded as revenue when the customer utilizes the service. Messaging
services customers are being charged on a per minute basis, per fax page or email.
Commissions to agents are accounted as marketing costs for the Company.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-10

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 2 -      Significant
Accounting Policies (Cont.)

| | H. | Reclassification
| | -- | ----------------

| |  | Certain reclassification
of 2003 amounts have been made to conform to the 2004 presentation.
| |  | --------------------------------------------------------------------------------------------

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

| |  | The preparation
of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | Basic earning
per share (EPS) is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | Deferred tax
liabilities or assets reflect temporarily differences between amounts of assets and
liabilities for financial and tax reporting and are adjusted, as appropriate, to reflect
changes in tax rates expected to be in effect when the temporary differences reverse.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | The Company
accounts for equity-based compensation arrangements in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations, and complies with the disclosure
provisions of SFAS No. 123, Accounting for Stock-Based Compensation. All
equity-based awards to non-employees are accounted for at their fair value in accordance
with SFAS No. 123. Under APB No. 25, compensation expense is based upon the difference,
if any, on the date of grant, between the fair value of the Companys stock and the
exercise price. Pro forma information (see Note 12) regarding the Companys net
income and net earnings per share is required by SFAS No. 123 and has been determined as
if the Company had accounted for its employee stock options under the fair value method
prescribed by SFAS No. 123.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-11

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 2 -   Significant
Accounting Policies (Cont.)

| | M. | Foreign
Currency Translation
| | -- | ----------------------------

| |  | Assets and
liabilities of subsidiaries operating outside United Kingdom with a functional currency
other than Pound are translated into Pounds using year end exchange rates, costs and
expenses are translated at the average exchange rate effective during the year. Foreign
currency translation gains and losses are included in the shareholders equity section.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | N. | Recent
Accounting Pronouncements G.
| | -- | -----------------------------------

| |  | In December
2004, the FASB issued statement of financial Accounting Standards No. 123 (revised)  Share
based payments (revised 2004) (SFAS 123R) requiring that the compensation cost
relating to share based payment transactions be recognized in financial statements. The
cost is to be measured based on the fair value of the equity or liability instruments
issued. SFAS 123R is effective as of the first interim or annual reporting period
beginning after December 15, 2005. We currently expect that the adoption of SFAS 123R
will reduce 2005 diluted earnings by £.08 to £.09 per share.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In January
2003, the FASB issued FIN 46, which provides guidance on consolidation of variable
interest entities. In December 2003, the FASB referred the effective date of FIN 46 for
certain variable interest entities (non special purpose entities) until the first quarter
of 2004. The provisions of FIN 46 do not have effect on the consolidated financial
statements.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-12

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 3  Prepaid
Expenses, Other Receivables and Deposits

|                                                     | December 31,
2004 | December 31,
2004
|---------------------------------------------------- | ----------------- | -----------------
|
|Prepaid acquisition costs                            |                   |                  
|Other prepaid expenses                               |                   |                  
|Due from Swiftglobal, Limited (nonaffiliated entity) |                   |                  
|Due from Story Ltd. (affiliated entity)              |                   |                  
|Due from WS Telecom Inc.                             |                   |                  
|Other receivables                                    |                   |                  
|                                                     |                   |                  
|                                                     |                   |                  
|                                                     |                   |                  

F-13

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Contd.)

Note 4 -    Loan to the
Chairman of the Board and Shareholder

| |  | The Company
has a non-interest bearing loan of £247,931 due from shareholders. Which has been
classified as noncurrent and is to be repaid as follows.:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|     |  | Convenience translation into US$
|---- |  | --------------------------------
|2005 |  |                                 
|2006 |  |                                 
|     |  |                                 
|     |  |                                 
|     |  |                                 

Note 5  Fixed Assets

|                                             | December 31,
2004 | December 31,
2004
|-------------------------------------------- | ----------------- | -----------------
|
|Prepaid acquisition costs                    |                   |                  
|Cost                                         |                   |                  
|Equipment held under capital lease           |                   |                  
|Office furniture and equipment               |                   |                  
|Development costs                            |                   |                  
|Compuer equipment                            |                   |                  
|                                             |                   |                  
|                                             |                   |                  
|                                             |                   |                  
|                                             |                   |                  
|Accumulated Depreciation under capital lease |                   |                  
|Equipment held under capital lease           |                   |                  
|Office furniture and equipment               |                   |                  
|Development costs                            |                   |                  
|Computer equipment                           |                   |                  
|                                             |                   |                  
|                                             |                   |                  
|                                             |                   |                  

F-14

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 6  Investments

| |  | The Company
has investments in two business ventures as follows: 47 1/2% of Auracall Limited (Auracall)
and 40% of Story Telecom Ltd. (Story), both start up entities in the U.K.
Through December 31, 2004, the cumulative net loss of Story has exceeded the Companys
investments therein, Accordingly, such investments have been reduced to zero. Story and
Auracall Limited buy their telecommunications services they resell, from the Company.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 7  Other Assets

|                          | December 31,
2004 | December 31,
2004
|------------------------- | ----------------- | -----------------
|
|Prepaid acquisition costs |                   |                  
|Cost                      |                   |                  
|Accumulated amortization  |                   |                  
|                          |                   |                  
|                          |                   |                  
|                          |                   |                  

| |  | During 2004,
the Company acquired a communication license for operating Xfone Israel at a cost of
£57,816, which is being amortized over 20 year term of the license.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 8  Other
Liabilities and Accrued Expenses

|                          | December 31,
2004 | December 31,
2004
|------------------------- | ----------------- | -----------------
|
|Prepaid acquisition costs |                   |                  
|Corporate taxes           |                   |                  
|Professional fees         |                   |                  
|Payroll and other taxes   |                   |                  
|Others                    |                   |                  
|                          |                   |                  
|                          |                   |                  
|                          |                   |                  

F-15

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 9  Notes
Payable

|                                                                      | December 31,
2004 | December 31,
2004
|--------------------------------------------------------------------- | ----------------- | -----------------
|
|Prepaid acquisition costs                                             |                   |                  
|First National Finance - maturity 2005, annual                        |                   |                  
|Interest rate 7.16%                                                   |                   |                  
|Newcourt - maturity 2004-5, annual interest rate 7.16%                |                   |                  
|Bank Hapoalim - maturity, October 2009                                |                   |                  
|annual interest of the bank's prime rate                              |                   |                  
|plus 1%, payable in 58 equal payments of                              |                   |                  
|Pound 7,654 including interest                                        |                   |                  
|Shareholder (minority interest holder) due and payable, November 2008 |                   |                  
|annual interest at Israeli consumer price index plus 4%               |                   |                  
|                                                                      |                   |                  
|                                                                      |                   |                  
|Less current portion                                                  |                   |                  
|                                                                      |                   |                  
|                                                                      |                   |                  
|                                                                      |                   |                  

| |  | Five years
maturity of long term debts is as follows:
| |  | -----------------------------------------------------

|             |  | Convenience translation into US$
|------------ |  | --------------------------------
|December 31, |  |                                 
|2005         |  |                                 
|2006         |  |                                 
|2007         |  |                                 
|2008         |  |                                 
|2009         |  |                                 
|             |  |                                 
|             |  |                                 
|             |  |                                 

F-16

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 10  Capital
Lease Obligations

| |  | The Company
is the lessee of switching and other equipment under capital leases expiring in various
years through 2007. The assets and liabilities under capital leases are recorded at the
lower of the present value of the minimum lease payments or the fair value of the asset.
The assets are depreciated over their estimated productive lives. Depreciation of assets
under capital leases is included in depreciation expense for 2004.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Minimum future
lease payments under capital leases as of December 31, 2004 for each of the next four
years are:
| |  | ---------------------------------------------------------------------------------------------------------------

|                                           |  | Convenience translation into US$
|------------------------------------------ |  | --------------------------------
|December 31,                               |  |                                 
|2005                                       |  |                                 
|2006                                       |  |                                 
|2007                                       |  |                                 
|                                           |  |                                 
|Total minimum lease payments               |  |                                 
|Less: amount representing interest         |  |                                 
|                                           |  |                                 
|Present value of net minimum lease payment |  |                                 
|                                           |  |                                 

| | Interest | rates
on capitalized leases vary up to 9.6%, per annum.
| | -------- | -------------------------------------------------------

F-17

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 11  Income
Taxes

| | The | Company
does not file consolidated tax returns.
| | --- | -----------------------------------------------

| | The | following
table reflects the Companys deferred tax assets and (liabilities) at December 31,
2004:
| | --- | --------------------------------------------------------------------------------------------------

|                                         |  | Convenience translation into US$
|---------------------------------------- |  | --------------------------------
|Defered tax liabilities:                 |  |                                 
|Accelerated tax writeoff of fixed assets |  |                                 
|Deferred tax assets:                     |  |                                 
|Allowance for doubtful debts             |  |                                 
|                                         |  |                                 
|Net deferred taxes liabilities           |  |                                 
|                                         |  |                                 

F-18

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 11  Income
Taxes (cont.)

| |  | The provision
for income taxes differs from the amount computed by applying the statutory income tax
rates to income before taxes as follows:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|                                           | Years Ended
December 31, | Years Ended
December 31,
|------------------------------------------ | ------------------------ | ------------------------
|
|
|Income tax computed at statutory rate      |                          |                         
|Effect of tax authority adjustments        |                          |                         
|Other                                      |                          |                         
|Effect of permanent differences (including |                          |                         
|effect of nonconsolidated tax filings)     |                          |                         
|Utilization of net operating loss          |                          |                         
|                                           |                          |                         
|Provision for income taxes                 |                          |                         
|                                           |                          |                         

Note 12 
Commitments & Contingencies

| |  | Xfone entered
into an agreement with an investor in Israel, whereby the later purchased 26% interest in
Xfone Israel owned by an existing shareholder through providing a bank guarantee of
£1,203,731 ($2,321,116) to the Ministry of Communications of the State of Israel
which replaced an existing bank guarantee given by the Company. As part of the agreement,
the Company agreed to indemnify the investor for any damage caused to him due to the
forfeiture of the bank guarantee with the Ministry of Communications on account of any
act and/or omission of Xfone, provided that the said act or omission is performed against
the opinion of the investor or without his knowledge. Further, the Company agreed that if
at the end of the first two years of Xfone Israel business activity, its revenues shall
be less than £1,037,200 ($2,000,000), or if it shall cease business activity (at
any time), the Company shall secure the return of the bank guarantee to the investor.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-19

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 13  Capital
Structure, Stock Options

| |  | In connection
with a Stock Purchase Agreement, clarified on July 30, 2001, Campbeltown Business Limited
(Campbeltown), an entity owned by the Nissenson family including the Companys
President and principal Executive Officer, a shareholder, holds options from the Company
and one of its directors to purchase 500,000 additional shares of the Company for the
amount of $200,000. This transaction can be executed either by the Company issuing new
shares, or by the director selling his private shares as long as he has an adequate
amount of shares, as the director will decide. This option will expire on December 31,
2005.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | During January
2004, the Company issued 17,500 shares and 17,500 Warrants A, and 17,500 Warrants B for
consulting services. In addition the Company granted 100,000 Warrants A for legal
services. During February 2004, the Company granted 50,000 Warrants A for consulting
services.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On February
12, 2004, the Company closed an offering of 986,737 restricted shares of common stock,
with 1,136,737 Warrants A and 986,737 Warrants B. The Company sold 969,237 shares of
common stock with a Warrants A and B attached for aggregate proceeds of £1,580,278.
Costs associated with this funding were £433,051 from the proceeds of the offering
and an additional 150,000 Warrant A, valued at 33,179. Each Warrant A, which is not
freely transferable, entitles the owner to purchase one share, until not later than
January/February 2009 at an exercise price of $5.50. Each Warrant B, which is not freely
transferable, entitles the owner to purchase one share, until not later than until the
earlier of 10 days after our common stock is traded on the NASDAQ Small Cap or the
American Stock Exchange. The Warrants B are exercisable at an exercise price of $3.50.
Warrants B were expired on November 2004 according to the warrants terms. The Company
sold shares with attached Warrants A and B to a total of 16 persons and 8 entities.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The offering
agreement requires the Company is issue additional shares for nil consideration to the
participants of the offering under certain conditions, as defined. Accordingly, on
November 17, 2004, the Company issued 109,716 shares according to this agreement.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-20

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 13  Capital
Structure, Stock Options (cont.)

| |  | The following
restricted stock was issued, in Pounds during 2004:
| |  | -----------------------------------------------------------------

|Month
Issued                 | Number of
Shares | Price
Per share | Share
capital | Contributions in
excess of par Value | Total issue
Price
|---------------------------- | ---------------- | --------------- | ------------- | ------------------------------------ | -----------------
|February                     |                  |                 |               | 986,737                              |                  
|Cost of issuance in February |                  |                 |               |                                      |                  
|May                          |                  |                 |               | 3,000                                |                  
|July                         |                  |                 |               | 3,734                                |                  
|November                     |                  |                 |               | 109,716                              |                  
|                             |                  |                 |               |                                      |                  
|                             |                  |                 |               | 1,103,187                            |                  
|                             |                  |                 |               |                                      |                  

| |  | Stock Option
Plan
| |  | -----------------

| |  | In November
2004, the Companys board of directors approved the adoption of the principal items
forming the Companys 2004 stock option plan (The Plan) for the benefit
of employees, officers, directors, consultants and subcontractors of the Company
including its subsidiaries.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The purpose
of the 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 Plan
will provide for the grant of options an aggregate of 5,500,000 shares of the Companys
common stock. The Plan shall be administered by the board to determine 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.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | At November
24, 2004 3,200,000 options were granted under the plan described above according to the
following terms:
| |  | --------------------------------------------------------------------------------------------------------------------

| |  | Option exercise
price  $3.5, vesting date  12 month from the date of grant, expiration date
 5 years from the vesting date.
| |  | ------------------------------------------------------------------------------------------------------------------------------

F-21

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 13  Capital
Structure, Stock Options (cont.)

| |  | Stock Option
Plan (cont..)
| |  | --------------------------

| |  | Transactions related
to the above Plan during the period ending December 31, 2004 were as follows:
| |  | --------------------------------------------------------------------------------------------------

|                                                   | 2004 | Exercise price
|-------------------------------------------------- | ---- | --------------
|Options outstanding at the beginning of the period |      |               
|Granted                                            |      |               
|Forfeited                                          |      |               
|Options outstanding at the end of the period       |      |               
|Exercised at end of the period                     |      |               
|Weighted average fair value of options granted     |      |               

| |  | The following
table summarize information about options outstanding and exercisable at December 31,
2004:
| |  | ---------------------------------------------------------------------------------------------------------

|  | Options Outstanding
|- | -------------------
|
|$ | 3.50               

F-22

# Xfone, Inc. and
Subsidiaries

Note
13  Capital Structure, Stock Options (cont)

| |  | Stock Option
Plan (cont.)
| |  | -------------------------

| |  | The Company
accounts for stock options plan grants to employees and directors in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
No. 25). Under APB No. 25, there is no compensation cost recognized for the Companys
stock option plan, because the options granted under the plan have an exercise price
greater than the market value of the underlying stock at the grant date. Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
No. 123), as amended, allows, but does not require companies to record compensation cost
for fixed stock option plans using a fair value based method. As permitted by SFAS No.
123, the Company elected to account for compensation cost for the stock option plan using
the intrinsic value based method under APB No. 25. See Recent Accounting Pronouncements
section of this Note for discussion of recently issued rules regarding accounting for
share-based payments. The following table sets forth pro forma information as if
compensation cost had been determined consistent with the requirements of SFAS No. 123.
The fair value of the options granted was estimated on the date of grant using
Black-Scholes option pricing model.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Proforma reporting
based on the fair value method
| |  | -------------------------------------------------

|                                     | Period Ended December 31, 2004
|------------------------------------ | ------------------------------
|
|Cost of compensation - net           |                               
|Net income (loss) for the period     |                               
|Basic net earnings (loss) per share  |                               
|Diluted net earning (loss) per share |                               

F-23

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note
14  Earnings Per Share

|                                        | Year Ended December 31, 2004 |           |              |        
|--------------------------------------- | ---------------------------- | --------- | ------------ | -------
|
|
|Net Income                              | £39,874                      |           |              |        
|Basic EPS:                             
|Income available to common stockholders | £39,874                      | 5,998,252 | £       0.00 | $ 0.013
|                                        |                              |           |              |        
|Effect of dilutive securities:         
|Options and warrants                    | --                           | 2,634,698 | --           | --     
|Diluted EPS:                           
|Income available to common stockholders | £39,874                      | 8,632,950 | £       0.00 | $ 0.009

|                                        | Year Ended December 31, 2003 |           |       |              
|--------------------------------------- | ---------------------------- | --------- | ----- | -------------
|
|
|Net Income                              | £421,445                     |           |       |              
|Basic EPS:                             
|Income available to common stockholders | £421,445                     | 5,098,286 | £0.08 | $       0.154
|                                        |                              |           |       |              
|Effect of dilutive securities:         
|Options and warrants                    | --                           | 500,000   | --    | --           
|Diluted EPS:                           
|Income available to common stockholders | £421,445                     | 5,598,286 | £0.08 | $       0.154

F-24

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 15  Selected
Statement of Operations Data

|  |                           | Years Ended
December 31, | Years Ended
December 31, |             |             
|- | ------------------------- | ------------------------ | ------------------------ | ----------- | ------------
|
|
|A | Marketing & Selling:      |                          |                          |             |             
|  | Advertising               | £ 60,363                 | £25,365                  | 116,500     | $     48,954
|  | Consultancy               | 75,471                   | 83,970                   | 145,659     | 162,062     
|  | Commissions               | 1,408,860                | 964,623                  | 2,719,099   | 1,861,723   
|  | Others                    | 81,594                   | 17,054                   | 157,474     | 32,914      
|  |                           | £ 1,626,288              | £1,091,012               | $3,138,732  | $2,105,653  
|B | General & Administrative:
|  | Salaries & benefits       | £ 835,495                | £410,024                 | $ 1,612,505 | $791,346    
|  | Rent & maintenance        | 233,196                  | 84,121                   | 450,068     | 162,354     
|  | Communications            | 23,005                   | 4,830                    | 44,400      | 9,322       
|  | Professional fees         | 149,911                  | 224,087                  | 289,328     | 432,488     
|  | Bad debts                 | 125,333                  | 109,532                  | 241,893     | 211,397     
|  | Depreciation              | 51,376                   | 89,592                   | 99,156      | 172,913     
|  | Others                    | 155,410                  | 130,124                  | 299,941     | 251,138     
|  |                           | £ 1,573,726              | £1,052,310               | $3,037,291  | $2,030,958  

F-25

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 15  Selected
Statement of Operations Data (cont.)

|                           | Years Ended
December 31, | Years Ended
December 31, |  |        
|-------------------------- | ------------------------ | ------------------------ |  | -------
|
|
|Financing Expenses, Net:   |                          |                          |  |        
|Bank charges               |                          |                          |  | £33,420
|Interest on capital leases |                          |                          |  | 17,581 
|Foreign currency exchange  |                          |                          |  | 31,027 
|Other interest and charges |                          |                          |  | 1,375  
|                           |                          |                          |  |        
|                           |                          |                          |  | £83,430
|                           |                          |                          |  |        

F-26

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 16 - Related Party Transactions

| |  | Refer to
notes 4 and 13 for additional related party activity
| |  | -------------------------------------------------------------

|                                                  | Years Ended
December 31, | Years Ended
December 31, |             | 
|------------------------------------------------- | ------------------------ | ------------------------ | ----------- | 
|
|
|Shareholder's salaries                            |                          |                          | £ 120,736   | 
|Bonus                                             |                          |                          | £ 5,000     | 
|Cambeltown Business Limited:                      |                          |                         
|Fees                                              |                          |                          | £ 57,000    | 
|Consultancy                                       |                          |                          | £ 44,643    | 
|Due to Campbeltown                                |                          |                          | £ 6,950     | 
|Accrued expenses                                  |                          |                          | £ 18,243    | 
|Vision Consulatants Limited:                      |                          |                         
|Fees                                              |                          |                          | £ 101,643   | 
|Story Telecom Limited:                            |                          |                         
|* Revenues                                        |                          |                          | £ 4,778,564 | 
|Trade payable                                     |                          |                          | £ -         | 
|Commissions                                       |                          |                          | £ 296,339   | 
|*Due from Story Telecom - net                     |                          |                          | £ 1,137,863 | 
|*Directly and indirectly through Global VOIP Ltd. |                          |                         
|Auracall Limited:                                 |                          |                         
|**Revenues                                        |                          |                          | £ 909,007   | 
|Commissions                                       |                          |                          | £ 496,822   | 
|Due to Auracall - net                             |                          |                          | £ 86,097    | 
|Trade payable                                     |                          |                          | £ -         | 
|                                                  |                          |                          |             | 
|** Resulting from Auracall sales                  |                          |                         
|Dionysos Limited:                                 |                          |                          |             | 
|Fees                                              |                          |                          | £ 16,274    | 
|                                                  |                          |                          |             | 

F-27

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 17  Financial
Commitments

| |  | The Company
has annual rent commitments under a non-cancellable operating lease of £38,200,
which terminates in December 2012. Rent expense for the two years ended December 31, 2004
and 2003, were £51,026 and £49,500, respectively.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Company
has a performance based incentive agreement with its Chairman of the Board and
Campbeltown which provides to each person/entity 1% of the Companys revenues
exclusive of revenues from Story.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Company
has an 18 month renewable consulting agreement with Campbeltown, which was renewed on
November 2004. Under this agreement Campbeltown agrees to provide (a) analysis of
proposed acquisitions; (b) such markets for the Companys telecommunications
services in additional countries; (c) formulate strategies for the Companys future
growth plans; and (d) introduce potential customers to the Companys business. The
Company is obligated to pay Campbeltown £2,000 ($3,860) per month plus an
additional performance bonus based upon monthly revenue targets as follows:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Target Monthly Revenue  | Monthly Bonus | Convenience Translation US$ |       
|----------------------- | ------------- | --------------------------- | ------
|Up to£125,000           |               |                             | £  -- 
|From£125,000 to£150,000 |               |                             | £1,250
|From£150,000 to£175,000 |               |                             | £2,500
|Over£175,000            |               |                             | £2,750

| |  | The Company
has commission agreements with various resellers that are entitled to 10% of the revenues
that they generate.
| |  | -------------------------------------------------------------------------------------------------------------------------

| |  | The Company
anticipates annual maintenance of equipment to be approximately£50,000 ($96,500).
| |  | ---------------------------------------------------------------------------------------------

F-28

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 18  Economic
Dependency and Credit Risk

| |  | Approximately, 42%
and 22% of total 2004 revenues were derived, respectively, from two customers and
approximately 36% and 18% of total 2003 revenues were derived, respectively, from two
customers.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Approximately, 48%
and 21% of the total accounts receivable at 2004 were due from two customers.
| |  | ------------------------------------------------------------------------------------------------

| |  | Approximately, 20%,
20%, 20% and 12% of the Companys purchases are from four suppliers for the year
ended December 31, 2004, and 31%, 24%, 20% and 15% are from two suppliers for the year
ended December 31, 2003.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Company
may periodically maintain cash balances at a commercial bank within the countries that it
operates which are in excess of respective government insurance limits.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 19  Segment
Information

| |  | The percentage
of the Companys revenues is derived from the following segments.
| |  | --------------------------------------------------------------------------------

|                                 | Years Ended
December 31, | 
|-------------------------------- | ------------------------ | 
|
|Telephone minute billing plus    |                          | 
|messaging services,              |                          | 
|including facsimilie, nodal, and |                          | 
|e-mail related services          |                          | 
|Mobile phone service             |                          | 
|Calling cards                    |                          | 
|                                 |                          | 
|                                 |                          | 
|                                 |                          | 
|                                 |                          | 
|                                 |                          | 

F-29

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 19  Segment
Information (cont.)

| |  | The Company
has four major types of customers:
| |  | ----------------------------------------------

| |  | Residential
 These customers either must dial dial 1 service or acquire a box that
dials automatically.
| | - | ----------------------------------------------------------------------------------------------------------

| |  | Commercial
 Smaller business are treated the same as residential customers. Larger businesses PBX
units are programmed.
| | - | -------------------------------------------------------------------------------------------------------------------------

| |  | Governmental
agencies  Include the United Nations World Economic Forum, the Argentine Embassy
and the Israeli Embassy.
| | - | -----------------------------------------------------------------------------------------------------------------------

| |  | Resellers,
such as WorldNet and Vsat  We provide them with our telephone and messaging
services. For WorldNet we also provide the billing system.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------

|                                | Years Ended
December 31, | Years Ended
December 31, |            | 
|------------------------------- | ------------------------ | ------------------------ | ---------- | 
|
|
|Revenues                        |                          |                          |            | 
|Telephone & messaging           |                          | £                        | 5,930,541  | 
|Mobile                          |                          |                          | 480,451    | 
|Calling Cards                   |                          |                          | 4,919,124  | 
|                                |                          |                          |            | 
|Total Revenues                  |                          | £                        | 11,332,116 | 
|                                |                          |                          |            | 
|Direct Operating Expenses       |                          |                         
|Telephone & Messaging           |                          | £                        | 4,789,133  | 
|Mobile                          |                          |                          | 375,598    | 
|Calling Cards                   |                          |                          | 4,578,359  | 
|                                |                          |                          |            | 
|Total Direct Operating Expenses |                          | £                        | 9,743,090  | 
|                                |                          |                          |            | 

F-30

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 19  Segment
Information (cont.)

|                                        | Years Ended
December 31, | Years Ended
December 31, |             | 
|--------------------------------------- | ------------------------ | ------------------------ | ----------- | 
|
|
|Direct Operating Profit                 |                          |                          |             | 
|Telephone & Messaging                   |                          |                          | £ 1,141,408 | 
|Mobile                                  |                          |                          | 104,853     | 
|Calling Cards                           |                          |                          | 340,765     | 
|                                        |                          |                          |             | 
|Total Profits                           |                          |                          | £ 1,587,026 | 
|                                        |                          |                          |             | 
|Corporate and common operating expenses |                          |                          | £ 1,474,244 | 
|Operating Profit                        |                          |                          | £ 112,782   | 

| |  | The assets
of the Company are for common usage for all reportable segments.
| |  | ---------------------------------------------------------------------------

F-31

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 19  Segment
Information (cont.)

|                                        | Years Ended
December 31, | Years Ended
December 31, |   |           
|--------------------------------------- | ------------------------ | ------------------------ | - | ----------
|
|
|Revenues                                |                          |                          |   |           
|England                                 |                          |                          | £ | 9,722,528 
|United States                           |                          |                          |   | 1,598,344 
|Israel                                  |                          |                          |   | 9,244     
|                                        |                          |                          |   |           
|Total revenues                          |                          |                          | £ | 11,330,116
|                                        |                          |                          |   |           
|Direct Operating Expenses               |                          |                         
|England                                 |                          |                          | £ | 8,841,441 
|United States                           |                          |                          |   | 882,908   
|Israel                                  |                          |                          |   | 18,741    
|                                        |                          |                          |   |           
|Total direct operating expenses         |                          |                          | £ | 9,743,090 
|                                        |                          |                          |   |           
|Direct Operating Profit (Loss)          |                          |                         
|England                                 |                          |                          | £ | 881,087   
|United States                           |                          |                          |   | 715,436   
|Israel                                  |                          |                          |   | (9,497    
|                                        |                          |                          |   |           
|                                        |                          |                          | £ | 1,587,026 
|                                        |                          |                          |   |           
|Corporate and common operating expenses |                          |                         
|England                                 |                          |                          | £ | 805,285   
|United States                           |                          |                          |   | 584,186   
|Israel                                  |                          |                          |   | 84,773    
|                                        |                          |                          |   |           
|                                        |                          |                          | £ | 1,474,244 
|                                        |                          |                          |   |           
|Operating Profit                        |                          |                         
|England                                 |                          |                          | £ | 75,802    
|United States                           |                          |                          |   | 131,250   
|Israel                                  |                          |                          |   | (94,270   
|                                        |                          |                          |   |           
|Operating Profit                        |                          |                          | £ | 112,782   
|                                        |                          |                          |   |           

F-32

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 20  Management
Agreement

| |  | On July
1, 2004, in conjunction with this acquisition (see Note 21), Xfone USA also entered into
a management agreement with WS Telecom. The management agreement provides that WS Telecom
hires and appoints Xfone USA as manager to be responsible for the operation and
management of all of WS Telecoms business operations, including:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Personnel
 Supervising the current employees and independent contractors of WS Telecom with
the authority to hire, discharge and direct personnel for the conduct of the business;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Accounting
- Supervision and administration of all accounting and the maintenance of all books and
records for the business;
| | - | ----------------------------------------------------------------------------------------------------------------------------

| |  | Contracts
 Maintain all existing contracts necessary for the operation of the business and
the authority to enter into or renew contract in WS Telecoms name;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Policies
and procedures - Preparation of all policies and procedures for the operation of the
business; and
| | - | -----------------------------------------------------------------------------------------------------------

| |  | Budgets
 Preparation of all operating, capital or other budgets.
| | - | -----------------------------------------------------------------

F-33

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 20  Management
Agreement (cont.)

| |  | In consideration
of these management services, WS Telecom has assigned and transferred as of July 1, 2004
to Xfone USA all revenues generated from the operations of the business and Xfone USA has
agreed to pay from the revenues the normal operating, maintenance, administrative and
similar expenses of the business. Further, WS Telecom designates Xfone USA as the
controlling party of the current operating accounts of the business. In addition, Xfone
USA, in its discretion, will have the right to make advances or loans to WS Telecom
payable on demand (or if no demand payable in equal quarterly installments of principal
and interest) for an amount up to $500,000, with interest at 7% per annum from the date
advanced until paid for the payment of any amounts due during the term of the management
agreement for any of the special liabilities as defined in the management
agreement. Two senior executives of WS Telecom have jointly and severally,
unconditionally guaranteed the prompt payment when due of these manager loans.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                    | For the Six months ended
December 31, 2004 | Convenience translation into US$
|----------------------------------- | ------------------------------------------ | --------------------------------
|Revenue                             |                                            |                                 
|Cost of sales                       |                                            |                                 
|Gross profit                        |                                            |                                 
|Selling, general and administration |                                            |                                 
|Taxes on income                     |                                            |                                 
|Net income after tax expenses       |                                            |                                 

F-34

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 21  Subsequent
Events

| | A. | In
March 2005, Xfone Communications Ltd. officially changed its name to Xfone           018
Ltd.
| | -- | ------------------------------------------------------------------------------------------------

| | B. | OnJanuary
31, 2005 the Company transferred a 5% ownership share in Xfone Israel to an unrelated
party.
| | -- | ------------------------------------------------------------------------------------------------------

| | C. | The
Company granted to certain employees on February 6, 2005 a total of 730,000
          options subject to the principles of the stock option plan of the Company and
          according to the following terms: The Vesting Date 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 for all
abovementioned           options is 5.5 years from the Date of Grant.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | On
March 10, 2005, the Company consummated its merger with WS Telecom, Inc., d/b/a/ eXpeTel
Communications, Inc., a Mississippi corporation and its subsidiaries (eXpeTel)
through Xfone, Inc.s subsidiary Xfone USA, Inc. In connection with this acquisition
and according to the agreement, the Company is committed to issue 663,650 restricted
shares of its common stock representing a market value of $2,200,000. The Company also is
committed to issue a number of warrants with a value of $1,300,000, the value of which
will be calculated as of the date the Company and WS Telecom Inc. enter into a Management
Operating Agreement, assuming 90% volatility of the underlying share of common stock of
the Company in accordance with the Black Scholes option  pricing model.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Company
anticipates that this acquisition will require, approximately $1,000,000 for working
capital.
| |  | ---------------------------------------------------------------------------------------------------------

F-35

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 21  Subsequent
Events (cont.)

# Proforma Information

| |  | The following
proforma information has been prepared assuming the acquisition had occurred as of
December 31, 2004 for balance sheet purposes and as of January 1, 2004 for statement of
operations purposes:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Proforma Combined
Consolidated Balance Sheets

December 31, 2004

|                               | Xfone Inc.
Consolidated | WS Telecom Inc.
d/b/a eXpeTel
(Unaudited) | Proforma
Adjustments
(Unaudited) | Proforma
Combined
(Unaudited) | Proforma
Combined
Convenience translation into US$
(Unaudited)
|------------------------------ | ----------------------- | ----------------------------------------- | -------------------------------- | ----------------------------- | --------------------------------------------------------------
|Current Assets                 | £ 3,886,034             | £463,352                                  | (180,561)                        | £ 4,168,825                   | $8,045,832                                                    
|Loan to shareholder            | 123,966                 | --                                        | --                               | 123,966                       | 239,254                                                       
|Investments                    | 20,885                  | --                                        | --                               | 20,885                        | 40,308                                                        
|Fixed Assets                   | 1,255,293               | 588,079                                   | --                               | 1,843,372                     | 3,557,708                                                     
|Excess of costs over for value | --                     
|of net assets acquired         | --                      | --                                        | 1,900,002                        | 1,900,002                     | 3,667,005                                                     
|Other Assets                   | 57,106                  | 70,051                                    | --                               | 127,157                       | 245,413                                                       
|                               |                         |                                           |                                  |                               |                                                               
|Total Assets                   | £ 5,343,284             | £1,121,482;                               | £1,719,441                       | £8,184,207                    | $15,795,520                                                   
|                               |                         |                                           |                                  |                               |                                                               
|Currnt Liabilities             | 2,479,429               | 1,084,597                                 | (180,561)                        | 3,383,465                     | 6,530,087                                                     
|Long Term Liabilities          | 651,863                 | 121,787                                   | --                               | 773,650                       | 1,493,145                                                     
|Shareholders Equity            | 2,211,992               | (84,902)                                  | 1,900,002                        | 4,027,092                     | 7,772,288                                                     
|                               |                         |                                           |                                  |                               |                                                               
|Total liabilities and         
|Shareholders' Equity           | £ 5,343,284             | £1,121,482;                               | £1,719,441                       | £8,184,207                    | $15,795,520                                                   
|                               |                         |                                           |                                  |                               |                                                               

F-36

# Xfone, Inc. and
Subsidiaries

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Cont.)

Note 21  Subsequent
Events (cont.)

# Proforma Information  (cont.)

Proforma Combined
Consolidated Statement of Operations

# For the Year Ended
December 31, 2004

|                               | Xfone Inc.
Consolidated | WS Telecom Inc.
d/b/a eXpeTel
(Unaudited) | Proforma
Adjustments
(Unaudited) | Proforma
Combined
(Unaudited) | Proforma
Combined
Convenience translation into US$

(Unaudited)
|------------------------------ | ----------------------- | ----------------------------------------- | -------------------------------- | ----------------------------- | ---------------------------------------------------------------
|Revenues                       | £ 11,330,1£             | 1,597,697                                 | £--                              | £ 12,927,813                  | $24,950,679                                                    
|Cost of Revenues               | (7,991,375)             | (883,422)                                 | --                               | (8,874,797)                   | (17,128,358)                                                   
|                               |                         |                                           |                                  |                               |                                                                
|Gross Profit                   | 3,338,741               | 714,275                                   | --                               | 4,053,016                     | 7,822,321                                                      
|Operating expenses             | (3,225,959)             | (663,261)                                 | --                               | (3,889,220)                   | (7,506,195)                                                    
|                               |                         |                                           |                                  |                               |                                                                
|Operating profit               | 112,782                 | 51,014                                    | --                               | 163,796                       | 316,126                                                        
|Financing expenses - net       | (83,403)                | (23,338)                                  | --                               | (106,741)                     | (206,010)                                                      
|Other income                   | 21,128                  | (43,400)                                  | --                               | (22,272)                      | (42,985)                                                       
|                               |                         |                                           |                                  |                               |                                                                
|Income before taxes            | 50,507                  | (15,724)                                  | --                               | 34,783                        | 67,131                                                         
|Equity in income of affiliated
|Company                        | 20,885                  | --                                        | --                               | 20,885                        | 40,308                                                         
|                               |                         |                                           |                                  |                               |                                                                
|Income before taxes            | 71,392                  | (15,724)                                  | --                               | 55,668                        | 107,439                                                        
|Taxes on income                | (31,518)                | --                                        | --                               | (31,518)                      | (60,830)                                                       
|                               |                         |                                           |                                  |                               |                                                                
|Net income                     | £ 39,874                | £ 15,724                                  | £ -                              | £ 24,150                      | £ 46,609                                                       
|                               |                         |                                           |                                  |                               |                                                                
|Earning per Share:            
|Basic                          | £ 0.007                 |                                           |                                  | £ 0.004                       | $          0.008                                               
|                               |                         |                                           |                                  |                               |                                                                
|Diluted                        | £ 0.005                 |                                           |                                  | £ 0.003                       | $          0.006                                               
|                               |                         |                                           |                                  |                               |                                                                

F-37

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS AND FINANCIAL DISCLOSURE.

Not Applicable

ITEM 8A. CONTROLS AND PROCEDURES.

As of December 31, 2004, an
evaluation was performed under the supervision and with the participation of our
management and audit committee, including our Chief Executive Officer and Principal
Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, our management, including our Chief
Executive Officer and Principal Financial Officer, and our audit committee, they concluded
that our disclosure controls and procedures were effective as of December 31, 2004.

There have been no significant
changes in our internal control over financial reporting during the fiscal year ended
December 31, 2004, or subsequent to December 31, 2004, that have materially affected or
are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 8B.    OTHER
INFORMATION

In connection with our
January/February 2004 private placement, we entered into agreements with selling
shareholders which subject us to possible monetary penalties if we fail to remove the
restrictive legends on the selling shareholders certificates when the shares
represented by the certificates are eligible for resale. In addition, if we conduct other
financing where we sell shares of our common stock at prices of less than $3.00 per share,
we may be required to adjust the selling shareholders purchase price to the any
lower price by issuing the selling shareholders additional shares of our common stock.
Additionally, there are certain provisions in our agreements with selling shareholders
that provide if our registration statement is not effective within a certain period of
time, we will have to issue additional shares to. Because our registration statement was
declared effective only on November 12, 2004, we issued to our selling shareholders on
November 17, 2004, a total of 109,716 additional shares of our common stock. We are not
subject to any additional penalties under the terms of these selling shareholders
agreements.

We sent an application to the AMEX on
October 25, 2004, and is supplying information on an on-going basis to the AMEX for a
possible listing. Following recent achievements and financial results, our officers and
members of our Board of Directors have recommended that we apply for a higher tier
exchange.

Upon the assignment of the existing
Interconnection Agreement between WS Telecom, Inc. and BellSouth Telecommunications, Inc.
to Xfone USA, Inc., and consummation of the merger on March 10, 2005, we, the ultimate
parent company and our subsidiaries Swiftnet Ltd. and Xfone Communication Ltd. (which
changed its name to Xfone 018 Ltd.), individually and/or jointly, agreed to guarantee all
undisputed debts owing to BellSouth Telecommunications, Inc. by Xfone USA, Inc. in
accordance with the assigned Interconnection Agreement. The guarantee was given on
December 16, 2004 andbecame effective upon the consummation of the merger on March
10, 2005.

-50-

---

PART III.

ITEM 9. DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT.

Directors and Executive
Officers

Our Board of Directors elects our
executive officers annually. A majority vote of the directors who are in office is
required to fill vacancies of our Board of Directors. Each director shall be elected for
the term of one year, and until his successor is elected and qualified, or until his
earlier resignation or removal. Our bylaws provide that we have at least one director. Our
directors and executive officers are as follows:

|Name            | Age | Position | Term of Office
|--------------- | --- | -------- | --------------
|Abraham Keinan  |     |          | 55            
|                |     |          |               
|                |     |          |               
|Guy Nissenson * |     |          | 30            
|                |     |          |               
|                |     |          |               
|                |     |          |               
|                |     |          |               
|Eyal Harish     |     |          | 52            
|                |     |          |               
|                |     |          |               
|Shemer Schwartz |     |          | 30            
|                |     |          |               
|                |     |          |               
|Arye Czertok    |     |          | 64            
|                |     |          |               
|                |     |          |               
|Aviu Ben-Horrin |     |          | 56            
|                |     |          |               

* It was mutually agreed by us
and Mr. Tommy Ferguson, that effective December 24, 2004 Mr. Ferguson would cease his
managerial duties as Chief Financial Officer. Mr. Ferguson had been Chief Financial
Officer since August 30, 2004. It was further agreed at the time that Mr. Ferguson would
stay on at the Company until January 18, 2005 which Mr. Ferguson did. If we so desires Mr.
Ferguson will be available to us as a consultant. Guy Nissenson, President and CEO, has
assumed the role of our principal financial officer until a qualified Chief Financial
Officer is selected by the Board of Directors.

Mr.
          Abraham Keinan has been our Chairman of the Board of Directors since our
          inception. Abraham Keinan founded Swiftnet, Ltd., our subsidiary, in February
          1990. From 1991 to October 2003, Mr. Keinan was Swiftnets Managing
          Director. In or about January 2002, Mr. Keinan became a Director of Auracall,
          Ltd. In 1975, Mr. Keinan received a Bachelor of Science Degree in Mechanical
          Engineering from Ben-Gurion University, Beer-Sheeva  Israel.

Mr.
          Guy Nissenson has been our President, Chief Executive Officer, Principal
          Accounting Officer, Principal Financial Officer and a Director since our
          inception. Mr. Nissenson joined Swiftnet, Ltd. in October 1999, became a
          director of Swiftnet, Ltd. in May 2000, and its Managing Director in October
          2003. In October 2002, Mr. Nissenson became a Director of Story Telecom, Ltd. In
          or about January 2002, Mr. Nissenson became a Director of Auracall, Ltd. He was
          a marketing manager of RADA Electronics Industries in Israel from May 1997 to
          October 1998. Mr. Nissenson was an audit and control officer with the rank of
          Lieutenant of the Israeli Defense Forces  Central Drafting Base and other
          posts from March 1993 to May 1997. In July 2000, Mr. Nissenson received a
          Bachelor of Science Degree in Business Management from Kings College 
          University of London. In September 2001, Mr. Nissenson received a Master of
          Business Administration in International Business from Royal Holloway at the
          University of London in London, United Kingdom.

-51-

---

Dr.
          Eyal Harish has been a member of our Board of Directors since December 19, 2002.
          From 1980 to present, Dr. Harish has been in his own private practice in Israel
          as a dentist. Prior to becoming a dentist, from 1974 to 1980, Dr. Harish was an
          Administration Manager with Consortium Holdings, an Israel based communication
          company. Dr. Harish is the brother-in-law of Mr. Keinan, our Chairman of the
          Board.

Mr.
          Shemer Schwartz has been a member of our Board of Directors since December 19,
          2002 and is a member of the Audit Commitee. From March 2003 to present, Mr.
          Schwartz has been the co-founder and research and development expert of XIV
          Ltd., a data storage start up company located in Tel-Aviv, Israel. From November
          2001 to March 2003, Mr. Schwartz has been an Application Team Leader of RF
          Waves, an Israel based high technology company in the field of wireless
          communication. From 1996 to 2001, Mr. Schwartz was a Captain in the Research and
          Development Center of the Israeli Defense Forces Intelligence. In July 1995, Mr.
          Schwartz received a BSc degree in Physics and Mathematics from the Hebrew
          University in Jerusalem. In September 2003, Mr. Schwartz received an MSc degree
          in Computer science from the Tel-Aviv University in Tel-Aviv, Israel.

Mr.
          Arye Czertok has been a member of our Board of Directors since November 23,
          2004, and is an independent director and Chairman of the Audit Committee. From
          1980 to present, Mr. Czetock managed his own law firm and held various other
          senior management and financial positions including Chairman and CEO of Safety
          L Ltd., an Israeli based company in the field of computerized
          simulations systems (from 1985 to 1991) where he oversaw all financial,
          accounting and operational aspects of the company for more then six years. From
          1976 to 1980, Mr. Czertok was the assistant district attorney of Tel-Aviv 
          representing the attorney general in civil and criminal matters. From 1963 to
          1973, Mr. Czertok was a director and owner of a public relations firm. Mr.
          Czertok was the legal adviser of the United States Consulate in Tel Aviv. Mr.
          Czertok has represented many Israeli publicly traded companies such as Bezek,
          Electostar, Koor and others. Mr. Czertok led Eshed Robotec Ltd. to a successful
          IPO and was responsible for all matters, including SEC issues in the US and
          Israel as well as overseeing the financial accounts. From 1992 to 2004, Mr.
          Czertok was the Chairman of the Control Committee of Friends of Rabin Medical
          Center, a multimillion turnover facility where he was controlling all legal and
          financial proceedings. Mr. Czertok holds the following public posts: Chairman in
          the Israeli Bar Committees, an active lecturer and publisher of legal articles,
          President of Parents association for Soldiers, representative of Israeli Bar
          Association in the Israeli Parliament, examiner in oral bar exams, acting Judge
          in the police disciplinary court and in the disciplinary court of the Israeli
          Journalist Association. Mr. Czertok is an active arbitrator. Mr. Czertok is a
          Public Notary since 1998. In 1976, Mr. Czertok received a LLB degree from the
          Tel Aviv University in Tel Aviv. Mr. Czertok was severely wounded in the 1973
          Yom Kippur war while commanding in the Syrian front.

Mr.
          Aviu Ben-Horrin has been a member of our Board of Directors since November 23,
          2004, and is an independent director and a member of the Audit Committee. From
          2001 to present Mr. Ben-Horrin directs, controls and manages various real state
          projects together with Bonei RMAG Ltd. and MPK Ltd. From 1996 to 2001
          Mr.Ben-Horrin managed real estate projects for Lear Or Ltd. and was an
          engineering consultant for Orik Ltd., a construction company. From 1994 to 1996,
          Mr. Ben-Horrin worked for the Ministry of Construction and Housing of the state
          of Israel as a manager of various projects. From 1975 to 1992, Mr. Ben-Horrin
          was an officer with the rank of Colonel in the Israel Defense Forces and served
          in various engineering and commanding posts. In 1975 Mr. Ben-Horrin received a
          BSc in Mechanical Engineering from the Technion University in Haifa. In 1987 Mr.
          Ben-Horrin received a BA in Economics from the Bar-Ilan University in Ramat Gan.

SIGNIFICANT EMPLOYEES

Mrs.
          Bosmat Houston, 41 years of age, has been our Research and Development Manager
          since our inception. She joined Swiftnet, Ltd., in September 1991 as its
          Research and Development Manager. Mrs. Houston received a Bachelor of Science
          Degree in Computer Science from the Technion  Institution of Technology,
          Haifa Israel in 1986.

Mr.
          Rafael Dick, 50 years of age, has been the Managing Director of our Israel based
          subsidiary, Xfone Communication Ltd., since its inception. From October 2001 to
          April 2004, Mr. Dick was employed as a Director of Sales and Marketing with
          Hertz  Kesher Rent a Car Ltd., a rental and leasing firm
          located in Israel. From December 2000 to September 2001, Mr. Dick was employed
          as a Director of Sales and Customers Relations with Artnet Ltd., an Outsourcing
          Services firm located in Israel. From October 1996 to November 2000, Mr. Dick
          was employed as a Director of Sales and Customers Relations with 012 Golden
          Lines Ltd., an international telecommunication firm located in Israel   Mr.
          Wade Spooner, 48 years of age, has been CEO and President of Xfone-USA
          since the consummation of the eXpeTel/Xfone-USA merger on March 10, 2005. Prior
          to this he founded WS TeleCom, Inc, dba eXpeTel Communications in
          February, 2001 and served as Chairman, CEO and President. Prior to founding
          eXpeTel Communications Wade was the President and Chief Operating Officer of
          LSCI Telecommunications, Inc., an integrated Regional Local Exchange Carrier
          with operations in Mississippi and Louisiana. Prior to joining LSCI, Spooner
          worked with competitive telecommunications service providers, most recently
          serving as Director of Technical Operations for ITC^DeltaCom, Inc. (NASDAQ:
          ITCD), a publicly traded Competitive Local Exchange Carrier (CLEC) and fiber
          optic network provider, and served as Chairman and CEO for I.T. GROUP
          Communications, a regional, facilities-based, voice and data communications
          company operating out of Jackson, Mississippi. I.T.GROUP Communications was
          subsequently acquired by ITC^DeltaCom. Spooner received a B.S. Degree in
          Petroleum Engineering from Mississippi State University.

Other than as identified above, we
have no significant employees.

-52-

---

FAMILY RELATIONSHIPS

Dr.
          Harish, one of our directors, is the brother-in-law of Mr. Abraham Keinan, our
          Chairman of the Board.

Guy Nissenson, our President/Chief
Executive Officer/ Chief Financial Officer/Director and other members of the Nissenson
family own and control Campbeltown Business, Ltd. We have a consulting agreement with
Campbeltown Business, Ltd. and have issued stock and options to Campbeltown.

Other than these family relationship,
there are no other family relationships among our officers, directors, promoters, or
persons nominated for such positions.

LEGAL PROCEEDINGS

No officer, director, or persons
nominated for such positions, promoter or significant employee has been involved in legal
proceedings that would be material to an evaluation of our management.

Our directors, executive officers and
control persons have not been involved in any of the following events during the past five
years:

1.       
          any bankruptcy petition filed by or against any business of which such person
          was a general partner or executive officer either at the time of the bankruptcy
          or within two years prior to that time;

2.       
          any conviction in a criminal proceeding or being subject to a pending criminal
          proceeding (excluding traffic violations and other minor offenses);

3.       
          being subject to any order, judgment, or decree, not subsequently reversed,
          suspended or vacated, of any court of competent jurisdiction, permanently or
          temporarily enjoining, barring, suspending or otherwise limiting his involvement
          in any type of business, securities or banking activities; or

4.       
          being found by a court of competent jurisdiction (in a civil action),the
          Commission or the Commodity Futures Trading Commission to have violated a
          federal or state securities or commodities law, and the judgment has not been
          reversed, suspended, or vacated.

SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE

Section  16(a)  of the
 Securities  Exchange  Act of 1934  requires  the  Companys  directors  and  executive
     officers,  and persons who own more than 10% of a registered  class of the  Companys
 equity  securities,  to      file with the Securities and Exchange  Commission (the Commission)
 initial reports of ownership and reports      of changes in ownership of Common Stock
and other equity  securities of the Company.  Officers,  directors and      greater-than
 10%  shareholders  are  required by the  Commissions  regulations  to furnish the
Company  with      copies of all Section 16(a) forms they file. We believe,  during the
fiscal year ended  December 31, 2004, all      filing  requirements  under  Section
 16(a) of the  Securities  Exchange Act of 1934  applicable  to officers,      directors
and 10%  shareholders  were  satisfied  other than reports by certain  officers and
directors of the      grant of stock purchase options.

COMMITTEES OF THE BOARD
OF DIRECTORS

We have an audit committee that was
formed on in the November 24, 2004 board of directors meeting. The audit committee is
composed of three directors: Messrs Czertok, Ben-Horrin and Schwartz (all 3 are considered
independent directors). Mr. Czertok who satisfies the financial sophistication
requirement was appointed as the Chairman of the audit committee. The audit committee
makes decisions regarding compensation, our audit, the appointment of auditors, and the
inclusion of financial statements in our periodic reports. Issues regarding the stock plan
are decided by the Board of Directors including the audit committee.

AUDIT COMMITTEE FINANCIAL
EXPERT

Mr. Aryeh Czertok who satisfies the financial sophistication requirement is the audit committee financial
     expert as defined by Item 401(e)(2) of Regulation S-B of the Securities exchange Act of 1934 and. was
     appointed as the Chairman of the audit committee.

CODE OF ETHICS

We have not yet adopted a corporate
code of ethics. Our board of directors is considering, over the next year, establishing a
code of ethics to deter wrongdoing and promote honest and ethical conduct; provide full,
fair, accurate, timely and understandable disclosure in public reports; comply with
applicable laws; ensure prompt internal reporting of code violations; and provide
accountability for adherence to the code.

On November 24, 2004, the Board of
Directors of the Company by a board resolution adopted an Audit Charter. The purposes of
the Audit Charter is the following:

-53-

---

The Audit Committee will assist the
Board of Directors by overseeing the integrity of the Companys financial statements
and reporting process, overseeing the Companys compliance with legal and regulatory
requirements, overseeing the independent auditors qualifications and independence,
and overseeing the performance of the Companys internal audit function and
independent auditors. The Board of Directors recognizes that the Audit Committee will rely
on the advice and information it receives from the Companys management and its
internal and outside auditors. The Board of Directors does, however, expect the Audit
Committee to exercise independent judgment in assessing the quality of the Companys
financial reporting process and its internal controls. In doing so, the Board of Directors
expects that the Audit Committee will maintain free and open communications with the other
directors, the Companys independent and internal auditors and the financial
management of the Company. The Audit Committee will prepare a report as required by the
Securities and Exchange Commission (SEC) to be included in the Companys
annual proxy statement.

The Committee has the authority to
conduct any investigation appropriate to fulfilling its investigations. It shall have
direct access to the independent auditors as well as to anyone in the Corporation as
deemed necessary by the Committee. The Committee has the authority to retain, at the
Corporations expense, special legal, accounting or other experts, consultants and
advisors, as it deems necessary in the performance of its duties.

The Committee shall have a clear
understanding with the independent auditors that they must maintain an open and
transparent relationship with the Committee, that the ultimate accountability of the
independent auditors is to the Committee and that the independent auditors must report
directly to the Committee. The Committee shall make regular reports to the Board
concerning its activities.

The Company shall provide the
Committee with appropriate funding, as determined by the Committee, (i) to compensate the
independent auditors engaged for purposes of rendering an audit report or related work or
performing other audit, review or attest services, (ii) to compensate any experts,
consultants or advisors engaged by the Committee and (iii) for the ordinary administrative
expenses of the Committee that are necessary or appropriate in carrying out its duties.
The Committee shall give prompt notice to the Corporations Chief Financial Officer
of all expenditures by the Committee.

ITEM 10. EXECUTIVE COMPENSATION.

The following table sets forth
summary information concerning the compensation received for services rendered to it
during the current year and the years ended December 31, 2002 and 2003, and 2004
respectively by our Chairman of the Board, Abraham Keinan who is the managing director of
Swiftnet, and Guy Nissenson, who is our Principal Executive Officer/ President. Abraham
Keinan is our only executive officer who received aggregate compensation during our last
fiscal year which exceeded, or would exceed on an annualized basis, $100,000.

-54-

---

Summary Compensation
Chart

|                                                                                                                                                | Annual Compensation                                      |                                                                                                                                                                                   | Long Term Compensation                                                                                                                                |                                                                                                                                |                                                                             
|----------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------
|
|Abraham
Keinan
Chairman     
        
        
        
        
        
             
Guy Nissenson
Principal
Executive
And Financial
Officer | 2004  
 
2003  
 
2002  
 
      
2004  
 
2003  
 
2002 | $116,510      
(60,368 Pound)
$69,057(1)    
(40,622 Pound)
$51,000       
(30,000 Pound)
    
$116,510      
(60,368 Pound)
$74,820(4)    
(43,500 Pound)
$52,800
(33,000 Pound) | $9,650        
5,000 Pound)  
$112,576      
63,245 Pound) 
$9,588        
(6,372 Pound) 
              
 ----         
$171,302(5)   
(96,237 Pound) | $196,171 (7)   
(101,643 Pound)
$97,900(2)     
(55,000 Pound)
$67,500        
(45,000 Pound) 
$196,171 (8)   
(101,643 Pound) | 1,500,000 (9)
400,000(3)
0            
Pound        
1,500,000 (9)200,000(6)

(1)    
          On April 15, 2003, our Board of Directors approved of a salary increase for our
          Chairman of the Board from $1,473 to $4,000 per month. Abraham Keinans
          total salary of $69,057 for 2003, as reflected above, is composed of: (a) $3,250
          per month from January 2003 to March 2003; and (b) $4,000 per month from April
          2003 to December 2003.

Our chairman of the Board of
Directors, Mr. Abraham Keinan, does not have a written employment agreement with us. Since
January 2001, we have agreed to pay him a salary of $3,525 (2,500 Pound Sterling) per
month. Abraham Keinan receives pension benefits and a company car. On October 15, 2002,
our Board of Directors approved a bonus and success fee whereby if we receive monthly
revenues in excess of $485,000 then Mr. Keinan and our consultant, Campbeltown Business,
Ltd. shall receive 1% of the revenues for each month where our revenues reach $485,000 up
to a maximum of one million dollars. On April 10, 2003, Mr. Keinan and Campbeltown
Business Ltd waived their right to receive 1% of the revenues generated from calling cards
sold by Story Telecom.

(2)    
          This amount represents a success fee paid to Vision Consultants, which is solely
          owned and controlled by A. Keinan, and is further discussed in the paragraph
          following this table.

(3)    
          On March 1st, 2004, our Board of Directors cancelled these options.

(4)    
          On April 15, 2003, our Board of Directors approved of a salary increase for our
          Principal Executive Officer from UKP2,500 ($4,300) to UKP4,000 ($6,800) per
          month. Guy Nissensons total salary of $73,950 is composed of: (a) $4,250
          per month from January to March 2003; and (b) $6,800 per month from April 2003
          to December 2003. On May 11, 2000, we entered into a written employment
          agreement with our Principal Executive Officer/President, Guy Nissenson. Under
          the agreement, Mr. Nissenson will work on business development, sales and
          marketing. At that time, we agreed to pay him a salary of $1,473 (1000 Pound
          Sterling) per month, subject to a future increase of $1,473 (1000 Pound
          Sterling) if Swiftnet reaches average sales of $257,775 (175,000 Pound Sterling)
          per month. In addition, we have agreed that if we grant options to Abraham
          Keinan, we will grant Mr. Nissenson options to buy Swiftnet or us according to
          the following formula: 50% of the options with same price and conditions that
          Mr. Keinan will receive, subject to our reaching a benchmark of $176,760
          (120,000 Pound Sterling) average sales per month during Mr. Nissenson activities
          or in the 12 months thereafter. The agreement with Mr. Nissenson can be
          terminated by either party with one month notice.

(5)    
          This amount represents consultant fees of 41,237 pounds, and a success fee of
          55,000 pounds, paid to Campbeltown Business, Ltd., which is owned and controlled
          by Guy Nissenson and other members of the Nissenson family.

(6)    
          On March 1st, 2004 our Board of Directors canceled these options.

Our research and development manager,
Mrs. Bosmat Houston, has an employment agreement us which provides that we pay her a
salary of $3,337 (2266 Pound Sterling) per month. She is not subject to a covenant not to
compete. We may terminate Mrs. Houstons agreement with 8 weeks notice. She may
terminate the agreement with one week notice.

(7)    
          This amount represents a success fee paid to Vision Consultants, which is solely
          owned and controlled by A. Keinan.

(8)    
          This amount represents consultant fees of 44,463 pounds ($85,818) and a success
          fee of 57,000 pounds ($110,010), paid to Campbeltown Business, Ltd., which is
          owned and controlled by Guy Nissenson and other members of the Nissenson family.

(9)    
          At November 24, 2004, these options were granted by the Board of Directors based
          on the principles of a stock option plan put together for the benefit of
          employees, officers, directors, consultants and subcontractors of the Company
          including its subsidiaries.

-55-

---

# Options/SAR Grants 2004

|Name and
Principle
Position                                                                                                                                                                                                                                       | Number
Securities
Underlying
Options                                                                                                                             | % of Total
Options
Granted To
Employees
in 2003                                                                                         | % of Total
Options
Granted To
Employees
in 2004                              | Exercise
Price                                          | ExpirationDate                                                                                                                                                                                   
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Abraham Keinan(1)
Chairman         
of the Board     
              (3)
                 
                 
                 
Guy Nissenson(2) 
Principal        
Executive        
             (3) 
                 
                 
                 
TOTAL | 400,000    
common stock
   shares
    1,500,000 
Common stock  
              
              
   200,000    
common stock
   shares
    1,500,000 
Common stock | 66.7%   
            
            
            
            
    33.3%   
            
            
            
            
  100.00% | 50%  
       
       
       
       
  50%  
       
       
       
  100% | $0.475 
 $3.50 
       
       
       
 $0.475
  $3.50 | August 31, 2008
 5 years from the
 Vesting Date which is
12 months from the date
      Of Grant
  August 31, 2008
 5 years from the
 Vesting Date which is
12 months from the date
      Of Grant

(1)    
          On August 21, 2003, we issued 400,000 options to acquire shares of our
          restricted common stock to Abraham Keinan. These options were issued to Abraham
          Keinan for services rendered by Mr. Keinan as the Chairman of our Board of
          Directors. These options are exercisable at a price of $0.475 per share. Each
          option is convertible into one share of stock. These options are vested
          immediately and expire 5 years after issuance. On March 1st, 2004, our Board of
          Directors canceled these options.

(2)    
          On August 21, 2003, we issued 200,000 options to acquire shares of our
          restricted common stock to Guy Nissenson. These options were issued to Guy
          Nissenson for services rendered by Mr. Nissenson as our President and Principal
          Executive Officer. These options are exercisable at a price of $0.475 per share.
          Each option is convertible into one share of stock. These options are vested
          immediately and expire 5 years after issuance. On March 1st, 2004, our Board of
          Directors canceled these options.

(3)    
          On November 24, 2004, our board of directors approved and adopted the principal
          items forming our 2004 Stock Option Plan (the Plan) which is
          presently being drafted for the benefit of employees, officers, directors,
          consultants and subcontractors of the Registrant including its subsidiaries. The
          purpose of the Plan is to enable the Registrant to attract and retain the best
          available personnel for positions of substantial responsibility, to provide an
          incentive to such persons presently engaged with the Registrant, and to promote
          the success of our business. At the time of the issuance of options to Mr.
          Keinan and Mr. Nissenson, directors received the following options under the
          same terms as Mr. Keinan and Nissenson: Eyal Harish (75,000 options), Shemer
          Schwartz (75,000 options), Arye Czertok (25,000 options) and Aviu Ben-Horrin
          (25,000 options)as appear in the Options/SAR Grants 2004 table above.

-56-

---

Aggregate Option/SAR
Exercises in 2004 and Fiscal Year End Option/SAR Values

|Name                | Shares
Acquired on
Exercise(#) | Value
Realized
($) | Number of Securities Underlying
Unexercised Options/SARs at FY-End
(#)
Exercisable/Unexercisable | Value of Unexercised In-the
Money Options/SARs at FY-End
($)
Exercisable/Unexercisable
|------------------- | ------------------------------ | ------------------ | ------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------
|Guy Nissenson,      |                                |                    |                                                                                                  |                                                                                       
|Principal Executive
|Officer, President 
|and Financial      
|Officer             | Not Applicable                 | Not Applicable     | 700,000 / 0 (1)                                                                                  | $3,891,000 / $0 (2)                                                                   
|                   
|                    |                                |                    |                                                                                                  |                                                                                       
|                    | Not Applicable                 | Not Applicable     | 1,500,000/0 (5)                                                                                  | negative value / $0                                                                   
|Abraham Keinan,    
|Chairman of         | Not Applicable                 | Not Applicable     | 400,000 / 0 (3)                                                                                  | $2,202,000 / $0 (4)                                                                   
|The Board          
|                    |                                |                    |                                                                                                  |                                                                                       
|                    | Not Applicable                 | Not Applicable     | 1,500,000/0 (5)                                                                                  | negative value / $0                                                                   

| | (1) | Of the 700,000 share options, 200,000 were issued to Guy Nissenson, our
                    Principal Executive Officer and President, on August 21, 2003. On March 1, 2004,
                    these 200,000 share options were cancelled by our Board of Directors.
                    Campbeltown Business Ltd., a private company incorporated in the British Virgin
                    Islands which is owned by Guy Nissenson and other members of the Nissenson
                    family, own options to purchase 500,000 shares of our common stock for $0.40 per
                    share or an aggregate of $200,000. Guy Nissenson owns 20% of Campeltown Business
                    Ltd. Options to purchase shares of our common stock are shown in the table above
                    as owned by Guy Nissenson due to Guy Nissensons 20% ownership of
                    Campbeltown Business Ltd.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Based on the December 31, 2003 per share closing price of $5.98 and the exercise
                    prices of $0.475 per share for 200,000 share options, and $0.40 per share for
                    500,000 share options.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | The options to purchase 400,000 shares of our common stock were issued to
                    Abraham Keinan, our Chairman of the Board, on August 21, 2003, and on March 1,
                    2004, all 400,000 share options were cancelled by our Board of Directors.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Based on the December 31, 2003 per share closing price of $5.98, and an exercise
                    price of $0.475 per share.
| | --- | -------------------------------------------------------------------------------------------------------------------------------

| | (5) | Based on the December 30, 2004 per share closing price of $2.80, and an exercise
                    price of $3.50 per share.
| | --- | ------------------------------------------------------------------------------------------------------------------------------

-57-

---

On February 6, 2005 (Date of
the Grant)we granted to certain employees a total of 730,000 options. subject to the
principles of our 2004 stock option plan and according to the following terms: The
Vesting Date 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 for all abovementioned options is 5.5 years from the Date of Grant. The
following employees were granted options:

|Name of the Optionee | Date of Grant | Number of Options
granted | Price per Share | Vesting date \ period
|-------------------- | ------------- | ------------------------- | --------------- | ---------------------
|Tommy R. Ferguson    | 6.2.05        | 30,000                    | $   3.5         | 6.2.05               
|Bradley Marcus       | 6.2.05        | 75,000                    | $   3.5         | Vesting Date         
|Aggelos Kikiras      | 6.2.05        | 50,000                    | $   3.5         | Vesting Date         
|Nick Matsoukis       | 6.2.05        | 50,000                    | $   3.5         | Vesting Date         
|Bosmat Houston       | 6.2.05        | 150,000                   | $   3.5         | Vesting Date         
|Rafael Dick          | 6.2.05        | 300,000                   | $   3.5         | Vesting Date         
|Alon Reisser         | 6.2.05        | 75,000                    | $   3.5         | Vesting Date         

BOARD COMPENSATION

Other than provided above Abraham
Keinan and Guy Nissenson do not receive any compensation for their services as directors,
although some directors are reimbursed for reasonable expenses incurred in attending board
or committee meetings.

Eyal Harish (75,000 options), Shemer
Schwartz (75,000 options), Arye Czertok (25,000 options) and Aviu Ben-Horrin (25,000
options) receive options for being directors, all under the same terms: Option exercise
price  $3.5, vesting date  12 month from the date of grant, expiration date
 5 years from the vesting date.

ITEM 11. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following tables sets forth, as
of March 30, 2005, certain information with respect to the beneficial ownership of our
common stock by each stockholder known by us to be the beneficial owner of more than 5% of
our common stock and by each of our current directors and executive officers. Each person
has sole voting and investment power with respect to the shares of common stock, except as
otherwise indicated. Information relating to beneficial ownership of common stock by our
principal stockholders and management is based upon information furnished by each person
using beneficial ownership concepts under the rules of the Securities and
Exchange Commission. Under these rules, a person is deemed to be a beneficial owner of a
security if that person has or shares voting power, which includes the power to vote or
direct the voting of the security, or investment power, which includes the power to vote
or direct the voting of the security. The person is also deemed to be a beneficial owner
of any security of which that person has a right to acquire beneficial ownership within 60
days. Under the Securities and Exchange Commission rules, more than one person may be
deemed to be a beneficial owner of the same securities, and a person may be deemed to be a
beneficial owner of securities as to which he or she may not have any pecuniary beneficial
interest. We are unaware of any contract or arrangement which could result in a change in
control of our company.

The following table assumes, based on
our stock records, that there are 6,220,871 shares issued and outstanding as of March 30,
2005.

The following tables set forth the
ownership of our Common Stock as of the date of this Registration Statement by:

| |  | Each
shareholder  known by us to own beneficially more than 5%                   of our common
stock;
| | - | -----------------------------------------------------------------------------------------------------

| |  | Each
executive officer;
| | - | -----------------------

| |  | Each
director or nominee to become a director; and
| | - | --------------------------------------------------

| |  | All
directors and executive officers as a group.
| | - | ------------------------------------------------

-58-

---

Security Ownership of
Beneficial Owners

|Title of
Class | Name & Address of
Beneficial Owner | Amount of Beneficial
Ownership | Nature of
Ownership     | Percent of
Class
|-------------- | ---------------------------------- | ------------------------------ | ----------------------- | ----------------
|Common         | Abraham Keinan                     | 3,644,664                      | Direct*/****            | 58.59           
|               | Chairman of the Board             
|               | 4 Wycombe Gardens                 
|               | London Nw11 8al                   
|               | United Kingdom                    
|              
|Common         | Crestview Capital                  | 491,400                        | Direct                  | 7.90**          
|               | Master LLC**                      
|               | 95 Revere Drive, Suite F          
|               | Northbrook, Illinois 60062        
|              
|Common         | Guy Nissenson                      | 1,220,336                      | Direct/Indirect***/**** | 19.62           
|               | Principal Executive Officer       
|               | President/Director                
|               | Financial Officer                 
|               | 3A Finchley Park                  
|               | London N12 9JS                    
|               | United Kingdom                    
|              
|Total          |                                    | 5,356,400                      |                         | 86.11           

| | * | Until June 23, 2004, Mr. Keinan indirectly held 1,302,331 shares of our common stock
through Vision Consultants Limited, a Nassau, Bahamas incorporated company that is 100%
owned by Mr. Keinan. On June 23, 2004, the shares held by Vision Consultants Limited were
transferred to Mr. Keinan as an individual. On August 21, 2003, we issued 400,000 options
to Mr. Keinan, but on March 1, 2004, our Board of Directors cancelled these options. On November 24, 2004, our board of directors issued 1,500,000 options to Mr.
          Keinan on the following terms: Option exercise price  $3.5, vesting date
           12 month from the date of grant, expiration date  5 years from the
          vesting date.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ** | Crestview
Capital Master LLC, a selling shareholder, owns 491,400 shares of our common stock;
however, upon the exercise of Warrants A issued to Crestview Capital Master, it will
offer an additional 500,000 shares of our common stock. With a total of 991,400 shares
that Crestview Capital Master LLC will offer, its beneficial ownership would be 15.94%.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | *** | Guy Nissenson, our Principal Executive Officer/President, has beneficial ownership of
19.62% or 1,220,336 shares of our common stock, which consists of the following: (a)
720,336 shares of our common stock owned by Campbeltown Business Ltd., a British Virgin
Islands corporation, in which Mr. Nissenson owns 20% and his family are also shareholders;
(b) 500,000 options to purchase shares of our common stock that Campbeltown Business Ltd
has the right to acquire in accordance with a Stock Purchase Agreement, clarified on July
30, 2001 in which Campbeltown Business, Ltd. has an option to 500,000 shares of our
outstanding stock if we become listed on the OTC Bulletin Board before December 31, 2005.
We became listed on the OTC Bulletin Board on March 25, 2002. Campbeltown Business, Ltd.
has not exercised its option as of November 12, 2004, and Campbeltown Business, Ltd. has
until December 31, 2005 to exercise its option. Campbeltown Business, Ltd. also has a
first right of refusal on any of our securities offerings until December 31, 2005, so long
as Campbeltown Business, Ltd. owns more than 4% of our outstanding stock. To the extent
that we issue any shares to Abraham Keinan. Campbeltown Business, Ltd. has the right to
purchase or acquire such number of our shares on the same terms and conditions as Abraham
Keinan such that the relative percentage ownership of Abraham Keinan and Campbeltown
Business, Ltd. remains the same. On August 21, 2003, we issued 200,000 options to acquire
our shares to Mr. Nissenson, but on March 1, 2004 these options were cancelled by our Board
of Directors. On November 24, 2004, our board of directors issued 1,500,000 options to Mr.
Nissenson on the following terms: Option exercise price  $3.5, vesting date 
12 month from the date of grant, expiration date  5 years from the vesting date.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | **** | Our
Chairman of the Board, Abraham Keinan, and our President/Chief Executive
Officer/Director, Guy Nissenson, exercise significant control over stockholder matters
through a September 28, 2004 Voting Agreement between Mr. Keinan, Mr. Nissenson and
Campbeltown Business Ltd, an entity owned and controlled by Mr. Nissenson and his family.
This agreement is for a term of 10 years and provides that: (a) Messrs. Keinan and
Nissenson and Campbeltown Business, Ltd. agree to vote any shares of our common stock
controlled by them only in such manner as previously agreed by all these parties; and
(b)in the event of any disagreement regarding the manner of voting, a party to the
agreement will not vote any shares, unless all the parties have settled the disagreement.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We are unaware of any contract or
arrangement which could result in a change in control of our company.

-59-

---

Security Ownership of
Management:

|Title of
of
Class | Name & Address of
Percent of
Beneficial Owner | Amount of Beneficial
Ownership | Nature
Ownership      | Class
|----------------- | --------------------------------------------- | ------------------------------ | --------------------- | -----
|Common            | Abraham Keinan                                | 3,644,664                      | Direct*/***           | 58.59
|                  | Chairman of the Board                        
|                  | 4 Wycombe Gardens                            
|                  | London NW11 8AL                              
|                  | United Kingdom                               
|                 
|Common            | Guy Nissenson                                 | 1,220,336                      | Direct/Indirect**/*** | 19.62
|                  | Principal Executive Officer                  
|                  | President/Director                           
|                  | 3A Finchley Park                             
|                  | London N12 9JS                               
|                  | United Kingdom                               
|                 
|Common            | Eyal Harish                                   | 15,000                         | Direct                | 0.24 
|                  | Director                                     
|                  | 3 Moshe Dayan Street                         
|                  | Raanana, Israel                              
|                 
|Common            | Shemer Schwartz                               |                                | Not Applicable        | 0.0  
|                  | Director                                     
|                  | 8 Haamoraim Street                           
|                  | Tel-Aviv, Israel                             
|                 
|Common            | All directors and                            
|                  | executive officers                            | 4,880,000                      |                       | 78.45
|                  | as a group                                   

| | * | Our Chairman of the Board, Abraham Keinans direct/indirect ownership of 3,644,644
shares of our common stock or 59.70% beneficial ownership interest consists of: (a) his
direct ownership of 2,342,333 shares of our common stock individually owned by Mr. Keinan;
(b) his indirect ownership of 1,302,331 shares of common stock owned by Vision
Consultants, a Nassau, Bahamas incorporated company that is 100% owned by Mr. Keinan, and
is located at Kings Court, POB N-3944, Bay Street, Nassau, Bahamas. The sole business
purpose of Vision Consultants is to hold and manage Mr. Keinans investments. On
August 21, 2003, we issued 400,000 options to Mr. Keinan, but on March 1, 2004, our Board
of Directors
cancelled these options. On November 24, 2004 our Board of Directors approved in principal
a stock option plan for which is presently being drafted for the benefit of employees,
officers, directors and consultants and subcontractors of the Company including its
subsidiaries. Mr. Keinan received 1,500,000 options exercisable at
$3.50 a share, vesting to take place one year from the grant and the expiration date of
the options is 5 years from date of vesting of the grant.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ** | Guy Nissenson, our Principal Executive Officer/President, has beneficial ownership of
19.99% or 1,220,336 shares of our common stock, which consists of the following: (a)
720,336 shares of our common stock owned by Campbeltown Business Ltd., a British Virgin
Islands corporation, in which Mr. Nissenson has a 20% and his family are also
shareholders; (b) 500,000 options to purchase shares of our common stock that Campbeltown
Business Ltd has the right to acquire in accordance with a Stock Purchase Agreement,
clarified on July 30, 2001 in which Campbeltown Business, Ltd. has an option to 500,000
shares of our outstanding stock if we become listed on the OTC Bulletin Board before
December 31, 2005. We became listed on the OTC Bulletin Board on March 25, 2002.
Campbeltown Business, Ltd. has not exercised its option as of March 31, 2004, and
Campbeltown Business, Ltd. has until December 31, 2005 to exercise its option. Campbeltown
Business, Ltd. also has a first right of refusal on any of our securities offerings until
December 31, 2005, so long as Campbeltown Business, Ltd. owns more than 4% of our
outstanding stock. To the extent that we issue any shares to Abraham Keinan. Campbeltown
Business, Ltd. has the right to purchase or acquire such number of our shares on the same
terms and conditions as Abraham Keinan such that the relative percentage ownership of
Abraham Keinan and Campbeltown Business, Ltd. remains the same. On August 21, 2003, we
issued 200,000 options to acquire our shares to Mr. Nissenson, but on March 1, 2004 these
options were cancelled by our Board of Directors.
          On November 24, 2004 our Board of Directors approved in principal a stock option
          plan for which is presently being drafted for the benefit of employees,
          officers, directors and consultants and subcontractors of the Company including  its
subsidiaries. Mr. Nissenson received 1,500,000 options exercisable  at $3.50 a share, vesting to take place one year from the grant and the       expiration date of the options is 5 years from date of vesting of the grant.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | *** | Our
Chairman of the Board, Abraham Keinan, and our President/Chief Executive
Officer/Director, Guy Nissenson, exercise significant control over stockholder matters
through a September 28, 2004 Voting Agreement between Mr. Keinan, Mr. Nissenson and
Campbeltown Business Ltd, an entity owned and controlled by Mr. Nissenson and his family.
This agreement is for a term of 10 years and provides that: (a) Messrs. Keinan and
Nissenson and Campbeltown Business, Ltd. agree to vote any shares of our common stock
controlled by them only in such manner as previously agreed by all these parties; and
(b)in the event of any disagreement regarding the manner of voting, a party to the
agreement will not vote any shares, unless all the parties have settled the disagreement.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-60-

---

ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS.

ABRAHAM KEINAN

Keinan Share Issuance

On September 1, 2000, we issued
1,730,000 shares of our common stock to our founder and Chairman of the Board, Abraham
Keinan for services rendered to us in our corporate formation. Mr. Keinans services
consisted of the establishment of our business concept and providing us with technical
expertise. We valued Mr. Keinans services at $247,390.

Keinan Stock Ownership
Through Vision Consultants

Until June 23, 2004, Our Chairman of
the Board, Mr. Abraham Keinan indirectly held 1,302,331 shares of our common stock through
Vision Consultants Limited, a Nassau, Bahamas incorporated company that is 100% owned by
Mr. Keinan. On June 23, 2004, the shares held by Vision Consultants Limited were
transferred to Mr. Keinanas an individual.

Vision Consultants Limited is
entitled to receive 1% of all of our revenues if and when monthly revenues exceed
$485,000; however, in April 2003, Vision Consultants Limited and Campbeltown Business
Limited waived their right with regard to revenues derived from Story Telecom.

Keinan Loan

Since our inception in September 2000
through December 31, 2000, we along with our subsidiary, Swiftnet, Ltd.) loaned Abraham
Keinan, our Chairman of the Board, a total of 216,133 Pound Sterling or approximately
$322,586 based upon the exchange rate at December 31, 2000, $202,433 of which was loaned
to Mr. Keinan on September 29, 2000. This loan originally was reflected in a September 29,
2000 promissory note payable in ten equal installments of approximately $19,150 beginning
January 1, 2002 and ending on January 1, 2011. This note is non-interest bearing. We
provided the loan to Mr. Keinan to promote his loyalty and continued service as our
Chairman of the Board of Directors. As of December 31, 2003, 286,736 pounds ($510,390)
remain outstanding regarding this loan. On March 2004 Mr. Keinan signed a note to repay
his loan in four installments:

|     |           |            | 
|---- | --------- | ---------- | 
|2004 | £54,070   | ($ 96,245) | 
|2005 | £ 116,333 | ($207,073)
|2006 | £ 116,333 | ($207,073)

Keinan Bonus and Success
Fee

As indicated in more detail below, on
October 15, 2002, our Board of Directors approved a bonus and success fee whereby if we
receive monthly revenues in excess of $485,000 then Mr. Keinan and our consultant,
Campbeltown Business, Ltd. will receive 1% of the revenues for each month where our
revenues reach $485,000 up to a maximum of one million dollars.

On June 28, 2004, our Board of
Directors approved a bonus of £ 5,000 to Mr. Keinan for his efforts in connection
with obtaining the license to become an international telecom service provider in Israel
by our Israel based subsidiary, Xfone 018 Ltd.

GUY NISSENSON

Campbeltown Business, Ltd.

On May 11, 2000, Swiftnet, Ltd.,
which is now our wholly owned subsidiary, and our Chairman of the Board of Directors
,Abraham Keinan, entered into an 18-month renewable consulting agreement with Campbeltown
Business, Ltd., a private company incorporated in the British Virgin Island which is owned
by Guy Nissenson, our Principal Executive Officer/President and Director and four other
relatives of Mr. Nissenson. This agreement provides that Swiftnet hires Campbeltown
Business, Ltd. as its financial and business development Consultant and will pay
Campbeltown Business, Ltd. 2,000 UK Pound Sterling per month, along with an additional
monthly performance bonus based upon Swiftnet, Ltd., attaining the following revenue
levels for consulting services in the area of business development and management
activities:

-61-

---

|TARGET AMOUNT OF
REVENUES PER MONTH      | ADDITIONAL MONTHLY BONUS  
|---------------------------------------- | --------------------------
|Less than 125,000 Pounds (UK)            | 0 Pounds (UK)             
|Between 125,000 - 150,000 Pounds (UK)    | 1,250 Pounds (UK)         
|(approximately $ 225,000 - $ 270,000 US) | (approximately $ 2,250 US)
|Between 150,000 - 175,000 (UK)           | 2,500 Pounds (UK)         
|(approximately $ 270,000 - $ 315,000 US) | (approximately $4,500 US) 
|Over 175,000 Pounds (UK)                 | 2,750 Pounds (UK)         
|(approximately $ 315,000 US)             | (approximately $ 4,950 US)

This agreement with Campbeltown
Business, Ltd. involving this monthly payment of 2000 United Kingdom Pound, along with an
additional monthly performance bonus, is separate from a bonus and success fee arrangement
that we may pay in accordance with an October 15, 2002 approval by our Board of Directors
to pay such a bonus and success fee, as discussed below.

The May 11, 2000 agreement is for 18
months, but the agreement provides that the agreement will be renewed by mutual agreement
of Swiftnet and Campbeltown Business, Ltd.

On November 5, 2001, May 11, 2003,
and November 10, 2004, we renewed this agreement for additional 18 month periods.
Therefore, this agreement expires on May 11, 2006. Under the terms of this agreement,
Campbeltown agreed to provide the following services to us:

| |  | analysis
of proposed acquisitions;
| | - | ----------------------------------

| |  | seek
markets for our telecommunications services in additional                   countries;
| | - | -------------------------------------------------------------------------------------------

| |  | formulate
strategies for our future growth plans; and
| | - | -----------------------------------------------------

| |  | introduce
potential customers to our business.
| | - | ----------------------------------------------

On June 19th, 2000, Swiftnet, Ltd.
entered into a Stock Purchase Agreement with Abraham Keinan and Campbeltown Business,
Ltd., a company owned by Guy Nissenson and his family. This agreement provides that:

| |  | 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 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. This agreement term has been satisfied by Campbeltown.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Campbeltown would invest $100,000 in Swiftnet Ltd., in exchange for 20% of the total
issued shares of Swiftnet, Ltd.;
| | - | ---------------------------------------------------------------------------------------------------------------------

| |  | Campbeltown
would also receive 5% of our issued and                   outstanding  shares  following
 our acquisition with Swiftnet.                   In June 2000,  Campbeltown Business
Ltd. invested the $100,000                   in  Swiftnet.  We acquired  Swiftnet,  Ltd.
 and  Campbeltown                   received 720,336 shares of our common stock for its
20%                   interest in Swiftnet, Ltd.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Swiftnet, Ltd., and Keinan would guarantee that Campbeltowns 20% interest in the
outstanding shares of Swiftnet would be exchanged for at least 10% of our outstanding
shares and that Campbeltown would have in total at least 15% of our total issued shares
after our acquisition occurred.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-62-

---

| |  | Campbeltown would have the right to nominate 33% of the members of our board of directors
and Swiftnets board of directors. When Campbeltown ownership in our common stock was
less than 7%, Campbeltown would have the right to nominate only 20% of our board members
but always at least one member. In the case that Campbeltown ownership in our common stock
was less than 2%, this right would expire.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Campbeltown would have the right to nominate a vice president in Swiftnet and/or our
common stock. 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 and
Abraham Keinan will agree on another nominee. The Vice President will be employed with
suitable conditions.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Campbeltown has the option to purchase additional shares of Swiftnet that will represent
10% of all issued shares after the transaction for $200,000 US. This transaction can be
executed either by Swiftnet issuing new shares, or by Abraham Keinan selling his private
shares (as long as he has an adequate amount of shares), as Abraham Keinan will decide.
This option will expire on Dec 31, 2005. Campbeltown can exercise this option in parts.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Campbeltown 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In the event that Swiftnet or we will seek for money in a private placement for equity or
any other rights, Campbeltown will have the right of first refusal on any transaction or
part of it until Dec 31, 2005 or as long as it owns over 7% of Swiftnet equity or 4% of
our common stock.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Keinan and Campbeltown have signed a right of first refusal agreement for the sale of
their shares.
| | - | ---------------------------------------------------------------------------------------------------

| |  | Until we conduct a public offering or are traded on a stock market, we are not permitted
to issue any additional shares or equity rights without a written agreement from
Campbeltown. This right expires when Campbeltown no longer owns any equity interest or
shares in our company or our subsidiary, Swiftnet.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On October 15, 2002, our Board of
Directors approved a bonus and success fee whereby if we receive monthly revenues in
excess of $485,000 then Mr. Keinan and our consultant, Campbeltown Business, Ltd. shall
receive 1% of the revenues for each month where our revenues reach $485,000 up to a
maximum of one million dollars. This bonus and success fee is separate from our agreement
with Campbeltown Business, Ltd. involving a monthly payment of 2000 United Kingdom Pound,
along with an additional monthly performance bonus. The business purpose of the bonus and
success fee is to further motivate our Chairman of the Board, Mr. Keinan, and our
consultant, Campbeltown Business Ltd. to develop our business by providing them with
additional compensation if and when our revenues grow. During 2003, we paid Mr. Keinan,
through Vision Consultants, and Campbeltown each 55,000 pounds as a bonus and success fee
according to the formula described above. During 2003 we paid Campbeltown consultancy
related fees of 41,237 pounds ($73,402).

On April 10, 2003, Mr. Keinan and
Campbeltown Business Ltd waived their right to receive 1% of the revenues generated that
are derived from Story Telecom.

Guy Nissenson Employment
Agreement

On May 11, 2000, Swiftnet, Ltd. and
our Chairman of the Board of Directors, Abraham Keinan, entered into an employment
agreement with Guy Nissenson, our Principal Executive Officer/ President. This agreement
does not expire. Under the terms of the agreement, Swiftnet employed Mr. Nissenson to
provide business development and sales and marketing services, at a base rate of 1000
pounds (UK) per month (approximately $1,433 US). When Swiftnet reaches average sales of
175,000 pounds (UK) per month for a consecutive three month period, Mr. Nissensons
salary will increase to 2,000 pounds (approximately $2,866 US) per month. In addition, Mr.
Nissenson will receive an unspecified number of options to acquire our stock that is
limited to 50% of the options that Abraham Keinan receives. As such, the agreement
protects Mr. Nissensons rights to have at least 50% of the options rights that Mr.
Keinan will have. Mr. Nissenson can transfer the right of these options to another company
or person at his discretion. Swiftnet may only cancel these options if : (1) Mr. Nissenson
no longer works with Swiftnet; or (2) if within twelve months of Mr. Nissensons
employment with the company, Swiftnet and any other companies that may buy or merge into
Swiftnet in the future, do not reach average revenues (over a three consecutive month
period) of at least 120,000 pounds (UK). Because the average sales per month have exceeded
120,000 pounds within a twelve month period of Mr. Nissensons employment, Swiftnet
cannot cancel the options.

-63-

---

XFONE 018 Ltd.

On  April  15,  2004,  we
  established  an  Israel  based   subsidiary,   Xfone Communication  Ltd.  whose name
was changed in March 2005 to Xfone 018 Ltd. On July 4, 2004 the Ministry of
 Communications  of the state of Israel granted Xfone  Communication  a license to
provide international telecom services in Israel.

In accordance with Israel government
regulations and the license, at least 26% of Xfone Communication holdings are to be owned
by Israeli citizens who reside in Israel. Xfone Communication was owned 74% by us and 26%
by H.S.N. Communication Investments Ltd., an Israel based company, that is owned: 40% by
Mrs. Naama Harish, the wife of Dr. Eyal Harish, a member of our Board of Directors, 40% by
Dionysos Investments Ltd., a company owned by members of the family of Mr. Guy Nissenson,
our Chief Executive Officer, and 20% by Margo Sport Ltd., a company owned by Mr. Giora
Spigel and his wife.

Xfone Communication Ltd. received a
credit facility from Bank Hapoalim B.M. in Israel to finance its activities. The credit
facility included a 10 Million NIS (New Israeli Shekel) Bank Guarantee in favor of the
Government of Israel, a revolving credit line of 1 million NIS and an on call short term
credit line of 850,000 NIS. In addition, the bank made available for Xfone Communication a
long term facility of 3,150,000 NIS to procure equipment. The credit facility was secured
with a cash deposit of $1,000,000, a floating charge on Xfone Communications assets,
a fixed charge on Xfone Communications switch and a personal collateral by Mr.
Keinan. In addition, we, Swiftnet Limited and H.S.N. Communication Investments Ltd. issued
a Letter of Guarantee, unlimited in amount, in favor of the bank, guaranteeing all debt
and indebtedness of Xfone Communication towards the bank.

On November 23, 2004, Mr. Ilan
Shoshani provided Xfone Communication Ltd. with a 10,000,000 New Israeli Shekel bank
guarantee as part of the steps required to fulfill the investment agreement signed on
August 26, 2004 and the addendum and clarification to the investment agreement dated
September 13, 2004 between the Subsidiary, the Company and Mr. Shoshani. Such agreements
were also dependent on approval of the Ministry of Communications of the State of Israel,
which came on November 8, 2004.

Pursuant to the agreements, Mr.
Shoshani was obligated to secure the replacement of the bank guarantee, which was provided
to the State of Israel by the Subsidiary in accordance with Regulation 22 of the
International Operators Regulations, with another bank guarantee that will conform to all
the provisions and terms of the International Operators Regulations and the
Subsidiarys license, and shall be to the complete satisfaction of the Ministry of
Communications of the State of Israel. The agreements provide that the costs involved in
the issuance of the bank guarantee (commission and stamp duty) will be paid by the
Subsidiary.

Pursuant to the agreements, Mr.
Shoshani was obligated to extend a shareholder loan to the Subsidiary for the New Israeli
Shekel equivalent of the sum of $400,000. The agreements provide that the shareholder loan
of Mr. Shoshani shall be given for a period of four years, save if otherwise agreed by the
parties to the agreements, at an annual rate of interest of 4% and linked to the Israeli
Consumer Price Index. The full amount of the shareholder loan of Mr. Shoshani was deposited in an escrow
account.

We have made financial commitments
under the agreements as well.

In return for the replacement of the
bank guarantee and the grant of the shareholder loan of Mr. Shoshani, the Subsidiary and
we undertook to ensure that 26% of the Subsidiarys shares will be transferred and
registered in the name of a person and/or company as determined by Mr. Shoshani. In
addition, the Subsidiary and the Registrant undertook to ensure that Mr. Shoshani will be
appointed as a director of the Subsidiary.

On November 24, 2004,  Mr. Ilan
 Shoshani was elected as a director of the Subsidiary.

On November 24, 2004, the board of
directors of the Subsidiary approved that shares held by H.S.N. Communication Investments
Ltd., representing 26% ownership of the Subsidiary be transferred to Newcall Ltd., a
company owned by Mr. Shoshani and his wife. The full amount of the shareholder loan of Mr.
Shoshani was transferred from the escrow account to the Subsidiarys account on
December 20,2004.

Pursuant to a verbal agreement
between Mr. Giora Spigel and us, the board of directors of the Subsidiary approved on
November 24, 2004, subject to the approval of the Ministry of Communications of the State
of Israel, that shares held by the Registrant, representing 5% ownership of the
Subsidiary, was transferred to Margo Sport Ltd., a company owned by Mr. Spigel and his
wife. Presently, Margo Sport Ltd. holds 20% of H.S.N. Communication Investments Ltd. Mr.
Giora Spigel is a director of the Subsidiary and holds the position of Vice President
Business Development with the Subsidiary.

Upon approval of the Ministry of
Communications of the State of Israel, such verbal agreement was evidenced by a share
transfer deed as required by the Israel Company Law  1999.

-64-

---

The Subsidiary is currently owned
69% by Xfone, Inc., 26% by Newcall Ltd., and 5% by Margo Sport Ltd.

We started  providing  services in
Israel through Xfone  Communication Ltd. in mid December 2004.

AURACALL LIMITED

We have an investment in and own
47.5% of a joint business venture, Auracall Limited. Auracall Limiteds services were
introduced in approximately March 2002. Our Chairman of the Board, Abraham Keinan, and our
Chief Executive Officer/Director, Guy Nissenson, are both directors of Auracall Limited.
Our management will indirectly benefit from revenues generated by Auracall Limited
activities, to the extent that Vision Consultants, Inc., which is solely owned by Mr.
Keinan, and Campbeltown Business Limited, which is partially owned by our Chief Executive
Office, Guy Nissenson, receives 1% of all our revenues, except revenue generated by Story
Telecom activities, if our entire monthly revenue, except revenue generated by Story
Telecom activities, exceeds $485,000. We have made no guarantee or any other commitment on
behalf of Auracall, Ltd. and we are not committed to provide Auracall, Ltd. with any
further support.

STORY TELECOM

We have an investment in and own 40%
of a joint business venture, Story Telecom, which is a calling card service we offer that
is detailed on page ( ). Story Telecom purchases their telecommunications services from
us. Our Chief Executive Officer/Director, Guy Nissenson, is a director of Story; our
Chairman of the Board, Abraham Keinan,is not a director of Story Telecom. Our management
does not benefit from revenues generated by Story Telecom activities. Story Telecom We
have made no guarantee or any other commitment on behalf of Story Telecom and we are not
committed to provide Story Telecom with any further support.

XFONE USA, INC.

Xfone USA, Inc. was  incorporated  in the State of  Mississippi  on May 28, 2004
especially  for the  purpose of  becoming  the  surviving  corporation  upon the consummation of the merger. We are
the sole shareholder of Xfone USA, Inc. Mr. Abraham Keinan, our Chairman of the Board, Mr.
Guy Nissenson, our President/Chief Executive Officer/Director, Mr. Eyal J. Harish and Mr.
Shemer S. Schwarz are the directors of Xfone USA, Inc. Our President/Chief Executive
Officer/Director, Guy Nissenson, is also the President/Secretary/Treasurer of Xfone USA,
Inc. Messrs Keinan and Nissenson are co-chairman.

The agreement and plan of merger was
consummated on March 10, 2005.

On July 1, 2004, we entered into a
management agreement which provides that Xfone USA will provide management services to WS
Telecom pending the consummation of the merger. The management agreement provides that all
revenues generated from WS Telecoms business operations will be assigned and
transferred to Xfone USA. This agreement terminated upon consummation of the merger on
March 10, 2005.

Voting Agreement

Our Chairman of the Board, Abraham
Keinan, and our President/Chief Executive Officer/Director, Guy Nissenson, exercise
significant control over stockholder matters through a September 28, 2004 Voting Agreement
between Mr. Keinan, Mr. Nissenson and Campbeltown Business Ltd, an entity owned and
controlled by Mr. Nissenson and his family. This agreement, which is for a term of 10
years, provides that: (a) Messrs. Keinan and Nissenson and Campbeltown Business, Ltd.
agree to vote any shares of our common stock controlled by them only in such manner as
previously agreed by all these parties; and (b)in the event of any disagreement regarding
the manner of voting, a party to the agreement will not vote any shares, unless all the
parties have settled the disagreement.

Dionysos Investments (1999) Ltd
FINANCIAL SERVICES AND BUSINESS DEVELOPMENT CONSULTING AGREEMENT

This Financial Services Consulting
Agreement was entered into on November 18, 2004, between Dionysos Investments (1999) Ltd.,
an Israeli company (Dionysos) and Xfone, Inc. with respect to certain
services. The principal of Dionysos is Mr. Haim Nissenson, father of Guy Nissenson,
President, CEO and Financial Officer of Xfone, Inc.

Dionysos agrees to assist the Xfone,
Inc. in connection with services related to financial activities, financial reports,
mergers & acquisitions and other business development work (the Services).
In the event Xfone, Inc. requests additional services, the scope of such additional
services shall be as agreed by the parties and shall be governed by this Agreement.

The parties agree that Dionysos will
be compensated by Xfone, Inc. for the Services provided to Xfone, Inc. in the amount of
Three Thousand British Sterling Pounds (£3,000) per month beginning on the Effective
Date of this Agreement (the Fees). In addition, Xfone, Inc. will reimburse
Dionysos, based on prior approval by Xfone, Inc., for expenses incurred, which expenses
will include travel, hotel, meals, courier, report reproduction and other administrative
costs when and where needed (the Expenses). Compensation for any additional
services provided by Dionysos for Xfone, Inc. shall be as agreed by the parties.

The Effective Date of this Agreement
shall be January 1, 2005 (the Effective Date). The term of this Agreement
shall be two (2) years (the Term). Dionysoss Services shall begin on the
Effective Date. The Term will be automatically renewed for successive two-year periods,
unless either party provides written notice at least ninety (90) days prior to the end of
the Term that such party does not wish to renew this Agreement.

During first quarter 2005, we and
Swiftnet are in discussions with Abraham Keinan, Chairman of the Board, and Guy Nissenson,
President and CEO and acting CFO, about employment agreements for them with Xfone, Inc.
and Swiftnet Ltd. If signed, this will result in the assignment and novation of certain
compensation, rights and obligations related to Vision Consultants and Campbeltown
Business as well.

Other than the above transactions, we
have not entered into any material transactions with any director, executive officer, and
nominee for director, beneficial owner of five percent or more of our common stock, or
family members of such persons within the last five years and we have not other than the
above transactions, we have not entered into any material transactions with any promoter
within the last five years.

-65-

---

ITEM 13. EXHIBITS AND REPORTS ON FORM
8-K.

Exhibit Number  /
   Description

| | 2. | Agreement
and plan or reorganization between Xfone, Inc. and Swiftnet       Ltd. dated September
20, 2000 (1)
| | -- | -------------------------------------------------------------------------------------------------------------

| | 3.1 | Articles
of Incorporation of Xfone, Inc.(1)
| | --- | -------------------------------------------

| | 3.2a | Bylaws
of Xfone, Inc.(1)
| | ---- | ------------------------

| | 3.2b | Amended
Bylaws of Xfone, Inc.(4)
| | ---- | --------------------------------

| | 3.3 | Articles
of Incorporation of Swiftnet, Ltd.(1)
| | --- | ----------------------------------------------

| | 3.4 | Bylaws
of Swiftnet, Ltd.(1)
| | --- | ---------------------------

| | 3.5 | Amended
bylaws of Xfone, Inc.(3)
| | --- | --------------------------------

| | 3.6 | By-Laws
of Xfone USA, Inc. (7)
| | --- | ------------------------------

| | 3.7 | Office
of the Mississippi Secretary of State, Articles of Merger or Share       Exchange Profit
Corporation (7)
| | --- | ---------------------------------------------------------------------------------------------------------------

| | 4. | Specimen
Stock Certificate(1)
| | -- | -----------------------------

| | 5. | Opinion
of Hamilton, Lehrer & Dargan, P.A.
| | -- | ------------------------------------------

| | 10.1 | Agreement
between Swiftnet Ltd. and Guy Nissenson dated May 11, 2000(1)
| | ---- | -----------------------------------------------------------------------

| | 10.2 | Employment
Agreement with Bosmat Houston dated January 1, 2000(1)
| | ---- | -----------------------------------------------------------------

| | 10.3 | Loan
Agreement with Swiftnet Ltd., Guy Nissenson, and Nissim Levy dated       August 5, 2000(1)
| | ---- | -----------------------------------------------------------------------------------------------

| | 10.4 | Promissory
Note executed between Xfone and Swiftnet Ltd. dated September       29, 2000(1)
| | ---- | ------------------------------------------------------------------------------------------

| | 10.5 | Stock
Purchase Agreement between Swiftnet, Ltd, Abraham Keinan, and       Campbeltown Business,
Ltd. dated June 19, 2000(1)
| | ---- | ---------------------------------------------------------------------------------------------------------------------------

| | 10.6 | Consulting
Agreement between Swiftnet, Ltd. and Campbeltown Business, Ltd.       dated May 11,
2000(1)
| | ---- | ------------------------------------------------------------------------------------------------------

| | 10.7 | Agreement
with Campbeltown Business Ltd. dated July 30, 2001(1)
| | ---- | ---------------------------------------------------------------

| | 10.8 | Contract
with WorldCom International, Ltd. dated June 20, 1998(1)
| | ---- | -----------------------------------------------------------------

| | 10.9 | Contract
with VoiceNet Inc. dated April 11, 2000(1)
| | ---- | ---------------------------------------------------

| | 10.10 | Contract
with InTouchUK.com Ltd. dated April 25, 2000(1)
| | ----- | --------------------------------------------------------

| | 10.11 | Letter
of Understanding from Campbeltown Business, Ltd. to Xfone, Inc.       dated July 30, 2001
(2)
| | ----- | ----------------------------------------------------------------------------------------------------

| | 10.12 | Agreement
between Adar International, Inc./Mr. Sidney J. Golub and       Swiftnet dated April 6,
2000 (2)
| | ----- | ---------------------------------------------------------------------------------------------------------

| | 10.13 | Lease
Agreement between Elmtree Investments, Ltd. and Swiftnet, Ltd. dated       December 4,
1991 (2)
| | ----- | -----------------------------------------------------------------------------------------------------

| | 10.14 | Lease
Agreement between Postwick Property Holdings Limited and Swiftnet,       Ltd. dated
October 8, 2001.(2)
| | ----- | -------------------------------------------------------------------------------------------------------------

| | 10.15 | Agreement
between Xfone, Inc., Swiftnet, Ltd., and Nir Davison dated       September 30, 2002 (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. [3
investors] (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. [11
investors] (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. [2       investors] (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. [1 investors] (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. [7 investors] (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 | December
31, 2003 letter to Xfone from A. Keinan (6)
| | ----- | ----------------------------------------------------

| | 10.30 | Agreement
between Swiftnet, Ltd. and Dan Kirschner (8)
| | ----- | ------------------------------------------------------

| | 10.31 | Agreement
and Plan of Acquisition (7)
| | ----- | -------------------------------------

| | 10.32 | Escrow
Agreement (7)
| | ----- | --------------------

| | 10.33 | Release
Agreement (7)
| | ----- | ---------------------

-66-

---

| | 10.34 | Employment
Agreement between WS Telecom, Inc. and Wade Spooner (7)
| | ----- | ------------------------------------------------------------------

| | 10.35 | Employment
Agreement between WS Telecom, Inc. and Ted Parsons (7)
| | ----- | -----------------------------------------------------------------

| | 10.36 | First
Amendment to Agreement and Plan of Merger (WS Telecom, Inc./Xfone,       Inc./Xfone USA,
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 (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 | Ilan
Shoshani Investment Agreement dated August 26, 2004. (12)
| | ----- | --------------------------------------------------------------

| | 10.44.1 | Addendum
and  Clarification to the Ilan Shoshani  Investment         Agreement dated September 13,
2004. (12)
| | ------- | -------------------------------------------------------------------------------------------------------------

| | 10.45 | Elite
Financial Communications Group Agreement
| | ----- | ----------------------------------------------

| | 10.46 | Dionysos
Investments (1999) Ltd FINANCIAL SERVICES AND BUSINESS          DEVELOPMENT CONSULTING
AGREEMENT
| | ----- | ---------------------------------------------------------------------------------------------------------

| | 21.1 | List
of Subsidiaries (Amended) (8)
| | ---- | ----------------------------------

| | 23. | Consent
of  Chaifetz & Schreiber, P.C.
| | --- | --------------------------------------

| | 31.1 | Certification
pursuant to section 302 of the Sarbanes - Oxley Act Of 2002.
| | ---- | --------------------------------------------------------------------------

| | 32 | 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, file # 333-67232.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Denotes
 previously filed exhibits:  filed on October 16, 2001 with Xfone,       Inc.'s
SB-2/Amendment 1 registration statement, file # 333-67232.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Denotes
 previously filed exhibit:  filed on November 28, 2001 with Xfone,       Inc.'s
SB-2/Amendment 2 registration statement, file # 333-67232.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------

| | (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 No. 2 registration statement,  file #       333-67232
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | Denotes
previously filed exhibit: filed on April 15, 2004 with Xfone's,  Inc.SB-2 Amendment 1
Registration          Statement, file # 333-113020.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------

| | (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, file # 333-113020.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------

| | (9) | Denotes
previously filed exhibit: filed on August 11, 2004 with Xfone's, Inc.SB-2 Amendment 3
Registration          Statement, file # 333-113020.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------

| | (10) | Denotes
previously filed exhibit: filed on September 13, 2004 with Xfone's, Inc.SB-2 Amendment 4
         Registration Statement, file # 333-113020.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | (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
| | ---- | ------------------------------------------------------------------------------------------------

-67-

---

We hereby incorporate the
following additional documents by reference:

| | (a) | our
Forms 10-KSB/A for the year ended December 31, 2002 which was filed on       June 9, 2004;
| | --- | ----------------------------------------------------------------------------------------------

| | (b) | our
Registration Statement on Form SB-2 and all amendments thereto which       was filed on
August 10, 2001 and amended on October 16, 2001, November 28,       2001, December 27,
2001, December 28, 2001, February 4, 2002, March 3,       2003, and April 8, 2003;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | our
Registration Statement on Form SB-2 and all amendments thereto which       was filed on
February 23, 2004 and amended on April 15, 2004, June 7,       2004, August 11, 2004,
September 13, 2004, November 1, 2004, November 9, 2004, and was effective November 12,
2004;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) | our
Forms 10-QSB for the periods ended March 31, 2002 which was filed on       May 14, 2002,
June 30, 2002 which was filed on August 13, 2002 and amended       on August 20, 2002,
September 30, 2002 which was filed on November 14,       2002, March 31, 2003 which was
filed on May 15, 2003, June 30, 2003 which       was filed on August 14, 2003, September
30, 2003 which was filed on       November 10, 2003 and filed on May 17, 2004, and March
31, 2004 which was       amended on June 9, 2004 and August 12, 2004, and June 30, 2004
which was       filed on August 17, 2005, and September 30, 2004 which was filed on
November       15, 2004.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Reports
on Form 8-K
| | --- | -------------------

We filed a Form 8-K on
February 18, 2004 pertaining to Item 5 - Other Events, which disclosed completion of our
private placement during January and February 2004, in which we sold to certain investors
an aggregate of 969,237 shares of common stock at a purchase price of $3.00 per share and
each investor in the financing was also granted a Warrant A and Warrant B to purchase a
number of shares of common stock equal to one hundred percent (100%) of the shares
purchased by that investor in the financing.

On June 1, 2004, we filed
a Form 8-K, Item 5. Other Events, to disclose an agreement to acquire WS Telecom, Inc., a
Mississippi corporation, through a statutory merger of WS Telecom, Inc. with and into the
Company's wholly owned subsidiary, Xfone USA, Inc.

On October 4, 2004, we
filed a Form 8-K, Item 8.01. Other Events, to disclose that on September  28, 2004,
 Abraham  Keinan  ("Keinan"),  our Chairman of the Board,  Guy  Nissenson  ("Nissenson"),
 our President/Chief  Executive  Officer/Director,  and Campbeltown Business Ltd.
 ("Campbeltown"),  a related party consultant, entered into a Voting Agreement which
provides for mutual obligations by all parties to the agreement.

On November  29,  2004,
 we filed a Form 8-K,  Item 1. Entry Into A Material  Agreement,  to disclose  that on
November 23, 2004,  Mr. Ilan  Shoshani  provided our Israeli based  subsidiary,  Xfone
 Communication  Ltd.  (the  "Subsidiary")  with a 10,000,000  New  Israeli  Shekel  bank
 guarantee  as part of the  steps  required  to  fulfill  the  agreements  signed on
August 26,  2004 and  September  13, 2004  between  the  Subsidiary,  the  Registrant
 and Mr.  Shoshani.  Such  agreements were also dependent on approval of the Ministry of
Communications  of the State of Israel,  which came on November 8, 2004, and that on
 November  24,  2004,  our board of  directors  approved  and  adopted  the  principal
 items  forming our 2004 Stock  Option  Plan  (the  "Plan")   which  is  presently
  being   drafted  for  the  benefit  of   employees,   officers, directors,  consultants
and  subcontractors  of the Xfone, Inc.  including its subsidiaries.  The purpose of the
Plan is to enable the  Registrant to attract and retain the best  available  personnel
for  positions of  substantial  responsibility, to provide an  incentive  to such
 persons  presently  engaged  with the  Registrant,  and to  promote  the  success of our
business,  and at the time the board of directors approved the granting of 3,200,000
options to the Chairman of Xfone, Inc, and the President and CEO of Xfone,  Inc, and the
directors of Xfone,  Inc.;  Item 5.02 Departure of Directors or principal officers;
 election of  directors;  appointment  of principal  officers,  to disclose that on
November 23, 2004, by written shareholders  consent to action without  meeting of over
90% of the voting group of common shares,  the Registrant  elected two new  independent
 directors,  Mr. Arye  Czertok (64 years old),  Esquire and Mr. Aviu  Ben-Horrin  (56
years old),  and formation  of an audit  committee  on  November  24,  2004 by the board
of  directors  at a meeting.  Committee.  The Audit Committee  is  composed  of  three
  directors:   Messrs   Czertok,   Ben-Horrin   and  Schwartz  (all  3  are   considered
independent  directors.  Mr.  Czertok  was  appointed  as the  Chairman  of the Audit
 Committee,  and during the  November 24,  2004  board of  directors  meeting  Mr. Guy
 Nissenson,  President  and Chief  Executive  Officer of the Xfone,  Inc., resigned  from
his  position as the  Secretary  of the Xfone,  Inc..  The board of  directors  elected
 Mr.  Alon  Reisser, Advocate as the new  Secretary.  Mr.  Reisser is presently  the
internal  legal  adviser for Xfone,  Inc. and legal adviser for Xfone Communication Ltd.

On December 24, 2004,  we
filed a Form 8-K,  Item 5.02.  Departure of Principal  Officer,  to disclose that it was
mutually agreed by Xfone,  Inc. ("the  Company") and Mr. Tommy  Ferguson,  Chief
 Financial  Officer of the Company,  that effective December 24, 2004 Mr.  Ferguson would
cease his managerial  duties as Chief Financial  Officer.  It was further agreed that Mr.
 Ferguson  would stay on at the  Company  until  January 18,  2005.  If the  Company so
desires  Mr.  Ferguson  will be available to the Company as a consultant.

On March 15, 2005, we
filed a Form 8-K, Item 2.01  Completion  of  Acquisition  or  Disposition  of Assets,  to
disclose as previously  disclosed on Form 8-K filed June 1, 2004, on May 28, 2004,
 XFONE,  Inc.  entered into an Agreement and Plan of Merger (the  "Agreement")  to
acquire WS Telecom,  Inc., a  Mississippi  corporation,  through the  statutory  merger
of WS Telecom,  Inc. with and into the XFONE,  Inc.`s wholly owned  subsidiary  XFONE
USA,  Inc.,  effective  March 10, 2005. The acquisition of WS Telecom,  Inc. included its
two wholly owned  subsidiaries  eXpeTel  Communications,  Inc. and Gulf Coast Utilities,
 Inc.  Pursuant to the  Agreement  which was  previously  disclosed  as an exhibit to the
Form 8-K dated June 1, 2004, as  consideration  for  surrendering  their shares,
 shareholders  of WS Telecom,  Inc. will receive a combination of stock of XFONE,  Inc.
 valued in the  aggregate at  $2,200,000.00  and warrants of XFONE,  Inc.  valued in the
aggregate at $1,300,000.00.  Further,  on July 1, 2004,  XFONE USA entered into a
management  agreement  with WS Telecom which  provided that Xfone USA provide management
 services to WS Telecom pending the consummation of the merger. The management  agreement
provided,  among other things,  that all revenues  generated  from WS Telecom's  business
 operations  will be assigned and transferred to Xfone USA. The term of the Agreement
 commenced on July 1, 2004 and continued until the  consummation of the merger on March
10,  2005;  Item 8.01.  Other  Events.  On March 15,  2005,  XFONE,  Inc.  announced  by
press  release the completion of the  acquisition of WS Telecom,  Inc. The  acquisition
 became  effective March 10, 2005. A copy of the press release is attached to the Form
8-K as Ex. 99.1 and incorporated herein by reference;  Item 9.01.  Financial Statements
and Exhibits.(a)Financial  Statements of Businesses  Acquired.  The financial  statements
required by this Item 9.01(a) are not included in this initial  report on Form 8-K. The
financial  statements  will be filed by amendment to this report no later than 71
calendar days after the date of this initial  report.(c)  Exhibits.  9.1 Press Release
issued by XFONE,  Inc. dated March 15, 2005 headed "XFONE USA Completes Merger with
Jackson, Mississippi-Based Telecommunications Company.

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ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES.

Audit Fees

The aggregate fees billed for the fiscal year ended December 31, 2004 for

professional services rendered by the principal accountant for the audit of our

annual financial statements and review of the financial statements included in

our Form 10-KSB or services that are normally provided by the accountant in

connection with statutory and regulatory filings or engagements for these fiscal

periods were estimated as follows: we paid our accountant, Chaifetz & Schreiber,
P.C. $52,000.

Audit-Related Fees

none

Tax Fees

The aggregate fees billed for the fiscal year ended December 31, 2004 for

professional services rendered by the principal accountant for tax compliance,

tax advice and tax planning were estimated as follows: we paid our accountant,

Chaifetz & Schreiber, P.C. $5,000.

All Other Fees

Audit Fees

$49,500

The aggregate fees billed
for the fiscal year ended December 31, 2003 for professional services rendered by the
principal accountant for the audit of our annual financial statements and review of the
financial statements included in our Form 10-KSB or services that are normally provided
by the accountant in connection with statutory and regulatory filings or engagements for
these fiscal periods were estimated as follows: we paid our accountant, Chaifetz & Schreiber,
P.C. $30,500.

Audit-Related Fees

None.

Tax Fees

The aggregate fees billed for the fiscal year ended December 31, 2003 for

professional services rendered by the principal accountant for the audit of our

annual financial statements and review of the financial statements included in

our Form 10-KSB or services that are normally provided by the accountant in

connection with statutory and regulatory filings or engagements for these fiscal

periods were estimated as follows: we paid our accountant, Chaifetz & Schreiber,

P.C. $30,500.

All Other Fees

None.

SIGNATURES

In accordance with
Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

|March 31 , 2005 |  | XFONE, INC.BY: /S/ Guy Nissenson 
Guy Nissenson President,
   Principal Executive Officer, Principal Financial Officer,
   Principal Accounting Officer, and Director
|--------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In accordance with the Exchange Act,
this report has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

|March 31, 2005 |  | BY: /S/ Guy Nissenson 
Guy Nissenson President,
   Principal Executive Officer, Principal Financial Officer,
   Principal Accounting Officer, and DirectorBY: /S/ Abraham Keinan
Abraham Keinan  Chairman of the Board of DirectorsBY: /S/ Eyal J. Harish 
Eyal J. Harish  Director
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

-69-

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