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,
2007




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.)





2506
Lakeland Drive, Suite 100


Flowood,
MS 39232, USA


(Address
of principal executive offices) (Zip Code)




601.983.3800


(Issuer’s
telephone number, including area code)




Securities
registered under Section 12(b) of the Exchange Act:




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





Securities
registered under Section 12(g) of the Exchange Act:




None.




Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. o




Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes þ No
o




Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B 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.o




Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes o No þ




The
issuer’s revenues for its most recent fiscal year were $44,723,934.




The
aggregate market value of the voting and non-voting common equity held by
non-affiliates was $31,954,154 as determined by the closing price of $3.55, as
quoted on the American Stock Exchange on March 28, 2008.




As of
March 28, 2008, there were 18,434,820 shares of our common stock issued and
outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE




None




Transitional Small Business Disclosure Format (Check one): Yes
o No þ


-1-




XFONE,
INC.




Table
of Contents




PART
      IITEM
      1.                      Description of
      BusinessITEM
      2.                      Description of
      PropertyITEM
      3.                      Legal
      ProceedingsITEM
      4.                      Submission of Matters to a Vote
      of Security HoldersPART
      IIITEM
      5.                      Market for Common Equity and
      Related Stockholder Matters and Small Business Issuer Purchases of Equity
      SecuritiesITEM
      6.                      Management’s
      Discussion and Analysis or Plan of
    OperationITEM
      7.                      Financial
      StatementsITEM
      8.                      Changes in and Disagreements with
      Accountants on Accounting and Financial
      DisclosureITEM
      8A(T).             Controls and
      ProceduresITEM
      8B.                   Other
      InformationPART
      IIIITEM
      9.                    
      Directors, Executive Officers, Promoters and Control Persons and Corporate
      Governance; Compliance with Section 16(a) of the Exchange
      ActITEM
      10.                  
      Executive Compensation




-2-




PART
I




ITEM
      1.
            Description
      of Business




Background




Xfone,
Inc. was incorporated in Nevada, U.S.A. in September 2000. We are a holding and
managing company providing international voice, video and data communications
services with operations in the United States, the United Kingdom and Israel
offering a wide range of services, including: local, long distance and
international telephony services; video; prepaid and postpaid calling cards;
cellular services; Internet services; messaging services (Email/Fax Broadcast,
Email2Fax and Cyber-Number); and reselling opportunities. We serve customers
worldwide.




In
February 2007, we moved our principal executive offices from the UK to Flowood,
Mississippi, and shared executive office space with our wholly owned U.S.
subsidiary, Xfone USA, Inc. The headquarters of Xfone USA recently moved from
the Flowood, Mississippi location to Lubbock, Texas, to the existing
headquarters of NTS Communications, Inc., which we acquired in February 2008.
See “NTS Communications, Inc.” below. We intend to move our principal executive
offices to the Lubbock, Texas, location in the near future as well.




Swiftnet
Limited




On
October 4, 2000, we acquired Swiftnet Limited which had a business plan to
provide comprehensive range of telecommunication services and products,
integrated through one website. Swiftnet was incorporated in 1990 under the laws
of the United Kingdom and is headquartered in London, England. Until 1999, the
main revenues for Swiftnet were derived from messaging and fax broadcast
services. During 2000, Swiftnet shifted its business focus to voice services and
now offers a comprehensive range of calling services to resellers and end
customers. Utilizing automation and proprietary software packages, Swiftnet’s
strategy is to grow without the need for heavy investments and with lower
expenses for operations and registration of new customers.




Xfone
018 Ltd.




On April
15, 2004, we established an Israel based subsidiary, Xfone Communication Ltd.
(which changed its name to Xfone 018 Ltd. in March 2005). On July 4, 2004, the
Ministry of Communications of the State of Israel granted Xfone 018 a license to
provide international telecom services in Israel. We started providing services
in Israel through Xfone 018 as of mid-December 2004. Headquartered in Petach
Tikva, Israel, Xfone 018 Ltd. is a telecommunications service provider that owns
and operates its own facilities-based telecommunications switching system. Xfone
018 provides residential and business customers with high quality international
carrier services.




WS
Telecom, 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 into our wholly owned U.S. subsidiary Xfone USA, Inc. 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 that all revenues
generated from WS Telecom business operations would 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. Xfone USA,
Inc. is an integrated telecommunications service provider that owns and operates
its own facilities-based, telecommunications switching system and network. Xfone
USA provides residential and business customers with high quality local, long
distance and high-speed broadband Internet services, as well as cable television
services in certain planned residential communities in Mississippi. Xfone USA is
licensed to provide telecommunications services in Alabama, Florida, Georgia,
Louisiana and Mississippi. Xfone USA utilizes integrated multi-media offerings -
combining digital voice, data and video services over broadband technologies to
deliver services to customers throughout its service areas.


-3-




I-55
Internet Services, Inc.




On August
18, 2005, we entered into an Agreement and Plan of Merger to acquire I-55
Internet Services, Inc., a Louisiana corporation (the “I-55 Internet Merger
Agreement”). On September 13, 2005, we filed a Form 8-K discussing the impact of
Hurricane Katrina on the transaction contemplated by the I-55 Internet Merger
Agreement. On October 10, 2005, we entered into a First Amendment to the Merger
Agreement, by and among I-55 Internet Services, Xfone, Inc, Xfone USA, Inc., our
wholly-owned United States subsidiary and Hunter McAllister and Brian Acosta,
key employees of I-55 Internet Services, in order to induce Xfone, Inc and Xfone
USA not to terminate the I-55 Internet Merger Agreement due to the material
adverse effect that Hurricane Katrina has had on the assets and business of I-55
Internet Services. As part of the amendment and since, at that time, the merger
of I-55 Internet Services with and into Xfone USA had not been consummated yet,
in the interim, the parties agreed and entered into on October 11, 2005 a
Management Agreement (the “I-55 Internet Management Agreement”) that provided
that I-55 Internet Services hired and appointed Xfone USA as manager to be
responsible for the operation and management of all of I-55 Internet Services
business operations, including among other things personnel, accounting,
contracts, policies and budget. In consideration of the management services
provided under the I-55 Internet Management Agreement, I-55 Internet Services
assigned and transferred to Xfone USA all revenues generated and expenses
incurred in the ordinary course of business during the term of the I-55 Internet
Management Agreement. The term of the I-55 Internet Management Agreement
commenced on October 11, 2005 and continued until the consummation of the merger
on March 31, 2006.




In
conjunction with the consummation of the merger and in exchange for all of the
capital stock of I-55 Internet Services, we issued a total of 789,863 shares of
our common stock valued at $2,380,178 and 603,939 warrants exercisable for a
period of five years into shares of our common stock, with an exercise price of
$3.31, valued based on the Black Scholes option-pricing model (the “Xfone Stock
and Warrant Consideration”). A portion of the Xfone Stock and Warrant
Consideration issued at closing was placed in an escrow account, to be held
pending certain adjustments. The Company subsequently made the following
two claims against such escrow account: Claim #1: The Company
made a claim on March 27, 2007 to adjust the total consideration based upon the
changes in customer billings as determined pursuant to a formula set forth in
the First Amendment to the Merger Agreement (the “Customer Billing Adjustment
Amount”), which the Company had determined was $247,965.57. Claim #2: The Company
determined an undisclosed liability, in accordance with Article 6.03 of the I-55
Internet Services, Inc. Merger Agreement (as amended), in the amount of $147,550
and on November 28, 2006, sent a claim for this amount. The Shareholder
Representatives of I-55 Internet Services disputed the amounts in both claims
submitted and so the parties entered into negotiations on May 2, 2007, where
they agreed to reduce the amount claimed in Claim #1 by $104,948.46, which
represents adjustments made to the 90-Day column, Trade Accounts, and certain
accounts that had previously been listed as having 90-Day balances but were
subsequently confirmed as not having 90-Day balances, and by the final amount
billed to EBI Comm, Inc. (“EBI”) in 2005 prior to the assets of EBI being
purchased by Xfone USA, and agreed to reduce the original Loss amount claimed in
Claim #2 by $6,800.00, representing additional services purchased with Zipa,
Inc. under the direction of Xfone USA during the Management Agreement period
from October 2005 through March 2006. Upon settlement of the claims, two Joint
Deposition Notices for the escrow agent, Trustmark National Bank, were delivered
to the Shareholder Representatives of I-55 Internet Services for execution,
however, a Shareholder Representative refused to execute the notices pending
approval of the claims by the shareholders of I-55 Internet Services.  On
June 7, 2007, the shareholders met and rejected the figure agreed upon with
respect to Claim #1 and accepted the figure agreed upon with respect to Claim
#2.  There has been no further action taken by Xfone USA or us with respect
to either of these claims.   As a result of the rejection of the figure for
Claim #1, the Company officially retracted the Joint Deposition of Escrow Claim,
and consequently the original Pending Claim Notice dated March 27, 2007 in the
amount of $247,965.57 is still claimed, and the revised Claim #2 in the amount
of $140,750 is also claimed. Xfone USA’s new management, which was appointed
following the Company’s acquisition of NTS, is reviewing this matter to
determine how best to proceed in connection with the remaining pending claims
against the escrow.




In
conjunction with that certain Letter Agreement dated October 10, 2005 with MCG
Capital Corporation, a major creditor of I-55 Internet Services, and upon the
consummation of the merger on March 31, 2006, we issued to MCG Capital 667,998
shares of our common stock, valued at fair value of $2,010,006, in return for
retiring its loan with I-55 Internet Services. -4-




I-55
Internet Services provided Internet access and related services, such as
installation of various networking equipment, website design, hosting and other
Internet access installation services, throughout the Southeastern United States
to individuals and businesses located predominantly in rural markets in
Louisiana and Mississippi. As a result of the merger with and into Xfone USA,
these services are now available in expanded markets throughout Louisiana and
Mississippi. The Internet service offerings include dial-up, DSL, high speed
dedicated Internet access, web services, email, the World Wide Web, Internet
relay chat, file transfer protocol and Usenet news access to both residential
and business customers. The I-55 Internet Services offerings provided various
prices and packages that allowed I-55 Internet Services subscribers to customize
their subscription with services that met customers’ particular requirements.
Xfone USA now provides bundled services of voice and data (broadband Internet)
to customers throughout its service areas.




On August
26, 2005, we entered into an Agreement and Plan of Merger to acquire I-55
Telecommunications, LLC, a Louisiana corporation (the “I-55 Telecom Merger
Agreement”). On September 13, 2005, we filed a Form 8-K discussing the impact of
Hurricane Katrina on the transaction contemplated by the I-55 Telecom Merger
Agreement. In order to demonstrate our intention to continue on with the
transaction contemplated by the I-55 Telecom Merger Agreement, the parties
entered into on October 12, 2005 a Management Agreement (the “I-55 Telecom
Management Agreement”) that provided that I-55 Telecommunications hired and
appointed Xfone USA as manager to be responsible for the operation and
management of all of I-55 Telecommunications’ business operations. In
consideration of the management services provided under the I-55 Telecom
Management Agreement, I-55 Telecommunications assigned and transferred to Xfone
USA all revenues generated and expenses incurred in the ordinary course of
business during the term of the I-55 Telecom Management Agreement. The term of
the I-55 Telecom Management Agreement commenced on October 12, 2005 and
continued until the consummation of the merger on March 31, 2006.




In
conjunction with the consummation of the merger and in exchange for all of the
capital stock of I-55 Telecommunications, LLC, we issued a total of 223,702
shares of our common stock valued at $671,687 and 79,029 warrants exercisable
for a period of five years into shares of our common stock, with an exercise
price of $3.38, valued based on the Black Scholes option-pricing model (the
“Xfone Stock and Warrant Consideration”). A portion of the Xfone Stock and
Warrant Consideration issued at closing was placed in an escrow. The Company
determined a breach of the representations and warranties in the Merger
Agreement resulting from the failure of I-55 Telecommunications to disclose the
liability due and payable to the Louisiana Universal Service Fund (“LA USF”)
through the period of October 2005, at which time Xfone USA undertook the
management role of I-55 Telecommunications. Pursuant to Section 1(g) of the
Escrow Agreement dated as of March 31, 2006 by and among Xfone USA, the Escrow
Agent, and the President and Sole Member of I-55 Telecommunications, and in
accordance with Article 6.02 of the Merger Agreement, Xfone USA notified the
other parties that it believed that it had suffered a Loss of $30,625.52,
pursuant to the provisions of Article 6.02 of the Merger Agreement dated as of
August 26, 2005. Having not received any response from the President and Sole
Member of I-55 Telecommunications, nor from his counsel, on October 15, 2007,
and after the allotted response time allowed, Xfone USA instructed the Escrow
Agent (Trustmark National Bank) to deliver from the Escrow Fund of the President
and Sole Member of I-55 Telecommunications, to the Company, 7,043 shares of
Common Stock and 4,838 Xfone Stock Warrants. The 7,043 shares of Common Stock
and 4,838 Xfone Stock Warrants were returned to the Company for cancellation on
October 31, 2007.




In
conjunction with certain Agreements to Purchase Promissory Notes dated October
31, 2005 / February 3, 2006 with Randall Wade James Tricou; Rene Tricou - Tricou
Construction; Rene Tricou - Bon Aire Estates; Rene Tricou - Bon Aire Utility;
and Danny Acosta, creditors of I-55 Telecommunications (the “Creditors”), and
upon the consummation of the merger on March 31, 2006, we issued to the
Creditors an aggregate of 163,933 restricted shares of common stock and an
aggregate of 81,968 warrants, exercisable at $3.38 per share, at a total value
of $492,220, in return for retiring their individual loans with I-55
Telecommunications.




I-55
Telecommunications provided voice, data and related services throughout
Louisiana and Mississippi to both individuals and businesses. Prior to the
merger with and into Xfone USA, I-55 Telecommunications was a licensed facility
based CLEC operating in Louisiana and Mississippi with a next generation class 5
carrier-switching platform. I-55 Telecommunications provided a complete package
of local and long distance services to residential and business customers across
both states. As a result of the merger, Xfone USA has now expanded its On-Net
(facilities) service area, through I-55 Telecommunications, into New Orleans,
Louisiana and surrounding areas, including Hammond, Louisiana and Baton Rouge,
Louisiana. Xfone USA is expanding its sales offices to include New Orleans, in
an effort to continue revenue growth and increase market share in the
revitalized city, as well as into Biloxi, Mississippi, Hammond, Louisiana and
Baton Rouge, Louisiana. Regulations affecting the telecommunications industry
began in March 2006; conversions of all circuits affected were completed in
April 2006. The competition in secondary markets, such as Jackson, Mississippi,
Baton Rouge, Louisiana, and Biloxi, Mississippi, as opposed to Tier 1 markets
such as Atlanta, Georgia, is also rapidly declining due to the removal of UNE-P
and the decline in the competitive local exchange providers that had been
dependent on UNE-P as their only source for providing competitive local
telephone services in those markets. This provides for a unique opportunity for
Xfone USA to gain market share, by utilizing its existing network and to expand
its facilities into these opportunity areas becoming a primary alternative to
the monopoly Incumbent Local Exchange Company. -5-




EBI
Comm, Inc.




On
January 1, 2006, Xfone USA, Inc., our wholly owned subsidiary, entered into an
Agreement with EBI Comm, Inc. (“EBI”), a privately held Internet Service
Provider, to purchase the assets of EBI. EBI provided a full range of Internet
access options for both commercial and residential customers in north
Mississippi. Based in Columbus, Mississippi, EBI’s services included Dial-up,
DSL, T1 Dedicated Access and Web Hosting. The customer base, numbering
approximately 1,500 Internet users, is largely concentrated in the Golden
Triangle area, which includes Columbus, West Point and Starkville, Mississippi.
The acquisition was structured as an asset purchase, providing for Xfone USA to
pay EBI total consideration equal to 50% of the monthly collected revenue from
the customer base during the first 12 months, beginning January 2006. Acquired
assets include the customer base and customer lists, trademarks and all related
intellectual property, fixed assets and all account receivables. As a result of
further negotiations between us and EBI, we have agreed to pay the total
consideration of this acquisition in cash in the amount of $85,699 in monthly
payments of $10,000 until paid in full, and we made the first of such payments
on June 1, 2007 and final payment on January 25, 2008. The acquisition was not
significant from an accounting perspective.




Canufly.net,
Inc.




On
January 10, 2006 (effective as of January 1, 2006), Xfone USA, Inc., our wholly
owned subsidiary, entered into an Asset Purchase Agreement with Canufly.net,
Inc. (“Canufly.net”), an Internet Service Provider based in Vicksburg,
Mississippi, and its principal shareholder, Mr. Michael Nassour. Canufly.net
provided residential and business customers with high-speed Internet services
and utilized the facilities-based network of Xfone USA, as an alternative to
BellSouth, to provide Internet connectivity to its customers. Canufly.net also
provided Internet services through a small wireless application in certain areas
in Vicksburg, Mississippi. The transaction was closed on January 24, 2006. We
agreed to pay a total purchase price of up to $710,633, payable as follows:
(i) $185,000 in cash payable in twelve equal monthly payments, the first
installment was paid at closing, and as of December 31, 2006, the entire amount
was paid in full and in accordance with the Asset Purchase Agreement;
(ii) $255,633 in cash, paid at closing, to pay off the loan with the
B&K Bank; (iii) 33,768 restricted shares of common stock and 24,053
warrants exercisable at $2.98 per share for a period of five years were issued
to the shareholders of Canufly.net during May 2006. Following the closing in
2006 and due to the satisfaction of certain earn out provisions in the Asset
Purchase Agreement the Company issued in March 2007 an additional 20,026
restricted shares of common stock and 14,364 warrants exercisable at $2.98 per
share for a period of five years to the shareholders of Canufly.net. The
acquisition was not significant from an accounting perspective.




Story
Telecom




On May
10, 2006, we, Story Telecom, Inc., Story Telecom Limited, Story Telecom
(Ireland) Limited, Nir Davison, and Trecastle Holdings Limited, a company owned
and controlled by Mr. Davison, entered into a Stock Purchase Agreement. Pursuant
to the Stock Purchase Agreement, we increased our ownership interest in Story
Telecom from 39.2% to 69.6% in a cash transaction valued at $1,200,000. $900,000
of the total consideration was applied to payables owed by Story Telecom to us
and our subsidiary Swiftnet Limited for back-end telecommunications services.
The balance of $300,000 was paid to Story Telecom to be used as working capital.
Story Telecom, Inc., a telecommunication service provider, operated in the
United Kingdom through its two wholly owned subsidiaries, Story Telecom Limited
and Story Telecom (Ireland) Limited (which was dissolved on February 23, 2007).
Following the acquisition, Story Telecom operates as a division of our
operations in the United Kingdom. The stock purchase pursuant to the Stock
Purchase Agreement was completed on May 16, 2006. The transaction contemplated
by the Stock Purchase Agreement was not significant from an accounting
perspective.




On March
25, 2008, in connection with a settlement of a legal proceeding before the UK
Employment Tribunal initiated by Mr. Nir Davison, we purchased from Mr. Davison
and Trecastle Holdings Limited, the shares of common stock of Story Telecom,
Inc. that each party owned, respectively, for an aggregate purchase price of
£270,000 ($539,662), pursuant to the terms of a Compromise Agreement and a
Securities Purchase Agreement entered into between the parties on that date.
Upon acquisition of the shares of common stock of Story Telecom, Inc. from Mr.
Davison and Trecastle Holdings, Story Telecom, Inc. became our wholly owned
subsidiary. -6-




Equitalk.co.uk
Limited




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




Auracall
Limited




On August
15, 2007, the Company, Swiftnet Limited, our wholly owned U.K.-based subsidiary
(“Swiftnet”), and Dan Kirschner entered into a definitive Share Purchase
Agreement to be completed on the same date, pursuant to which Swiftnet purchased
from Mr. Kirschner the 67.5% equity interest in Auracall Limited (“Auracall”)
that he beneficially owned, thereby increasing Swiftnet’s ownership interest in
Auracall from 32.5% to 100%. Swiftnet had acquired the 32.5% interest in
Auracall through several transactions that occurred since October 16, 2001. The
purchase price for the shares was £810,917.64 (approximately $1,616,158),
payable as follows: £500,000 (approximately $996,500) was paid in cash upon
signing of the Share Purchase Agreement, and the remaining £304,000, plus
interest of £6,917.64 (approximately $619,658), was payable in monthly
installments beginning in September 2007 and continued through March 2008. In
connection with the acquisition, Auracall and Swiftnet entered into an
Inter-Company Loan Agreement, pursuant to which Auracall agreed to lend Swiftnet
£850,000 (approximately $1,694,050) for the sole purpose of and in connection
with Swiftnet’s acquisition of the Auracall shares. The loan is unsecured, bears
interest at a rate of 5% per annum, and is to be repaid in five years (i.e.,
August 15, 2012), but may be repaid earlier without charge or penalty. As a
result of the terms of the transaction, Mr. Kirschner no longer serves as
Auracall’s Managing Director or as a member of its board of
directors.




NTS
Communications, Inc.




On August
22, 2007, we entered into a Stock Purchase Agreement (the “NTS Purchase
Agreement”) with NTS Communications, Inc. (“NTS”), a provider of integrated
voice, data and video solutions headquartered in Lubbock, Texas, and the owners
of approximately 85% of the equity interests in NTS, to acquire NTS.
Subsequently, all of the remaining shareholders of NTS executed the Agreement,
bringing the total percentage of equity interests in NTS owned by NTS
shareholders that entered into the Agreement (the “NTS Sellers”) to
100%.   On February 14, 2008, we entered into a First Amendment
to the NTS Purchase Agreement to amend the agreement to further extend the
expiration date for the closing of our acquisition of NTS.  On
February 26, 2008, we entered into a Second Amendment to the NTS Purchase
Agreement which amended, among other things, the definition and elements of
working capital, as such term is defined in the NTS Purchase Agreement, and
increased the escrow amount.




The
acquisition closed on February 26, 2008.  Upon closing of the
acquisition, NTS and its six wholly owned subsidiaries, NTS Construction
Company, Garey M. Wallace Company, Inc., Midcom of Arizona, Inc., Communications
Brokers, Inc., NTS Telephone Company, LLC, and NTS Management Company, LLC,
became our wholly owned subsidiaries.




The
purchase price for the acquisition set forth in the NTS Purchase Agreement was
approximately $42,000,000 (excluding acquisition related costs), plus (or less)
(i) the difference between NTS’ estimated working capital and the working
capital target for NTS as set forth in the NTS Purchase Agreement, and (ii) the
difference between amounts allocated by NTS for its fiber optic network
build-out project anticipated in Texas and any indebtedness incurred by NTS in
connection with this project, each of which was subject to our advance written
approval.  After applying this formula, the final aggregate purchase
price was calculated as $41,900,000, and was paid as follows:




·
            $35,414,715.33
      was paid in cash; and




·
            2,366,892
      shares of our common stock were issued to certain NTS Sellers who elected
      to reinvest all or a portion of their allocable sale price in our Common
      Stock, pursuant to the terms of the NTS Purchase Agreement. Our Board of
      Directors determined, in accordance with the NTS Purchase Agreement, the
      number of shares of our Common Stock to be delivered to each participating
      NTS Seller by dividing the portion of such NTS Seller’s allocable sale
      price that the NTS Seller elected to receive in shares of our Common Stock
      by 93% of the average closing price of our Common Stock on the American
      Stock Exchange for the ten consecutive trading days preceding the trading
      day immediately prior to the Closing Date (i.e., $2.74). The aggregate
      sales price reinvested by all such NTS Sellers was
      $6,485,284.67.


-7-




Recent
Developments




On March
17, 2008, Xfone 018 entered into an Agreement of Principles with Tiv Taam
Holdings 1 Ltd., an Israeli public company (“Tiv Taam”), pursuant to which Xfone
018 agreed to purchase from Tiv Taam, and Tiv Taam agreed to sell to Xfone 018,
approximately 89% of the outstanding share capital (approximately 69% of its
fully diluted share capital) of Robomatix Technologies Ltd. (“Robomatix”) which
Tiv Taam currently owns.  Robomatix owns approximately 90% of the
issued share capital of Tadiran Telecom-Communication Services In Israel Ltd.
(“Tadiran Telecom”), which is the general partner of Tadiran
Telecom-Communication Services In Israel – Limited Partnership (“Tadiran Telecom
LP”), an Israeli entity dealing with the distribution, maintenance, assistance
services and sale of switchboards for the business community in
Israel.  Accordingly, upon consummation of the acquisition, Xfone 018
will also acquire control over Tadiran Telecom and Tadiron Telecom
LP.  The purchase price for the acquisition is NIS 44,000,000
(approximately $12,503,552), subject to adjustment as set forth in the
agreement, payable in three installments, as follows:




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




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




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




Xfone 018
will have all rights as a shareholder of Robomatix upon closing of the
acquisition and payment of the First Installment.




We, as
the parent company of Xfone 018, have agreed to sign a letter of guarantee with
respect to the Second Installment and the Third Installment.  The
agreement provides for a 60-day period during which Xfone 018 shall perform a
legal and accounting due diligence examination of Robomatix, Tadiran Telecom and
Tadiran Telecom LP.  Xfone 018 has undertaken to maintain
confidentiality of all information delivered to Xfone 018, and has entered into
a Confidentiality Undertaking.




The
closing of the transaction will occur on the later of (i) 75 days after the
execution of the Agreement (i.e, May 31, 2008), or (ii) 15 days after receipt of
necessary approvals of the General Director of the Antitrust Authority and other
Israeli governmental authorities.  In the event that the necessary
approvals are not received within 120 days of the date of execution of the
Agreement, or a reserved approval was received or an approval under conditions
which make it burdensome on Xfone 018 or significantly prejudice the
profitability of the transaction for Xfone 018, the Agreement will be null and
void as if it was never executed.




Our
Principal Services and Their Markets




We
provide through our United Kingdom operations (Swiftnet, Equitalk, Story Telecom
and Auracall) the following telecommunication products / services:




Services
provided by Swiftnet




Telephony
Services




·
            Carrier Pre
      Select (CPS): CPS is a telephony service which enables customers to
      benefit from our low call usage charges, without having to make any
      changes to their existing telephone lines or numbers. The service allows
      customers to route all their outgoing calls over our network. This gives
      them access to competitive call rates and a wide range of services.
      Customers using CPS only pay line rental to their service operator, while
      we bill them for all call charges. CPS is available nationally provided
      the customer is connected to a BT local
  exchange.


-8-


·
            Indirect
      Access: This is a telephony service which enables customers to
      benefit from our low call usage charges, without having to make any
      changes to their existing telephone lines or numbers. The service allows
      customers to route a specific outgoing call over our network by using the
      prefix code “1689.”




·
            Calling
      Cards: This service is available to all our subscribers. The
      Calling Card works by using an access number and a PIN code, and offers a
      convenient and easy way to make calls virtually anywhere in the UK, as
      well as from 27 other destinations
  worldwide.




Messaging
Services




·
            Email2Fax:
      Allows users to send fax messages directly from their email or web
      software.




·
            Cyber-Number: Allows
      users to receive fax messages directly to their email software via a
      personal number.




·
            Email/Fax
      Broadcast: This service allows the user to send multiple
      personalized faxes and emails to thousands of users in
      minutes.




Internet
Based Customer Service




·
            Our
      Internet based customer service and on-line registration (found at
      www.swiftnet.co.uk) includes full details on all our products and
      services.




Our UK
based subsidiary, Swiftnet Limited owns and operates its own facilities-based
telecommunications switching system.




Services
Provided by Equitalk.co.uk




Telephony
Services




·
            Carrier Pre
      Select (CPS): CPS is a telephony service which enables customers to
      benefit from our low call usage charges, without having to make any
      changes to their existing telephone lines or numbers. The service allows
      customers to route all their outgoing calls over our network. This gives
      them access to competitive call rates and a wide range of services.
      Customers using CPS only pay line rental to their service operator, while
      we bill them for all call charges. CPS is available nationally provided
      the customer is connected to a BT local
  exchange.




·
            Indirect
      Access: This is a telephony service which enables customers to
      benefit from our low call usage charges, without having to make any
      changes to their existing telephone lines or numbers. The service allows
      customers to route a specific outgoing call over our network by using the
      prefix code “1664.”




·
            Internet/Data
      Service: We provide high-speed Internet access to residential
      customers utilizing the digital data network of Griffin Internet. Our ADSL
      service provides up to 8 Mbps of streaming speed combined with Static IP
      addresses, as well as multiple mailboxes. Our Internet/Data services are
      bundled with our voice services for residential and business
      customers.




·
            Conference
      Service: We provide web-managed low cost teleconferencing services
      through our partnership with Auracall Limited. Up to 10 people can call in
      to a conference circuit and be joined together by dialing the same PIN.
      There is no need to reserve a conference call in advance and each caller
      pays for their own call.


-9-




Internet
Based Customer Service and Billing Interface




·
            Our
      Internet based customer service and billing interface (found at
      www.equitalk.co.uk) includes on-line registration, full account control,
      and payment and billing functions and information
    retrieval.




Services
provided by Story Telecom




·
            Prepaid
      Calling Cards: Story Telecom initiates, markets and distributes Prepaid
      Calling Cards that are served by our switch and systems. Story Telecom
      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 either a toll free number or a local access 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.




·
            Story
      Direct and Story Mobile: These services allow any individual with either a
      BT line or a mobile phone to make international calls at a lower cost and
      without prepayment for setting up an account with another carrier. These
      services can be accessed by any business or residential user through Story
      Telecom website, found at www.storytelecom.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 BT published rates or their network operator’s rates by gaining
      access to our switch and providing savings on a per minute
      basis.




·
            Text
      & Talk: This service allows any individual with a mobile phone to make
      international calls at a lower cost by purchasing calling credit via a
      Premium Rate Text. When customers need to make an international or
      national call they can dial an access number followed by their destination
      number.




Internet
Based Customer Service and Billing Interface




·
            Our
      Internet based customer service (found at www.storytelecom.co.uk) includes
      full details on all our products and
services.




Services
provided by Auracall




·
            Free
      Time:  This service allows any individual with a BT 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 BT published rates by gaining access to our switch
      and providing savings on a per minute
basis.




·
            T-Talk:  This
      service allows any individual with a mobile phone to make international
      calls at a lower cost by purchasing calling credit via a Premium Rate
      Text. When customers need to make an international or national call they
      can dial an access number followed by their destination
      number.


-10-




Internet
Based Customer Service and Billing Interface




·
            Our
      Internet based customer service (found at www.auracall.co.uk) includes
      full details on all our products and
services.




We
provide through our United States operations (Xfone USA and NTS Communications)
the following telecommunication products / services:




Services
provided by Xfone USA




·
            Local Telephone
      Service: Using our own network in concentrated local areas
      throughout Mississippi and Louisiana and utilizing the underlying network
      of BellSouth Telecommunications, Inc. (the new ATT), outside of our local
      areas, we provide local dial tone and calling features, such as hunting,
      call forwarding and call waiting to both business and residential
      customers throughout Alabama, Florida, Georgia, Louisiana and Mississippi,
      including T-1 and PRI local telephone services to business
      customers.




·
            Long Distance
      Service: We use our own network where available and QWEST, a
      nationwide long distance carrier, as our underlying long distance network
      provider. In conjunction with Local Telephone Services, we provide Long
      Distance Services to our residential and business customers. We provide
      two different categories of long distance services - Switched Services to
      both residential and small business customers, which include 1+ Outbound
      Service, Toll Free Inbound Service and Calling Card Service. For larger
      business customers we also provide Dedicated Services such as T-1 and PRI
      Services. Our long distance services are only available to customers who
      use our local telephone
services.




·
            Internet/Data
      Service: We provide high-speed broadband Internet access to
      residential and business customers utilizing our own integrated digital
      data network and utilizing the broadband gateway network of the new ATT.
      Our DSL service provides up to 3 Mbps of streaming speed combined with
      Dynamic IP addresses, as well as multiple mailboxes and Web space. Our DSL
      services also include spam filter, instant messaging, pop-up blocking, web
      mail access, and parental controls. We also provide dial-up Internet
      access service for quick and dependable connection to the web. Our
      Internet/Data services are stand-alone products or are bundled with our
      voice services for residential and business
    customers.




·
            Customer
      Service: Customer Service is paramount at Xfone USA and is one of
      our major differentiating characteristics, thus tantamount to being one of
      our product offerings. Customers have been conditioned to accept poor
      customer service from the larger monopoly companies because they have
      never had any real choice in service providers, especially in the
      residential market. Our attentive customer service department is an
      additional “product offering” which sells - as well as retains -
      customers. The full scope of communications service entails network
      service, customer service, and repair
  service.




Our US
based subsidiary, Xfone USA, Inc. owns and operates its own facilities-based
telecommunications carrier class-switching platform.


-11-




Services
provided by NTS Communications




Retail
Services




·
            Local
      Services: NTS delivers local telephony service to its customers
      through an “on-net” UNE-L connection, including voice mail, caller ID,
      forwarding, 3-way calling, blocking, and PBX services.  In
      addition, NTS sells ”off-net” total service resale lines which contribute
      less than 7% of total local service revenue.  NTS provides UNE-L
      services in Lubbock, Abilene, Amarillo, Midland, Odessa, Pampa, Plainview,
      and Wichita Falls, Texas.  NTS provides local services via FTTP
      in Lubbock and Wolfforth.  NTS provides resold local services
      throughout Texas via its resale agreement with
      AT&T.




·
            Retail Long
      Distance Services: NTS offers a full range of long distance
      services to its customers, including competitively priced switched long
      distance (including intrastate, interstate, and international), toll-free
      service, dedicated T-1 long distance and calling cards.  The
      vast majority of its customers are concentrated in West
      Texas.  Approximately 10% of long distance customers are in
      Arizona, New Mexico, Oklahoma, Kansas, and
  Colorado.




·
            Internet Data
      Services: NTS began offering broadband service in
      1999.  Download speeds range from 500 Kilobits to 100 Megabits
      per second, depending on the end user’s distance from an NTS collocation
      or the type of facilities used to deliver the service.  NTS
      launched dial-up service in 1985.  NTS provides broadband and
      dial-up Internet service in all of its Texas
    markets.




·
            Fiber-Based
      Services (“FTTP”): As an integrated telecom provider, NTS is
      capable of providing quality triple play (voice, digital video & data)
      on one bill at competitive prices to its FTTP customers.  NTS
      offers a full selection of video services, including basic cable, video on
      demand, HDTV and DVR.  NTS is a member of the National Cable
      Television Cooperative and as a member obtains favorable programming rates
      from most major networks.  NTS provides FTTP service in Lubbock
      and Wolfforth, Texas.




·
            Customer Premise
      Equipment (“CPE”): NTS resells a variety of CPE and CPE related
      services to its customers.  Primarily, these sales involve NTS
      acting as an authorized dealer for Toshiba phone systems. These systems
      are sold to customers either on a stand-alone basis, or in conjunction
      with the purchase of local, long distance, and/or data services from the
      company.




Wholesale
Services




·
            Private Line
      Services: NTS offers aggregation and resale of leased fiber
      transport network from AT&T and other fiber network
      operators.  This service is mostly provided for carrier
      customers that need direct network connectivity, as well as enterprises
      that require dedicated branch office connections.  Services
      generally offered under 1-year contracts for a fixed amount per
      month.  NTS provides private line service
      nationwide.




·
            Wholesale
      Switched Termination Services: NTS sells its wholesale-switched
      minutes to local telecom companies who do not have the volume to warrant
      attractive pricing from AT&T and other large carriers.  NTS
      provides multi-regional switched termination, switched toll free
      origination and wholesale Internet access services to various carrier
      customers.  Services are generally offered for a fixed amount
      per minute.  NTS provides wholesale switched termination
      services to customers via network connections in NTS POPs and switch
      sites.


-12-




Internet
Based Customer Service




·
            Our
      Internet based customer service (found at www.ntscom.com) includes full
      details on all our retail products and
services.




Our US
based subsidiary, NTS Communications, Inc., owns and operates its own
facilities-based telecommunications switching system.




Future
Plans




Levelland/Smyer
FTTP Opportunity




NTS,
through its wholly owned subsidiary, NTS Telephone Company, LLC, plans to extend
its FTTP network to the nearby communities of Levelland (located 30 miles west
of Lubbock) and Smyer (approximately 15 miles west of Lubbock).  Upon
project completion, these communities will add approximately 6,200 passings to
the NTS FTTP footprint and bring total FTTP passings to approximately
21,000.  NTS Telephone Company, LLC, has received approval from the
Rural Utilities Service (“RUS”) for an $11.8 million, 17-year debt financing to
complete this overbuild.  The RUS loan is non-recourse to NTS and all
other NTS subsidiaries and interest is charged at the average rate of U.S.
government obligations (equivalent to approximately 4.5% a year at today’s
rates).  Data from marketing surveys indicated a very strong demand
for triple play (voice, data/Internet, and video) service offerings and
projected a market penetration for NTS of 69% in approximately three years from
project completion.  NTS’ capital investment in the project is a $2.5
million equity contribution that serves as credit support for the
loan.  NTS will provision voice, data and video services for NTS
Telephone Company.  NTS will receive a management fee from NTS
Telephone Service equal to 15% of its revenues.  NTS expects to begin
providing initial triple-play service to some areas of Levelland in the fourth
quarter of 2008 with more areas becoming available as overbuild construction is
completed.  Project completion could be delayed by any number of
factors including but not limited to weather and the availability of contractors
and materials.




We
provide through our Israeli operations (Xfone 018) the following
telecommunication products / services:




·
            International
      Telephony Services: We provide international telephony services
      with the prefix code of “018.” We provide these services both to our
      subscribers and to subscribers of other Israeli carriers. The service is
      offered to both residential and business
  customers.




·
            XFONECARD:
      We provide an international toll free calling card service, available in
      over 40 countries around the
globe.




·
            SIMPLE:
      The SIMPLE is a pre programmed, rechargeable, mobile SIM card which can be
      used with any unlocked GSM (Global System for Mobiles) mobile phone
      virtually anywhere in the world. SIMPLE allows us to deliver call savings,
      by diverting the customer dialing command away from the local mobile
      operator that the phone is connected to, and instead, it sends the call to
      one of the mobile operators with whom we hold a special agreement. We
      offer for sale or rent two types of SIM Cards - a local SIM Card which may
      be used only from a specific country, and a global SIM Card which may be
      used from over 90 countries around the
  globe.




·
            International
      Telephony Access: We provide international telephony access to the
      Israeli telephone network by selling incoming call minutes to various
      international operators across the
globe.


-13-




Internet
Based Customer Service




·
            Our
      Internet based customer service and on-line registration (found at
      www.018.co.il) includes full details on all our products and
      services.




Our
Israel based subsidiary Xfone 018 owns and operates its own facilities-based
telecommunications carrier class-switching platform.




Our
Distribution and Marketing Methods




We use
the following distribution methods to market our services:




·
            We
      use employed, direct sales executives to sell to medium to large size
      business customers; these sales executives have quota attainment
      requirements and receive a monthly salary, allowance and are paid
      commissions;




·
            We
      actively recruit independent contractor agents and resellers who purchase
      telephone traffic directly from us at a discount, and who then resell this
      telephone traffic to their customers at a mark-up according to their own
      price lists;




·
            We
      utilize agents that sell our services directly to customers at our
      established prices; these agents receive a commission of approximately
      5%-12% of the total sale amount less any bad
  debts;




·
            We
      use third party direct sales organizations (telesales and door-to-door) to
      register new customers;




·
            We
      cooperate with major companies and worker’s
  councils;




·
            We
      have retail and wholesale sales offices; employees at these sales offices
      receive annual salaries and
commissions;




·
            We
      use direct marketing, including by newspaper, radio and television
      advertisements;




·
            We
      attend telecommunications trade shows to promote our services;
      and




·
            We
      utilize the Internet as an additional distribution channel for our
      services.




Our
Billing Practices




We charge
our customers based on a monthly fixed amount or on actual usage by full or
partial minutes. Our rates vary with distance, duration, time, type of call, and
product or service provided, but are not dependent upon the facilities selected
for the call transmission. The standard terms for our customers require either
pre-payments or payments due as early as 16 or as late as 30 days from the date
of the invoice, or within 90 days from when the invoice is issued by the local
operator. Our supplier’s standard terms are payment within 30 to 90 days from
invoice date; however, some new suppliers ask for shorter payment terms. -14-




Carriers
and Negotiating Lower Rates




Our
increased sales in 2006 and 2007 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
anticipate that we will continue to negotiate for lower rates. There can be no
assurance that we will be successful in negotiating lower rates.




Divisions




We
operate 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.




·
            Customer Service
      Division – In the United Kingdom and the United States we operate a
      live customer service center that operates 24 hours a day, 7 days a week.
      In Israel our customer service center operates 6 days a
      week.




·
            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 Division – The function of our Research and Development
      Division is to develop and improve our billing system, switch and
      telephony platforms, websites and special
  projects.




·
            Marketing
      Division – Our Marketing Division is responsible for 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.
However, we serve customers worldwide.




Competitive
Business Conditions




The
U.K. Market




The
communications and information services industry in the U.K. is highly
competitive and varied. In 2007, we had only approximately 0.2% of the market
share of the United Kingdom telecommunication market (not including mobiles
revenues), based on our revenues of $24 million during 2007, compared with the
approximately $10 billion telecommunication market (not including mobiles
revenues) in the United Kingdom, according to the United Kingdom regulatory
oversight of these companies, the Office of Communications - United Kingdom,
otherwise known as Ofcom, the website of which may be accessed at
www.ofcom.org.uk. -15-




The
U.S. Market




NTS
operates in a highly competitive environment which is generally characterized by
the dominance of the Incumbent Local Exchange Carrier (ILEC).  With
respect to its primary Texas markets, the dominant ILEC is AT&T (formerly
Southwestern Bell Telephone Company).  NTS also competes with the
Incumbent Cable TV Provider (ICTVP) in markets where that carrier provides
voice, data and/or video services.  In its core Texas markets, the
ICTVP is SuddenLink Communications or Time Warner
Communications.  Within these same core markets, NTS also competes
with a variety of widely dispersed smaller Competitive Local Exchange Carriers
(CLEC).  In the February 2007 FCC report, Trends in Telephone Service
– Industry Analysis and Technology Division, Wireline Competition Bureau, it is
reported that total Texas switched access lines in service (as of June 30, 2006)
were 11,863,981, with the ILEC community possessing a market share of
approximately 84% and the balance is being served by various CLEC’s and
ICTVP’s.  With respect to its data and long distance products, the
company competes with various national and regional players including AT&T,
Verizon, Qwest, Level 3 and others.




In 2007,
Xfone USA had approximately 11,000 End-User Switched Access telephone lines in
the Alabama, Louisiana and Mississippi market or approximately 0.2% of market
share. This total market size in 2007 represented 5,732,998 telephone lines,
with BellSouth Telecommunications maintaining its monopoly market share with
4,949,629 telephone lines or approximately 86% of the market. All CLECs combined
made up the remaining 783,369 telephone lines or approximately 14% of the
tri-state market, according to the 2007 FCC Report - Trends in Local Telephone
Competition.




The
Israeli Market




Since the
opening of the international telephony market in Israel to competition in 1996,
and until 2004, only three companies have provided international telephony
services in Israel. The market, estimated at that time to be 2 billion minutes
per year, was more or less equally divided between the three companies. On July
4, 2004, the Ministry of Communications of the State of Israel granted our
subsidiary, Xfone 018 a license to provide international telecom services in
Israel. We started providing services in Israel through Xfone 018 as of
mid-December 2004. In 2004, two other new providers of international telephony
services launched their services. The international telephony market is highly
competitive and therefore all six providers had to offer low prices in order to
attract or retain subscribers and call minutes.




During
2006, two significant mergers occurred in the Israeli international telephony
market, leaving only four companies in the competition. The aforementioned
mergers enabled Xfone 018 to execute, as of December 2006, a new business
strategy, according to which it re-priced its services by distinguishing the
rates for its subscribed customers from the rates for its non-subscribed
customers. The new strategy has proved to be successful, and in 2007 Xfone 018
revenues were significantly increased.




In 2007,
the Israeli international telephony market was estimated to be 2.9 billion
minutes. We estimate our market share as of December 31, 2007, as approximately
5.5% of the Israeli market.




Principal
Suppliers




In 2007,
our principal suppliers of telephone routing and switching services according to
the percentage of the costs of revenues were:




·
            “the
      new ATT” (formerly BellSouth Telecommunications) -
  25%




·
            British
      Telecommunications - 20%




·
            Bezeq
      The Israel Telecommunication Corp -
7%


-16-




We are
dependent on several of our suppliers, including those that provide significant
hardware and software products and support. However, these suppliers are
required to provide us with services according to the relevant regulations and
their licenses to operate as a telecommunications provider in the relevant
jurisdictions.




Major
Customers




We have
six major types of customers:




·
            Residential
      – in the U.S. - pre-subscribed customers, including for local, long
      distance, internet and cable television services; outside of the U.S. -
      pre-subscribed customers and customers who must dial a special code to
      access our switch or acquire a box that dials
      automatically.




·
            Commercial
      – we serve small to complex business customers around the
      world.




·
            Governmental
      agencies – Including the United Nations World Economic Forum,
      certain embassies and the Bank of Israel. We also provide cities,
      counties, schools and universities in Texas with a host of services,
      including local, long distance, internet and private line
      services.




·
            Resellers
      – We provide resellers with our telephone and messaging services
      for a wholesale price.  We also provide long haul switched
      termination to a variety of companies throughout the United States who
      resell our services.




·
            Telecommunications companies
      – We provide our services through telecommunication companies (such
      as British Telecom and Bezeq The Israel Telecommunication Corp) which
      collect the fees relating to such services and forward them to
      us.




·
            Mobile Users
      – including customers who can access our switch utilizing our
      access number and thereafter are able to make low-cost international
      calls; customers who purchase, via a reversed billed SMS, pre-paid credit
      for international calls and those using our international roaming SIM
      cards.




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


-17-




In 2007
our largest non-affiliated reseller was WorldNet Global Communications Ltd.
which generated under 1% of our total revenues. We provide WorldNet Global
Communications with the billing system. We anticipate that WorldNet will
continue to contribute approximately the same amount of UKP to our revenues in
year 2008.




Collectively,
in 2007 the United Kingdom accounts for approximately 54.3% of our revenues, the
United States accounts for approximately 27.5% of our revenues and Israel
accounts for approximately 18.3% of our revenues.




Our
integrated revenue approach led to revenue from each source as described above
and is partially driven by the activities of other revenue sources. Our revenues
are dependent upon the following factors: price competition in telephone rates;
access provided to our services by other telecoms companies and the prices for
that access; demand for our services; individual economic conditions in our
markets; and our ability to market our services.




Patents
and Trademarks




In the
U.K




On
September 14, 2000, Equitalk received notification from the Trademarks Registry
Office of Great Britain that its trademark, “Equitalk,” was registered by
that government agency.




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.




In the
U.S




The Mark,
“NTS Communications”
related to the provision of telephone telecommunications services in the United
States, was registered by the United States Patent and Trademark Office on
September 4, 1984, and renewed through the year 2014.





The Mark,
“NTS Communications (with
design)” related to the provision of telephone communications services in
the United States, was registered by the United States Patent and Trademark
Office on October 12, 1993, and has been renewed through the year
2013.





The Mark,
“NTS-ONLINE (with
design)” related to the provision of web hosting, on-line message boards
and information, was registered by the United States Patent and Trademark Office
on August 15, 2000.





On
February 6, 2007, NTS filed an application with the United States Patent and
Trademark Office to register the Mark, “NTS-ONLINE” related to the
provision of expanded telecom services, web hosting services, and domain name
services.  The application also seeks to eliminate the design
associated with the mark.  The status of this application is
pending.





On April
22, 2005, Xfone USA received notification from the United States Patent and
Trademark Office that as of April 12, 2005, its Mark, “eXpeTel,” was registered by
that government agency. -18-




In
Israel




On August
6, 2007, Xfone 018 received notification from the Israeli Patent Office that as
of March 30, 2007, its Mark, “Xfone 018,” was registered by
that government agency.




We do not
have any other patents or registered trademarks.




Regulatory
Matters




We
provide our services in many 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.




In the
U.K




In 1996,
our subsidiary, Swiftnet Limited was granted a license to operate a
telecommunications system from the Secretary of State for Trade and Industry of
the United Kingdom. On July 25, 2003, the regulatory situation within the United
Kingdom changed dramatically with the ending of the licensing regime and the
withdrawal and revocation of the Telecommunication Act.




The
licensing regime has been replaced by a general authorization regime with the
introduction of the General Conditions of Entitlement.




Swiftnet
Limited, Equitalk.co.uk Limited, Auracall Limited and Story Telecom Limited are
now affected by regulations introduced by the Office of Communications
(“Ofcom”). Ofcom is the regulator for the UK communications industries, with
responsibilities across television, radio, telecommunications and wireless
communications services. Our UK businesses are also affected by the rules set by
regulator for Premium Rate Services (Phonepay Plus - www.phonepayplus.org.uk).
We do not believe that any regulations introduced by Ofcom or Phonepay Plus will
significantly interfere with or substantially impair our business.




In the
U.S




Xfone USA
is licensed as a CLEC 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.




As of
March 10, 2005, and upon consummation of the merger of WS Telecom, with and into
Xfone USA, we became subject to applicable US state and federal
telecommunications laws and regulations. Compliance with such laws involved
higher costs than we had in Europe.




On March
9, 2005, the Mississippi Public Service Commission (“MSPSC”) issued an Order
opening a Generic Change of Law Proceeding (“MSPSC Proceeding”) to consider
amendments to existing Interconnection Agreements between BellSouth
Telecommunications, Inc. and all (CLECs) in Mississippi. As an interested party
and as a CLEC, Xfone USA petitioned and was granted permission to intervene in
the MSPSC Proceeding for regulatory purposes. On October 26, 2005, the MSPSC
held its hearing on the MSPSC Proceeding and took the results of the proceeding
under advisement. On October 20, 2006 the MSPSC issued its Order in this matter,
requiring various changes to Interconnection Agreements between BellSouth
Telecommunications, Inc. and all CLECs in Mississippi, including the
Interconnection Agreement under which Xfone USA operates. The issues addressed
by the MSPSC in this proceeding were regulatory in nature and did not involve
monetary damages. -19-




From time
to time Xfone USA may be required to seek regulatory approval before applicable
state public utility commissions of certain transactions, including business
combinations with other telecommunications providers. During 2005, upon request
of Xfone USA, the MSPSC and the Louisiana Public Service Commission granted
regulatory approval of the sale and transfer of the assets and the customer base
of I-55 Telecommunications to Xfone USA. This transaction was closed on March
31, 2006.




It has
come to our attention that certain required annual regulatory reports with the
MSPSC may not have been made in a timely manner. We are currently evaluating all
required reports, and are working diligently to remediate any such omissions.
Xfone USA could face a potential penalty and/or revocation of its certificate as
a result of the late filings.




On
February 14, 2008, Xfone and NTS received domestic and international Section 214
authorization from the United States Federal Communications Commission to
transfer control of NTS to the Company.




NTS has
certain domestic and international Section 214 authority, which authorizes NTS
to provide long distance service in the United States.




NTS is
registered re-seller of long-distance services in the states of Arizona,
Colorado, Kansas, New Mexico, Oklahoma and Texas.  NTS is also
registered to provide local services in New Mexico and
Texas.  Further, in Texas, NTS has the authority to provide local
telecommunications services throughout the state of Texas, to provide cable
community registrations in Lubbock and Wollforth, and has permits to provide
video services in designated areas within Lubbock, Wolfforth, Smyer and
Levelland. In addition, NTS has entered into 9-1-1 Emergency Service Agreements
with the applicable 9-1-1 entities in the markets it serves.




Effect
of Probable Governmental Regulations




As an
ETC, there are numerous actions proposed at both the state and federal level
which could limit NTS’ future access to reimbursement from various Universal
Service Funds (“USF”).  NTS currently only receives minimal
reimbursement from USF for its provision of Lifeline and LinkUp
services.  However, these measures could limit NTS ability to obtain
reimbursement for services provided in high cost areas.  NTS continues
to rely on AT&T for access to high cap interoffice and last mile copper loop
facilities.  AT&T’s obligation to provide these facilities is
created by the Federal Telecommunications Act of 1996 and corresponding
regulations of the FCC and memorialized in interconnection agreements between
NTS and Incumbent Local Exchange Carriers.  Should laws or regulations
be changed to limit and or eliminate competitive access to these essential
facilities, NTS business could be adversely affected.  The FCC has
been considering access charge reform to address issues created by VoIP traffic,
namely the compensation due, if any, to terminating carriers for VoIP originated
calls.  Resolution of this issue will clarify legal and regulatory
uncertainty about the treatment of these calls and could have the effect of
opening the door to new markets for NTS’ wholesale switched
services.  At the state level, the Texas State PUC has implemented
rules which may result in the reduction of NTS’ intrastate access revenues in
the fourth quarter of 2008.





In
Israel




On April
15, 2004, we established Xfone Communication Ltd. and renamed it to Xfone 018
Ltd in March 2005. On July 4, 2004 the Ministry of Communications of the State
of Israel (the "MOCSIL") granted Xfone 018 a license to provide international
telecom services in Israel (the "International Telecommunications Services
License"). The International Telecommunications Services License may be revoked
by this agency in the occurrence of certain events such as breach of
telecommunication laws and regulations or breach of certain provisions of the
license. -20-




On May
31, 2006, Xfone 018 was granted permission by the MOCSIL to commence an
experimental deployment of International Telephone Services utilizing Voice over
Broadband (VoB) technology. On May 31, 2007 the permission expired. The MOCSIL
is currently evaluating an amendment to the International Telecommunications
Services License, which would, if adopted, include Voice over Broadband (VoB)
technology within our International Telecommunications Services
License.




On August
21, 2006, the MOCSIL granted Xfone 018 a license to operate in Israel as an ISP,
thus enabling Xfone 018 to provide Internet access, Email and EDI (electronic
data interchange) services.




On
November 7, 2007, the MOCSIL granted Xfone 018 a license to commence an
experimental deployment of Local Telephone Services utilizing Voice over
Broadband (VoB) technology. The license will expire on October 31,
2007.




On May
24, 2007, the MOCSIL informed Xfone 018 that it is considering imposing on it a
financial sanction as a result of Xfone 018’s failure to provide the new
"Mobilization of Telephone Numbers" service (the "Service"), as of September 1,
2006, as required by law. On June 14, 2007, Xfone 018 responded to the MOCSIL
and explained the reasons for the delay in the implementation of the Service,.
In December 2007, the Service was implemented in Israel by all telecom service
providers, including Xfone 018. Xfone 018 has not recieved any additional
communications from the MOCSIL in this regard since its implementation of the
Service, and accordingly, believes the matter to be resolved.




Effect
of Probable Governmental Regulations




There are
numerous actions recently proposed by the Grunow Committee, an advisory
committee appointed by the Ministry of Communications of the State of Israel,
which could affect our business in the future. Below are the significant
recommendations of the committee that could apply to us if adopted:




·
            Naked
      ADSL: A proposal has been made to separate between the telephony and
      internet access in the "Last Mile". If adopted, this could be
      beneficial to Xfone 018, as it would provide Xfone 018 with the
      opportunity to penetrate the market with its VOB local calls
      services.




·
            Unbundling:
      A proposal has been made to force the existing infrastructure providers to
      enable other providers to use their infrastructure in fair prices to
      encourage competition. If adopted, this could affect Xfone 018’s business
      by allowing it to offer a wider range of services at attractive
      prices.




·
            MVNO: A
      proposal has been made to open the Israeli market to new virtual players
      in the mobile arena.  If adopted, this could affect Xfone 018’s
      business by allowing it to penetrate a new market, which constitutes more
      than 50% of the Israeli communication
market.




·
            International
      Calls: A proposal has been made to enable mobile operators to supply
      international calls based on agreed access charge from the international
      carriers. If adopted, this could negatively affect Xfone 018’s business by
      enlarging the number of its
competitors.




·
            WIMAX: A
      proposal has been made to issue WIMAX frequencies in order to establish
      new access networks in Israel.  If adopted, this could be beneficial
      to Xfone 018’s business by allowing it to penetrate and gain a new market
      share by direct access.


-21-




Research
and Development Activities




During
fiscal year 2006, we spent £23,333 ($49,101) on research and development
activities. During fiscal year 2007, we spent £23,794 ($47,609) on research and
development activities. During the first quarter of 2008 we spent £13,830
($29,175) on research and development activities. Other than developing and
expanding our telecommunications applications and our websites, we do not intend
to undertake any significant research and development activities in
2008.


Cost
of Compliance with Environmental Laws




During
2007, NTS incurred approximately $31,000 expenses related to the encapsulation
of asbestos insulation located on certain of the basement piping and basement
boiler jacket of the Metro Tower, a property owned in Lubbock, Texas, and in
connection with the replacement of the roof of the building to remediate a
potential interior mold problem with originated from a roof leak.  NTS
will from time to time incur additional similar expenses in the future to
monitor and encapsulate, where necessary, isolated areas of asbestos. On March
21, 2008, NTS received notice that the remediation project at Metro Tower had
been completed, and accordingly does not anticipate significant future expenses
related to mold remediation at this property over and above those normally
associated with customary and usual building maintenance.




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




Employees




We
currently have 30 employees in the United Kingdom, 357 in the United States, and
41 employees in 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
at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1–800–SEC–0330. Our filings are also available to the
public from commercial document retrieval services and the Internet worldwide
website maintained by the U.S. Securities and Exchange Commission at
www.sec.gov. We also provide a link to these filings on our website at
www.xfone.com.




ITEM
      2.
            Description of Property




In
February 2007, we moved our principal executive offices to Flowood, Mississippi,
USA, sharing executive office space with our wholly owned U.S. subsidiary, Xfone
USA, Inc.




In the
U.K




The
headquarters of Swiftnet, Equitalk, Auracall and Story Telecom are located at
960 High Road, London N12 9RY - United Kingdom. This is a six-floor building
with a concierge, two elevators and parking facilities. We lease space on the
fifth and sixth floors. For our office on the fifth floor we renewed our lease
for a period of ten years on December 20, 2002, with a five-year cancellation
option. Our current lease for the fifth floor expires on December 20, 2012 and
the annual lease payments are £49,134 ($98,107). This 3,000 square foot facility
has a switch and computer room, six offices, one board room, entrance hall, main
hall, accounting, secretarial and administration and two kitchens. In December
2006, we took a lease for the sixth floor, ending on April 5, 2009. In March
2007, we extended this lease for 10 years, ending April 5, 2019, with a 5-year
cancellation option. This 3,000 square foot facility has an open-plan
administration area plus two offices, one computer room and one kitchen. The
annual lease payments are £40,119 ($80,188). -22-




On
November 1, 2007, Auracall acquired serviced office facilities at Charlottenstr
68, 10117, Berlin, Germany. These offices are in the central business district
and include reception and meeting facilities, purchased on a ‘pay as you use’
basis, plus business address and mail forwarding services. The contract can be
terminated with one month’s notice.




On
November 1, 2007, Swiftnet entered in to a 24 month agreement with Crosspoint
Collocation Ltd to lease a single rack space on the Second Floor of Telehouse
North, Coriander Avenue, London E14 2AA at a cost of £850 ($1,699) per month
(including power).




In the
U.S




NTS
Communications and subsidiaries





Owned
Real Property





NTS’
video headend and operations center for NTS Construction Company is located at
8902 Alcove Avenue, Wolfforth, Texas 79382.  This is a single story
3,500 sq. ft. building built in 2004.  The building is used for
equipment storage warehouse, office space, and the video and data
headend.  A satellite farm is located adjacent to the
building.  The building sits on two (2) fenced acres within a ten (10)
acre lot.





NTS
Management Company, a wholly owned subsidiary of NTS Communications, Inc.,
purchased Metro Tower in 1997.  Metro Tower is a 20-story building
located at 1220 Broadway, Lubbock, Texas 79401.  Each floor of the
building measures approximately 5,000 square feet.  This building
houses NTS’ retail and Toshiba sales offices, local switching, local
provisioning and outside technicians.  The building is in fair
condition.  NTS Management Company leases office space in the building
to various businesses including many technology and telecommunications
companies.  NTS Management Company also leases roof space to companies
to house communications antennas.  Rental income on the property
through July 31, 2007, was $570,474.30.





NTS
owns two buildings at 615 N. Price Road, Pampa, Texas 79065.  NTS
acquired the buildings in 1997.  One single story building is
used as office space for sales and technicians.  The first
building measures an estimated 3,552 square feet and is in good
condition.  The second building is a single story 9 bay garage with a
small shop area and is used for equipment storage.  The second building
measures an estimated 3,000 square feet and is in good condition.





NTS owns
a building at 400 S. Columbia, Plainview, Texas 79072.  NTS acquired
the building in 1997.  The single story building measures an estimated
1,000 square feet and is in good condition.  It is used as office
space for sales and technicians.





NTS
Telephone Company, LLC, purchased a 7,700 square foot single story building at
601 College Avenue, Levelland, Texas, 79336 on February 29, 2008.  The
building is in good condition and will house NTS Telephone Company’s operations
in Levelland.




Leased
Real Property





·
            NTS
      corporate offices, Network Control Center, Customer Care, and Internet
      help desk are located at 5307 W. Loop 289, Lubbock, TX, between NTS
      Communications, Inc. and Shareholder Value, Ltd., measuring 45,072 sq. ft.
      on three floors with annual triple net base rent of
      $518,328.00.  The lease expires July 31, 2013 and contains three
      (3) options for five (5) year renewal terms.  The building was
      built and completed in 1998 and is in good condition.  NTS
      believes the building has sufficient space for its
    operations. -23-





·
            Local
      sales offices located at 801 S. Fillmore, Suite 130, Amarillo, TX, between
      NTS and Amarillo Place One Properties, measuring 3,958 sq. ft. with annual
      rent of $45.516.00.  The lease expires on 11/20/2010 and has no
      renewal option.





·
            Point
      of Presence (“POP”) site and fiber node located at 201 E Main, Ste. 104,
      El Paso Texas, between NTS and Borderplex LLC, measuring 950 sq. ft.
      (including 850 linear feet of conduit) with annual rent of
      $52,250.00.  The lease expires 02/28/2010 and contains one (1)
      option for five (5) year renewal
term.





·
            Local
      sales office located at 450E 10 Desta Drive Midland, TX, between NTS and
      Claydesta Buildings, L.P., measuring 2,981 sq. ft. with annual rent of
      $27,574.00.  The lease expires 02/29/2011 and contains one (1)
      option for a two (2) year renewal
term.





·
            POP,
      switch site and fiber node located at 500 Chestnut, Suite 936, Abilene,
      TX, between NTS and Enterprise Building Abilene, L.P., measuring 4,763 sq.
      ft. (including roof space for one (1) GPS antenna) with annual rent of
      $47,520.00.  The lease expires 12/30/2009 and contains one (1)
      option for four (4) year renewal
term.





·
            Local
      sales office located at 400 Pine Street, Suites 500 and 310W, Abilene, TX,
      between NTS and First Financial Bank, N.A., measuring 4,971 sq. ft. with
      annual rent of $52,692.60.  The lease expires 04/28/2008 and has
      no renewal option.





·
            POP
      located at 201 Robert S. Kerr, Suite 1070, Oklahoma City, OK, between NTS
      and BOKP Tower, LLC, measuring 4,092 sq. ft. with annual rent of
      $16,926.00.  The lease expires 04/30/2011 and has no renewal
      option.





·
            Equipment
      room located at 8212 Ithaca, Room W-12, Lubbock, TX, between NTS and
      Megaron approximately 16 sq. ft. of wall space with annual rent of
      $480.00.  The lease is on a month to month
  term.





·
            Sales
      and technician offices, POP, switch site and fiber node local provisioning
      offices, and record storage at Metro Tower, 1220 Broadway, Lubbock, TX,
      between NTS and NTS Management Co., LLC, measuring 29,110 sq. ft. with
      annual rent of $93,000.00.  The lease is on a month to month
      term.





·
            Local
      sales and technician offices located at 4214 Kell, Suite 104 Wichita
      Falls, TX, between NTS and Skyline Developers, Inc., measuring 2,400 sq.
      ft. with annual rent of $39,600.00.  The lease expires
      08/01/2008 and has no renewal
option.





·
            POP
      site located at United Center, 1049 N. 3rd,
      Abilene, TX, between NTS and State National Bank, measuring
      approximately300 sq. ft. with annual rent of $6,600.00.  The
      lease is on a month to month term.





·
            POP,
      switch site, and fiber node located at Petroleum Building, 203 W. 8th
      Street Suite 102, Amarillo, TX, between NTS and TNT Properties, Inc.
      measuring 3,056 sq. ft. with annual rent of $36,672.00.  The
      lease is on a month to month term.





·
            POP,
      switch site, and fiber node located at 710 Lamar Street, Suite 10-25,
      Wichita Falls, TX, between NTS and White Realty Management Co., measuring
      approximately 890 sq. ft. plus 200 sq. ft. to house a gas generator at 714
      Travis, 6th
      Floor, Wichita Falls.  Annual rent for both spaces totals
      $11,377.08.  The lease expires 04/30/2010 and has two (2)
      options for three (3) year renewal terms. -24-





·
            POP
      and switch site located at 4316 Bryan, Dallas, TX, between NTS and XC
      Networks measuring 3,816 sq. ft. with annual rent of
      $155,870.76.  The lease expires on 10/31/2009 and has no renewal
      option.





·
            NTS
      has established the following collocations with
  AT&T:





o
            Abilene
      Orchard, 343 Cedar Street, Abilene, TX
79601


o
            Abilene
      Owen, 2626 Post Oak Road, Abilene, TX
79605


o
            Amarillo
      Drake, 113 W. 10th Street, Amarillo,
  TX  79101


o
            Amarillo
      Evergreen, 1700 E. Hastings Ave., Amarillo, TX
  79108


o
            Amarillo
      Fleetwood, 3312 Western Ave., Amarillo, TX
79109


o
            Amarillo
      Osage, 10609 Osage, Amarillo, TX
79118


o
            Lubbock
      Frankford, 5711 98th St., Lubbock, TX
79424


o
            Lubbock
      Parkview, 1601 82nd St., Lubbock, TX
79423


o
            Lubbock
      Porter Sherwood, 1405 Main, Lubbock, TX
79401


o
            Lubbock
      Swift, 4402 34th St., Lubbock, TX
79414


o
            Midland
      Mutual, 410 W. Missouri, Midland, TX
79701


o
            Midland
      Oxford, 305 Midland Dr., Midland, TX
79703


o
            Odessa
      Emerson, 3801 Dawn, Odessa, TX
79762


o
            Odessa
      Lincoln, 301 W. 7th, Odessa, TX
79761


o
            Pampa,
      311 N. Ballard, St., Pampa, TX
79065


o
            Plainview,
      916 Denver St., Plainview, TX 79072


o
            Terminal,
      2806 LaForce Dr., Midland 79703


o
            Wichita
      Falls Callfield, 4010 Callfield Rd., Wichita Falls, TX
    76308


o
            Wichita
      Falls Lamar, 812 9th, Wichita Falls, TX
76301


o
            Wichita
      Falls Tank Farm/Airport, 3145 Airport Dr., Wichita Falls, TX
      79306





·
            NTS
      has established the following collocation with
  Verizon:





o
            San
      Angelo Main, 14 W. Twohig Ave., San Angelo, TX
  79603




Easements
and Private Rights of Way




·
            Perpetual
      Construction and Utility Easement from Benny Judah for facility hut at
      10508 Topeka, Lubbock, Texas,
79424.





·
            Right
      of Way Use Permit: City of Midland, Texas, Right of Way Use Permit for S.
      Marienfeld Street and W. Missouri Avenue. -25-





Xfone
USA




The
headquarters of Xfone USA have recently been moved from the 2506 Lakeland Drive,
Flowood, Mississippi 39232 location to the existing headquarters of NTS
Communications, located at 5307 W. Loop 289, Lubbock, Texas 79414. In connection
with this move, we are currently in the process of negotiating a new lease with
respect to the Flowood location. The current lease is month-to-month and
the monthly rentals are $9,288.05 after release of the Customer Care area. At
this time, we intend to significantly reduce the size of the leased space
and transform the Flowood site into a local sales and operations
center.




Xfone USA
has another Mississippi office located at 1907 Pass Road Suite D, Biloxi,
Mississippi. This 1,000 square foot office space is primarily used as a sales
office and dispatch center and contains four offices, a reception area, small
kitchen and bathroom. These premises are leased on a 2-year term that is due to
expire in June 2008. The yearly lease payments are approximately $14,500. The
company also has two Louisiana locations, one in Hammond, Louisiana and the
other in downtown New Orleans, Louisiana.




The Xfone
USA Hammond, Louisiana location primarily houses upper level customer support,
field technicians and the company’s web design division. Xfone USA recently
downsized the existing office space of the two-story building and now utilizes
approximately 75% of the second floor, only. The building is located at 211 E.
Thomas Street in downtown Hammond, Louisiana and has eight offices and two
bathrooms. Xfone USA executed a new 3-year lease and pays $5,000 monthly, which
includes utilities.




The Xfone
USA New Orleans Sales Office is located at 650 Poydras Street on the 10th floor,
Suite 1000, of the 650 Poydras Office Building in downtown New Orleans,
Louisiana. The 3,645 square foot facility is a sales office and operations
office supporting the company’s carrier switch and network facilities, which is
adjacent to this office on the same floor. The office has a glass front entry
reception area, six offices, one conference room, two large open areas that can
be fitted with workstations for additional sales personnel, provisioning and
network operations, a kitchen and a large storage room. The lease is a five-year
term and is set to terminate in October 2008. The yearly lease payments are
$58,320.




The Xfone
USA Baton Rouge Sales Office is located at 3636 South Sherwood Forest Boulevard,
on the 4th floor
in Baton Rouge, Louisiana. This 2,100 square foot facility has a reception area,
two offices, a conference room, a kitchen area and one large open area that will
be fitted with 6 workstations for sales and sales support personnel. The office
building has two elevators and parking facilities. The lease for the premises
was executed in June 2007 for a 3-year term beginning July 1, 2007, and is due
to expire in June 2010. The yearly lease payments are $28,644.




In
Israel




The
headquarters of Xfone 018 are located at 1 Haodem Street, Petach Tikva, Israel.
This 3,593 square foot 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 offices are 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 per month. The lease
payments for the 31-48 months are $2,004 per month. The lease payments for the
49-60 months are $2,171 per month. The lease payments for the 61-72 months are
$2,338 per month. The lease payments for the 73-84 months are $2,505 per month.
The lease payments for the 85th month
are $2,672 per month. We also pay $50 a month for each parking spot. We
presently use four parking spaces. As of September 1, 2006, an additional 2,367
square foot facility with six offices, one boardroom, one kitchen, entrance hall
and main hall, in the first floor of the same building, is leased under the same
terms and conditions as set forth above. Xfone, Inc. has guaranteed all Xfone
018 obligations under this lease agreement. -26-




In
addition, we have two switches which are located at two different locations in
Israel. We rent the cages in which our switches are located from unrelated third
parties. The cages are in good condition.




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




We do not
intend to renovate, improve or develop any properties; however, from time to
time we improve leased office space in order to comply with local legislation
and to provide an office environment necessary to conduct business in the
markets in which we operate. We are not subject to competitive conditions for
property. 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




I.
MG Telecom Limited




In August
2002, Swiftnet Limited, the Company’s wholly-owned U.K. based subsidiary, filed
a summary procedure lawsuit in the Magistrate Court of Tel - Aviv, Israel
against MG Telecom Ltd. and its Chief Executive Officer, Mr. Avner Shur. In this
lawsuit, we alleged 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. On August 16, 2005, the
Magistrate Court rendered a judgment in this matter, rejecting our claims. On
October 16, 2005, we filed an appeal with the District Court of Tel - Aviv. On
December 28, 2006, the District Court rescinded the judgment of the Magistrate
Court. The case was returned to the Magistrate Court for writing a new reasoned
judgment. On May 28, 2007, the Magistrate Court rendered a new judgment,
rejecting our claims. On July 15, 2007 we filed an appeal with the District
Court of Tel - Aviv. A preliminary hearing was held on January 10, 2008. The
next hearing is scheduled for May 22, 2008.




II.
MCI WorldCom Limited (Currently Operating as “Verizon Business”)




Swiftnet
Limited, the Company’s wholly-owned U.K. based subsidiary, was served with a
claim on October 11, 2005 that was filed by MCI WorldCom Limited (currently
operating as Verizon UK Limited) (“MCI”) in an English court for the sum of
£1,640,440 ($3,277,949) plus interest accruing at a daily rate of £401 ($801)
which at the date of claim had amounted to £92,317 ($184,519).  MCI’s claim
was for telecommunication services provided to Swiftnet. Swiftnet had been in
dispute with MCI regarding amounts due to MCI for telecommunications services
provided by MCI to Swiftnet.  Swiftnet alleged that the disputed charges
were improperly billed by MCI to its account and therefore MCI should credit
Swiftnet for a certain amount of the claim.  A substantial element of
Swiftnet’s counterclaim for credits was based upon special rates agreed verbally
by Swiftnet and MCI, which were not applied by MCI in its invoices. 
Swiftnet pleaded a counterclaim and that £275,574 ($550,803) owed in relation to
traffic terminated through the Xfone network in Israel should be deducted.





On March
19, 2008, the Judge handed down judgment in this dispute and awarded £1,278,942
($2,556,285) plus legal costs and interest in favour of MCI. Our financial
statements have carried the full amount Swiftnet calculated that it owed to MCI
based on the data held in Swiftnet’s billing systems. The net effect of this
judgement is that Swiftnet’s costs will be increased by £705,645 ($1,410,408),
plus MCI’s legal costs and interest payable, which have not as yet been finally
determined. Swiftnet is in the process of taking legal advice as to whether it
will seek an appeal to the English Court of Appeal. -27-





III.
FCC Enforcement Bureau




On March
6, 2006, the FCC’s Enforcement Bureau initiated an investigation into Telephone
Electronic Company’s (“TEC”) compliance with FCC Rules for compensation of
payphone service providers.  The Enforcement Bureau issued requests
for production to TEC, its affiliates and subsidiaries.  TEC was a
majority shareholder of NTS Communications, Inc. ("NTS") at the time of this
investigation, prior to our acquisition of NTS on February 26,
2008.  On April 26, 2006, NTS filed its response to the request for
production.  The FCC has the authority to issue fines for violations
of its regulations.  NTS believes it is in compliance and will not
incur any fine.  The investigation is pending.




IV.
Famous Telecommunications




In August
2006, Story Telecom Limited, at that time the Company’s majority-owned U.K.
based subsidiary, and as of March 25, 2008 a wholly-owned subsidiary, filed a
lawsuit in the Barnet County Court, London, United Kingdom, against “Famous
Telecommunications”, a reseller of calling cards, and its owner, Mr. Tanvir
Babar. In this lawsuit, Story Telecom alleged an unpaid debt in the amount of
£52,000 ($103,935) from Famous Telecommunications and/or Mr. Baber for services
rendered by it. The debt arose from an agreement between Story Telecom and
famous Telecommunications and/or Mr. Baber, in which Story Telecom supplied
Famous Telecommunications and/or Mr. Baber with calling cards which they in turn
distributed in the market. In September 2006, the court rendered a Judgment in
Default in favor of Story Telecom. According to the judgment Famous
Telecommunications and/or Mr. Baber must pay the debt plus interest forthwith,
approximately £54,000 ($107,932). Famous Telecommunications and/or Mr. Baber
failed to comply with the court’s order and as a result thereof Story Telecom
applied for a Third Party Debt Order, requesting the court to order Mr. Baber’s
bank, Halifax plc, to make available to Story Telecom any monies currently
available within Mr. Baber’s account. In October 2006, the court made an Interim
Order ordering Halifax plc to hold any amounts available within Mr. Baber’s
account (up to the amount of the judgment being £54,000) in favor of Story
Telecom until full hearing takes place. Full hearing took place on January 18,
2007, during which the court ordered Halifax plc to pay Story Telecom any monies
held in Mr. Baber’s account. Halifax plc transferred approximately £1,200
($2,398) to Story Telecom’s account, as these were all the monies available.
Story Telecom will request that the court order Mr. Baber to attend court for
questioning regarding his financial situation, whereby he will also be required
to detail all his assets. Following such questioning Story Telecom will look to
pursue the most likely to succeed course of action in collecting the monies
due.




V.
Aya Goldenberg




On
December 10, 2006, Aya Goldenberg, a former employee of Xfone 018 Ltd., the
Company’s majority-owned Israel based subsidiary, filed a lawsuit against Xfone
018 in the District Labor Court of Tel Aviv-Jaffa, Israel. Mrs. Goldenberg, who
had been employed by Xfone 018 for almost two years, and whose employment was
terminated by Xfone 018 on March 24, 2006, sought : (a) compensation for an
alleged unlawful termination of employment, alleging discrimination on a
parenthood basis, which constituted a violation of the Israeli Equal
Opportunities Work Law; and (b) alleged unpaid overtime payment. The total
lawsuit amount involved is NIS 532,000 ($151,179) plus linkage differentials and
interest pursuant to the applicable Israeli law.




Initially,
due to an insufficient payment of court fees by Mrs. Goldenberg, the lawsuit was
directed to a quick
legal procedure.  Subsequently, Xfone 018 initiated preliminary
proceedings in January 2007, and as a result of these proceedings, Mrs.
Goldenberg was compelled to pay the entire due court fees and the lawsuit was
transferred in March 2007 to the standard
legal procedure.




Xfone 018
submitted its statement of defense, and a preliminary hearing took place on June
10, 2007. Consequently, both parties have submitted their chief testimonies by
way of affidavits. An evidences' hearing has been summoned by the court and is
scheduled to take place on May 19, 2008. -28-




VI.
Property Owners’ Association of Shadow Ridge, Inc. and Others





On June
26, 2007, Property Owners’ Association of Shadow Ridge, Inc. and Others
(collectively, the "Plaintiffs") filed suit against the Company’s wholly-owned
U.S. based subsidiary, Xfone USA, Inc. and its wholly-owned subsidiary eXpeTel
Communications, Inc. (collectively, the "Defendants") in the Circuit Court of
Lamar County, Mississippi alleging the Defendants inadequately provided
telephone, Internet and cable television service to their subdivision outside of
Hattiesburg, Mississippi.





The
Plaintiffs do not allege a specific dollar figure for their alleged injuries,
and the suit was more declaratory and injunctive in nature, wanting the
Defendants to provide better service.





The
Defendants state that the telephone service to the subdivision has been
excellent over the years and cable television and Internet service has been
delivered as good as technology is available.  The problem is derived
from the developer of the subdivision never fully building out the area, and
there are only fifteen (15) homes in the subdivision at the time of the filing
of the lawsuit, making it not economically feasible to upgrade the cable
television and Internet service to the most modern technology available, which
would improve the service.





The
Defendants filed a motion to transfer the litigation to the Mississippi Public
Service Commission and to stay the state court litigation.  Deposition
of Defendants' President and CEO was held on October 17, 2007, which has proven
to be helpful in settling the litigation.  As of February 13, 2008,
the file is inactive with the exception of a settlement request from the
Plaintiffs, and a request from the circuit court to transfer the case to county
court.  There has been no further contact from the Plaintiffs
counsel.





VII.
David Espinoza vs. NTS Communications, Inc. and Schindler Elevator
Corp.




On June
29, 2007, David Espinoza filed a personal injury suit against NTS
Communications, Inc. (“NTS”), a wholly-owned U.S. based subsidiary of the
Company as of February 26, 2008, and Schindler Elevator Corp., in the 237th
District Court of Lubbock County, Texas.  Espinoza was an employee of
one of the tenants in Metro Tower, a building owned by NTS
Communications.  The complaint alleges that the claim arises from an
incident that occurred on July 20, 2005 when Espinoza fell in an elevator at
Metro Tower and sustained injuries to his knee and shoulder.  Espinoza
is seeking unspecified damages for personal injuries.  The case is set
for mediation in April 2008 and jury trial the week of July 21, 2008. The matter
is currently being handled by NTS Communications’ insurance
carrier.




VIII.
Nir Davison




On July
25, 2007, the Company received notification of a claim filed on July 23, 2007 by
Nir Davison with the United Kingdom Employment Tribunals, against Story Telecom
Limited, at that time the Company’s majority-owned subsidiary and, as of March
25, 2008, a wholly-owned subsidiary, alleging wrongful termination of his
employment as Managing Director. The claim did not seek any specific damages. On
August 21, 2007, Story Telecom responded to the United Kingdom Employment
Tribunal by rejecting Mr. Davison’s claim.




On March
25, 2008, we, Story Telecom, Inc., Story Telecom Limited, Nir Davison and
Trecastle Holdings Limited, a company owned and controlled by Mr. Davison,
entered into a Compromise Agreement (the “Compromise Agreement”). (Story
Telecom, Inc., Story Telecom Limited, and Xfone, together with their associated
companies are collectively referred to in the Compromise Agreement as the Xfone
Group.)  Pursuant to the Compromise Agreement, the Xfone Group and Mr.
Davison settled all claims which Mr. Davison had or may have had against the
Xfone Group and any of their respective present or former directors, officers,
shareholders, employees or workers (excluding Mr. Davison and Trecastle
Holdings) arising out of Mr. Davison’s employment or its termination, his status
as a director of any company in the Xfone Group, his rights as a shareholder,
stockholder or option holder of any company in the Xfone Group, and any other
claims of whatsoever nature, howsoever and wherever arising, which he may have
had, whether or not any such claims existed or were known to or contemplated by
the parties or recognized by law at the date of the Compromise
Agreement.  Additionally, Trecastle Holdings and the Xfone Group
settled any claims of whatsoever nature and wherever arising which Trecastle
Holdings may have had against the Xfone Group and any of their respective
present or former directors, officers, shareholders, employees or workers
(excluding Mr. Davison and Trecastle Holdings) whether arising out of Trecastle
Holdings’ rights as a stockholder of any company in the Xfone Group, whether or
not such claims existed or were known to or contemplated by the parties or
recognized by law at the date of the Compromise Agreement. -29-





As part
of the settlement, Story Telecom Limited agreed to pay Mr. Davison £30,000
($59,962) as compensation for loss of employment, which payment was made without
admission of liability.  In addition, Mr. Davison agreed to file a
Withdrawal of Claim with the United Kingdom Employment Tribunal no later than
March 26, 2008. The Withdrawal of Claim was filed with the United Kingdom
Employment Tribunal on March 31, 2008.





In
connection with the Compromise Agreement, Nir Davison, Trecastle Holdings and
Xfone entered into a Securities Purchase Agreement on the same date, pursuant to
which Mr. Davison and Trecastle Holdings agreed to sell to Xfone, and Xfone
agreed to purchase from each of Mr. Davison and Trecastle Holdings, the shares
of common stock of Story Telecom, Inc. that each party owned, respectively, for
an aggregate purchase price of £270,000 ($539,662).  Upon acquisition
of the shares of common stock of Story Telecom from Mr. Davison and Trecastle
Holdings, Story Telecom, Inc. became our wholly owned subsidiary.





The
Securities Purchase Agreement also contains non-competition and non-solicitation
provisions, which bind Mr. Davison for a period of two years from the closing of
the sale of the shares.





IX.
Richard C. Mixon and Onsite Guardian, LLC





Xfone
USA, Inc., the Company’s wholly-owned U.S. based subsidiary, commenced a lawsuit
on August 27, 2007, against former employee Richard Clay Mixon, a resident of
Louisiana, and his company OnSite Guardian, LLC (collectively, the
"Defendants"), alleging violations of the Louisiana Trade Secrets Act, LRS
51:1431 et seq., and
the Louisiana Unfair Trade Practices and Consumer Protection Act, LRS 51:1401
et seq.  Mr.
Mixon began his employment with Xfone USA on March 31, 2006, and he resigned
from employment on June 11, 2007.  The complaint alleges that the
Defendants, particularly Mr. Mixon, unlawfully competed with Xfone USA and
unlawfully solicited and diverted clients from Xfone USA to Mr. Mixon’s
competing business during the time that Mr. Mixon was employed and earning a
salary as an Xfone USA employee.  Further, the complaint alleges that
Mr. Mixon is in possession of proprietary and confidential information that he
did not return to Xfone USA upon his resignation.  OnSite Guardian was
a direct beneficiary of Mr. Mixon’s unlawful conduct.  Xfone USA seeks
at least $100,000 in monetary damages from Defendants.





Defendants
answered the Complaint on October 1, 2007, denying the substantive allegations
in the complaint and asserting the following counterclaims against Xfone USA: 1)
Breach of contract based on Xfone USA’s alleged failure to pay quarterly bonuses
to Mr. Mixon; 2) Detrimental Reliance; 3) Unfair Trade Practices; and 4)
Invasion of Privacy.   Xfone USA responded to Defendant’s
counterclaims on November 2, 2007, denying the substantive allegations made by
Mr. Mixon.





The case
is pending in federal district court in New Orleans, Louisiana.  The
federal court has jurisdiction over the parties and the claims based on
diversity of citizenship.  The parties are presently engaged in
discovery.  Trial of the case is scheduled for the week of July 14,
2008 in New Orleans, Louisiana.





X. E.B.I. Comm,
Inc.




On
January 4, 2008, E.B.I. Comm, Inc. (“EBI”) filed a Complaint against our
wholly-owned U.S.-based subsidiary, Xfone USA, Inc. in the County Court of
Lowndes County, Mississippi, alleging that Xfone USA was in default under the
terms of the agreement related to the acquisition, in January 2006, of the
Internet Service Provider business of E.B.I. Specifically, the complaint alleged
that Xfone USA had failed to pay required consideration of $69,215.91 related to
the acquisition and demanded payment of this amount, together with pre-and post
judgment interest and attorneys fees. On January 25, 2008, Xfone USA made
payment to E.B.I. in the amount of $75,000.00 as final settlement of this
matter, and on January 29, 2008, E.B.I. dismissed the lawsuit with prejudice. -30-






ITEM
      4.
            Submission of Matters to a Vote of Security
      Holders




On
December 17, 2007, an Annual Meeting of shareholders of the Company was held at
the offices of Gersten Savage LLP in New York, New York. The following items
were approved by the shareholders at the Annual Meeting:




(A)
            The
      election of eight (8) members of the Board of Directors, each director to
      serve for a number of years corresponding to his Class, respectively, one
      year for Class A, two years for Class B and three years for Class C, until
      the 2008, 2009 and 2010 Annual Meetings of Stockholders of the Company;
      each such director to serve until re-elected for a term of three (3) years
      or his successor is duly elected and qualified or until his earlier
      resignation, removal or death: (i) Abraham Keinan (Class A);
      (ii) Guy Nissenson (Class A); (iii) Shemer Shimon Schwarz (Class
      A); (iv) Eyal Josef Harish (Class B); (v) Aviu Ben-Horrin (Class
      B); (vi) Itzhak Almog (Class B); (vii) Morris Mansour (Class C);
      (viii) Israel Singer (Class
C).




(B)
            The
      appointment of Stark, Winter, Schenkein & Co., LLP as the Company’s
      Independent Certified Public Accountants, for the fiscal year ending
      December 31, 2007, and the first three quarters of the fiscal year ending
      December 31, 2008;




(C)
            The
      Company’s 2007 Stock Incentive Plan which is designated for the benefit of
      employees, directors, and consultants of the Company and its affiliates;
      and




(D)
            The
      acquisition of NTS Communications, Inc. (“NTS”) pursuant to that certain
      Stock Purchase Agreement by and among the Company, NTS and the
      shareholders of NTS, dated August 22, 2007, including the issuance of
      shares of the Company’s common stock to i) certain shareholders of
      NTS who have elected to re-invest all or a portion of their allocable sale
      price in the Company’s common stock, and ii) to Oberon Securities,
      LLC, as partial compensation for acting as an adviser for the financing of
      the cash portion of the purchase price for the acquisition of
      NTS.




-31-




PART
II




ITEM
      5.
            Market
      for Common Equity and Related Stockholder Matters and Small Business
      Issuer Purchases of Equity
Securities




Market
Information




As of
June 8, 2005, our common stock is quoted and traded under the symbol “XFN” on
the American Stock Exchange (“AMEX”). As of July 24, 2006, our common stock is
also quoted and traded under the symbol “XFN” on the Tel Aviv Stock Exchange
(“TASE”).




As of
December 31, 2007, the closing price of our common stock was $3.14 (AMEX) /
12.17 NIS (TASE). As of March 28, 2008, the closing price of our common stock
was $3.55 (AMEX) / 11.16 NIS (TASE).




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 that it
will be sustained. A shareholder in all likelihood, therefore, may not be able
to resell his securities should he or she desire to do so when eligible for
public resale. Furthermore, it is unlikely that a lending institution will
accept our securities as pledged collateral for loans unless a regular trading
market develops.




Below is
the market information pertaining to the range of the high and low closing price
of our common stock for each quarter since year 2003. The quotations reflect
inter-dealer prices, without retail markup, markdown or commission and may not
represent actual transactions.




Period
            
            Low
            
            
            High2007Fourth
      Quarter
            
            $
            2.84
            
            
            $
            3.88Third
      Quarter
            
            $
            2.34
            
            
            $
            3.05Second
      Quarter
            
            $
            2.50
            
            
            $
            3.70First
      Quarter
            
            $
            2.40
            
            
            $
            2.892006Fourth
      Quarter
            
            $
            2.26
            
            
            $
            2.90Third
      Quarter
            
            $
            2.18
            
            
            $
            2.85Second
      Quarter
            
            $
            2.65
            
            
            $
            3.01First
      Quarter
            
            $
            2.68
            
            
            $
            3.842005Fourth
      Quarter
            
            $
            2.30
            
            
            $
            3.09Third
      Quarter
            
            $
            2.90
            
            
            $
            3.40Second
      Quarter
            
            $
            2.80
            
            
            $
            3.30First
      Quarter
            
            $
            2.50
            
            
            $
            4.292004Fourth
      Quarter
            
            $
            1.95
            
            
            $
            3.35Third
      Quarter
            
            $
            3.00
            
            
            $
            3.75Second
      Quarter
            
            $
            3.20
            
            
            $
            3.95First
      Quarter
            
            $
            3.45
            
            
            $
            5.752003Fourth
      Quarter
            
            $
            3.15
            
            
            $
            6.00Third
      Quarter
            
            $
            0.69
            
            
            $
            3.45Second
      Quarter
            
            $
            0.39
            
            
            $
            0.75First
      Quarter
            
            $
            0.35
            
            
            $
            0.90


-32-


The
source of the above information is http://www.amex.com.




Holders




On March
28, 2008, there were 347 holders of record of our common stock.




Dividends




No cash
dividend was declared in 2005, 2006 or in 2007 through the date of this Annual
Report.




Securities
Authorized For Issuance under Equity Compensation Plans




Equity
Compensation Plan Information


as
of December 31, 2007




Plan
      category
            
            Number
      of Securities to be Issued upon Exercise of Outstanding Options, Warrants
      and Rights
            
            Weighted
      Average Exercise Price of Outstanding Options, Warrants and
      Rights
            
            
            Number
      of Securities Remaining Available for Future Issuance under the
      Plan(a)
            
            (b)
            
            
            (c)Equity compensation plans approved by security holders(1)
            
            
            11,519,159
            
            
            $
            3.69
            
            
            
            8,078,700Equity
      compensation plans not approved by security holders
            
            
            0
            
            
            
            --
            
            
            
            --Total
            
            
            11,519,159
            
            
            $
            3.69
            
            
            
            8,078,700




(1)
            Represents
      the number of shares issuable under the Company’s 2004 Stock Option Plan
      (the “2004 Plan”) and 2007 Stock Incentive Plan (the “2007 Plan”). On
      November 24, 2004, our board of directors approved and adopted the
      principal items forming our 2004 Plan which is designated for the benefit
      of employees, officers, directors, consultants and subcontractors of the
      Company including its subsidiaries. On November 1, 2005, the 2004 Plan was
      approved by our board of directors, and on March 13, 2006 by our
      shareholders, at a Special Meeting. Under the 2004 Plan, the Plan
      Administrator is authorized to grant options to acquire up to a total of
      5,500,000 shares of common stock. On October 28, 2007, our Board of
      Directors adopted and approved the Company’s 2007 Plan, and on December
      17, 2007, our shareholders approved this plan at the Annual Meeting of
      stockholders. The 2007 Plan authorizes the issuance of awards for up to a
      total of 8,000,000 shares of our common stock underlying such
      awards. -33-




Recent
Sales of Unregistered Securities




On
January 16, 2007, and in conjunction with a December 24, 2006 Securities
Purchase Agreement we issued an aggregate of 172,414 warrants to Halman-Aldubi
Provident Funds Ltd. and Halman-Aldubi Pension Funds Ltd. The warrants are
exercisable on a one to one basis into restricted shares of our common stock, at
an exercise price of $3.40, and have a term of five years. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended (the “Act”). We believed that the exemption was available
because: (i) the offer and sale of the securities did not involve a public
offering or an underwriter; (ii) the certificates representing the warrants
were marked with a restrictive legend; and (iii) the investor represented
that he was sophisticated enough to evaluate the merits of his
investment.




On
February 1, 2007, and in conjunction with a December 24, 2006 Securities
Purchase Agreement we issued an aggregate of 344,828 restricted shares of our
common stock, at a purchase price of $2.90 per share, to Halman-Aldubi Provident
Funds Ltd. and Halman-Aldubi Pension Funds Ltd. We relied upon the exemption
from registration provided by Section 4(2) of the Act. We believed that the
exemption was available because: (i) the offer and sale of the securities
did not involve a public offering or an underwriter; (ii) the shares issued
were restricted as to transfer and the certificates representing the shares were
marked with a restrictive legend; and (iii) the investor represented that
he was sophisticated enough to evaluate the merits of his
investment.




On March
1, 2007, 187,500 of Alon Mualem’s options under the Company's 2004 Stock Option
Plan were terminated due to his resignation.




On March
20, 2007, following the closing in 2006 and due to the satisfaction of certain
earnout provisions in the Asset Purchase Agreement by and among Xfone USA, Inc.
and Canufly.net, Inc., we issued to the following shareholders of Canufly.net an
aggregate of 20,026 additional restricted shares of our common stock and 14,364
warrants exercisable at $2.98 per share for a period of five years: J. Michael
Nassour - 2,529 shares and 1,825 warrants; Ann S. Nassour - 1,148 shares and 823
warrants; John A. Nassour - 1,148 shares and 823 warrants; Mike A. Gatti - 917
shares 658 warrants; Clara Booth Pinkston - 2,817 shares and 2,014 warrants;
Robert Portwood - 1,148 shares and 823 warrants; Beverly Roggenkamp - 383 shares
and 274 warrants; Ashley Zweifel - 383 shares and 274 warrants; Larry Roggenkamp
- 383 shares and 274 warrants; Becky & Grey Cobb - 764 shares and 548
warrants; Sharon E. & Norman R. Francingues, Jr. - 764 shares and 548
warrants; Salena & Mickey Greenlee - 764 shares and 548 warrants; Dawn &
Clifton Burroughs, Jr. - 764 shares and 548 warrants; Mynette & Harry Gibson
- 764 shares and 548 warrants; Jimmy Boyd - 383 shares and 274 warrants; Tracey
Boyd - 383 shares and 274 warrants; Wayne M. Pitre - 764 shares and 548
warrants; Nancy H. & Robert C. Clingan, JTWROS - 764 shares and 548
warrants; Dana Allen - 764 shares and 548 warrants; Betty Joe & Hugh A.
Allen, Sr. JTWROS - 764 shares and 548 warrants; Anthony Bruce McCall - 764
shares and 548 warrants; Travis Wayne Vance - 764 shares and 548 warrants. We
relied upon the exemption from registration provided by Section 4(2) of the Act.
We believed that the exemption was available because: (i) the offer and
sale of the securities did not involve a public offering or an underwriter; and
(ii) the shares issued were restricted as to transfer and the certificates
representing the securities were marked with a restrictive legend.




During
May 2007, Alon Mualem exercised 6,300 of his outstanding options under the
Company's 2004 Stock Option Plan, at an exercise price of $3.50 per share. On
June 1, 2007, the remaining 106,200 of his options were terminated due to his
resignation.




On June
5, 2007, the Company’s Board of Directors approved a grant of 20,000 options,
under and subject to the Company’s 2004 Stock Option Plan, to Israel Singer, an
Independent Director and a member of the Audit Committee of the Company. The
options were granted under the following terms: Date of Grant - June 5, 2007;
Exercise Price - $3.50 per share; Vesting Date - 12 months from the Date of
Grant; Expiration Date - 5 years from the Vesting Date. We relied upon the
exemption from registration provided by Section 4(2) of the Act. We believed
that the exemption was available because the offer and sale of the securities
did not involve a public offering or an underwriter. -34-




On June
5, 2007, the Company’s Board of Directors approved a grant of 20,000 options,
under and subject to the Company’s 2004 Stock Option Plan, to Morris Mansour, an
Independent Director and currently a member of the Nominating and Compensation
Committees of the Company’s Board. The options were granted under the following
terms: Date of Grant - June 5, 2007; Exercise Price - $3.50 per share; Vesting
Date - 12 months from the Date of Grant; Expiration Date - 5 years from the
Vesting Date. We relied upon the exemption from registration provided by Section
4(2) of the Act. We believed that the exemption was available because the offer
and sale of the securities did not involve a public offering or an
underwriter.




On June
5, 2007, the Company’s Board of Directors approved a grant under the Company’s
2004 Stock Option Plan of 200,000 options to Brian Acosta, the Chief Technical
Officer of our subsidiary, Xfone USA. The options are granted under the
following terms: Date of Grant - June 5, 2007; Exercise Price - $3.146 per
share; Vesting Date - (a) 25,000 options on March 31, 2009; (b) 50,000
options on March 31, 2010; and (c) 125,000 options on March 31, 2011;
Expiration Date - 5 years from the Vesting Date; Termination - in the event of
termination of employment prior to the completion of Mr. Acosta’s second year of
employment with Xfone USA, then 175,000 of the aforementioned options shall
automatically terminate; in the event of termination of employment during Mr.
Acosta’s third year of employment with Xfone USA, then 125,000 of the
aforementioned options shall automatically terminate. We relied upon the
exemption from registration provided by Section 4(2) of the Act. We believed
that the exemption was available because the offer and sale of the securities
did not involve a public offering or an underwriter.




On June
5, 2007, the Company’s Board of Directors approved a grant under the Company’s
2004 Stock Option Plan of 200,000 options to Hunter McAllister, the Vice
President Business Development of our subsidiary, Xfone USA. The options are
granted under the following terms: Date of Grant - June 5, 2007; Exercise Price
- $3.146 per share; Vesting Date - (a) 25,000 options on March 31, 2009;
(b) 50,000 options on March 31, 2010; and (c) 125,000 options on March
31, 2011; Expiration Date - 5 years from the Vesting Date; Termination - in the
event of termination of employment prior to the completion of Mr. McAllister’s
second year of employment with Xfone USA, then 175,000 of the aforementioned
options shall automatically terminate; in the event of termination of employment
during Mr. McAllister’s third year of employment with Xfone USA, then 125,000 of
the aforementioned options shall automatically terminate. We relied upon the
exemption from registration provided by Section 4(2) of the Act. We believed
that the exemption was available because the offer and sale of the securities
did not involve a public offering or an underwriter.




On June
21, 2007, 32,812 of Brad Marcus’ options were terminated due to his resignation.
Mr. Marcus was an employee of Swiftnet Limited, the Company’s wholly owned
subsidiary. On September 21, 2007, the remaining 42,188 of Brad Marcus’ options
were terminated due to his resignation.




On
October 31, 2007, the Company canceled 7,043 shares of its common stock, and
4,838 warrants which were returned to it by Trustmark National Bank, acting as
escrow agent in conjunction with the consummation of the Company’s acquisition
of I-55 Telecommunications, Inc. on March 31, 2006. The 7,043 shares and 4,838
warrants were being held in escrow, and were released and returned to the
Company for cancellation after determination by the Company of a breach of the
representations and warranties in the Agreement and Plan of Merger by I-55
Telecommunications, notification by the Company that it had suffered a loss
pursuant to the terms of the Escrow Agreement entered into in connection with
the acquisition, and upon expiration of the response time allotted with no
response from the other parties or their counsel, in accordance with the terms
of the Escrow Agreement.




On
December 26, 2007, and in conjunction with a December 13, 2007 Subscription
Agreements we issued an aggregate of 1,300,000 warrants to: (i) XFN-RLSI
Investments, LLC, an entity affiliated with Richard L. Scott Investments, LLC, a
U.S. institutional investor; and (ii) certain investors affiliated with or
who are customers of Gagnon Securities LLC. The warrants are exercisable on a
one to one basis into restricted shares of our common stock, at an exercise
price of $3.10, and have a term of five years. We relied upon the exemption from
registration provided by Section 4(2) of the Act. We believed that the exemption
was available because: (i) the offer and sale of the securities did not
involve a public offering or an underwriter; (ii) the certificates
representing the warrants were marked with a restrictive legend; and
(iii) the investor represented that he was sophisticated enough to evaluate
the merits of his investment. Additional details regarding this financing are
set forth under “Management’s Discussion and Analysis or Plan of Operations”
below. -35-




On
December 13, 2007, and in conjunction with a private offering of the same date,
the Company issued an aggregate of NIS 100,382,100 (approximately $28,525,746)
bonds (Series A) (the “Bonds”) to Israeli institutional
investors.  The Bonds will pay an initial annual interest at a rate of
9% that will be paid semi-annually on the 1st of June
and on the 1st of December of every year from 2008 until 2015
(inclusive).  Commencing on the date of listing of the Bonds on the
TASE, the interest rate payable for the unpaid balance of the Bonds will be
reduced by 1%, to an annual interest rate of 8%.  The principal of the
Bonds will be repaid in eight equal annual payments on the 1st of
December of every year from 2008 until 2015 (inclusive). The principal and
interest of the Bonds is linked to the Israeli Consumer Price
Index.




The
Company has also agreed to issue the holders of the Bonds, for no additional
consideration, 956,020 (non-tradable) warrants, each exercisable at an exercise
price of $3.50 with a term of 4 years (the "Warrants"). The Company issued the
Warrants on March 25, 2008.




The
Company engaged Excellence Nessuah (1993) Ltd. and First International & Co.
- Underwriting and Investments Ltd. as pricing underwriters for the prospectus
to be filed with the Israeli Securities Authority and the TASE for the listing
for trade of the Bonds on the TASE. Additional details regarding the Bonds are
set forth under “Management’s Discussion and Analysis or Plan of Operations”
below.




The
offering of the Bonds was not registered under the Act, as it was made in
accordance with Regulation S promulgated under the Act (“Regulation
S”).  We believed that the exemption was available because each of the
institutional investors (i) represented that it is an institutional investor
classified as a type of investor listed in the first supplement to the Israeli
Securities Law, for the purposes of Section 15a(b)(1) of the Israeli Securities
Law; that its offer was for itself and/or for customers that are investors
listed in Section 5a(b)(1) of the Israeli Securities Law, respectively; (ii)
declared that it knows and understands, that the private placement is being done
in Israel only (and not in the U.S.) and is intended only for Israeli residents,
that are in Israel (and not in the U.S.) and not for U.S. persons (“U.S.
Person”) as they are defined in Regulation S; (iii) declared and confirmed, that
it is incorporated and active in Israel, and that it is not a U.S. Person, and
that it is not located outside of Israel at the time of the filing of the offer;
(iv) declared that it knows that it will not be allowed to take action to sell
the Bonds and Warrants in the U.S. and/or to a U.S. Person; and (v) declared and
confirmed that the Bonds, Warrants and shares that may result from the exercise
of the Warrants, are not acquired for the purpose of “distribution” (as this
term is defined in the US securities laws) in the U.S.









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


EMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
 FORWARD-LOOKING
STATEMENTS
 
 The
information set forth in Management's Discussion and Analysis of Financial
Condition and Results of Operations (“MD&A”) contains certain
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as
amended, and the Private Securities Litigation Reform Act of 1995, including,
among others (i) expected changes in the Company's revenues and profitability,
(ii) prospective business opportunities and (iii) the Company's strategy for
financing its business. Forward-looking statements are statements other than
historical information or statements of current condition. Some forward-looking
statements may be identified by use of terms such as “believes”, “anticipates”,
“intends” or “expects”. These forward-looking statements relate to the plans,
objectives and expectations of the Company for future operations. Although the
Company believes that its expectations with respect to the forward-looking
statements are based upon reasonable assumptions within the bounds of its
knowledge of its business and operations, in light of the risks and
uncertainties inherent in all future projections, the inclusion of
forward-looking statements in this Annual Report should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved.
 
 You
should read the following discussion and analysis in conjunction with the
Financial Statements and Notes attached hereto, and the other financial data
appearing elsewhere in this Annual Report.
 
 The
Company's revenues and results of operations could differ materially from those
projected in the forward-looking statements as a result of numerous factors,
including, but not limited to, the following: the risk of significant natural
disaster, the inability of the Company to insure against certain risks,
inflationary and deflationary conditions and cycles, currency exchange rates,
changing government regulations domestically and internationally affecting our
products and businesses.
  
 
 OVERVIEW
 
 Xfone,
Inc. was incorporated in Nevada, U.S.A. in September 2000. We are a holding and
managing company providing international voice, video and data communications
services with operations in the United States, the United Kingdom and Israel
offering a wide range of services, including: local, long distance and
international telephony services; video; prepaid and postpaid calling cards;
cellular services; Internet services; messaging services (Email/Fax Broadcast,
Email2Fax and Cyber-Number); and reselling opportunities. We serve customers
worldwide.
 In
February 2007, we moved our principal executive offices from the UK to Flowood,
Mississippi, and shared executive office space with our wholly owned U.S.
subsidiary, Xfone USA, Inc. The headquarters of Xfone USA recently moved from
the Flowood, Mississippi location to Lubbock, Texas, to the existing
headquarters of NTS Communications, Inc., which we acquired in February 2008.
See “NTS Communications, Inc.” below. We intend to move our principal executive
offices to the Lubbock, Texas, location in the near future as well.
 
 On
October 4, 2000, we acquired Swiftnet Limited which had a business plan to
provide comprehensive range of telecommunication services and products,
integrated through one website. Swiftnet was incorporated in 1990 under the laws
of the United Kingdom and is headquartered in London, England. Until 1999, the
main revenues for Swiftnet were derived from messaging and fax broadcast
services. During 2000, Swiftnet shifted its business focus to voice services and
now offers a comprehensive range of calling services to resellers and end
customers. Utilizing automation and proprietary software packages, Swiftnet’s
strategy is to grow without the need for 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.
(which changed its name to Xfone 018 Ltd. in March 2005). On July 4, 2004, the
Ministry of Communications of the State of Israel granted Xfone 018 a license to
provide international telecom services in Israel. We started providing services
in Israel through Xfone 018 as of mid-December 2004. Headquartered in Petach
Tikva, Israel, Xfone 018 Ltd. is a telecommunications service provider that owns
and operates its own facilities-based telecommunications switching system. Xfone
018 provides residential and business customers with high quality international
carrier services.
  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 into our wholly owned U.S. subsidiary Xfone USA, Inc. 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 that all revenues
generated from WS Telecom business operations would 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. Xfone USA,
Inc. is an integrated telecommunications service provider that owns and operates
its own facilities-based, telecommunications switching system and network. Xfone
USA provides residential and business customers with high quality local, long
distance and high-speed broadband Internet services, as well as cable television
services in certain planned residential communities in Mississippi. Xfone USA is
licensed to provide telecommunications services in Alabama, Florida, Georgia,
Louisiana and Mississippi. Xfone USA utilizes integrated multi-media offerings -
combining digital voice, data and video services over broadband technologies to
deliver services to customers throughout its service areas.
 
 On August
18, 2005, we entered into an Agreement and Plan of Merger to acquire I-55
Internet Services, Inc., a Louisiana corporation (the “I-55 Internet Merger
Agreement”). On September 13, 2005, we filed a Form 8-K discussing the impact of
Hurricane Katrina on the transaction contemplated by the I-55 Internet Merger
Agreement. On October 10, 2005, we entered into a First Amendment to the Merger
Agreement, by and among I-55 Internet Services, Xfone, Inc, Xfone USA, Inc., our
wholly-owned United States subsidiary and Hunter McAllister and Brian Acosta,
key employees of I-55 Internet Services, in order to induce Xfone, Inc and Xfone
USA not to terminate the I-55 Internet Merger Agreement due to the material
adverse effect that Hurricane Katrina has had on the assets and business of I-55
Internet Services. As part of the amendment and since, at that time, the merger
of I-55 Internet Services with and into Xfone USA had not been consummated yet,
in the interim, the parties agreed and entered into on October 11, 2005 a
Management Agreement (the “I-55 Internet Management Agreement”) that provided
that I-55 Internet Services hired and appointed Xfone USA as manager to be
responsible for the operation and management of all of I-55 Internet Services
business operations, including among other things personnel, accounting,
contracts, policies and budget. In consideration of the management services
provided under the I-55 Internet Management Agreement, I-55 Internet Services
assigned and transferred to Xfone USA all revenues generated and expenses
incurred in the ordinary course of business during the term of the I-55 Internet
Management Agreement. The term of the I-55 Internet Management Agreement
commenced on October 11, 2005 and continued until the consummation of the merger
on March 31, 2006.
 
 
 In
conjunction with the consummation of the merger and in exchange for all of the
capital stock of I-55 Internet Services, we issued a total of 789,863 shares of
our common stock valued at $2,380,178 and 603,939 warrants exercisable for a
period of five years into shares of our common stock, with an exercise price of
$3.31, valued based on the Black Scholes option-pricing model (the “Xfone Stock
and Warrant Consideration”). A portion of the Xfone Stock and Warrant
Consideration issued at closing was placed in an escrow account, to be held
pending certain adjustments. The Company subsequently made the following
two claims against such escrow account: Claim #1: The Company
made a claim on March 27, 2007 to adjust the total consideration based upon the
changes in customer billings as determined pursuant to a formula set forth in
the First Amendment to the Merger Agreement (the “Customer Billing Adjustment
Amount”), which the Company had determined was $247,965.57. Claim #2: The Company
determined an undisclosed liability, in accordance with Article 6.03 of the I-55
Internet Services, Inc. Merger Agreement (as amended), in the amount of $147,550
and on November 28, 2006, sent a claim for this amount. The Shareholder
Representatives of I-55 Internet Services disputed the amounts in both claims
submitted and so the parties entered into negotiations on May 2, 2007, where
they agreed to reduce the amount claimed in Claim #1 by $104,948.46, which
represents adjustments made to the 90-Day column, Trade Accounts, and certain
accounts that had previously been listed as having 90-Day balances but were
subsequently confirmed as not having 90-Day balances, and by the final amount
billed to EBI Comm, Inc. (“EBI”) in 2005 prior to the assets of EBI being
purchased by Xfone USA, and agreed to reduce the original Loss amount claimed in
Claim #2 by $6,800.00, representing additional services purchased with Zipa,
Inc. under the direction of Xfone USA during the Management Agreement period
from October 2005 through March 2006. Upon settlement of the claims, two Joint
Deposition Notices for the escrow agent, Trustmark National Bank, were delivered
to the Shareholder Representatives of I-55 Internet Services for execution,
however, a Shareholder Representative refused to execute the notices pending
approval of the claims by the shareholders of I-55 Internet Services.  On
June 7, 2007, the shareholders met and rejected the figure agreed upon with
respect to Claim #1 and accepted the figure agreed upon with respect to Claim
#2.  There has been no further action taken by Xfone USA or us with respect
to either of these claims.   As a result of the rejection of the figure for
Claim #1, the Company officially retracted the Joint Deposition of Escrow Claim,
and consequently the original Pending Claim Notice dated March 27, 2007 in the
amount of $247,965.57 is still claimed, and the revised Claim #2 in the amount
of $140,750 is also claimed. Xfone USA’s new management, which was appointed
following the Company’s acquisition of NTS, is reviewing this matter to
determine how best to proceed in connection with the remaining pending claims
against the escrow.
  In conjunction with that certain Letter Agreement dated October 10, 2005
with MCG Capital Corporation, a major creditor of I-55 Internet Services, and
upon the consummation of the merger on March 31, 2006, we issued to MCG Capital
667,998 shares of our common stock, valued at fair value of $2,010,006, in
return forretiring its loan
with I-55 Internet Services.
 
 I-55
Internet Services provided Internet access and related services, such as
installation of various networking equipment, website design, hosting and other
Internet access installation services, throughout the Southeastern United States
to individuals and businesses located predominantly in rural markets in
Louisiana and Mississippi. As a result of the merger with and into Xfone USA,
these services are now available in expanded markets throughout Louisiana and
Mississippi. The Internet service offerings include dial-up, DSL, high speed
dedicated Internet access, web services, email, the World Wide Web, Internet
relay chat, file transfer protocol and Usenet news access to both residential
and business customers. The I-55 Internet Services offerings provided various
prices and packages that allowed I-55 Internet Services subscribers to customize
their subscription with services that met customers’ particular requirements.
Xfone USA now provides bundled services of voice and data (broadband Internet)
to customers throughout its service areas.
 
 On August
26, 2005, we entered into an Agreement and Plan of Merger to acquire I-55
Telecommunications, LLC, a Louisiana corporation (the “I-55 Telecom Merger
Agreement”). On September 13, 2005, we filed a Form 8-K discussing the impact of
Hurricane Katrina on the transaction contemplated by the I-55 Telecom Merger
Agreement. In order to demonstrate our intention to continue on with the
transaction contemplated by the I-55 Telecom Merger Agreement, the parties
entered into on October 12, 2005 a Management Agreement (the “I-55 Telecom
Management Agreement”) that provided that I-55 Telecommunications hired and
appointed Xfone USA as manager to be responsible for the operation and
management of all of I-55 Telecommunications’ business operations. In
consideration of the management services provided under the I-55 Telecom
Management Agreement, I-55 Telecommunications assigned and transferred to Xfone
USA all revenues generated and expenses incurred in the ordinary course of
business during the term of the I-55 Telecom Management Agreement. The term of
the I-55 Telecom Management Agreement commenced on October 12, 2005 and
continued until the consummation of the merger on March 31, 2006.
 
 
 In
conjunction with the consummation of the merger and in exchange for all of the
capital stock of I-55 Telecommunications, LLC, we issued a total of 223,702
shares of our common stock valued at $671,687 and 79,029 warrants exercisable
for a period of five years into shares of our common stock, with an exercise
price of $3.38, valued based on the Black Scholes option-pricing model (the
“Xfone Stock and Warrant Consideration”). A portion of the Xfone Stock and
Warrant Consideration issued at closing was placed in an escrow. The Company
determined a breach of the representations and warranties in the Merger
Agreement resulting from the failure of I-55 Telecommunications to disclose the
liability due and payable to the Louisiana Universal Service Fund (“LA USF”)
through the period of October 2005, at which time Xfone USA undertook the
management role of I-55 Telecommunications.  Pursuant to Section 1(g)
of the Escrow Agreement dated as of March 31, 2006 by and among Xfone USA, the
Escrow Agent, and the President and Sole Member of I-55 Telecommunications, and
in accordance with Article 6.02 of the Merger Agreement, Xfone USA notified the
other parties that it believed that it had suffered a Loss of $30,625.52,
pursuant to the provisions of Article 6.02 of the Merger Agreement dated as of
August 26, 2005. Having not received any response from the President and
Sole Member of I-55 Telecommunications, nor from his counsel, on October 15,
2007, and after the allotted response time allowed, Xfone USA instructed the
Escrow Agent (Trustmark National Bank) to deliver from the Escrow Fund of the
President and Sole Member of I-55 Telecommunications, to the Company, 7,043
shares of Common Stock and 4,838 Xfone Stock Warrants.  The 7,043
shares of Common Stock and 4,838 Xfone Stock Warrants were returned to the
Company for cancellation on October 31, 2007.
  In
conjunction with certain Agreements to Purchase Promissory Notes dated October
31, 2005 / February 3, 2006 with Randall Wade James Tricou; Rene Tricou - Tricou
Construction; Rene Tricou - Bon Aire Estates; Rene Tricou - Bon Aire Utility;
and Danny Acosta, creditors of I-55 Telecommunications (the “Creditors”), and
upon the consummation of the merger on March 31, 2006, we issued to the
Creditors an aggregate of 163,933 restricted shares of common stock and an
aggregate of 81,968 warrants, exercisable at $3.38 per share, at a total value
of $492,220, in return for retiring their individual loans with I-55
Telecommunications.
 
 I-55
Telecommunications provided voice, data and related services throughout
Louisiana and Mississippi to both individuals and businesses. Prior to the
merger with and into Xfone USA, I-55 Telecommunications was a licensed facility
based CLEC operating in Louisiana and Mississippi with a next generation class 5
carrier switching platform. I-55 Telecommunications provided a complete package
of local and long distance services to residential and business customers across
both states. As a result of the merger, Xfone USA has now expanded its On-Net
(facilities) service area, through I-55 Telecommunications, into New Orleans,
Louisiana and surrounding areas, including Hammond, Louisiana and Baton Rouge,
Louisiana. Xfone USA is expanding its sales offices to include New Orleans, in
an effort to continue revenue growth and increase market share in the
revitalized city, as well as into Biloxi, Mississippi, Hammond, Louisiana and
Baton Rouge, Louisiana. Regulations affecting the telecommunications industry
began in March 2006; conversions of all circuits affected were completed in
April 2006. The competition in secondary markets, such as Jackson, Mississippi,
Baton Rouge, Louisiana, and Biloxi, Mississippi, as opposed to Tier 1 markets
such as Atlanta, Georgia, is also rapidly declining due to the removal of
UNE-P and the decline in the competitive local exchange providers that had been
dependent on UNE-P as their only source for providing competitive local
telephone services in those markets. This provides for a unique opportunity
for Xfone USA to gain market share, by utilizing its existing network and to
expand its facilities into these opportunity areas becoming a primary
alternative to the monopoly Incumbent Local
Exchange Company.
 
 On
September 27, 2005, a Securities Purchase Agreement was entered for a $2,000,000
financial transaction by and among us, Xfone USA, Inc., eXpeTel Communications,
Inc., Gulf Coast Utilities, Inc. and Laurus Master Fund, Ltd. The investment
took the form of a convertible term note secured by our United States assets.
The Term Note has a 3 year term, bears interest at a rate equal to prime plus
1.5% per annum, and is convertible, under certain conditions, into shares of our
common stock at an initial conversion price equal to $3.48 per share. In
conjunction with the financial transaction, we issued to Laurus Master Fund
157,500 warrants which are exercisable at $3.80 per share for a period of five
years. The closing of the financial transaction was on September 28, 2005. As of
August 1, 2007, Laurus Master Fund, Ltd. assigned to Valens U.S. SPV I, LLC a
principal amount equal to $169,925.11 of the Term Note, and to Valens Offshore
Fund SPV I, Ltd. a principal amount equal to $549,289.76 of the Term Note. The
conversion of the Term Note will result in dilution in the percentage of common
stock owned by the company’s existing shareholders, although the conversion
price was in excess of the net tangible book value per share and accordingly was
not economically dilutive.
 
 
 On
September 28, 2005, a Securities Purchase Agreement was entered for a $2,212,500
financial transaction by and among us, Crestview Capital Master, LLC, Burlingame
Equity Investors, LP, Burlingame Equity Investors II, LP, Burlingame Equity
Investors (Offshore), Ltd., and Mercantile Discount - Provident Funds. Upon the
closing of the financial transaction on October 31, 2005, we issued to the
investors an aggregate of 885,000 shares of common stock at a purchase price of
$2.50 per share together with, 221,250 warrants exercisable at $3.00 per share
and 221,250 warrants exercisable at $3.25 per share. The financial transaction
resulted in dilution in the percentage of common stock owned by the Company’s
existing shareholders, although the price paid was in excess of the net tangible
book value per share and accordingly was not economically dilutive.
 
 On
November 23, 2005, a Securities Purchase Agreement was entered for a $810,000
financial transaction by and among us, Mercantile Discount-Provident Funds,
Hadar Insurance Company Ltd., the Israeli Phoenix Assurance Company Ltd., and
Gaon Gemel Ltd. In conjunction with the financial transaction, we issued an
aggregate of 324,000 shares of common stock at a purchase price of $2.50 per
share together with 81,000 warrants exercisable at $3.00 per share for a period
of five years and 81,000 warrants exercisable at $3.25 per share for a period of
five years. The financial transaction was closed on April 6, 2006. The financial
transaction resulted in dilution in the percentage of common stock owned by the
Company’s existing shareholders, although the price paid was in excess of the
net tangible book value per share and accordingly was not economically
dilutive.
 
 On
January 1, 2006, Xfone USA, Inc., our wholly owned subsidiary, entered into an
Agreement with EBI Comm, Inc. (“EBI”), a privately held Internet Service
Provider, to purchase the assets of EBI. EBI provided a full range of Internet
access options for both commercial and residential customers in north
Mississippi. Based in Columbus, Mississippi, EBI’s services included Dial-up,
DSL, T1 Dedicated Access and Web Hosting. The customer base, numbering
approximately 1,500 Internet users, is largely concentrated in the Golden
Triangle area, which includes Columbus, West Point and Starkville, Mississippi.
The acquisition was structured as an asset purchase, providing for Xfone USA to
pay EBI total consideration equal to 50% of the monthly collected revenue from
the customer base during the first 12 months, beginning January 2006. Acquired
assets include the customer base and customer lists, trademarks and all related
intellectual property, fixed assets and all account receivables. As a result of
further negotiations between us and EBI, we have agreed to pay the total
consideration of this acquisition in cash in the amount of $85,699 in monthly
payments of $10,000 until paid in full, and we made the first of such payments
on June 1, 2007 and final payment on January 25, 2008. The acquisition was not
significant from an accounting perspective.
 
 On
January 10, 2006 (effective as of January 1, 2006), Xfone USA, Inc., our wholly
owned subsidiary, entered into an Asset Purchase Agreement with Canufly.net,
Inc. (“Canufly.net”), an Internet Service Provider based in Vicksburg,
Mississippi, and its principal shareholder, Mr. Michael Nassour. Canufly.net
provided residential and business customers with high-speed Internet services
and utilized the facilities-based network of Xfone USA, as an alternative to
BellSouth, to provide Internet connectivity to its customers. Canufly.net also
provided Internet services through a small wireless application in certain areas
in Vicksburg, Mississippi. The transaction was closed on January 24, 2006. We
agreed to pay a total purchase price of up to $710,633, payable as follows: (i)
$185,000 in cash payable in twelve equal monthly payments, the first installment
was paid at closing, and as of December 31, 2006, the entire amount was paid in
full and in accordance with the Asset Purchase Agreement; (ii) $255,633 in cash,
paid at closing, to pay off the loan with the B&K Bank; (iii) 33,768
restricted shares of common stock and 24,053 warrants exercisable at $2.98 per
share for a period of five years were issued to the shareholders of Canufly.net
during May 2006. Following the closing in 2006 and due to the satisfaction of
certain earnout provisions in the Asset Purchase Agreement the Company issued in
March 2007 an additional 20,026 restricted shares of common stock and 14,364
warrants exercisable at $2.98 per share for a period of five years to the
shareholders of Canufly.net. The acquisition was not significant from an
accounting perspective.
  
 On May
10, 2006, we, Story Telecom, Inc., Story Telecom Limited, Story Telecom
(Ireland) Limited, Nir Davison, and Trecastle Holdings Limited, a company owned
and controlled by Mr. Davison, entered into a Stock Purchase Agreement. Pursuant
to the Stock Purchase Agreement, we increased our ownership interest in Story
Telecom from 39.2% to 69.6% in a cash transaction valued at $1,200,000. $900,000
of the total consideration was applied to payables owed by Story Telecom to us
and our subsidiary Swiftnet Limited for back-end telecommunications services.
The balance of $300,000 was paid to Story Telecom to be used as working capital.
Story Telecom, Inc., a telecommunication service provider, operated in the
United Kingdom through its two wholly owned subsidiaries, Story Telecom Limited
and Story Telecom (Ireland) Limited (which was dissolved on February 23, 2007).
Following the acquisition, Story Telecom operates as a division of our
operations in the United Kingdom. The stock purchase pursuant to the Stock
Purchase Agreement was completed on May 16, 2006. The transaction contemplated
by the Stock Purchase Agreement was not significant from an accounting
perspective.
 
 On March
25, 2008, in connection with a settlement of a legal proceeding before the UK
Employment Tribunal initiated by Mr. Nir Davison, we purchased from Mr. Davison
and Trecastle Holdings Limited, the shares of common stock of Story Telecom,
Inc. that each party owned, respectively, for an aggregate purchase price of
£270,000 ($539,662), pursuant to the terms of a Compromise Agreement and a
Securities Purchase Agreement entered into between the parties on that date.
Upon acquisition of the shares of common stock of Story Telecom, Inc. from Mr.
Davison and Trecastle Holdings, Story Telecom, Inc. became our wholly owned
subsidiary.
 
 On May
25, 2006, we and the shareholders of Equitalk.co.uk Limited, a privately held
telephone company based in the United Kingdom (“Equitalk”) entered into an
Agreement relating to the sale and purchase of Equitalk (the “Equitalk
Agreement”). The Equitalk Agreement provided for us to acquire Equitalk in a
restricted common stock and warrant transaction valued at $1,650,000. The
acquisition was completed on July 3, 2006, and on that date Equitalk became our
wholly owned subsidiary. In conjunction with the completion of the acquisition
and in exchange for all of the capital stock of Equitalk, we issued a total of
402,192 restricted shares of our common stock and a total of 281,872 warrants
exercisable at $3.025 per share for a period of five years. Founded in December
1999, Equitalk, a VC-financed company, was the first fully automated e-telco in
the United Kingdom. Equitalk provides both residential and business customers
with low-cost IDA and CPS voice services, broadband and
teleconferencing.
 
 On June
19, 2006, we entered into a Securities Purchase Agreement to sell to Central
Fund for the Payment of Severance Pay of the First International Bank of Israel
Ltd.; Meiron Provident Fund for Self Employed Persons of the First International
Bank of Israel Ltd.; Atidoth Provident and Compensation Fund of the First
International Bank of Israel Ltd.; Tohelet Provident and Compensation Fund of
the first International Bank of Israel Ltd.; Mishtalem Funds for Continuing
Education of the First International Bank of Israel Ltd.; Keren
Hashefa Provident and Compensation Fund of the First International Bank of
Israel Ltd.; Hamelacha Provident and Compensation Fund of the First
International Bank of Israel Ltd.; Teuza Provident and Compensation Fund of the
First International Bank of Israel Ltd.; Kidma Provident Funds Management
Company Ltd. for Menifa Provident Fund for Bank of Israel Employees; and
Security Pension Fund for Artisans Industrialists and Self Employed Persons Ltd.
an aggregate of 344,825 restricted shares of common stock, at a purchase price
of $2.90 per share, together with an aggregate of 172,415 warrants to purchase
shares of common stock, at an exercise price of $3.40 per share and with a term
of five years. The financial transaction was closed on September 28, 2006. The
financial transaction resulted in dilution in the percentage of common stock
owned by the Company’s existing shareholders, although the price paid was in
excess of the net tangible book value per share and accordingly was not
economically dilutive.
 
 
 On
December 24, 2006, the Company entered into an Agreement to sell to
Halman-Aldubi Provident Funds Ltd. and Halman-Aldubi Pension Funds Ltd. an
aggregate of 344,828 restricted shares of its common stock, at a purchase price
of $2.90 per share, together with an aggregate of 172,414 warrants to purchase
shares of its common stock, at an exercise price of $3.40 per share and with a
term of five years. The financial transaction was closed on February 8, 2007.
The financial transaction resulted in dilution in the percentage of common stock
owned by the Company’s existing shareholders, although the price paid was in
excess of the net tangible book value per share and accordingly was not
economically dilutive.
 
 On August
15, 2007, the Company, Swiftnet Limited, our wholly owned U.K.-based subsidiary
(“Swiftnet”), and Dan Kirschner entered into a definitive Share Purchase
Agreement to be completed on the same date, pursuant to which Swiftnet purchased
from Mr. Kirschner the 67.5% equity interest in Auracall Limited (“Auracall”)
that he beneficially owned, thereby increasing Swiftnet’s ownership interest in
Auracall from 32.5% to 100%. Swiftnet had acquired the 32.5% interest in
Auracall through several transactions that occurred since October 16, 2001. The
purchase price for the shares was £810,917.64 (approximately $1,616,158),
payable as follows: £500,000 (approximately $996,500) was paid in cash upon
signing of the Share Purchase Agreement, and the remaining £304,000, plus
interest of £6,917.64 (approximately $619,658), was payable in monthly
installments beginning in September 2007 and continued through March 2008. In
connection with the acquisition, Auracall and Swiftnet entered into an
Inter-Company Loan Agreement, pursuant to which Auracall agreed to lend Swiftnet
£850,000 (approximately $1,694,050) for the sole purpose of and in connection
with Swiftnet’s acquisition of the Auracall shares. The loan is unsecured, bears
interest at a rate of 5% per annum, and is to be repaid in five years (i.e.,
August 15, 2012), but may be repaid earlier without charge or penalty. As a
result of the terms of the transaction, Mr. Kirschner no longer serves as
Auracall’s Managing Director or as a member of its board of
directors.
  On
October 23, 2007, the Company entered into Subscription Agreements with 15
investors affiliated with Gagnon Securities, Inc. who agreed to purchase an
aggregate of 1,000,000 shares of the Company’s common stock, par value $0.001
per share at a price of $3.00 per share, for a total subscription amount of
$3,000,000. This offering was made by the Company, acting without a placement
agent, pursuant to the Company’s Registration Statement on Form SB-2 (File No.
333-143618) which was declared effective by the U.S. Securities and Exchange
Commission on August 6, 2007. The 1,000,000 shares were issued on November 6,
2007.
 
 On
November 4, 2007, the Company entered into Subscription Agreements with: (i) XFN
- RLSI Investments, LLC, an entity affiliated with Richard L. Scott Investments,
LLC, a U.S. institutional investor, which agreed to purchase 250,000 shares of
the Company’s common stock, par value $0.001 per share at a price of $3.00 per
share, for a total subscription amount of $750,000 (the “U.S. Offering”); and
(ii) certain Israeli institutional investors, which agreed to purchase an
aggregate of 700,000 shares of the Company’s Common Stock, at a price of $3.00
per share, for a total subscription amount of $2,100,000 (the “Israeli
Offering”). The U.S. Offering and Israeli Offering were made by the Company
pursuant to the Company’s Registration Statement on Form SB-2 (File No.
333-143618) which was declared effective by the U.S. Securities and Exchange
Commission on August 6, 2007. The U.S. Offering was made by the Company acting
without a placement agent. The Israeli Offering was made by the Company with the
services of First International & Co. - Underwriting & Investments Ltd.,
one of the Israeli investors, acting as placement agent, for which it is
entitled to a placement fee equal to 5% (plus VAT, if applicable) of the gross
proceeds of the Israeli Offering.  In addition, the Company will pay
its consultant, Dionysos Investments (1999) Ltd. (“Dionysos”) a success fee
equal to 0.5% of the gross precedes of the Israeli Offering, pursuant to that
certain First Amendment to Financial Services and Business Development
Consulting Agreement by and among the Company and Dionysos dated February 8,
2007.
 
 
 On
December 13, 2007, the Company entered into Subscription Agreements with:
(i) XFN-RLSI Investments, LLC, an entity affiliated with Richard L. Scott
Investments, LLC, a U.S. institutional investor, which agreed to purchase
800,000 Units, each of which consists of two shares of the Company’s common
stock and one warrant to purchase one share of common stock at a price of $6.20
per Unit (“Unit”), for a total subscription amount of $4,960,000; and
(ii) certain investors affiliated with or who are customers of Gagnon
Securities LLC who agreed to purchase an aggregate of 500,000 Units, for a total
subscription amount of $3,100,000. The warrants are exercisable for a period of
five years from issuance at an exercise price of $3.10 per share.  The
financing was completed on February 26, 2008. XFN-RLSI Investments, LLC is not
an affiliate of the Company. This offering was made pursuant to the 4(2)
exemption under the Securities Act of 1933, as amended, and was made by the
Company acting without a placement agent.
 
 On
December 13, 2007 (the “Date of Issuance”), the Company accepted offers, for the
issuance of securities to Israeli institutional investors, for total gross
proceeds of NIS 100,382,100 (approximately $25,413,189) par value bonds (Series
A) (the “Bonds”). The Bonds are issued for an amount equal to their par
value.  A summary of the main terms of the Bonds follows:
 
 The Bonds
will pay annual interest at a rate of 9% that will be paid semi-annually on the
1st
of June and on the 1st of December of every year from 2008 until 2015
(inclusive). The principal of the Bonds will be repaid in eight equal annual
payments on the 1st of
December of every year from 2008 until 2015 (inclusive). The principal and
interest of the Bonds is linked to the Israeli Consumer Price Index
(“CPI”).
 
 Within
the framework of the conditions of the Bonds' offering, the Company has
committed, among other things, as follows:
 
 1.
              To
      make an effort and to take all actions that are reasonably required,
      subject to the law and the rules of the Tel Aviv Stock Exchange Ltd. (the
      “TASE”), to list the Bonds for trading on the TASE, such that restrictions
      on resale will not apply in accordance with Section 15c of the Israeli
      Securities Law 5728-1968 (the “Israeli Securities Law”) on the holders of
      the Bonds, no later than 12 months from the Date of
    Issuance.
 
 2.
              Immediately
      after the issuance the Company will apply to the TASE to list the Bonds as
      a “non-tradable security” with the TASE Clearing House, at the discretion
      of the Company, subject to the law and the rules of the
    TASE.
 
 3.
              Starting
      from the date of the Bonds’ listing for trade on the TASE, to the extent
      such listing occurs, the interest rate payable for the unpaid balance of
      the Bonds will be reduced by 1% (to an annual interest rate of
      8%).
 
 4.
              Until
      the Bonds are listed for trade on the TASE, in the event that the rating
      of the Bonds is reduced from the rating given them at their issuance - A3
      by Midroog - to Baa1 (or an equivalent rating by another rating company),
      the annual rate of interest on the Bonds will increase by
      0.25%.
 
 5.
              If
      the Bonds are not listed for trading within 12 months from the Date of
      Issuance, any holder of the Bonds will be allowed (but not required), to
      redeem his Bonds, in whole or in part, in an early
    redemption.
 
 6.
              In
      the event that by March 31, 2008 the conditions for the release of the
      proceeds of the offering by the Trustee, as set forth in the Indenture of
      the Bonds, are not met, the issuance will be canceled and the Trustee will
      return the proceeds of the offering to the holders of the Bonds, along
      with interest at an annual rate of 9%, linked to the CPI, for the period
      from the Date of Issuance until the date of the return of the proceeds as
      stated.  The interest from the proceeds of the offering that
      have accumulated in the trust account will be transferred to the Company.
      The applicable conditions are: (i) that the Company raises an aggregate of
      at least $20.0 million in equity financings (this condition has been
      satisfied subject to the receipt of certain regulatory approvals); and
      (ii) that the conditions (which are not related to the financing of the
      acquisition) for the consummation of the NTS Acquisition have been
      met.
 
 7.
              The
      occurrence of certain events in connection with the Company may lead to
      the requirement to immediately redeem the Bonds. Among those events are:
      (1) customary events such as non-payment, the appointment of a liquidator
      or temporary or permanent conservator, whose appointment is not canceled
      within a certain period of time, the placement of a lien on substantive
      assets of the Company, the realization of pledges on substantive assets of
      the Company, the termination of the Company and when a bank requires
      immediate repayment of a substantive amount of credit; (2) specific events
      that relate to the period before the Bonds are listed for trade on the
      TASE such as the reduction of the rating of the Bonds to Baa2 of Midroog
      (or an equivalent rating of another rating company) or to a lower rating,
      if the Company issues additional bonds in a manner that causes the current
      rating of the Bonds to be reduced, if the Bonds cease to be rated for a
      period greater than 30 days, if the proportion of the debt to EBITDA
      increases above 4:1, if the Company ceases to control (directly and/or
      indirectly) NTS Communications (for this purpose “control” has the meaning
      as defined in the Israeli Securities Law) and in the event that Mr. Guy
      Nissenson ceases to serve as President and CEO of the Company; (3)
      additional specific events such as the payment of a dividend that will
      cause the proportion of the shareholders equity to the Company’s balance
      sheet to be lower than 25%.
  
 Additionally,
the Company has undertaken that upon the transfer of the proceeds of the
offering to the Company by the Trustee (which will not occur until the
satisfaction of the conditions set forth in 1.6 above) it will issue the holders
of the Bonds, for no additional consideration, 956,020 (non-tradable) Warrants,
each exercisable at an exercise price of $3.50 with a term of 4
years.
 
 The
Company has committed that it will act to register, in accordance with the U.S.
Securities Act of 1933, as amended, (the “Securities Act”) the shares underlying
said Warrants within 12 months from the date of the issuance of the Warrants. If
the Company does not fulfill its commitment as above, the Warrants will be
canceled and the Company will pay the holders of the Warrants, as an exclusive
remedy, the amount of NIS 2 (approximately $0.5) for each cancelled
Warrant.
 
 Each of
the institutional investors represented that it is an institutional investor
classified as a type of investor listed in the first supplement to the Israeli
Securities Law, for the purposes of Section 15a(b)(1) of the Israeli Securities
Law; that its offer was for itself and/or for customers that are investors
listed in Section 5a(b)(1) of the Israeli Securities Law,
respectively.
 
 Each of
the institutional investors has also declared that it knows and understands,
that the private placement is being done in Israel only (and not in the U.S.)
and is intended only for Israeli residents, that are in Israel (and not in the
U.S.) and not for U.S. persons (“U.S. Person”) as they are defined in Regulation
S regulated under the Securities Act.  Each of the institutional
investors has declared and confirmed, that it is incorporated and active in
Israel, and that it is not a U.S. Person, and that it is not located outside of
Israel at the time of the filing of the offer.  Each of the
institutional investors has declared that it knows that it will not be allowed
to take action to sell the Bonds and Warrants in the U.S. and/or to a U.S.
Person. Each of the institutional investors has declared and confirmed that the
Bonds, Warrants and shares that may result from the exercise of the Warrants,
are not acquired for the purpose of “distribution” (as this term is defined in
the US securities laws) in the U.S.
 
 According
to an agreement entered into as of December 12, 2007, between the Company and
Excellence Nessuah (1993) Ltd. (“Excellence Underwriters”) and First
International & Co. - Underwriting and Investments Ltd. (“First
International Underwriters”) (the "December 12, 2007 Agreement"), Excellence
Underwriters and First International Underwriters undertook to serve as the
pricing underwriters for the prospectus to be filed with the Israeli Securities
Authority and the TASE for the listing for trade of the Bonds on the TASE
(“Commitment to Serve as a Pricing Underwriter”). The Commitment to Serve as a
Pricing Underwriter is subject to the fulfillment of the requirements of the
Israeli Securities Law in connection with the prospectus, that every
irregularity found during the due diligence, if any, will be corrected, and that
the Company and said underwriters will enter into a customary underwriting
agreement. In connection with Excellence Underwriters and First International
Underwriters Commitment to Serve as a Pricing Underwriter and the services
rendered by them to the Company in connection with the Bonds offering, the
Company agreed to pay Excellence Underwriters and First International
Underwriters a fee equal to 3% of the proceeds of the offering, 1% to be paid
upon the receipt of the proceeds of the offering by the Trustee, and the
additional 2% to be paid upon the release to the Company of the proceeds of the
offering by the Trustee. In the event that the conditions set forth in 1.6 above
are not met, the Company will not be paid back the 1% payment.
 
 In
addition, the Company will pay its consultant, Dionysos Investments (1999) Ltd.
(“Dionysos”) a success fee equal to 0.5% of the proceeds of the offering,
pursuant to that certain First Amendment to Financial Services and Business
Development Consulting Agreement by and among the Company and Dionysos dated
February 8, 2007.
 
 To the
Company’s best knowledge and based on information that was provided to it by
Excellence Underwriters and First International Underwriters, the requirements
of the Israeli law have been fulfilled regarding the prohibition on conflicts of
interest between an underwriter and its associates and between an underwriter
and an issuer, including in connection with a sale through a non-uniform
offer.
 
  Under the
terms of the offering, each investor has to pay the Company an amount equal to
the par value of the Bonds purchased by it.
  
 Recent
Developments
  On August
22, 2007, we entered into a Stock Purchase Agreement (the “NTS Purchase
Agreement”) with NTS Communications, Inc. (“NTS”), a provider of integrated
voice, data and video solutions headquartered in Lubbock, Texas, and the owners
of approximately 85% of the equity interests in NTS, to acquire NTS.
Subsequently, all of the remaining shareholders of NTS executed the Agreement,
bringing the total percentage of equity interests in NTS owned by NTS
shareholders that entered into the Agreement (the “NTS Sellers”) to
100%.   On February 14, 2008, we entered into a First Amendment
to the NTS Purchase Agreement to amend the agreement to further extend the
expiration date for the closing of our acquisition of NTS.  On
February 26, 2008, we entered into a Second Amendment to the NTS Purchase
Agreement which amended, among other things, the definition and elements of
working capital, as such term is defined in the NTS Purchase Agreement, and
increased the escrow amount.
  The
acquisition closed on February 26, 2008.  Upon closing of the
acquisition, NTS and its six wholly owned subsidiaries, NTS Construction
Company, Garey M. Wallace Company, Inc., Midcom of Arizona, Inc., Communications
Brokers, Inc., NTS Telephone Company, LLC, and NTS Management Company, LLC,
became our wholly owned subsidiaries.
  The
purchase price for the acquisition set forth in the NTS Purchase Agreement was
approximately $42,000,000 (excluding acquisition related costs), plus (or less)
(i) the difference between NTS’ estimated working capital and the working
capital target for NTS as set forth in the NTS Purchase Agreement, and (ii) the
difference between amounts allocated by NTS for its fiber optic network
build-out project anticipated in Texas and any indebtedness incurred by NTS in
connection with this project, each of which was subject to our advance written
approval.  After applying this formula, the final aggregate purchase
price was calculated as $41,900,000, and was paid as follows:
  o
              $35,414,715.33
      was paid in cash; and
  o
              2,366,892
      shares of our common stock were issued to certain NTS Sellers who elected
      to reinvest all or a portion of their allocable sale price in our Common
      Stock, pursuant to the terms of the NTS Purchase Agreement. Our Board of
      Directors determined, in accordance with the NTS Purchase Agreement, the
      number of shares of our Common Stock to be delivered to each participating
      NTS Seller by dividing the portion of such NTS Seller’s allocable sale
      price that the NTS Seller elected to receive in shares of our Common Stock
      by 93% of the average closing price of our Common Stock on the American
      Stock Exchange for the ten consecutive trading days preceding the trading
      day immediately prior to the Closing Date (i.e., $2.74). The aggregate
      sales price reinvested by all such NTS Sellers was
      $6,485,284.67.
  On
February 26, 2008, and in connection with the closing of the acquisition, the
parties entered into the following material definitive agreements:
  A.           
Free Cash Flow Participation Agreement.
  The Company entered into
a Free Cash Flow Participation Agreement (the “Participation Agreement”) with
NTS Holdings, ”), an entity owned by Barbara Baldwin, NTS’ President and CEO,
Jerry Hoover, NTS’ Executive Vice President – Chief Financial Officer, and Brad
Worthington, NTS’ Executive Vice President – Chief Operating Officer, pursuant
to which NTS Holdings will be entitled to a payment from the Company of an
amount equal to 5% of the aggregate excess free cash flow generated by the
Company’s U.S. Operations, which is defined in the Participation Agreement as
the operations of the Company and its U.S. subsidiaries, which include Xfone
USA, Inc. and NTS, and their respective subsidiaries, as well as any U.S. entity
that the Company acquires
directly, or indirectly through its subsidiaries in the future (a “Future
Acquisition”). NTS Holdings will be entitled to the participation amount
beginning at such time as the Company has received a full return of its initial
invested capital, plus an additional 8% return per year, in connection with the
NTS acquisition (as well as in connection with any Future
Acquisition).
  The
Participation Agreement will remain in effect in perpetuity, unless earlier
terminated in accordance with its terms. Termination of the Participation
Agreement may occur upon a sale or buyout of the Company’s U.S. Operations, at
the option of the purchaser in any such transaction, and in the limited
circumstances set forth in the Participation Agreement.
  
 B.           
Escrow Agreement.
  In
accordance with the terms of the Purchase Agreement, the Company and certain
representatives of the NTS Shareholders (the “NTS Shareholder Representatives”)
entered into an Escrow Agreement with Trustmark National Bank, as escrow agent,
pursuant to which the Company deposited an amount of cash and shares of Common
Stock equal to $6,679,999 (15.9%) of the aggregate purchase price for the
acquisition, to be held and administered by the escrow agent in order to secure
certain obligations of the sellers under the Purchase Agreement. Each share of
Common Stock deposited with the escrow agent has an agreed value of $2.74, which
was determined by using the average per share closing price of the Common Stock
for the ten (10) consecutive trading days preceding the trading day immediately
prior to the Closing Date.
  C.           
Release.
  Concurrently
with the execution of the agreements described above, each of Barbara Baldwin,
Jerry Hoover and Brad Worthington executed a Release, releasing NTS, the Company
and their respective officers, directors, shareholders, employees and their
successors and assigns, from any and all claims, causes or rights of action,
demands and damages related to the business, affairs, actions or omissions of
NTS and those of its officers, directors, employees or independent contractors
through the Closing Date, as well as from any amounts due from NTS to the
Officer for serving NTS in any capacity through the Closing Date.
  D.           In
addition, the Company entered into a Noncompetition, Nondisclosure and
Nonsolicitation Agreement with Telephone Electronics Corporation, the largest
NTS shareholder prior to the closing; and NTS entered into employment agreements
with Barbara Baldwin, Jerry Hoover and Brad Worthington.
  In
connection with the closing of the acquisition on February 26, 2008, the Company
issued 2,366,892 shares of the Company’s Common Stock to certain NTS
Shareholders who elected to reinvest all or a portion of their allocable sale
price in the Company’s Common Stock, pursuant to the terms of the Purchase
Agreement.  The Company’s Board of Directors determined, in accordance
with the Purchase Agreement, the number of shares of the Company’s Common Stock
to be delivered to each participating NTS Shareholder by dividing the portion of
such NTS Shareholder’s allocable sale price that the NTS Shareholder elected to
receive in shares of the Company’s Common Stock by 93% of the average closing
price of the Company’s Common Stock on the American Stock Exchange for the ten
consecutive trading days preceding the trading day immediately prior to the
Closing Date (i.e., $2.74).  The aggregate sales price reinvested by
all such NTS Shareholders was $6,485,284.67. The offering of the shares of
Common Stock to the NTS Shareholders was not registered under the Securities Act
of 1933, as amended and the NTS Shareholders do not have any registration rights
with respect to the shares they received pursuant to this offering.
  On March
5, 2008, the Company entered into a letter agreement (the “March 5, 2008
Agreement”) with  Oberon Securities, LLC, a New York City-based
registered broker-dealer (“Oberon Securities”), pursuant to which the Company
will pay Oberon Securities $1,200,000 in cash for its services to the Company as
financial advisor in connection with the Company's acquisition of NTS, payable
as follows: (i) $400,000 no later than March 7, 2008 (ii) $400,000 no later than
May 1, 2008 and (iii) $400,000 no later than July 1, 2008. The March 5, 2008
Agreement sets forth the total and final fees due to Oberon Securities for
its services in connection with the NTS acquisition, pursuant to the Company’s
prior agreements with Oberon Securities and its affiliates.
  On March
17, 2008, Xfone 018 entered into an Agreement of Principles with Tiv Taam
Holdings 1 Ltd., an Israeli public company (“Tiv Taam”), pursuant to which Xfone
018 agreed to purchase from Tiv Taam, and Tiv Taam agreed to sell to Xfone 018,
approximately 89% of the outstanding share capital (approximately 69% of its
fully diluted share capital) of Robomatix Technologies Ltd. (“Robomatix”) which
Tiv Taam currently owns.  Robomatix owns approximately 90% of the
issued share capital of Tadiran Telecom-Communication Services In Israel Ltd.
(“Tadiran Telecom”), which is the general partner of Tadiran
Telecom-Communication Services In Israel – Limited Partnership (“Tadiran Telecom
LP”), an Israeli entity dealing with the distribution, maintenance, assistance
services and sale of switchboards for the business community in
Israel.  Accordingly, upon consummation of the acquisition, Xfone 018
will also acquire control over Tadiran Telecom and Tadiron Telecom
LP.  The purchase price for the acquisition is NIS 44,000,000
(approximately $12,503,552), subject to adjustment as set forth in the
agreement, payable in three installments, as follows:
  o
              On
      the closing date, NIS 15,500,000 (approximately $4,404,660) (the “First
      Installment”);
  o
              By
      November 20, 2008, NIS 15,500,000 (approximately $4,404,660), subject to
      adjustment resulting from linkage to the Consumer Price
      Index  (the “Second Installment”);
and
  o
              By
      November 1, 2009, NIS 13,000,000 (approximately $3,694,231), subject to
      adjustment resulting from linkage to the Consumer Price Index (the
      “Third Installment”).
  
 Xfone 018
will have all rights as a shareholder of Robomatix upon closing of the
acquisition and payment of the First Installment.
  We, as
the parent company of Xfone 018, have agreed to sign a letter of guarantee with
respect to the Second Installment and the Third Installment.  The
agreement provides for a 60-day period during which Xfone 018 shall perform a
legal and accounting due diligence examination of Robomatix, Tadiran Telecom and
Tadiran Telecom LP.  Xfone 018 has undertaken to maintain
confidentiality of all information delivered to Xfone 018, and has entered into
a Confidentiality Undertaking.
  The
closing of the transaction will occur on the later of (i) 75 days after the
execution of the Agreement (i.e, May 31, 2008), or (ii) 15 days after receipt of
necessary approvals of the General Director of the Antitrust Authority and other
Israeli governmental authorities.  In the event that the necessary
approvals are not received within 120 days of the date of execution of the
Agreement, or a reserved approval was received or an approval under conditions
which make it burdensome on Xfone 018 or significantly prejudice the
profitability of the transaction for Xfone 018, the Agreement will be null and
void as if it was never executed.
  
 RESULTS
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2007
  U.K.
Operations - 2007
 
 Our U.K.
subsidiary, Swiftnet Limited operates switching and computer systems
offering a range of innovative, in-house developed telecommunications services.
Swiftnet's strategy is to grow without the need for heavy investments and with
lower operational expenses through the use of
automation. A comprehensive range of telecommunication services
and products are sold directly to end-users, through a web
site integrating all of Swiftnet's services. The services
are mainly telephone related services to customers dialing local and
international destinations. Swiftnet provides value added services such as fax
broadcast, email to fax and various other messaging services. Swiftnet
also provides services for a range of resellers and partners to sell to
their customers. These resellers and partners include Auracall Limited, Story
Telecom Limited and Equitalk.co.uk Limited. Swiftnet's telecommunications
services are used by subscribers in the U.K. and worldwide.
 
 Our U.K.
subsidiary, Equitalk.co.uk Limited is an automated e-telco providing
post-paid, telecommunications services to customers across the whole of the
U.K. These customers are typically making calls within the UK. Equitalk’s
strategy is to grow through acquiring customers directly through sales and
marketing activities.
 
 Our U.K.
subsidiary, Story Telecom Limited provides international
calling services through calling cards and special access numbers
available for use from mobile phones and landlines. Story
Telecom's strategy is to grow through adding products and services targeted at
customers making international calls.
  In 2007,
we had only approximately 0.2% of the market share of the United Kingdom
telecommunication market (not including mobiles revenues), based on our revenues
of $24 million during 2007, compared with the approximately $10 billion
telecommunication market (not including mobiles revenues) in the United
Kingdom,.
 We had four major types of customers in
the U.K.: Residential, Commercial, Governmental agencies
and Resellers. In 2007 our largest non-affiliated reseller was
WorldNet Global Communications Ltd. which generated under 1% of our total
revenues. We provide WorldNet Global Communications with the billing system. We
anticipate that WorldNet will continue to contribute approximately the same
amount of UKP to our revenues in year 2008.
  However,
should our agreements involving WorldNet be cancelled, our revenues will be
negatively affected.
 
 In 2007,
approximately 54.3% of our revenues were derived from our operations in the
United Kingdom.
 
 
 U.S.
Operations - 2007
 
 Our sole
U.S. subsidiary during 2007, Xfone USA, Inc. provides voice, data and related
services throughout Louisiana and Mississippi to both individuals and
businesses. Xfone USA is a licensed facility based CLEC operating in Louisiana
and Mississippi with a next generation class 5-carrier switching platform. Xfone
USA offers a complete package of local and long distance services to residential
and business customers across both states.
 
 In 2007
we had approximately 11,000 End-User Switched Access telephone lines in the
Alabama, Louisiana and Mississippi market through the combination of Xfone USA
and I-55 Telecommunications, LLC or approximately 0.2% of market share. This
total market size in 2007 represented 5,732,998 telephone lines, with BellSouth
Telecommunications maintaining its monopoly market share with 4,949,629
telephone lines or approximately 86% of the market. All CLECs combined made up
the remaining 783,369 telephone lines or approximately 14% of the tri-state
market, according to the 2007 FCC Report - Trends in Local Telephone
Competition.
  In 2007,
approximately 27.5% of our revenues were derived from our operations in the
United States.
 
 With
continued cross selling to Xfone USA Customers as well as projected expansion
into specific targeted wire centers, we expect to continue revenue growth and
increase market share. Regulations affecting the telecommunications industry
began in March 2006; conversions of all circuits affected were completed in
April 2006. The competition in rural markets is also rapidly declining due to
the removal of UNE-P and the decline in the competitive local exchange providers
that had been dependent on UNE-P as their only source for providing competitive
local telephone services in those communities. We believe that this provides for
a unique opportunity for Xfone USA to continue to gain market share, by
utilizing its existing network and to expand it facilities into these areas
becoming a primary alternative to the monopoly Incumbent Local Exchange
Company.
 
 The
overall trend for 2007 continued to show improving wire line margins in the
Business markets and maintaining margins in the Residential (Consumer) markets
for facilities based providers.  Mergers and acquisitions continued
throughout 2007, as a component for offsetting the line loss felt throughout the
CLEC industry due to the regulatory changes. The industry will see continued
merger and acquisition activity in 2008 and beyond for companies that have cash
and public equity resources. These transactions will continue to change the
landscape in the telecommunications industry. Analysts still believe there will
be more consolidation opportunity over the next two to three years in both wire
line and wireless markets.
 
 As a
result of regulatory changes, the competitive landscape continues to change,
creating additional opportunity for facilities based competitive carriers to
gain a larger market share in a shorter period of time in certain geographic
markets, through internal growth (sales) and external growth (mergers and
acquisitions) due to the continued departure of non-faculties based providers
through either termination of their business or through
acquisitions.
 
 Demands
in the market show continued interest in providing Telco TV, VOIP products and
rapid growth in the Broadband market, heating up competition with the Regional
Bell Carriers and cable providers. DSL services should continue to grow due to
aggressive pricing with higher speeds becoming the norm delivering download
speeds of 6 Meg in certain areas.
 
 Xfone
USA’s business plan for 2007 continues to include expansion of market share in
both Business and Residential markets with focus in its specific geographic
service areas primarily in Mississippi and Louisiana, and in those markets where
the company has deployed its own network and Central Offices (CO’s), which are
the highest margin areas. The Business markets will continue to be expanded
through Direct Sales and Independent sales efforts, while the Residential
markets will be expanded through radio, direct mail, email marketing and other
low cost advertising and message delivery opportunities.
 
 
 In May
2007, Xfone USA hired a Vice President of Business Sales and incorporated an
aggressive business sales expansion plan focusing this effort in its specific
geographic and high margin service areas in Jackson, Mississippi, Baton Rouge
and New Orleans, Louisiana. The expansion effort is on plan from the projections
submitted in May 2007.
 
 The
Company’s business plan in 2007 also included growth through acquisitions, which
made sense for several reasons: (i) faster results in achieving large top line
revenue performance; (ii) significant synergies impact from consolidating
corporate functions; and (iii) relatively easy integration of acquired companies
because of facilities and network architecture.
 
 Xfone USA
is also planning for the future and emergence of the “Third Network” and has
scale and availability to implement VoIP, Telco TV, WiFi and WiMax network
architecture, as they become more viable into the future. However, these
deployments are currently under much scrutiny and are being implemented in
larger metropolitan areas such as New York City, Philadelphia, and San
Francisco.
  Xfone
USA, a facilities based fully integrated communications carrier, is positioned
in 2008 to continue to take full advantage of the regulatory opportunities
afforded to facilities-based providers as a result of the FCC TRRO ruling in
2005, as well as to take advantage of the consolidation momentum started in
2006.
  
 Israeli
Operations - 2007
 
 Since the
opening of the international telephony market in Israel to competition in 1996,
and until 2004, only three companies have provided international telephony
services in Israel. The market, estimated at that time to be 2 billion minutes
per year, was more or less equally divided between the three companies. On July
4, 2004, the Ministry of Communications of the State of Israel granted our
subsidiary, Xfone 018 a license to provide international telecom services in
Israel. We started providing services in Israel through Xfone 018 as of
mid-December 2004. In 2004, two other new providers of international telephony
services launched their services. The international telephony market is highly
competitive and therefore all six providers had to offer low prices in order to
attract or retain subscribers and call minutes.
 
 During
2006, two significant mergers occurred in the Israeli international telephony
market, leaving only four companies in the competition. The aforementioned
mergers enabled Xfone 018 to execute, as of December 2006, a new business
strategy, according to which it re-priced its services by distinguishing the
rates for its subscribed customers from the rates for its non-subscribed
customers. The new strategy has proved to be successful, and in 2007 Xfone 018
revenues were significantly increased.
  In 2007,
the Israeli international telephony market was estimated to be 2.9 billion
minutes. We estimate our market share as of December 31, 2007, as approximately
5.5% of the Israeli market.
  We have
two major types of customers in Israel: Residential and Commercial.
 
 In 2007,
approximately 18.3% of our revenues were derived from our operations in
Israel.
 
 Xfone 018 is operating with
significantly lower overhead than its three competitors in the Israeli market by
utilizing and building on our previous business models. We therefore believe
that Xfone 018 will increase its market share in the international communication
market, will generate a greater part of our revenues and will have a major
contribution to our expected growth.
 
 Our
primary geographic markets are the United Kingdom, the United States and
Israel.  However, we serve customers worldwide.
 
 
 Comparison
Financial Information Years ended December 31, 2007 and 2006 - Percentage of
Revenues:
 
 Year
      Ended
                December
      31,2007
              
              2006Revenues
              
              
              100
              %
              
              100
              %Cost
      of Revenues
              
              
              -44
              %
              
              -58
              %Gross
      Profit
              
              
              56
              %
              
              42
              %Operating
      Expenses:Research
      and Development
              
              
              0
              %
              
              0
              %Marketing
      and Selling
              
              
              -24
              %
              
              -13
              %General
      and Administrative
              
              
              -28
              %
              
              -26
              %Non-
      recurring loss
              
              
              -6
              %
              
              -
              %Total
      Operating Expenses
              
              
              58
              %
              
              -39
              %Income
      before Taxes
              
              
              -4
              %
              
              2
              %Net
      Income
              
              
              -3
              %
              
              2
              %
 
 
 COMPARISON
OF THE YEARS ENDED DECEMBER 31, 2007 AND 2006
 
 Revenues.
Revenues for the year ended December 31, 2007 increased 18% to $44,723,934 from
$37,914,037 for the same period in 2006. The increase in our revenues is
primarily attributable to the operation of Xfone UK and Xfone 018. During 2007,
the revenues of Xfone UK increased 43% to $24,263,610 from $16,951,116 for the
same period in 2006. Increased revenues in the U.K. is mainly a result of
increased marketing activity and on-going product improvements. Despite the
sharp increase in the revenues in the UK, Xfone UK suffered a slow down during
the fourth quarter due to a change in the tariff structure by one of the local
mobile operators. During the fourth quarter, Xfone UK suffered a decrease in
sales attributable to a change in the tariff structure by a local mobile
operator. A high proportion of Xfone UK's customers have mobile phones from this
operator and use Xfone's services by dialing an Xfone access number from their
mobile phone. During the fourth quarter, the mobile operator changed the pricing
on the access numbers, so that they were no longer cost effective for customers
to dial. This change effected not only Xfone, but all alternative suppliers of
international calls in the UK. Xfone UK undertook a marketing campaign to
promote its other services to these customers, to allow them to connect via
alternative, low cost access numbers. This has been successful in terms of
migrating customers, and the number of minutes switches by the company is
growing well. However, these alternative products generate a lower level of
sales and margin per minute than the original products.
 
 During
2007, revenues of Xfone 018 increased by 49% to 8,169,433 from $5,488,712 for
the same period in 2006. The increase in revenues of Xfone 018 is mainly a
result of a new business strategy, according to which it re-priced its services
by distinguishing the rates for its subscribed customers from the rates for its
non-subscribed customers, expanding its customer base, and introducing a new
product to the market. During 2007, the revenues of Xfone USA decreased 21% to
$12,290,891 from $15,474,206 for the same period in 2006. The decrease in
revenues is primarily due to the attrition of dialup internet customers and
longer than expected commissioning process until revenues is
earned.
  Cost of Revenues.Cost of revenues consists primarily of traffic time purchased from
telephony companies and other related charges. Cost of revenues for the year
ended December 31, 2007, decreased 10.7% to $19,626,322 from $21,968,998 for the
same period in 2006. The decrease in our cost of revenues is primarily
attributed to the operations in the UK and Israel. The results of operations of
Equitalk and Story Telecom in the UK were consolidated for the full period of
2007 for the first time, and as a result, contributed to the high gross margin
in the UK. Commencing August 15, 2007, Auracall's results of operations were
consolidated for the first time and contributed high margin to our UK
operations. High gross marging contributed by Xfone 018 resulted from the change
in the business strategy from the end of 2006. Cost of revenues as a percentage
of revenues decreased to approximately 43.9% in 2007, from approximately 58% in
2006.
 
 As a
result of ongoing product improvements, an increase in the sales of higher
margin services and strategic change in our pricing policy to segregate between
registered and unregistered users in Israel, we achieved a decreased in cost of
revenues as percentage of revenues in all our geographic markets, and primarily
in the U.K. and Israel where cost of revenues as percentage of revenues decrease
to 54.5% and 15.4%, respectively, in the year ended December 31, 2007, compared
to 69.8% and 44.6%, respectively, in the same period in 2006.
  GENERAL
ANALYSIS
  
 Research and
Development. Research and development expenses were $47,609 for the year
ended December 31, 2007, which is consistent with our research and development
costs of $45,709 during the year ended December 31, 2006.. Research and
development expenses consist of labor costs of our research and development
manager and other related costs. We estimate that research and development
expenses will remain in the same level in 2008.
 
 Marketing and Selling
Expenses.Marketing and selling expenses consist primarily of commissions
to agents and resellers. Other marketing and selling expenses are related to
compensation attributed to employees engaged in marketing and selling
activities, promotion, advertising and related expenses. Marketing and selling
expenses for the year ended December 31, 2007, increased 121% to $10,886,883
from $4,937,007 for the same period in 2006. The increase in the marketing and
selling expenses is primarily attributed to our operations in the U.K and
Israel. Approximately $5,250,000 of the increase is attributed to agents'
commission payable by Swiftnet, $5,075,000 of which was payable to Auracall
Limited, in the period before Auracall became a wholly owned subsidiary.
Approximately $725,000 of the increase is attributed to the selling and
marketing activities of Story Telecom which was consolidated for the first time
during the second quarter of 2006, and Equitalk which was consolidated in our
financial statements during July 2006. Approximately $500,000 of the marketing
and selling expenses is attributed to the launch of marketing campaign in
Israel. Marketing and selling expenses as a percentage of revenues increased to
24% for the year ended December 31, 2007 from 13.2% for the same period in
2006.
  General and
Administrative Expenses. General and administrative expenses for the year
ended December 31, 2007, increased 28% to $12,335,759 from $9,927,301 for the
same period in 2006. This increase is mainly due to increase in payroll expenses
in the U.K., U.S. and Israel. General and administrative expenses consist
primarily of compensation costs for administration, finance and general
management personnel and consulting fees.
 
 Non- recurring
Loss.On  March 19,
2008, the UK court handed down judgment in the dispute between Swiftnet and MCI
and awarded £1,278,942 ($2,564,036) plus legal costs and interest in favour of
MCI. The Company's financial statements have carried the full amount
Swiftnet calculated that it owed to MCI based on the data held in Swiftnet’s
billing systems. The net effect of this judgement including estimation of the
Company's legal fees, MCI’s legal costs and interest payable is app. £1,427,737
($2,856,803) which is presented as a non-recurring loss in the Statement Of
Operations. Swiftnet is in the process of taking legal advice as to whether it
will seek an appeal to the English Court of Appeal.
  Financing Expenses.Financing expenses, net,
for the year ended December 31, 2007, decreased 5% to $515,562 from $540,668 for
the same period in 2006.This decrease is mainly due to the
repayment of interest bearing loans and balances in the US and
Israel.
  Net Income (Loss).Net Loss for the year ended December 31, 2007 was $1,283,891 compared
with a net income $660,696 for the same period in 2006.  This is
primarily due to the non recurring loss and decrease in the
U.K.
 
 Earning (Loss) Per
Share.Diluted net loss
per share of common stock for the year ended December 31, 2007 was $0.109
compared to diluted net profit of 0.033 for the same period in 2006.
  
 BALANCE
SHEET
 
 Comparison
of the balance sheet as of December 31, 2007 and December 31, 2006
 
 Current Assets.
Current assets amounted to $41,269,446 as of December 31, 2007, as compared with
$10,291,475 as of December 31, 2006. The increase in the current assets is
mainly attributable to the increase in cash in the amount of $4,617,216 provided
mainly by operating expenses, an increase in restricted cash provided by
issuance of debentures, and accrued expenses incurred in connection with the
debentures issuance and with the judgment handed down against Swiftnet in its
dispute with MCI.
  Fixed Assets.Fixed assets net, amounted to $5,747,758 as of December 31, 2007, as
compared with $4,466,048 as of December 31, 2006.
 
 Current Liabilities.As of December 31, 2007, current liabilities amounted to $18,433,343 as
of December 31, 2007, as compared with $11,220,856 as of December 31,
2006.
 
 Long-term
liabilities. As of December 31, 2007, long-term liabilities amounted
to $23,279,294 as of December 31, 2007, as compared with $2,333,830 as of
December 31, 2006.
 
 The
increase in both current and long term liabilities is mainly attributed to the
issuance of debentures in December 2007.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 Cash and
cash equivalents as of December 31, 2007, amounted to $5,835,608 compared to
$1,218,392 as of December 31, 2006, an increase of $4,617,216. Net cash provided
by operating activities in the year ended December 31, 2007, was $5,211,141.
Cash used for investing activities in the year ended December 31, 2007, was
$27,413,190. Net cash provided by financing activities for the year ended
December 31, 2007, was $27,158,817, mainly attributable to issuance of shares
and warrants for cash of $7,465,555, the repayment of financial obligations of
$1,051,079, the decrease in short-term bank credit of $1,821,597 and the
issuance of debentures of $22,450,419.
  Our
capital investments are primarily for the purchase of equipment and software for
services that we provide or intend to provide. Among other network
modifications, this includes an extensive build out of seven ATT central office
collocations in the Jackson, Mississippi area capable of providing both digital
and analog facilities-based telecommunication services to the commercial and
residential markets.
 
 Capital
lease obligations: We are the lessee of switching and other telecom equipment
under capital leases expiring on various dates from 2007 through
2009.
  
 The
minimum future lease payments are:
 
 Date
              
              U.S.
      Dollar2008
              
              $
              89,6552009
              
              $
              31,893
 
 We will
continue to finance our operations and fund the current commitments for capital
expenditures mainly from the cash provided from operating activities and from
private and/or public placements.
 
 On April
18, 2002 Bank Leumi (UK) plc issued company credit cards to two directors of
Swiftnet Limited, and by way of securing the balances on these cards, took
a First Party Charge over Swiftnet to the sum of £50,000
($100,241).
 
 As of
April 10, 2003, Equitalk.co.uk Limited, our U.K. based subsidiary since July
2006, has received loan facilities from Barclays Bank plc in the form of a
Government Small Firms Loan Guarantee Scheme Loan Agreement whereby
Barclays would lend Equitalk £150,000 ($300,722). The loan plus interest is
repaid monthly and payments are up to date. As part of the agreement a
Debenture charge was raised on all the assets of Equitalk. The balance as of
December 31, 2007 due is £25,000 ($50,120).
 
 Our U.S.
subsidiary, Xfone USA, Inc., has certain loan facilities with certain liens on
our fixed assets in the form of installment loan agreements. The total aggregate
amount of these loans as of December 31, 2007 is $623,643.
 
 Upon the
assignment of the 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 Limited and Xfone 018 Ltd., individually and/or jointly, agreed to
guarantee all undisputed debts owing to BellSouth Telecommunications by Xfone
USA 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.
 
 Our
Israel based subsidiary, Xfone 018 Ltd. has received credit facilities from Bank
Hapoalim B.M. in Israel in order to finance its activities. As of June 30, 2007,
the credit facilities include a revolving credit line of 500,000 NIS ($127,453),
a short-term credit line of 2,250,000 NIS ($573,541), and long-term credit line
of 1,290,000 NIS ($328,830). In addition, the bank made available to Xfone 018 a
long-term facility of 3,150,000 NIS ($802,957) to procure equipment. The credit
facilities are secured with: (a) a floating charge on Xfone 018 assets; (b) a
fixed charge on its telecommunication equipment (including switches); (c)
subordination of a Term Note of $800,000. This Term Note was executed in July
2004 by Xfone 018 in favor of the Company; (d) assignment of rights by way of
pledge on the Partner Communications Company Ltd. contract, the Cellcom Israel
Ltd. contract, the Pelephone Communications Ltd. contract, and the credit
companies contracts with Xfone 018; (e) personal collateral by Abraham Keinan
and Guy Nissenson, which includes a pledge on 1,000,000 shares of common stock
of the Company owned by Mr. Keinan, and an undertaking to provide Bank Hapoalim
with an additional financial guarantee of up to $500,000 under certain
circumstances. We agreed to indemnify Abraham Keinan and/or Guy Nissenson on
account of any damage and/or loss and/or expense (including legal expenses) that
they may incur in connection with the stock pledge and/or any other obligation
made by them to Bank Hapoalim in connection with the collateral; (f) We and
Swiftnet Limited issued a Letter of Guarantee, unlimited in amount, in favor of
the bank, guaranteeing all debt and indebtedness of Xfone 018 towards the bank;
(g) subordination of the Minority Partner Loan (as defined below). As of
December 31, 2007, we have a balance due of 2,365,447 NIS ($615,040) under the
credit facility.
 
 
 According
to an agreement between us, Xfone 018 Ltd. and our 26% minority interest partner
in Xfone 018 (the “Minority Partner”), the Minority Partner provided in 2004 a
bank guarantee of 10,000,000 NIS ($2,600,104) to the Ministry of Communications
of the State of Israel which replaced an existing bank guarantee given by the
Company in connection with Xfone 018’s license to provide international telecom
services in Israel. As part of the agreement, the Company agreed to indemnify
the Minority Partner 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 018, provided that the said act or omission is performed
against the opinion of the Minority Partner or without his
knowledge.
 
 According
to the above-mentioned agreement with the Minority Partner, the Minority Partner
provided in the fourth quarter of 2004, a shareholder loan of approximately
$400,000 to Xfone 018 (the “Minority Partner Loan”). The Minority Partner Loan
is payable after four years with annual interest of 4% and linkage to the
Israeli consumer price index. As of December 31, 2007, the balance of the
Minority Partner Loan is 1,891,293 NIS ($491,756).
 
 As of
December 31, 2007, we provided to Xfone 018 a shareholder loan in an
aggregate amount of $1,250,394.
 
 As of
December 31, 2007, our Israeli subsidiary activities were financed by the
shareholders loans and by using 2,365,447 NIS ($615,040) of the credit facility
from Bank Hapoalim.
 
 On
September 27, 2005, we entered into a Securities Purchase Agreement for a
$2,000,000 financial transaction with Xfone USA, Inc., eXpeTel
Communications, Inc., Gulf Coast Utilities, Inc. and Laurus Master Fund, Ltd.
The investment, which took the form of a convertible term note secured by our
United States assets, has a 3 year term and bears interest at a rate equal to
prime plus 1.5% per annum. The Term Note is convertible, under certain
conditions, into shares of our common stock at an initial conversion price equal
to $3.48 per share. In conjunction with the financial transaction, we issued to
Laurus Master Fund 157,500 warrants which are exercisable at $3.80 per share for
a period of five years. The closing of the financing was on September 28, 2005.
As of August 1, 2007, Laurus Master Fund, Ltd. assigned to Valens U.S. SPV I,
LLC a principal amount equal to $169,925.11 of the Term Note, and to Valens
Offshore Fund SPV I, Ltd. a principal amount equal to $549,289.76 of the Term
Note. Net proceeds from the financing were mainly used for procurement of
capital equipment and general working capital purposes for us and Xfone USA,
eXpeTel Communications and Gulf Coast Utilities, Inc. The conversion of the Term
Note will result in dilution in the percentage of common stock owned by our
existing shareholders, although the conversion price was in excess of the net
tangible book value per share and accordingly was not economically dilutive. The
potential or actual resale of the shares underlying the note could have an
adverse effect on the price of our common stock. The balance as of December 31,
2007 due to Laurus Master Fund is $623,643.
 
 On
September 27, 2006, a Shareholders Loan Agreement was entered by and between
Auracall Limited, at that time an affiliated entity and currently a wholly owned
subsidiary, Swiftnet Limited, a wholly owned U.K. subsidiary and the former
Managing Director of Auracall who held 67.5% of Auracall. As part of this
agreement, Swiftnet agreed to provide a loan of £24,000 ($48,115) to Auracall,
free of interest, to be repaid within one year. The loan was funded on October
13, 2006, and repaid by Auracall in full on May 10, 2007.
  On August
24, 2006, we announced by Press Release that we had filed with
the Israel Securities Authority (“ISA”) and the Tel Aviv Stock Exchange (“TASE”)
a preliminary draft prospectus for a proposed public offering of convertible
debentures to be listed and traded on the TASE (the “Proposed Public Offering”).
The total amount proposed to be raised in the Proposed Public Offering was
approximately $12 million. The Proposed Public Offering was subject to the
approval of the ISA and the TASE, as well as the execution of an underwriting
agreement and final pricing. On November 9, 2006 we were informed that the TASE
decided to seek a No-Action Letter from the U.S. Securities and Exchange
Commission (the “No-Action Letter”) and that until the No-Action Letter is
granted to the TASE the Proposed Public Offering is delayed. On May 7, 2007, we
were informed by the TASE that the No-Action Letter had not yet been
granted. We recently raised $2,100,000 from institutional investors in Israel
from the sale of shares of our common stock in connection with our “best
efforts” offering pursuant to a Registration Statement on Form SB-2 (File No.
333-143618) which was declared effective by the U.S. Securities and Exchange
Commission on August 6, 2007, and continue to consider additional private /
public offerings in Israel in order to raise additional capital as
needed.
  
 On
December 24, 2006, we entered into an Agreement to sell to Halman-Aldubi
Provident Funds Ltd. and Halman-Aldubi Pension Funds Ltd. an aggregate of
344,828 restricted shares of its common stock, at a purchase price of $2.90 per
share, together with an aggregate of 172,414 warrants to purchase shares
of our common stock, at an exercise price of $3.40 per share and with a
term of five years. The financial transaction was closed on February 8, 2007.
The net proceeds of the financial transaction were $853,649, and are being used
for general working capital and/or investment in equipment and/or acquisition
and/or business development. The financial transaction resulted in dilution in
the percentage of common stock owned by our existing shareholders, although
the price paid was in excess of the net tangible book value per share and
accordingly was not economically dilutive.
 
 Our
subsidiary, Xfone USA, Inc. was receiving services from Embarq Logistics, Inc.
("Embarq") related to the installation of certain collocation facilities in
Mississippi. Certain disputes arose between the parties as to the scope of
the work, the manner in which it was carried out and the timeliness of
completion, and the parties agreed that Xfone USA had accrued an aggregate of
$830,000 in liabilities to Embarq in connection with the services Embarq
provided. On May 31, 2007, the parties reached a settlement agreement,
pursuant to which Xfone USA paid Embarq $415,004 upon execution of the
agreement, and issued a promissory note for the remaining balance of $414,996,
which is payable in six consecutive monthly installments of $69,166 each,
beginning on June 30, 2007 through November 30, 2007. In order to induce
Embarq to enter into the settlement with our subsidiary, we guaranteed the
obligations of Xfone USA by executing a Parent Guarantee.
  During
May 2007, 6,300 options under the Company's 2004 Stock Option Plan were
exercised at an exercise price of $3.50 per share.
  On July
17, 2007, Story Telecom Limited agreed to loan us up to £400,000 ($801,924) that
it had as cash surplus in its bank account. The loan bears fixed interest rate
at 4% over the interest payable by the bank for deposits under the same terms.
The loan is for a one-year term but can be accelerated by Story Telecom if it
requires additional financing to continue to operate as a going concern. The
loan is guaranteed by our wholly-owned UK subsidiary, Swiftnet Limited and by
amounts owed to us by Story Telecom. In addition, Story Telecom has the right to
set-off repayments under the loan against sums due to us by Story Telecom. The
loan is pre-payable at any time upon 30 days’ notice. On July 18, 2007 and on
September 25, 2007, we borrowed £350,000 ($701,684) and £50,000 ($100,241),
respectively, of the loan. On October 8, 2007, Story Telecom agreed to increase
the loan ceiling by £300,000 to a maximum of £700,000. Further borrowings of
£100,000 ($200,481) were made on October 9, 2007. As of December 31, 2007, the
aggregate outstanding borrowings were £500,000 ($1,002,405).
 
 On
October 23, 2007, the Company entered into Subscription Agreements with 15
investors affiliated with Gagnon Securities, Inc. who agreed to purchase an
aggregate of 1,000,000 shares of the Company’s common stock, par value $0.001
per share at a price of $3.00 per share, for a total subscription amount of
$3,000,000. This offering was made by the Company, acting without a placement
agent, pursuant to the Company’s Registration Statement on Form SB-2 (File No.
333-143618) which was declared effective by the U.S. Securities and Exchange
Commission on August 6, 2007. The 1,000,000 shares were issued on November 6,
2007.
 
 On
November 4, 2007, the Company entered into Subscription Agreements with: (i) XFN
- RLSI Investments, LLC, an entity affiliated with Richard L. Scott Investments,
LLC, a U.S. institutional investor, which agreed to purchase 250,000 shares of
the Company’s common stock, par value $0.001 per share at a price of $3.00 per
share, for a total subscription amount of $750,000 (the “U.S. Offering”); and
(ii) certain Israeli institutional investors, which agreed to purchase an
aggregate of 700,000 shares of the Company’s Common Stock, at a price of $3.00
per share, for a total subscription amount of $2,100,000 (the “Israeli
Offering”). The U.S. Offering and Israeli Offering were made by the Company
pursuant to the Company’s Registration Statement on Form SB-2 (File No.
333-143618) which was declared effective by the U.S. Securities and Exchange
Commission on August 6,. The U.S. Offering was made by the Company acting
without a placement agent. The Israeli Offering was made by the Company with the
services of First International & Co. - Underwriting & Investments Ltd.,
one of the Israeli investors, acting as placement agent, for which it is
entitled to a placement fee equal to 5% (plus VAT, if applicable) of the gross
proceeds of the Israeli Offering.  In addition, the Company paid its
consultant, Dionysos Investments (1999) Ltd. (“Dionysos”) a success fee equal to
0.5% of the gross precedes of the Israeli Offering, pursuant to that certain
First Amendment to Financial Services and Business Development Consulting
Agreement by and among the Company and Dionysos dated February 8,
2007.
 
 On
November 5, 2007, Bank Hapoalim B.M. in Israel provided a bank guarantee of
322,500 NIS ($83,853) to the Ministry of Communications of the State of Israel
in connection with a November 7, 2007 license to commence an experimental
deployment of Local Telephone Services utilizing Voice over Broadband (VoB)
technology, which was granted to Xfone 018. In connection with the bank
guarantee, Xfone 018 executed an indemnification agreement in favor of Bank
Hapoalim. The bank guarantee will expire on April 30, 2009.
 
 
 On
December 13, 2007, the Company entered into Subscription Agreements with:
(i) XFN-RLSI Investments, LLC, an entity affiliated with Richard L. Scott
Investments, LLC, a U.S. institutional investor, which agreed to purchase
800,000 Units, each of which consists of two shares of the Company’s common
stock and one warrant to purchase one share of common stock at a price of $6.20
per Unit (“Unit”), for a total subscription amount of $4,960,000; and
(ii) certain investors affiliated with or who are customers of Gagnon
Securities LLC who agreed to purchase an aggregate of 500,000 Units, for a total
subscription amount of $3,100,000. The warrants are exercisable for a period of
five years from issuance at an exercise price of $3.10 per
share.  XFN-RLSI Investments, LLC is not an affiliate of the Company.
This offering was made pursuant to the 4(2) exemption under the Securities Act
of 1933, as amended, and was made by the Company acting without a placement
agent.
 
 On
December 13, 2007, the Company accepted offers, for the issuance of securities
to Israeli institutional investors, for total gross proceeds of NIS 100,382,100
(approximately $25,413,189) par value bonds (Series A) (the “Bonds”). The Bonds
were issued for an amount equal to their par value.  A summary of the
main terms of the Bonds is described above under "Overview".
 
 IMPACT
OF INFLATION AND CURRENCY FLUCTUATIONS
 
 Effective
January 1, 2007, we changed our functional and reporting currency from the
Great Britain Pounds ("GBP") to the U.S. dollar for the reason that the majority
of our transactions and balances are denominated in U.S. dollars. Consistent
with SFAS No. 52 “Foreign Currency Translation,” the change in functional
currency will be accounted for prospectively; therefore, there is no effect on
our historical consolidated financial statements. The translated amounts for
non-monetary assets at December 31, 2006 became the accounting basis for those
assets as of January 1, 2007. 54.3% and 18.3% of our revenues in the 2007 were
derived from our U.K. and Israeli operations, respectively. In 2007,
approximately 32% of the direct traffic costs in Israel were in GBP and the rest
were in New Israeli Shekels (“NIS”).
 
 For continuing
transactions made in currencies other then US dollar, we use a current
conversion rate. For noncontingent past transactions made in currencies other
then US dollar we use the conversion rate of the time of
transaction.
 
 Our costs
of revenues are mainly in U.S. dollars and GBP.
 
 Most of
our assets, liabilities, revenues and expenditures are in U.S. dollars and GBP.
The remainder of the assets, liabilities, revenues and expenditures are in NIS.
We anticipate that in 2008 the portion of U.S. dollars will continue to grow
although the portion of GBP will stay significant.
 
 A
devaluation of the GBP or the NIS in relation to the U.S. dollar will have the
effect of decreasing the U.S. dollar value of all assets and liabilities that
are in GBP or NIS. Conversely, any increase in the value of the GBP or the NIS
in relation to the U.S. dollar will have the effect of increasing the U.S.
dollar value of all GBP or NIS assets and the U.S. dollar amounts of any GBP or
NIS 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 the
rate of inflation causes a rise in salaries or other expenses and the market
conditions don't allow us to raise prices proportionally, it will have a
negative effect on the value of our assets and on our potential
profitability.




ITEM 7.
            Financial
      Statements


Xfone,
      Inc. and SubsidiariesCONSOLIDATED
      FINANCIAL STATEMENTSAs
      of December 31, 2007CONTENTS
 
  Report of Independent Registered Public Accounting
      Firm
                
                
                F-1Balance Sheet
                
                
                F-2Statements of Operations
                
                
                F-4Statements of Changes in Shareholders'
      Equity
                
                
                F-5Statements of Cash Flows
                
                
                F-6Notes
      to Consolidated Financial Statements
                
                
                F-8
  
 -i-
 
 REPORT OF INDEPENDENTREGISTERED
PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors
 Xfone,
Inc.
 
 We have
audited the accompanying consolidated balance sheet of Xfone, Inc. as of
December 31, 2007, and the related consolidated statements of operation, changes
in stockholders' equity and cash flows for the years ended December 31, 2007 and
2006. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. We did not audit the
financial statements of Xfone 018, Ltd., a 69% owned subsidiary, which
statements reflect 5.5% of total consolidated assets as of December 31, 2007 and
18.3% of consolidated revenues for the year ended December 31, 2007. Those
financial statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Xfone 018, Ltd. as of December 31, 2007 and for the year ended December 31,
2007 and 2006 is based solely on the report of the other
auditor.
 
 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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 
 In our
opinion, and based on that of the other auditor, the consolidated financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of Xfone, Inc. as of December 31, 2007, and the
consolidated results of its operations and cash flows for the years ended
December 31, 2007 and 2006, in conformity with accounting principles generally
accepted in the United States of America.
 
 /s/ Stark
Winter Schenkein & Co., LLP
  Denver,
Colorado
 March __,
2008
 
 
 F-1
 Xfone, Inc. andSubsidiariesBALANCE
      SHEETDecember
    31,2007CURRENT
      ASSETS:Cash
                  
                  $
                  5,835,608Restricted
      cash
                  
                  
                  25,562,032Accounts
      receivable, net
                  
                  
                  5,886,499Prepaid
      expenses and other receivables (Note 3)
                  
                  
                  3,985,307Totalcurrent assets
                  
                  
                  41,269,446MINORITY
      INTEREST
                  
                  
                  7,190LONG
      TERM RECEIVABLES
                  
                  
                  2,076,061FIXED
      ASSETS, NET (NOTE 4)
                  
                  
                  5,747,758OTHER
      ASSETS, NET (NOTE 5)
                  
                  
                  17,948,872Totalassets
                  
                  $
                  67,049,327
 
 The
accompanying notes are an integral part of these consolidated financial
statements
 
  F-2
 
 Xfone,
      Inc. and SubsidiariesBALANCE
      SHEETDecember
    31,2007CURRENT
      LIABILITIES:Notes
      payable - current portion (Note 7)
                  
                  $
                  1,094,339Trade
      payables
                  
                  
                  8,287,420Other
      liabilities and accrued expenses (Note 6)
                  
                  
                  5,322,045Obligations
      under capital leases - current portion (note 9)
                  
                  
                  89,654Current
      maturities of bonds  (note 8)
                  
                  
                  3,268,476Total current
      liabilities
                  
                  
                  18,061,934DEFERRED
      TAXES (NOTE 10)
                  
                  
                  1,103NOTES
      PAYABLE (NOTE 7)
                  
                  
                  1,013,808BONDS(NOTE
      8)
                  
                  
                  22,083,892OBLIGATIONS
      UNDER CAPITAL LEASES (NOTE 9)
                  
                  
                  31,893SEVERANCE
      PAY
                  
                  
                  148,600Total
      liabilities
                  
                  $
                  41,341,230COMMITMENTS
      AND CONTINGENT LIABILITIES (NOTE 11)SHAREHOLDERS'
      EQUITY:Common
      stock:25,000,000
      and 75,000,000 shares authorized at December 31, 2006 and December 31,
      2007, respectively;11,153,817
      and 13,467,928 issued and outstanding at December 31, 2006 and December
      31, 2007, respectively;
                  
                  
                  13,468Contributions
      in excess of par value
                  
                  
                  26,494,985Foreign
      currency translation adjustment
                  
                  
                  (1,564,814
                  )Deferred
      stock compensation
                  
                  
                  (295,155
                  )Retained
      earnings
                  
                  
                  1,059,613
                  )Total shareholders'
      equity
                  
                  
                  25,708,097Total liabilities and
      shareholders' equity
                  
                  $
                  67,049,327The
      accompanying notes are an integral part of these consolidated financial
      statements
 
 
  F-3
 
 Xfone, Inc.and
      SubsidiariesSTATEMENTS
      OF OPERATIONS
 Years
      EndedDecember
      312007
                    
                    
                    2006Revenues
                    
                    $
                    44,723,934
                    
                    
                    $
                    37,914,037Cost
      of revenues
                    
                    
                    19,626,322
                    
                    
                    
                    21,968,998Gross
      profit
                    
                    
                    25,097,612
                    
                    
                    
                    15,945,039Operating
      expenses:Research
      and development
                    
                    
                    47,609
                    
                    
                    
                    45,709Marketing
      and selling
                    
                    
                    10,886,883
                    
                    
                    
                    4,937,007General
      and administrative
                    
                    
                    12,335,759
                    
                    
                    
                    9,927,301Non- recurring loss (note
      11)
                    
                    
                    2,856,803Total operating
      expenses
                    
                    
                    26,127,054
                    
                    
                    
                    14,910,017Operating
      profit (loss)
                    
                    
                    (1,029,442
                    )
                    
                    
                    1,035,022Financing
      expenses, net
                    
                    
                    (515,562
                    )
                    
                    
                    (540,688
                    )Equity
      in income of affiliated company
                    
                    
                    132,867
                    
                    
                    
                    60,574Loss
      from a change of holding of affiliated company
                    
                    
                    -
                    
                    
                    
                    (58,472
                    )Other
      income
                    
                    
                    -
                    
                    
                    
                    84,723Income
      (loss) before minority interest and taxes
                    
                    
                    (1,412,137
                    )
                    
                    
                    581,159Minority
      interest
                    
                    
                    (297,860
                    )
                    
                    
                    81,802Income
      (loss) before taxes
                    
                    
                    (1,709,997
                    )
                    
                    
                    662,961Income
      tax benefit (expense)
                    
                    
                    426,105
                    
                    
                    
                    (2,265
                    )Net
      income (loss)
                    
                    $
                    (1,283,892
                    )
                    
                    $
                    660,696Basic
      net profit (loss) per share
                    
                    $
                    (0.109
                    )
                    
                    $
                    0.065Diluted
      net profit (loss) per share
                    
                    $
                    (0.109
                    )
                    
                    $
                    0.065Weighted
      average number of shares used for computing:Basic
      profit (loss) per share
                    
                    
                    11,777,645
                    
                    
                    
                    10,135,874Diluted
      profit (loss) per share
                    
                    
                    11,779,390
                    
                    
                    
                    10,135,874
   The
      accompanying notes are an integral part of these consolidated financial
      statements
  F-4
 
 Xfone, Inc. andSubsidiariesSTATEMENTS
      OF CHANGES IN SHAREHOLDERS' EQUITY
 For the year
ended December 31, 2006 and 2007
 Number
      ofOrdinaryShares
                  
                  
                  ShareCapital
                  
                  
                  Contributionsin
      excess ofpar
      value
                  
                  
                  Foreign
      currencytranslationadjustments
                  
                  
                  DeferredStockCompensation
                  
                  
                  RetainedEarnings
                  
                  
                  TotalShareholders'EquityBalance
      at January 1, 2006
                  
                  
                  8,172,671
                  
                  
                  $
                  8,684
                  
                  
                  $
                  8,354,964
                  
                  
                  $
                  (228,043
                  )
                  
                  $
                  -
                  
                  
                  $
                  1,682,809
                  
                  
                  $
                  9,818,414Deferred
      stock compensation, net
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  739,131
                  
                  
                  
                  -
                  
                  
                  
                  (739,131
                  )
                  
                  
                  -
                  
                  
                  
                  -Amortization
      of deferred compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  227,738
                  
                  
                  
                  -
                  
                  
                  
                  227,738Redemption
      of stock
                  
                  
                  (100,000
                  )
                  
                  
                  (100
                  )
                  
                  
                  (269,762
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (269,862
                  )Stock
      issued during the period, net of issuance expenses :For
      services
                  
                  
                  40,629
                  
                  
                  
                  47
                  
                  
                  
                  27,381
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  27,428For
      cash
                  
                  
                  663,825
                  
                  
                  
                  709
                  
                  
                  
                  1,020,717
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,021,426For
      acquisitions
                  
                  
                  1,544,761
                  
                  
                  
                  1,610
                  
                  
                  
                  5,920,870
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,922,480For
      loan repayment
                  
                  
                  831,931
                  
                  
                  
                  204
                  
                  
                  
                  2,790,652
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,790,856Warrants
      granted to consultants for services and others
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  425,740
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  425,740Currency
      translation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,152,658
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,152,658
                  )Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  660,696
                  
                  
                  
                  660,696Balance
      at December 31, 2006
                  
                  
                  11,153,817
                  
                  
                  $
                  11,154
                  
                  
                  $
                  19,009,693
                  
                  
                  $
                  (1,380,701
                  )
                  
                  $
                  (511,393
                  )
                  
                  $
                  2,343,505
                  
                  
                  $
                  19,472,258Balance
      at January 1, 2007
                  
                  
                  11,153,817
                  
                  
                  $
                  11,154
                  
                  
                  $
                  19,009,693
                  
                  
                  $
                  (1,380,701
                  )
                  
                  $
                  (511,393
                  )
                  
                  $
                  2,343,505
                  
                  
                  $
                  19,472,258Deferred
      stock compensation, net
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Amortization
      of deferred compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  216,238
                  
                  
                  
                  
                  
                  
                  
                  216,238Stock
      issued during the period, net oof
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -of  
      issuance expenses :For
      cash
                  
                  
                  2,294,828
                  
                  
                  
                  2,295
                  
                  
                  
                  6,489,955
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,492,250For
      acquisitions
                  
                  
                  20,026
                  
                  
                  
                  20
                  
                  
                  
                  (20
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercise
      of options options
                  
                  
                  6,300
                  
                  
                  
                  6
                  
                  
                  
                  22,044
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  22,050Shares
      cancelled
                  
                  
                  (7,403)
                  
                  
                  
                  (7)
                  
                  
                  
                  7
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Fair
      value of warrants granted to bonds holders
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  973,306
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  973,306Currency
      translation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (184,113
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (184,113
                  )Net
      loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,283,892
                  )
                  
                  
                  (1,283,892
                  )Balance
      at December 31, 2007
                  
                  
                  13,467,928
                  
                  
                  $
                  13,468
                  
                  
                  $
                  26,494,985
                  
                  
                  $
                  (1,564,814
                  )
                  
                  $
                  (295,155
                  )
                  
                  $
                  1,059,613
                  
                  
                  $
                  25,708,097
 
 The
accompanying notes are an integral part of these consolidated financial
statements
  F-5
 
 Xfone, Inc. and SubsidiariesSTATEMENTS
      OF CASH FLOWSYears
    EndedDecember 31
      ,2007
                  
                  
                  2006Cash flow from operating
      activities:Net
      income (loss)
                  
                  $
                  (1,283,892
                  )
                  
                  $
                  660,696Adjustments
      required to reconcile net incometo
      net cash provided by (used in)operating
      activities:Depreciation
      and amortization
                  
                  
                  1,211,798
                  
                  
                  
                  1,092,085Compensation  in
      connection with the issuance of warrants and options issued for
      professional services
                  
                  
                  216,238
                  
                  
                  
                  255,166Minority
      interest
                  
                  
                  297,860
                  
                  
                  
                  (81,802
                  )Currency
      differences on convertible notes and loans
                  
                  
                  -
                  
                  
                  
                  368Loss
      from a change of holding of affiliated company
                  
                  
                  -
                  
                  
                  
                  58,472Changes
      in earnings of equity investments
                  
                  
                  (132,868
                  )
                  
                  
                  (60,574
                  )(increase)
      Decrease in account receivables
                  
                  
                  2,796,353
                  
                  
                  
                  (1,335,519
                  )(Increase)
      decrease in long term receivables
                  
                  
                  373,258
                  
                  
                  
                  -Increase
      (decrease) in severance pay
                  
                  
                  57,160
                  
                  
                  
                  63,305(Increase)
      decrease in other receivables
                  
                  
                  (1,703,548
                  )
                  
                  
                  771,517Decrease
      in shareholder loans receivable
                  
                  
                  -
                  
                  
                  
                  242,847Increase
      (decrease) in trade payables
                  
                  
                  663,601
                  
                  
                  
                  (1,305,973
                  )Increase
      (decrease) in other payables
                  
                  
                  2,523,797
                  
                  
                  
                  (390,947
                  )(Decrease)
      in deferred taxes
                  
                  
                  (180,026
                  )
                  
                  
                  (51,657
                  )Net
      cash provided by (used in) operating activities
                  
                  
                  4,839,731
                  
                  
                  
                  (82,016
                  )Cash flow from investing
      activities:Investment
      in short- term deposit
                  
                  
                  (24,998,173
                  )Purchase
      of other assets
                  
                  
                  -
                  
                  
                  
                  (1,258
                  )Purchase
      of equipment
                  
                  
                  (1,322,908
                  )
                  
                  
                  (871,998
                  )Change
      in prepaid acquisition costs
                  
                  
                  (479,502
                  )
                  
                  
                  -Change
      in long- term receivables
                  
                  
                  -
                  
                  
                  
                  (106,254
                  )Acquisition
      of EBI
                  
                  
                  -
                  
                  
                  
                  (99,372
                  )Acquisition
      of Canufly
                  
                  
                  -
                  
                  
                  
                  (506,684
                  )Acquisition
      of I-55 Internet Services
                  
                  
                  -
                  
                  
                  
                  (104,560
                  )Acquisition
      of I-55 Telecommunications
                  
                  
                  -
                  
                  
                  
                  (30,196
                  )Net
      cash acquired from the acquisition of Equitalk
                  
                  
                  -
                  
                  
                  
                  146,878Net
      cash acquired from the acquisition of Story Telecom
                  
                  
                  -
                  
                  
                  
                  65,579Net
      cash acquired from the acquisition of Auracall
                  
                  
                  (612,607
                  )
                  
                  
                  -Net cash
      (used in) investing activities
                  
                  
                  (27,413,190
                  )
                  
                  
                  (1,507,865
                  )
 
 The
accompanying notes are an integral part of these consolidated financial
statements
 
  F-6
 
 
 Xfone,
      Inc. and SubsidiariesSTATEMENTS
      OF CASH FLOWS (Continued)Years
    EndedDecember 31
      ,2007
                  
                  2006Cash flow from financing
      activities:Repayment
      of long term loans from banks and others
                  
                  
                  (1,051,079
                  )
                  
                  
                  (2,544,945
                  )Increase
      in capital lease obligation
                  
                  
                  (105,968
                  )
                  
                  
                  52,511Increase
      (decrease) in short-term bank credit, net
                  
                  
                  (1,821,597
                  )
                  
                  
                  240,647Proceeds
      from long term loans from banks
                  
                  
                  199,437
                  
                  
                  
                  307,412Repayment
      of convertible notes
                  
                  
                  -
                  
                  
                  
                  (623,812
                  )Issuance
      of bonds, net of issuance expenses
                  
                  
                  22,821,827
                  
                  
                  
                  -Proceeds
      from exercise of options
                  
                  
                  22,050
                  
                  
                  
                  -Proceeds
      from issuance of shares and detachable warrants, net of issuance
      expenses
                  
                  
                  7,465,555
                  
                  
                  
                  751,564Net
      cash provided by (used in) financing activities
                  
                  
                  27,530,225
                  
                  
                  
                  (1,816,623
                  )Effect
      of exchange rate changes on cash and cash equivalents
                  
                  
                  (339,550
                  )
                  
                  
                  (262,660
                  )Net
      (decrease) increase in cash and cash equivalents
                  
                  
                  4,617,216
                  
                  
                  
                  (3,669,164
                  )Cash
      and cash equivalents at the beginning of year
                  
                  
                  1,218,392
                  
                  
                  
                  4,887,556Cash
      and cash equivalents at the end of year
                  
                  $
                  5,835,608
                  
                  
                  $
                  1,218,392The
      accompanying notes are an integral part of these consolidated financial
      statements
 
 Supplemental disclosure of non cash investing and
      financing activities:Cash
      paid for:Interest
      paid
                  
                  $
                  129,308
                  
                  
                  $
                  290,404Tax
      paid
                  
                  $
                  986
                  
                  
                  $
                  111,859Acquisition
      of EBI
                  
                  $
                  -
                  
                  
                  $
                  176,326Acquisition
      of Canufly
                  
                  $
                  -
                  
                  
                  $
                  354,412Acquisition
      of I-55 Internet Services
                  
                  $
                  -
                  
                  
                  $
                  3,195,299Acquisition
      of I-55 Telecommunication
                  
                  $
                  -
                  
                  
                  $
                  818,513Acquisition
      of Equitalk
                  
                  $
                  -
                  
                  
                  $
                  279,475Purchase
      of fixed assets
                  
                  $
                  830,000
                  
                  
                  $
                  -Purchase
      of fixed assets via capital lease
                  
                  $
                  26,510
                  
                  
                  $
                  -Capitalization
      of finance expenses related with acquisition costs of NTS
      Communications
                  
                  $
                  213,179
                  
                  
                  $
                  -
 The
accompanying notes are an integral part of these consolidated financial
statements
 
  F-7
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER
      31, 2007
 
 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
      voice, video and data telecommunications services, including: local, long
      distance and international telephony services; prepaid and postpaid
      calling cards; cellular services; Internet services; messaging services
      (Email/Fax Broadcast, Email2Fax and Cyber-Number); and reselling
      opportunities, with operations in the United States, the United
      Kingdom and Israel.
 
 Xfone's
holdings in subsidiaries as of December 31, 2007 were as follows:
 
 -
                    Swiftnet
      Limited ("Swiftnet") - wholly
      owned U.K. subsidiary.
 
 -
                    Equitalk.co.uk
      Limited ("Equitalk") - wholly
      owned U.K. subsidiary.
 
 -
                    Auracall
      Limited ("Auracall") - wholly owned U.K. subsidiary of
      Swiftnet.
 
 -
                    Xfone
      USA, Inc. and its two wholly owned subsidiaries, eXpeTel Communications,
      Inc. and Gulf Coast Utilities, Inc. (collectively, "Xfone USA ") - wholly
      owned U.S. subsidiary.
 
 -
                    Story
      Telecom, Inc. and its wholly owned U.K. subsidiary, Story Telecom Limited
      (collectively, "Story
      Telecom ") - majority owned U.S. subsidiary, in which Xfone holds a
      69.6% ownership share.
 
 -
                    Xfone
      018 Ltd. ("Xfone
      018") - majority owned Israeli subsidiary in which Xfone holds a
      69% ownership share.
 
 See also
Note 18 (Subsequent Events).
 
 B.
                    On
      January 1, 2006, Xfone USA, Inc., entered into an Agreement with EBI Comm,
      Inc. (“EBI”), a privately held Internet Service Provider, to purchase the
      assets of EBI. EBI provided a full range of Internet access options for
      both commercial and residential customers in north Mississippi. Based in
      Columbus, Mississippi, EBI's services included Dial-up, DSL, T1 Dedicated
      Access and Web Hosting. The customer base, numbering approximately 1,500
      Internet users, is largely concentrated in the Golden Triangle area, which
      includes Columbus, West Point and Starkville, Mississippi. The acquisition
      was structured as an asset purchase, providing for Xfone USA to pay EBI
      total consideration equal to 50% of the monthly collected revenue from the
      customer base during the first 12 months, beginning January 2006. Acquired
      assets include the customer base and customer lists, trademarks and all
      related intellectual property, fixed assets and all account receivables.
      Xfone USA paid a total consideration for this acquisition in the amount of
      $85,699 in monthly payments of $10,000 until paid in full, and made the
      first of such payments on June 1, 2007 and final payment on January 25,
      2008. Payment for this acquisition was recorded as other
      assets.
 
 
 The
following table summarizes the fair values of the assets acquired and
liabilities assumed, as of January 1, 2006:
 
 EBI
      Comm, Inc.Current
      Assets, excluding cash acquired
                    
                    $
                    -Total
      Assets acquired
                    
                    
                    -Total
      liabilities
                    
                    
                    176,326Net
      liabilities assumed
                    
                    $
                    176,326Purchase
      price:Cash
      paid
                    
                    $
                    85,698Acquisition
      costs
                    
                    
                    13,674$
                    99,372Goodwill
                    
                    $
                    275,698
  
 
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER
      31, 2007Note 1
      - Organization and Nature of
      Business (Cont.)C.
                    On
      January 10, 2006 (effective as of January 1, 2006), Xfone USA, Inc.,
      entered into an Asset Purchase Agreement with Canufly.net, Inc.
      (“Canufly.net”), an Internet Service Provider based in Vicksburg,
      Mississippi, and its principal shareholder, Mr. Michael Nassour.
      Canufly.net provided residential and business customers with high-speed
      Internet services and utilized the facilities-based network of Xfone USA,
      as an alternative to BellSouth, to provide Internet connectivity to its
      customers. Canufly.net also provided Internet services through a small
      wireless application in certain areas in Vicksburg, Mississippi. The
      transaction was closed on January 24, 2006. Xfone agreed to pay a total
      purchase price of up to $710,633, payable as follows: (i) $185,000 in cash
      payable in twelve equal monthly payments, the first installment was paid
      at closing, and as of December 31, 2006, the entire amount was paid in
      full and in accordance with the Asset Purchase Agreement; (ii) $255,633 in
      cash, paid at closing, to pay off the loan with the B&K Bank;
      (iii) 33,768 restricted shares of common stock and 24,053 warrants
      exercisable at $2.98 per share for a period of five years were issued to
      the shareholders of Canufly.net during May 2006. Following the closing in
      2006 and due to the satisfaction of certain earnout provisions in the
      Asset Purchase Agreement Xfone issued in March 2007 additional 20,026
      restricted shares of common stock and 14,364 warrants exercisable at $2.98
      per share for a period of five years to the shareholders of
      Canufly.net.Canufly.net,
      Inc.Current
      Assets, excluding cash acquired
                    
                    $
                    -Fixed
      Assets
                    
                    
                    36,753Total
      Assets acquired
                    
                    
                    36,753Current
      Liabilities
                    
                    
                    -Long-term
      Liabilities
                    
                    
                    -Total
      liabilities
                    
                    
                    -Net
      Assets assumed
                    
                    $
                    36,753Purchase
      price:Cash
      acquired or commitment in cash, net
                    
                    $
                    495,524Acquisition
      costs
                    
                    
                    11,160Fair
      market value of stock and warrant issued
                    
                    
                    193,951Total
                    
                    
                    700,635Goodwill
                    
                    $
                    663,882
 
 D.
                    On
      May 10, 2006, Xfone, Story Telecom, Inc., Story Telecom Limited, Story
      Telecom (Ireland) Limited, Nir Davison, and Trecastle Holdings Limited, a
      company controlled by Mr. Davison, entered into the Stock Purchase
      Agreement. Pursuant to the Stock Purchase Agreement, Xfone increased its
      ownership interest in Story Telecom from 39.2% to 69.6% in a cash
      transaction valued at $1,200,000. $900,000 of the total consideration was
      applied to payables owed by Story Telecom to Xfone and its subsidiary
      Swiftnet Limited for back-end telecommunications services. The
      balance of $300,000 was paid to Story Telecom, to be used as working
      capital. Story Telecom, Inc., a telecommunication service provider,
      operated in the United Kingdom through its two wholly owned subsidiaries,
      Story Telecom Limited and Story Telecom (Ireland) Limited (which was
      dissolved on February 23, 2007). Story Telecom operates as a division of
      Xfone's operations in the United Kingdom. The stock purchase pursuant to
      the Stock Purchase Agreement was completed on May 16,
      2006.  (See Note 18).
                      
                      Pursuant
      to the above-mentioned Stock Purchase Agreement, at certain dates and
      provided Story Telecom meets certain business and financial covenants, Nir
      Davison and Trecastle Holdings Limited shall have the option to sell to
      the Company all of their shares in Story Telecom for U.S. $450,000 in
      cash, or equivalent in the Company's common stock (to be decided by the
      Company). In addition, at certain dates and provided Story Telecom meets
      certain business and financial covenants, the Company shall have the
      option to buy from Nir Davison and Trecastle Holdings Limited all of their
      shares in Story Telecom for U.S. $900,000 in cash, or equivalent in the
      Company's common stock (to be decided by the Company). The Stock Purchase
      Agreement further provides that upon request from Story Telecom, and
      provided certain conditions are met, the Company shall provide all
      consents necessary to make Story Telecom a publicly traded company through
      a distribution of its shares as a dividend to the shareholders of the
      Company, or a similar transaction. If the Company will fail to provide all
      necessary consents it shall have to buy from Nir Davison and Trecastle
      Holdings Limited all their shares of Story Telecom for $1,000,000, paid
      70% in the Company's shares, valued at market price on an average of 30
      trading days, and 30% in cash.
 
  
 
 
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER
      31, 2007
 
 Note 1
- Organization and
Nature of Business
(Cont.)
 
 The
following table summarizes the fair values of the assets acquired and
liabilities assumed, as of May 10, 2006:
 
 Story
      Telecom, Inc.Current
      Assets, excluding cash acquired
                    
                    $
                    710,194Fixed
      Assets
                    
                    
                    2,200Other
      Assets
                    
                    
                    -Total
      Assets acquired
                    
                    
                    712,394Current
      Liabilities
                    
                    
                    3,541,719Long-term
      Liabilities
                    
                    
                    -Total
      liabilities
                    
                    
                    3,541,719Net
      liabilities assumed
                    
                    $
                    2,829,325Purchase
      price:Cash
      acquired, net
                    
                    $
                    (65,579Acquisition
      costs
                    
                    
                    -Total
                    
                    $
                    (65,579Goodwill
                    
                    $
                    2,690,786Trade
      name
                    
                    $
                    72,960
 
 The value
assigned to the trade name is amortized on a straight-line basis over 7
years.
 
 
 
 E.
                    As
      of May 10, 2006 the Company had a £1,010,030 receivable from Global VOIP
      Services Limited ("Global VOIP"), an Irish company which provided telecom
      services. Story Telecom, Inc. and/or its subsidiaries owed £1,010,030 to
      Global VOIP. In separate agreements, subsequent to the May 10,
      2006 Stock Purchase Agreement, Story Telecom, Inc and/or its subsidiaries
      were assigned the £1,010,030 receivable and payable on Global
      VOIP's books. The assignment of Global VOIP's receivable and payable
      resulted in a non-cash transaction that removed Globe VOIP's receivable
      from the books of the Company and results in inter-company receivables and
      payables that eliminate in consolidation. There is no income
      statement effect to these
transactions.
 
 
 
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER
      31, 2007
 
 Note 1
- Organization and
Nature of Business (Cont.)
 
 F.
                    On
      May 25, 2006, Xfone and the shareholders of Equitalk.co.uk Limited, a
      privately held telephone company based in the United Kingdom ("Equitalk")
      entered into an Agreement relating to the sale and purchase of Equitalk
      (the "Equitalk Agreement"). The Equitalk Agreement provided for Xfone to
      acquire Equitalk in a restricted common stock and warrant transaction
      valued at $1,650,000. The acquisition was completed on July 3, 2006,
      and on that date Equitalk became Xfone's wholly owned subsidiary. In
      conjunction with the completion of the acquisition and in exchange for all
      of the capital stock of Equitalk, Xfone issued a total of 402,192
      restricted shares of its common stock and a total of 281,872 warrants
      exercisable at $3.025 per share for a period of five years. Founded in
      December 1999, Equitalk, a VC-financed company, was the first fully
      automated e-telco in the United Kingdom. Equitalk provides both
      residential and business customers with low-cost IDA and CPS voice
      services, broadband and
teleconferencing.
 
 The
following table summarizes the fair values of the assets acquired and
liabilities assumed, as of July 3, 2006:
 
 Equitalk.co.uk
      LimitedCurrent
      Assets, excluding cash acquired
                    
                    $
                    276,442Fixed
      Assets
                    
                    
                    4,251Other
      Assets
                    
                    
                    -Total
      Assets acquired
                    
                    
                    280,693Current
      Liabilities
                    
                    
                    446,478Long-term
      Liabilities
                    
                    
                    141,200Total
      liabilities
                    
                    
                    587,678Net
      liabilities assumed
                    
                    $
                    (306,985Purchase
      price:Cash
      acquired, net
                    
                    $
                    (155,030Acquisition
      costs
                    
                    
                    13,875Fair
      market value of stock and warrant issued
                    
                    
                    1,420,567Total
                    
                    $
                    1,279,412Goodwill
                    
                    $
                    1,395,513Customer
      relations
                    
                    $ $
                    190,884
 
 The value
assigned to the customer relations is amortized on a straight-line basis over 7
years.
   
 
 
  Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER
      31, 2007
 
 Note 1
- Organization
and Nature of Business
(Cont.)
 
 G.
                    On
      August 15, 2007, the Company, Swiftnet, and the majority shareholder of
      Auracall Limited ("Majority Shareholder") entered into a definitive Share
      Purchase Agreement, pursuant to which Swiftnet purchased from the Majority
      Shareholder the 67.5% equity interest in Auracall, thereby increasing
      Swiftnet’s ownership interest in Auracall from 32.5% to 100%. The purchase
      price for the shares was £810,918 (approximately $1,616,158), payable
      as follows: £500,000 (approximately $996,500) was paid in cash upon
      signing of the Share Purchase Agreement, and the remaining £304,000, plus
      interest of £6,918 (approximately $619,658), was payable in monthly
      installments which commenced in September 2007 and 
      continued through March 2008. In connection with the acquisition,
      Auracall and Swiftnet entered into an Inter-Company Loan Agreement,
      pursuant to which Auracall agreed to lend Swiftnet £850,000 (approximately
      $1,694,050) for the sole purpose of and in connection with Swiftnet’s
      acquisition of the Auracall shares.  The loan is unsecured,
      bears interest at a rate of 5% per annum, and is to be repaid in five
      years, but may be repaid earlier without charge or penalty.
 
 The
following table summarizes the fair values of the assets acquired and
liabilities assumed, as of August 15, 2007:
 
 Auracall
      LimitedCurrent
      Assets, excluding cash acquired
                    
                    $
                    875,510Fixed
      assets
                    
                    
                    30,051Total
      Assets acquired
                    
                    
                    905,561Current
      liabilities
                    
                    
                    1,018,229Net
      liabilities assumed
                    
                    
                    (112,668
                    )Acquired
      net assets (67.5%)
                    
                    
                    (76,051
                    )Purchase
      price:Cash
      acquired, net
                    
                    
                    233,541Deferred
      liabilities
                    
                    
                    604,158Acquisition
      costs
                    
                    
                    140,900978,599Goodwill
                    
                    $
                    1,054,650
  The
financial statements consolidate the operations of Xfone, Swiftnet, Equitalk,
Xfone USA, Story Telecom, Auracall and Xfone 018 - (collectively the "Company ").
 
 
 
  
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER
      31, 2007
 
 Note 2 -
 Significant Accounting
Policies
 
 The
financial statements are prepared in accordance with generally accepted
accounting principles in the United States. 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 be recorded
according to the respective equity interest of the minority and up to its
exposure and/or legal obligation to cover the subsidiary losses in case of
equity reduced to zero or below.
 
 B.
                    Foreign Currency
  Translation
 
 Effective
January 1, 2007, the Company changed its functional and reporting currency from
the Great Britain Pounds ("GBP") to the U.S. dollar for the reason that a
majority of the Company's transactions and balances are denominated in U.S.
dollars. Consistent with SFAS No. 52, Foreign Currency Translation (“SFAS No.
52”), the change in functional currency will be accounted for prospectively;
therefore, there is no effect on the historical consolidated financial
statements. The translated amounts for non-monetary assets at December 31, 2006,
became the accounting basis for those assets as of January 1, 2007.
 
 The
determination of the functional currency for the Company's foreign subsidiaries
is made based on the appropriate economic factors. In addition a substantial
portion of the Company's costs are incurred in U.S. dollars. The Company's
management believes that the U.S. dollar is the primary currency of the economic
environment in which it operate. Thus, the Company's functional and reporting
currency and the functional and reporting currency of certain of its
subsidiaries is the U.S. dollar.
 
 Accordingly,
monetary accounts maintained in currencies other than the U.S. dollar are
re-measured into U.S. dollars in accordance with SFAS No. 52. All gains and
losses of the re-measurement of monetary balance sheet items are reflected in
the consolidated statements of operations as financial income or expenses as
appropriate. The Company's functional currency is US$, the Company's financial
records are maintained in US$, and the Company's financial statements are
prepared in US$. The functional currency of Swiftnet, Equitalk, Story Telecom
and Auracall is GBP, the financial records of these subsidiaries are maintained
in GBP and the financial statements of these subsidiaries are prepared in GBP.
The functional currency of Xfone 018 is New Israeli Shekels ("NIS"), the
financial records of Xfone 018 are maintained in NIS, and the financial
statements of Xfone 018 are prepared in NIS.
 
 Foreign
currency transactions during the period are translated into each company's
denominated currency at the exchange rates ruling at the transaction dates.
Gains and losses resulting from foreign currency transactions are included in
the consolidated statement of operations. Assets and liabilities denominated in
foreign currencies at the balance sheet date are translated into each company's
denominated currency at period-end exchange rates. All exchange differences are
dealt with in the consolidated statements of operations. The financial
statements of the Company's operations based outside of the United States have
been translated into US$ in accordance with SFAS No. 52. When translating
functional currency financial statements into US$, period-end exchange rates are
applied to the consolidated balance sheets, while average period rates are
applied to consolidated statements of operations. Translation gains and losses
are recorded in translation reserve as a component of shareholders'
equity.
 
  
 
 C.
                    Restrictedcash
 
 Restricted
cash include proceeds from the issuance of securities to Israeli institutional
investors, for total gross proceeds of NIS 100,382,100 (approximately
$25,562,032) par value bonds (Series A). The proceeds were invested in weekly
interest-bearing deposits and were transferred to the Company's control upon the
fulfillment of the following conditions: (i) that the Company raises an
aggregate of at least $20.0 million in equity financings; and (ii) that the
conditions for the consummation of the acquisition of NTS Communications, Inc
have been met. These conditions were satisfied during February
2008  (See also Note 18).
  
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER
      31, 2007
 
 Note 2 -  Significant Accounting Policies
(Cont.)
 
 D.
                    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, estimate of uncollectible
customer balances is made using factors such as the credit quality of the
customer and the economic conditions in the market. An allowance for doubtful
accounts is determined with respect to those amounts that the Company has
determined to be doubtful of collection. 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.
 
 As of
December 31, 2007 the accounts receivable are presented net of an allowance for
doubtful accounts of $1,090,572. Bad debt expenses for the year ended 2007 are
$641,477 and $290,998 respectively.
 
 
 E.
                    Fixed
Assets
 
 Fixed
Assets are stated at cost. Depreciation is calculated based on a straight-line
method over the estimated useful lives of the assets. Annual rates of
depreciation are as follows:
 
 Useful
      LifeCommunication
      equipment
                    
                    
                    10
      yearsEquipment
      held under lease
                    
                    
                    4  yearsOffice
      furniture and equipment
                    
                    
                    4-14
      yearsDevelopment
      costs
                    
                    
                    3
      yearsComputer
      equipment
                    
                    
                    3-4
      yearsMotor
      vehicles
                    
                    
                    4
      yearsBuilding
      and plant
                    
                    
                    4-14
      years
 
 Depreciation
expenses amounted to $1,044,722 and $833,541 for the years ended
December 31, 2007 and 2006, respectively.
 
 F.
                    OtherIntangibleAssets
 
 Other
intangible assets with determinable lives consist of license for communication
services and are amortized over the 20 year term of the license.
 
 Customer
base and trade name related to merger and acquisitions are amortized over a
period between 6-7 years from the date of the purchase.
 
 Amortization
expenses amounted to $167,076 and $258,544 for the years ended December 31,
2007 and 2006, respectively.
 
 
 G.
                    Long-Lived
Assets
 
 The
Company periodically evaluates 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. The
Company evaluates 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.
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. The Company also continually evaluates the
estimated useful lives of all long-lived assets and periodically revises such
estimates based on current events.
  
  
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER
      31, 2007
 
 Note 2 -
 Significant Accounting
Policies (Cont.)
 
 H.
                    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.
 
 Revenue
for services is recognized when the related services are provided. Payments
received in advance are deferred until the service is provided.
 
 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
 
 Effective
the beginning of the first quarter of fiscal year 2006, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 123(R),
“Share-Based Payment” (“SFAS 123(R)”) using the modified prospective transition
method. The Company previously applied APB 25, “Accounting for Stock Issued to
Employees” and related interpretations and provided the required pro forma
disclosures required under SFAS 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”). The Company elected to adopt the modified
prospective application method as provided by SFAS 123(R), and, accordingly, the
Company recorded compensation costs as the requisite service rendered for the
unvested portion of previously issued awards that remain outstanding at the
initial date of adoption and any awards issued, modified, repurchased or
cancelled after the effective date of SFAS 123(R). The Company use the
Black-Scholes option pricing model which requires extensive use of accounting
judgment and financial estimates, including estimates of the expected term
participants will retain their vested stock options before exercising them, the
estimated volatility of its common stock price over the expected term, and the
number of options that will be forfeited prior to the completion of their
vesting requirements. Application of alternative assumptions could produce
significantly different estimates of the fair value of stock-based compensation
and consequently, the related amounts recognized in the Consolidated Statements
of Operations.
 
 M.
                    Goodwill and Indefinite-Lived Purchased Intangible
      Assets
 
 In
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" (“SFAS No.
142”), goodwill acquired in business combination is assigned to reporting units
that are expected to benefit from the synergies of the combination as of the
acquisition date. The company assesses goodwill and indefinite-lived intangible
assets for impairment annually at the end of each year and more frequently if
events and circumstances indicate impairment may have occurred in accordance
with SFAS No. 142. SFAS 142 also requires that the fair value of
indefinite-lived purchased intangible assets be estimated and compared to the
carrying value. The Company recognizes an impairment loss when the estimated
fair value of the indefinite-lived purchased intangible assets is less than the
carrying value. No impairment was recorded at December 31, 2007 and
2006.
  
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER
      31, 2007
 
 Note 2 -
 Significant Accounting
Policies (Cont.)
 
 N.
                    Reclassification
 
 Certain
prior period balances in the consolidated statement of cash flows were
reclassified to appropriately present net cash used in operating activities and
effect of exchange rate changes on cash and cash equivalents. The
reclassification had no effect on previously reported net income and
shareholders' equity.
 
 O.
                    Recent Accounting
      Pronouncements
 
 1) SFAS
157
 In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (“SFAS
No. 157”) which provides enhanced guidance for using fair value to measure
assets and liabilities. SFAS No. 157 provides a common definition of fair value
and establishes a framework to make the measurement of fair value in generally
accepted accounting principles more consistent and comparable. SFAS No. 157 also
requires expanded disclosures to provide information about the extent to
which fair value is used to measure assets and liabilities, the methods and
assumptions used to measure fair value, and the effect of fair value measures on
earnings. SFAS No. 157 is effective for financial statements issued in fiscal
years beginning after November 15, 2007 and to interim periods within those
fiscal years. The Company is currently in the process of evaluating the effect,
if any, the adoption of SFAS No. 157 will have on its consolidated results of
operations, financial position, or cash flows.
  2) SFAS
159
 In
February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS No. 159).
SFAS No. 159 permits companies to choose to measure certain financial
instruments and other items at fair value. The standard requires that unrealized
gains and losses are reported in earnings for items measured using the fair
value option. SFAS No. 159 is effective for the Company beginning in
the first quarter of fiscal year 2008. The adoption of SFAS No. 159
will not have a significant impact on the Company’s consolidated financial
statements.
 
 3) SFAS
141
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (SFAS No. 141(R)). Under SFAS No. 141(R), an
entity is required to recognize the assets acquired, liabilities assumed,
contractual contingencies, and contingent consideration at their fair value on
the acquisition date. It further requires that acquisition-related costs be
recognized separately from the acquisition and expensed as incurred,
restructuring costs generally be expensed in periods subsequent to the
acquisition date, and changes in accounting for deferred tax asset valuation
allowances and acquired income tax uncertainties after the measurement period
impact income tax expense. The adoption of SFAS No. 141(R) will change
the Company’s accounting treatment for business combinations on a prospective
basis for those acquisitions being consummated beginning in the first quarter of
fiscal year 2009.
 
 4)
SAB 110
 In
December 2007, the U.S. Securities and Exchange Commission (the “SEC”)
issued Staff Accounting Bulletin 110 ("SAB 110") to amend the
SEC’s views discussed in Staff Accounting Bulletin 107
(SAB 107) regarding the use of the simplified method in developing an
estimate of expected life of share options in accordance with
SFAS No. 123(R). SAB 110 is effective for the Company beginning
in the first quarter of fiscal year 2008. The adoption of SAB 110 will not
have an impact on the Company’s consolidated financial statements.
 
 
 Note 3 - Prepaid
Expenses, Other Receivables and Deposits
 December31,2007Deferred
      taxes
                    
                    $
                    430,876Prepaid
      acquisition costs
                    
                    
                    692,681Accrued
      income
                    
                    
                    280,364Prepaid
      expenses
                    
                    
                    1,453,910Tax
      authorities
                    
                    
                    331,105Other
      receivables
                    
                    
                    796,371$
                    3,985,307
   
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER
      31, 2007
 
 Note 4 - Fixed
Assets
  December31,2007CostCommunication
      equipment
                    
                    $
                    5,214,315Equipment
      held under capital lease
                    
                    
                    103,392Office
      furniture and equipment
                    
                    
                    2,121,971Development
      costs
                    
                    
                    781,614Computer
      equipment
                    
                    
                    686,955Motor
      vehicles
                    
                    
                    179,041Building
      and plant
                    
                    
                    685,7309,773,018Accumulated
      DepreciationCommunication
      equipment
                    
                    
                    1,372,233Equipment
      held under capital lease
                    
                    
                    24,267Office
      furniture and equipment
                    
                    
                    1,690,335Development
      costs
                    
                    
                    344,800Computer
      equipment
                    
                    
                    414,712Motor
      vehicles
                    
                    
                    30,324Building
      and Plant
                    
                    
                    148,5894,025,260$
                    5,747,758
   
 
 Note
5 - Other Assets
  December
      31,2007Cost:Goodwill
                    
                    $
                    16,872,088Customer
      relations
                    
                    
                    982,448Trade
      name
                    
                    
                    73,478License
                    
                    
                    330,36518,258,379Accumulated
      amortization:Customer
      relations
                    
                    
                    232,475Trade
      name
                    
                    
                    17,145License
                    
                    
                    59,887309,507Other
      assets, net
                    
                    $
                    17,948,872
   
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER
      31, 2007
 
 Note 6 - Other
Liabilities and Accrued Expenses
  December
      31,2007Corporate
      taxes
                    
                    
                    62,648Government
      authorities
                    
                    
                    372,156Payroll
      and other taxes
                    
                    
                    94,232Accrued
      expense (1)
                    
                    
                    4,495,861Others
                    
                    
                    297,148$
                    5,322,045
 
 (1)
includes accrued expenses related to the issuance of bonds during December 2007
of $1,133,134 and accrued legal and interest expenses payable to MCI WorldCom
Limited of $1,494,640 (see also note 11).
  
 
 Note7- Notes
Payable
  Annual
      Interest
                    
                    December
      31,rate
                    
                    2007Convertible
      note (1)
                    
                    
                    Prime
      + 1.5%
                    
                    $
                    623,643Note
      payable to others, due on demand, monthly interest payments
      only
                    
                    
                    5%
      - 7%
                    
                    
                    327,587Bank
      loans
                    
                    
                    0%
                    
                    
                    50,120Loans
      payable over 5 years
                    
                    
                    Prime
      + 1.0%
                    
                    
                    615,041Loan
      (2)
                    
                    
                    Israeli
      Consumer Price Index + 4.0%
                    
                    
                    491,7562,108,147less
      current portion
                    
                    
                    
                    
                    
                    1,094,339Long
      term portion
                    
                    
                    
                    
                    $
                    1,013,806
 1.
                    On
      September 27, 2005, a Securities Purchase Agreement (the "Securities
      Purchase Agreement") was entered for a $2,000,000 financial transaction by
      and among the Company, Xfone USA, Inc., eXpeTel Communications, Inc., Gulf
      Coast Utilities, Inc. and Laurus Master Fund, Ltd. The investment, which
      took the form of a Convertible Term Note secured by the Company's United
      States assets, has a 3 year term and bears interest at a rate equal to
      prime plus 1.5% per annum. The Term Note is convertible, under certain
      conditions, into shares of the Company's common stock at an initial
      conversion price equal to $3.48 per share. In conjunction with this
      financial transaction, we issued to Laurus Master Fund 157,500 warrants
      which are exercisable at $3.80 per share for a period of five years. The
      closing of the financial transaction was on September 28, 2005. The
      Securities Purchase Agreement provides that for so long as twenty five
      percent (25%) of the principal amount of the Term Note is outstanding, the
      Company, without the prior written consent of Laurus Master Fund, shall
      not, and shall not permit any of the Subsidiaries (as defined in the
      Securities Purchase Agreement) to directly or indirectly declare or pay
      any dividends, other than dividends paid to the Company or any of its
      wholly-owned Subsidiaries.
 2.
                    According
      to the agreement between the Company, Xfone 018 Ltd. and our 26% minority
      interest partner in Xfone 018 (the “Minority Partner”), the Minority
      Partner provided in the fourth quarter of 2004, a shareholder loan of
      approximately $400,000 to Xfone 018 (the “Minority Partner Loan”). The
      Minority Partner Loan is payable after four years with annual interest of
      4% and linkage to the Israeli consumer price index. As of December
      31, 2007, the balance of the Minority Partner Loan is 1,891,293 NIS
      ($491,756).
 
  
 
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER
      31, 2007
 
 Note
7 - Notes Payable (Cont.)
 
 The notes
payable matures as follows:
 Year2008
                    
                    $
                    1,094,3392009
                    
                    
                    325,6072010
                    
                    
                    134,3072011
                    
                    
                    553,892$
                    2,108,145
 Note
8- Bonds
 
 A.
                    Issuance ofBonds
 
 On
December 13, 2007, the Company issued a total of NIS 100,382,100
($25,562,032) Series A Bonds (the “Bonds”) to Israeli institutional
investors. The Bonds will pay annual interest at a rate of 9% that will be paid
semi-annually on the 1st of June
and on the 1st of
December of every year from 2008 until 2015 (inclusive).  The
principal of the Bonds will be repaid in 8 equal annual payments on the 1st of
December of every year from 2008 until 2015 (inclusive). The principal and
interest of the Bonds is linked to the Israeli Consumer Price Index
(“CPI”). In the event that the Company shall list the Series A Bonds on
TASE, commencing from the date of the listing of the Series A Bonds on TASE, and
insofar as the Series A Bonds shall indeed be listed on TASE, the interest rate
that the unpaid balance of the Series A Bonds shall bear shall decrease by the
rate of 1% (calculated according to 365 days in a year) for the period that
shall commence on the date of the listing of the Series A Bonds on TASE and
concluding on the date of payment of the Series A Bonds. Additionally, the
Company issued the holders of the Bonds, for no additional consideration,
956,020 (non-tradable) Warrants, each exercisable at an exercise price of $3.50
with a term of 4 years.
 
 The
Company attributed the composition of the proceeds from the offering as
follows:
 
 December
      31,2007Bonds
      Series A
                    
                    
                    
                    
                    $
                    24,588,726Stock
      Purchase Warrants*
                    
                    
                    
                    
                    
                    973,306Total
      price per unit
                    
                    
                    
                    
                    
                    25,562,032
 ·
                    Presented
      as $973,306 as part of shareholders'
equity.
  
 
 Note
9 - Capital Lease Obligations
 
 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.
 
 Future
minimum lease payments under capital leases as of December 31, 2007
are:
 
 2008
                    
                    $
                    89,6552009
                    
                    
                    31,893Total
                    
                    $
                    121,548Total
      minimum lease payments
                    
                    $
                    136,274Less:
      amount representing interest
                    
                    
                    (14,726
                    )Present
      value of net minimum lease payment
                    
                    $
                    121,548
 
  
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER
      31, 2007
 
 Note
10 - Income Taxes
  The
Company accounts for income taxes under the provisions of SFAS 109. SFAS No. 109
requires the recognition of deferred tax assets and liabilities for both the
expected impact of differences between the financial statement and tax basis of
assets and liabilities and for the expected future tax benefit to be derived
from tax loss and tax credit carry forward. The Company does not file
consolidated tax returns.
 
 The
following table reflects the Company's deferred tax assets and
(liabilities):
 
 Deferred
      Tax Liabilities:Accelerated
      tax write off of fixed assets
                    
                    $
                    1,103Deferred
      Tax Assets:Carry
      forward losses
                    
                    
                    363,768Accrued
      Vacation and severance pay
                    
                    
                    67,108Net
      deferred taxes liabilities
                    
                    $
                    429,773
  
 
 The
provision for income taxes differs from the amount computed by applying the
statutory income tax rates to income before taxes as follows:
  Years
      EndedIncome
      tax computed at statutory rate
                    
                    $
                    (628,810
                    )Effect
      of tax authority adjustments
                    
                    
                    35,642Current
      income (losses) for which no deferred tax expense (benefit) has been
      recorded
                    
                    
                    39,860Difference
      between income reported for tax purposes and income for financial
      reporting purposes - net
                    
                    
                    30,073Deferred
      taxes on losses (utilization of losses)
                    
                    
                    (506,877
                    )Taxes
      on losses for which a valuation allowance was not provided
                    
                    
                    603,686Taxes
      in respect of prior years
                    
                    
                    320Provision
      for income taxes
                    
                    $
                    (426,106
                    )
  
  
 
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER
      31, 2007
 
 Note
11 - Commitments and Contingent Liabilities
  Swiftnet
Limited, the Company’s wholly-owned U.K. based subsidiary, was served with a
claim on October 11, 2005 that was filed by MCI WorldCom Limited (currently
operating as Verizon UK Limited) (“MCI”) in an English court for the sum of
£1,640,440 ($3,398,992) plus interest accruing at a daily rate of £401 ($831)
which at the date of claim had amounted to £92,317 ($191,281). MCI’s claim was
for telecommunication services provided to Swiftnet. Swiftnet had been in
dispute with MCI regarding amounts due to MCI for telecommunications services
provided by MCI to Swiftnet.  Swiftnet alleged that the disputed charges
were improperly billed by MCI to its account and therefore MCI should credit
Swiftnet for a certain amount of the claim.  A substantial element of
Swiftnet’s counterclaim for credits was based upon special rates agreed verbally
by Swiftnet and MCI, which were not applied by MCI in its invoices. 
Swiftnet pleaded a counterclaim and that £275,574 ($550,803) owed in relation to
traffic terminated through the Xfone network in Israel should be
deducted.
 
 On 19
March 2008, the court handed down judgment in this dispute and awarded
£1,278,942 ($2,564,036) plus legal costs and interest in favour of MCI. The
Company's financial statements have carried the full amount Swiftnet calculated
that it owed to MCI based on the data held in Swiftnet’s billing systems. The
net effect of this judgment including estimation of the Company's legal
fees, MCI’s legal costs and interest payable is app. £1,427,737 ($2,856,803)
which is presented as a non-recurring loss in the Statement of Operations.
Swiftnet is in the process of taking legal advice as to whether it will seek an
appeal to the English Court of Appeal.
 
 
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER
      31, 2007
  Note 12 - Capital
Structure, Stock Options
  Shares
and Warrants
  A.
                    The
      holders of common stock are entitled to one vote for each share held of
      record on all matters submitted to a vote of the stockholders. The common
      stock has no pre-emptive or conversion rights or other subscription
      rights. There are no sinking fund provisions applicable to the common
      stock.B.
                    On
      March 28, 2006, Xfone issued to Gersten Savage, LLP 755 restricted shares
      of its common stock as consideration for legal services with a value of
      £1,480 ($2,900).C.
                    On
      March 28, 2006, Xfone issued to Oberon Securities, LLC 30,144 shares of
      its common stock pursuant to that certain Letter Agreement dated November
      15, 2005, between Xfone and Oberon Securities with a value of £54,302
      ($106,378).D.
                    On
      March 31, 2006, and in conjunction with a Letter Agreement dated October
      10, 2005 with MCG Capital Corporation, a major creditor of I-55 Internet
      Services, Xfone issued to MCG Capital 667,998 shares of its common stock,
      valued at fair value of $2,010,006, in return for retiring its loan
      with I-55 Internet Services.E.
                    On
      April 6, 2006, Xfone sold 80,000 restricted shares of its common stock,
      20,000 warrants exercisable at $3.00 per share, and 20,000 warrants
      exercisable at $3.25 per share to Mercantile Discount-Provident Funds. The
      warrants are exercisable for a period of 5 years. The total value of the
      shares and warrants is £110,072 ($215,630).F.
                    On
      April 6, 2006, Xfone sold 90,000 restricted shares of its common stock,
      22,500 warrants exercisable at $3.00 per share, and 22,500 warrants
      exercisable at $3.25 per share to Hadar Insurance Company Ltd. The
      warrants are exercisable for a period of 5 years. The total value of the
      shares and warrants is £123,831 ($242,584).G.
                    On
      April 6, 2006, Xfone sold 110,000 restricted shares of its common stock,
      27,500 warrants exercisable at $3.00 per share, and 27,500 warrants
      exercisable at $3.25 per share to the Israeli Phoenix Assurance Company
      Ltd. The warrants are exercisable for a period of 5 years. The total value
      of the shares and warrants is £151,348 ($296,492).H.
                    On
      April 6, 2006, Xfone sold 44,000 restricted shares of its common stock,
      11,000 warrants exercisable at $3.00 per share, and 11,000 warrants
      exercisable at $3.25 per share to Gaon Gemel Ltd. The warrants are
      exercisable for a period of 5 years. The total value of the shares and
      warrants is £60,539 ($118,597).I.
                    During
      May 2006, and in conjunction with a January 10, 2006 Asset Purchase
      Agreement by and among Xfone USA, Inc. and Canufly.net, Inc., Xfone issued
      to the shareholders of Canufly.net 33,768 restricted shares of its common
      stock and 24,053 warrants, exercisable at $2.98 per share for a period of
      five years. The total value of the shares and warrants is £60,752
      ($112,330).J.
                    On
      May 10, 2006, Xfone issued in exchange for services 25,000 warrants
      exercisable at $4.00 per share, 25,000 warrants exercisable at $4.50 per
      share, 25,000 warrants exercisable at $5.00 per share, and 25,000 warrants
      exercisable at $5.50 per share to Elite Financial Communications Group,
      LLC. The term of the warrants shall expire at the later of: (i) 36 months
      from the day of grant; (ii) 6 months after the underlying shares are
      effective.K.
                    During
      May 2006, and in conjunction with the merger that consummated on March 31,
      2006, Xfone issued to the shareholders of I-55 Internet Services, Inc.
      789,863 restricted shares of its common stock valued at $2,380,178 and
      603,939 warrants valued at $1,284,722, based on the Black Scholes
      option-pricing model. The warrants are convertible on a one to one basis
      into restricted shares of Xfone's common stock at an exercise price of
      $3.31 per share, and have a term of five years.L.
                    During
      May 2006, and in conjunction with the merger that consummated on March 31,
      2006, Xfone issued to the sole shareholder of I-55 Telecommunications,
      LLC. 223,702 restricted shares of its common stock valued at $671,687 and
      79,029 warrants valued at $166,667, based on the Black Scholes
      option-pricing model. The warrants are convertible on a one to one basis
      into restricted shares of Xfone's common stock at an exercise price of
      $3.38 per share, and have a term of five years.M.
                    During
      May 2006, and in conjunction with Agreements to Purchase Promissory Notes
      dated October 31, 2005 / February 3, 2006 with certain creditors of I-55
      Telecommunications, LLC, Xfone issued to the creditors of I-55
      Telecommunications 163,933 restricted shares of its common stock and
      81,968 warrants at a total value of $492,220, in return for retiring their
      individual loans with I-55 Telecommunications. The warrants are
      convertible on a one to one basis into restricted shares of Xfone's common
      stock at an exercise price of $3.38 per share, and have a term of five
      years.N.
                    On
      May 30, 2006, Xfone issued 2,736 restricted shares of its common stock to
      Elite Financial Communications Group, LLC in exchange for services. The
      value of the shares is £4,955
($9,707).
 
 
 
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER
      31, 2007
  Note
12 - Capital Structure, Stock Options (Cont.)
  Shares
and Warrants (Cont.)
 
 O.
                    On
      June 28, 2006, Xfone cancelled 5,000 restricted shares of its common stock
      which were issued in 2000 to Ofer Weisglass. The shares were issued to Mr.
      Weisglass in return for services; however Mr. Weisglass failed to provide
      the services to Xfone.P.
                    On
      July 3 2006, Xfone issued to Preiskel & Co LLP 5,236 restricted shares
      of its common stock as consideration for legal services. The value of the
      shares is £7,500 ($1,469).Q.
                    On
      July 5, 2006, and in conjunction with the acquisition that was completed
      on July 3, 2006, Xfone issued to the shareholders of Equitalk.co.uk
      Limited a total of 402,192 restricted shares of its common stock and a
      total of 281,872 warrants exercisable at $3.025 per share for a period of
      five years. The total value of the shares and warrants is £717,167
      ($1,404,930).R.
                    On
      July 11, 2006, and in conjunction with a March 10, 2005 Employment
      Agreement between Xfone USA, Inc. and Wade Spooner, its President and
      Chief Executive Officer at that time, Xfone issued to Mr. Spooner an
      “Acquisition Bonus” of 32,390 warrants. Xfone was advised by AMEX that the
      approval of the shareholders of Xfone is required in order to allow the
      issuance and listing of the shares underlying said warrants. The required
      approval was obtained on December 28, 2006. The warrants are convertible
      on a one to one basis into restricted shares of Xfone's common stock at an
      exercise price of $3.285, and have a term of five years. The value of the
      warrants is £11,010 ($21,569).S.
                    On
      July 11, 2006, and in conjunction with a March 10, 2005 Employment
      Agreement between Xfone USA, Inc. and Ted Parsons, its Vice President and
      Chief Marketing Officer, Xfone issued to Mr. Parsons an “Acquisition
      Bonus” of 16,195 warrants. Xfone was advised by AMEX that the approval of
      the shareholders of Xfone is required in order to allow the issuance and
      listing of the shares underlying said warrants. The required approval was
      obtained on December 28, 2006. The warrants are convertible on a one to
      one basis into restricted shares of Xfone's common stock at an exercise
      price of $3.285, and have a term of five years. The value of the warrants
      is £5,506 ($10,785).T.
                    On
      July 11, 2006, and in conjunction with a Letter Agreement dated June 15,
      2006 between Xfone and Oberon Securities, LLC, Xfone issued to Oberon
      Securities 243,100 warrants at an exercise price of $2.86 and 37,200
      warrants at an exercise price of $3.34. The warrants are convertible on a
      one to one basis into restricted shares of Xfone's common stock, and have
      a term of five years. The value of the warrants is £180,140
      ($352,895).U.
                    On
      July 11, 2006, and in conjunction with a June 19, 2006 Securities Purchase
      Agreement Xfone issued to several investors an aggregate of 172,415
      warrants. The warrants are convertible on a one to one basis into
      restricted shares of Xfone's common stock, at an exercise price of $3.40,
      and have a term of five years. The value of the warrants is £91,186
      ($178,633).V.
                    On
      September 5, 2006, and in conjunction with a June 19, 2006 Securities
      Purchase Agreement Xfone issued to several investors an aggregate of
      344,825 restricted shares of common stock. The value of the shares is
      £531,163 ($1,040,549).W.
                    On
      September 19, 2006, and in conjunction with a Letter Agreement dated June
      15, 2006 between Xfone and Oberon Securities, LLC, Xfone issued to Oberon
      Securities 90,000 restricted shares of common stock. The value of the
      shares is £119,512 ($234,124).X.
                    On
      September 19, 2006, and pursuant to the Service Agreement dated December
      6, 2005, that was terminated on August 28, 2006, Xfone cancelled 64,360 of
      the 100,000 warrants which were issued to Elite Financial Communications
      Group, LLC on May 10, 2006.Y.
                    On
      November 1, 2006, Xfone issued 6,994 restricted shares of its common stock
      to Elite Financial Communications Group, LLC in exchange for services. The
      value of the shares is £9,044 ($17,717).Z.
                    On
      November 20, 2006, Xfone issued in exchange for services 36,000 warrants
      exercisable at $3.50 per share, 36,000 warrants exercisable at $4.00 per
      share, and 36,000 warrants exercisable at $4.50 per share to Institutional
      Marketing Services, Inc. The warrants have a term of five years. In the
      event Xfone elects early termination of its agreement with Institutional
      Marketing Services, then any warrants that have not yet reached their
      vesting date will be cancelled. The value of the warrants is
      £27,341($53,561).
 
 
 
 
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER
      31, 2007
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                    DECEMBER
      31, 2007
  Xfone,
Inc. and Subsidiaries
  
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007
  Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                    DECEMBER
      31, 2007
  Xfone,
Inc. and Subsidiaries
  
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER
31, 2007
  Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                    DECEMBER
      31, 2007
  
 Note
12 - Capital Structure, Stock Options (Cont.)
  Shares
and Warrants (Cont.)
 
 AA.
                  On
      November 27, 2006, Xfone issued in exchange for services 117,676 warrants
      exercisable at $3.50 per share to Crestview Capital Master, LLC. The
      warrants have a term of five years and shall vest as follows: 29,419
      warrants immediately, 29,419 warrants on February 10, 2007, 29,419
      warrants on May 10, 2007, and 29,419 warrants on August 10, 2007. The
      value of the warrants is £89,662 ($175,648).BB.
                  On
      December 26, 2006, and in conjunction with a December 25, 2006 oral stock
      purchase agreement, Xfone repurchased from Abraham Keinan, its Chairman of
      the Board, 100,000 restricted shares of its common stock at a price of
      $2.70 per share (market price at that day was $2.80 per share). The
      100,000 shares were returned to Xfone for cancellation. The Agreement was
      approved by all non-interested members of the Board of Directors,
      following a review and discussion by Xfone's Audit
    Committee.CC.
                  On
      January 16, 2007, and in conjunction with a December 24, 2006 Securities
      Purchase Agreement the Company issued an aggregate of 172,414 warrants to
      Halman-Aldubi Provident Funds Ltd. and Halman-Aldubi Pension Funds Ltd.
      The warrants are exercisable on a one to one basis into restricted shares
      of our common stock, at an exercise price of $3.40, and have a term of
      five years.
                    
                    On
      February 1, 2007, and in conjunction with a December 24, 2006 Securities
      Purchase Agreement the Company issued an aggregate of 344,828 restricted
      shares of our common stock, at a purchase price of $2.90 per share, to
      Halman-Aldubi Provident Funds Ltd. and Halman-Aldubi Pension Funds
      Ltd.DD.
                  On
      March 20, 2007, following the closing of the acquisition of the assets of
      Canufly.net in 2006, and due to the satisfaction of certain earn out
      provisions in the Asset Purchase Agreement, the Company issued to the
      shareholders of Canufly.net additional 20,026 restricted shares of common
      stock and 14,364 warrants exercisable at $2.98 per share for a period of
      five years.EE.
                  On
      October 23, 2007, the Company entered into Subscription Agreements with 15
      investors affiliated with Gagnon Securities, Inc. which agreed to
      purchase an aggregate of 1,000,000 shares of the Company's common stock at
      a price of $3.00 per share, for a total subscription amount of
      $3,000,000. The 1,000,000 shares were issued on November 6,
      2007.FF.
                  On
      November 4, 2007, the Company entered into Subscription Agreements with:
      (i) XFN - RLSI Investments, LLC, an entity affiliated with Richard L.
      Scott Investments, LLC, a U.S. institutional investor, which agreed to
      purchase 250,000 shares of the Company's common stock at a price of
      $3.00 per share, for a total subscription amount of $750,000; and (ii)
      certain Israeli institutional investors, which agreed to purchase an
      aggregate of 700,000 shares of the Company's common stock, at a price
      of $3.00 per share, for a total subscription amount of $2,100,000 . The
      950,000 shares were issued on November 13, 2007.GG.
                  In
      conjunction with the consummation of the merger and in exchange for all of
      the capital stock of I-55 Telecommunications, LLC, the Company issued
      a total of 223,702 shares of common stock valued at $671,687 and 79,029
      warrants exercisable for a period of five years into shares of common
      stock, with an exercise price of $3.38 (the “Xfone Stock and Warrant
      Consideration”). A portion of the Xfone Stock and Warrant Consideration
      issued at closing was placed in an escrow. The Company determined a breach
      of the representations and warranties in the Merger Agreement resulting
      from the failure of I-55 Telecommunications to disclose the liability due
      and payable to the Louisiana Universal Service Fund (“LA USF”)
      through the period of October 2005, at which time Xfone USA undertook the
      management role of I-55 Telecommunications. Pursuant to Section 1(g) of
      the Escrow Agreement dated as of March 31, 2006 by and among Xfone
      USA, the Escrow Agent, and the President and Sole Member of I-55
      Telecommunications, and in accordance with Article 6.02 of the Merger
      Agreement, Xfone USA notified the other parties that it believed that it
      had suffered a loss of $30,626 pursuant to the provisions of Article 6.02
      of the Merger Agreement dated as of August 26, 2005. Having not received
      any response from the President and Sole Member of I-55
      Telecommunications, nor from his counsel, on October 15, 2007, and after
      the allotted response time allowed, Xfone USA instructed the Escrow Agent
      (Trustmark National Bank) to deliver from the Escrow Fund of the President
      and Sole Member of I-55 Telecommunications, to the Company, 7,043 shares
      of Common Stock and 4,838 Xfone Stock Warrants. The 7,043 shares of Common
      Stock and 4,838 Xfone Stock Warrants were returned to the Company for
      cancellation on October 31, 2007.
 
 
 
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                    DECEMBER
      31, 2007
 
 Note
12 - Capital Structure, Stock Options (Cont.)
 
 Shares
and Warrants (Cont.)
 
 Year
      Ended December 31, 2007Number
      of warrants
                  
                  Weighted
      average exercise priceOptions
      outstanding at the beginning of the year
                  
                  
                  4,622,219
                  
                  $
                  3.91Granted
      (a)
                  
                  
                  1,486,778
                  
                  $
                  3.13Forfeited
                  
                  
                  (4,838
                  )
                  $
                  3.38Options
      outstanding and exercisable at the end of the year
                  
                  
                  6,104,159
                  
                  $
                  3.72
  
 Stock Option
Plan
  A.
                  In
      November 2004, Xfone's board of directors approved the adoption of the
      principal items forming Xfone's 2004 stock option plan (The “2004 Plan”)
      for the benefit of employees, officers, directors, consultants and
      subcontractors of the Company including its subsidiaries. The 2004
      Plan was approved by a special meeting of shareholders on March 13, 2006.
      The purpose of the 2004 Plan is to enable the Company to attract and
      retain the best available personnel for positions of substantial
      responsibility, to provide an incentive to such persons presently engaged
      with the Company and to promote the success of the Company business. The
      2004 Plan will provides for the grant of options an aggregate of 5,500,000
      shares of Xfone's common stock. The 2004 Plan is administered by the
      board that determines the persons to whom options are granted, the number
      of options that are granted, the number of shares to be covered by each
      option, the options may be exercised and whether the options is an
      incentive or non-statutory option.B.
                  At
      November 24, 2004 3,200,000 options were granted under the 2004 Plan
      according to the following terms: Option exercise price - $3.50, vesting
      date - 12 month from the date of grant, expiration date - 5 years from the
      vesting date.C.
                  On
      February 6, 2005, Xfone's board of directors approved a grant to employees
      of 730,000 options under and subject to the 2004 Plan according to the
      following terms: Option exercise price of $3.50; Vesting Date- the
      vesting of the options will be over a period of 4 years as follows: 25% of
      the options are vested after a year from the Date of Grant. Thereafter,
      1/16 of the options are vested every 3 months for the following 3 years;
      Expiration Date-  5.5 years from the Grant Date.D.
                  On
      November 13, 2005, Xfone's Board of Directors ratified the grant
      of 600,000 options to Wade Spooner and 300,000 options to Ted
      Parsons on March 10, 2005, under the 2004 Plan, pursuant to the terms
      described in their March 10, 2005 employment agreements. The stock options
      provided for a five (5) year term from the vesting date, a strike price
      that is 10% above the closing price of the Company's common stock on the
      date of issue of the Options.E.
                  On
      June 8, 2005, Xfone's board of directors approved a grant to Xfone's Chief
      Financial Officer, of 300,000 options under and subject to the 2004 Plan
      of Xfone according to the following terms: Option exercise price of $3.50;
      Vesting Date-  the
      vesting of the options will be over a period of 4 years as follows: 25% of
      the options are vested after a year from the Date of Grant. Thereafter,
      1/16 of the options are vested every 3 months for the following 3 years;
      Expiration Date- 5.5 years
      from the grant date.F.
                  On
      July 11, 2006, and in conjunction with a July 3, 2006 Service Agreement
      between Xfone, Swiftnet Limited and John Mark Burton, the Managing
      Director of Xfone's UK based subsidiaries, Xfone's Board of Directors
      approved the grant of 300,000 options, under and subject to its 2004 Plan,
      to Mr. Burton. The options are convertible on a one to one basis into
      restricted shares of Xfone's common stock, at an exercise price of $3.50,
      and have a term of ten years. The vesting of the options will be over a
      period of 4 years as follows: 75,000 options are vested on July 3, 2007.
      Thereafter, 18,750 options are vested every 3 months for the following 3
      years.G.
                  On
      October 30, 2006, Xfone's Board of Directors approved a grant of 25,000
      options to Itzhak Almog under and subject to Xfone's 2004 Plan. The
      options were granted according to the following terms: Date of Grant -
      October 30, 2006; Option exercise price - $3.50; Vesting Date - 12 months
      from the Date of Grant; Expiration Date - 5 years from the Vesting
      Date.
 
 
 
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                    DECEMBER
      31, 2007
 
 Note
12 - Capital Structure, Stock Options (Cont.)
 
 Stock Option
Plan(Cont.)
 
 H.
                  On
      June 5, 2007, the Company’s Board of Directors approved a grant of 20,000
      options to Israel Singer, and a grant of 20,000 options to Morris Mansour.
      The options were granted under and subject to the Company’s 2004 Stock
      Option Plan with the following terms: Date of Grant - June 5, 2007;
      Exercise Price - $3.50 per share; Vesting Date - 12 months from the Date
      of Grant; Expiration Date - 5 years from the Vesting
  Date.I.
                  On
      June 5, 2007, the Company’s Board of Directors approved a grant of 200,000
      options to Brian Acosta under the Company’s 2004 Plan. The options are
      granted under the following terms: Date of Grant - June 5, 2007; Exercise
      Price - $3.146 per share; Vesting Date - (a) 25,000 options on March 31,
      2009; (b) 50,000 options on March 31, 2010; and (c) 125,000 options on
      March 31, 2011; Expiration Date - 5 years from the Vesting Date;
      Termination - in the event of termination of employment prior to the
      completion of Mr. Acosta’s second year of employment with Xfone USA, then
      175,000 of the aforementioned options shall automatically terminate; in
      the event of termination of employment during Mr. Acosta’s third year of
      employment with Xfone USA, then 125,000 of the aforementioned options
      shall automatically terminate. Mr. Acosta is the Chief Technical Officer
      of our subsidiary, Xfone USA.J.
                  On
      June 5, 2007, the Company’s Board of Directors approved a grant of 200,000
      options to Hunter McAllister under the Company’s 2004 Plan. The options
      are granted under the following terms: Date of Grant - June 5, 2007; Exercise
      Price - $3.146 per
      share; Vesting Date - (a) 25,000 options on
      March 31, 2009; (b) 50,000 options on March 31, 2010; and (c) 125,000
      options on March 31, 2011; Expiration Date - 5 years from the
      Vesting Date; Termination - in the event of
      termination of employment prior to the completion of Mr. McAllister’s
      second year of employment with Xfone USA, then 175,000 of the
      aforementioned options shall automatically terminate; in the event of
      termination of employment during Mr. McAllister’s third year of employment
      with Xfone USA, then 125,000 of the aforementioned options shall
      automatically terminate. Mr. McAllister is the Vice President Business
      Development of our subsidiary, Xfone USA.K.
                  On
      October 28, 2007, our Board of Directors adopted and approved the
      Company’s 2007 Stock Incentive Plan (the "2007 Plan") which is designated
      for the benefit of employees, directors, and consultants of the Company
      and its affiliates. The 2007 Plan was approved on December 17, 2007, at an
      Annual Meeting of shareholders of the Company. The 2007 Plan authorizes
      the issuance of awards for up to a total of 8,000,000 shares of our common
      stock underlying such awards.L.
                  On
      August 26, 2007, the Company entered into a contractual obligation to
      grant the General Manager of Xfone 018 the following number of options to
      purchase shares of the Company’s common stock under the 2007 plan, (the
      “Plan”):
                    (1)Within
      30 days of adoption of the Plan, the Company will grant options to
      purchase 300,000 shares of Common Stock, at an exercise price of $3.50 per
      share, of which (i) options to purchase 75,000 shares will vest on August
      26, 2008,; and (ii) options to purchase 18,750 shares will be vest at the
      end of every 3 month period thereafter.
                    (2)At
      the end of each calendar year between 2008 and 2011, and upon the
      achievement by Xfone 018 100% of its Targets for each such year, the
      General Manager of Xfone 018 will be granted options to purchase 25,000
      shares of the Company’s Common Stock under the Plan, for an exercise price
      of $3.50 per share, which will be exercisable 30 days after the Company
      publishes its annual financial statements for such
      year.
                    
                    The
      options will expire 120 days after termination of employment with Xfone
      018.
  
 
 
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                    DECEMBER
      31, 2007
 
 Note
12 - Capital Structure, Stock Options (Cont.)
 
 Stock Option
Plan(Cont.)
 
 Year
      Ended December 31, 2007Number
      of options
                  
                  Weighted
      average exercise priceOptions
      outstanding at the beginning of the year
                  
                  
                  5,350,000
                  
                  $
                  3.69Granted
      (a)
                  
                  
                  740,000
                  
                  $
                  3.31Exercised
                  
                  
                  (6,300
                  )
                  $
                  3.50Forfeited
                  
                  
                  (368,700
                  )
                  $
                  3.50Options
      outstanding at the end of the year
                  
                  
                  5,715,000
                  
                  $
                  3.65Options
      vested and exercisable
                  
                  
                  3,689,063
                  
                  $
                  3.50Weighted
      average fair value of options granted
                  
                  
                  
                  
                  $
                  1.13
  (a)
Include options under contractual obligation as specified in note
12L.
 
 The
following table summarizes information about options vested and exercisable at
December 31, 2007:
 Options
      vested and exercisableRange
      price ($)
                  Number
      of options
                  Weighted
      average remaining contractual life (years)
                  Weighted
      average exercise price3.50
                  3,689,063
                  4.8
                  $3.02
 
 Note
13 - Earnings Per Share
 Year
      Ended December 31 , 2007Weighted
      AverageIncome
                  
                  Shares
                  
                  Per
      ShareAmountsNet
      Income
                  
                  
                  
                  
                  $
                  (1,283,891)Basic
      EPS:Income
      available to common stockholders
                  
                  
                  
                  
                  $
                  (1,283,891)
                  
                  
                  11,777,645
                  
                  $
                  (0.109)Effect
      of dilutive securities:Options
      and warrants
                  
                  
                  
                  
                  
                  -
                  
                  
                  1,745Diluted
      EPS:Income
      available to common stockholders
                  
                  
                  
                  
                  $
                  (1,283,891)
                  
                  
                  11,779,390
                  
                  $
                  (0.109)
  Year
      Ended December 31 , 2006Weighted
      AverageIncome
                  
                  Shares
                  
                  Per
      ShareAmountsNet
      Income
                  
                  
                  
                  
                  $
                  660,696Basic
      EPS:Income
      available to common stockholders
                  
                  
                  
                  
                  $
                  660,696
                  
                  
                  10,135,874
                  
                  $
                  0.065Effect
      of dilutive securities:Options
      and warrants
                  
                  
                  (*
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -Diluted
      EPS:Income
      available to common stockholders
                  
                  
                  
                  
                  $
                  660,696
                  
                  
                  10,135,874
                  
                  $
                  0.065
 (*)
Anti-diluted
  
 
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                    DECEMBER
      31, 2007
 
 Note 14 - Related
Party Transactions
  Years
      endedDecember 
      31,2007
                  
                  2006Campbeltown
      Business Ltd.:Fees
                  
                  $
                  4,302
                  
                  $
                  163,381Accrued
      Expenses
                  
                  
                  -
                  
                  
                  13,615Vision
      Consultants Limited:Fees
                  
                  
                  -
                  
                  
                  163,381Accrued
      expenses
                  
                  
                  -
                  
                  
                  -Abraham
      KeinanFees
                  
                  
                  254,350
                  
                  
                  100,710Accrued
      expenses
                  
                  
                  20,050
                  
                  
                  11,568Guy
      Nissensson-Fees
                  
                  
                  242,490
                  
                  
                  -Accrued
      expenses
                  
                  
                  20,050
                  
                  
                  -Story
      Telecom Limited:Revenues
      (*)
                  
                  
                  -
                  
                  
                  2,883,942Commissions
      (*)
                  
                  
                  -
                  
                  
                  312,300Auracall
      Limited:Related
      revenues (*)
                  
                  
                  3,324,726
                  
                  
                  1,501,092Commissions
      (*)
                  
                  
                  417,907
                  
                  
                  1,061,259Due
      (to) from Auracall (net)**
                  
                  
                  
                  
                  
                  (142,633
                  )Short-term
      loan from Auracall Limited**
                  
                  
                  
                  
                  
                  47,016Dionysos
      Investments (1999) Limited:Fees
                  
                  
                  183,363
                  
                  
                  70,524Accrued
      Expenses
                  
                  
                  146,542
                  
                  
                  5,877Balance:Guy
      Nissenson
                  
                  
                  -
                  
                  
                  (22,611
                  )Abraham
      Keinan
                  
                  
                  (7,205)
                  
                  
                  (62,670
                  )
 
 (*)
Amount represents the period for which Story Telecom Limited or Auracall Limited
was not consolidated into the Company's financial reports.
 (**) Due
to the acquisition these amounts are eliminated
   
 
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                    DECEMBER
      31, 2007
 
 Note
15 - Financial Commitments
  A.
                  The
      Company leases its facilities in the UK, USA and Israel under operating
      lease agreement, which will expire in 2009 through 2012. The minimum lease
      payments under non-cancelable operating leases are as
    follows:
  Year
      ended December 31,2008
                  
                  $
                  365,6492009
                  
                  
                  280,8052010
                  
                  
                  193,2572011
                  
                  
                  178,9352012
                  
                  
                  118,6121,137,258
   B.
                  Pursuant
      to a Company’s Board of Directors’ resolution dated December 25, 2006, on
      March 28, 2007, the Company and Mr. Keinan entered into a consulting
      agreement, to be effective as of January 1, 2007 (the “Keinan Consulting
      Agreement”).
                    The
      Keinan Consulting Agreement provides that Mr. Keinan shall render the
      Company advisory, consulting and other services in relation to the
      business and operations of the Company (excluding its business and
      operations in the United Kingdom).
                    In
      consideration of the performance of the Services pursuant to the Keinan
      Consulting Agreement, the Company shall pay Mr. Keinan a monthly fee of
      £10,000 ($21,044) (the “Fee”). Mr. Keinan shall invoice the Company at the
      end of each calendar month and the Company shall make the monthly payment
      immediately upon receiving such invoice".
 
 C.
                  Pursuant
      to a Company’s Board of Directors’ resolution dated December 25, 2006, on
      March 28, 2007, the Company and Mr. Nissenson entered into a consulting
      agreement, to be effective as of January 1, 2007 (the “Nissenson
      Consulting Agreement”).
                    The
      Nissenson Consulting Agreement provides that Mr. Nissenson shall render
      the Company advisory, consulting and other services in relation to the
      business and operations of the Company (excluding its business and
      operations in the United Kingdom).
                    In
      consideration of the performance of the Services pursuant to the Nissenson
      Consulting Agreement, the Company shall pay Mr. Nissenson a monthly fee of
      £10,000 ($21,044) (the “Fee”). Mr. Nissenson shall invoice the Company at
      the end of each calendar month and the Company shall make the monthly
      payment immediately upon receiving such invoice.
 
 
  
 
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                    DECEMBER
      31, 2007
 
 Stock
Purchase Agreement
 
 On June
19, 2000, Swiftnet Limited entered into a Stock Purchase Agreement with Abraham
Keinan and Campbeltown Business Ltd. a company owned and controlled 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
      Business declared that it is not involved in any business that competes
      with Swiftnet and would not be involved in such business at least for 18
      months after this transaction is concluded.·
                  Campbeltown
      Business would invest $100,000 in Swiftnet, in exchange for 20% of the
      total issued shares of Swiftnet;·
                  Campbeltown
      Business would also receive 5% of the Company's issued and outstanding
      shares following the Company's acquisition with Swiftnet. In June 2000,
      Campbeltown Business invested the $100,000 in Swiftnet. Xfone acquired
      Swiftnet and Campbeltown received 720,336 shares of the Company's common
      stock for its 20% interest in Swiftnet.·
                  Swiftnet
      and Abraham Keinan would guarantee that Campbeltown Business' 20% interest
      in the outstanding shares of Swiftnet would be exchanged for at least 10%
      of the Company's outstanding shares and that Campbeltown Business would
      have in total at least 15% of the Company's total issued shares after the
      Company's acquisition occurred.·
                  Campbeltown
      Business would have the right to nominate 33% of the members of the
      Company's board of directors and Swiftnet's board of directors. When
      Campbeltown Business ownership in the Company's common stock was less than
      7%, Campbeltown Business would have the right to nominate only 20% of the
      Company's board members but always at least one member. In the case that
      Campbeltown Business ownership in the Company's common stock was less than
      2%, this right would expire.·
                  Campbeltown
      Business would have the right to nominate a vice president in Swiftnet.
      Mr. Guy Nissenson was nominated as of the time of the June 19, 2000
      agreement. If for any reason Guy Nissenson will leave his position,
      Campbeltown Business and Abraham Keinan will agree on another nominee. The
      Vice President will be employed with suitable
  conditions.·
                  Campbeltown
      Business will have the right to participate under the same terms and
      conditions in any investment or transaction that involve equity rights in
      Swiftnet or us conducted by Abraham Keinan at the relative ownership
      portion.·
                  Keinan
      and Campbeltown Business have signed a right of first refusal agreement
      for the sale of their shares.
  Until
Xfone conducts a public offering or is traded on a stock market, we are not
permitted to issue any additional shares or equity rights without a written
agreement from Campbeltown Business. This right expires when Campbeltown no
longer owns any equity interest or shares in Xfone or Swiftnet.
  D.
                  The
      Company has commission agreements with various agents that are entitled to
      commission of approximately 5%-12% of the total sale amount less any bad
      debts.
  Note
16 - Economic Dependency and Credit Risk
  A. Certain
      Telecommunication operators act as collection channels for the Company. In
      2007 the Company had two major collection channels, one in the U.K. and
      one in Israel. Collections through these channels accounted to
      approximately 22% and 6% of the Company's total revenues in 2007,
      respectively, and 18% and 5% of the Company's total revenues in
      2006, respectively. With respect to collection of monies for the
      Company, these Telecommunication operators are not deemed to be customers
      of the Company.
   
 
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                    DECEMBER
      31, 2007
 
 B.
                  Approximately,
      25%, 20% and 7% of the Company's purchases are from three suppliers for
      the year ended December 31, 2007, and 31%, 28%, 5% are from three
      suppliers for the year ended December 31,
2006.
  Note
17 - Segment Information
  The
percentage of the Company's revenues is derived from the following Geographical
segments:
 Years
      EndedDecember
      31,2007
                  
                  2006Revenues:United
      Kingdom
                  
                  $
                  24,263,610
                  
                  $
                  16,951,119United
      States
                  
                  
                  12,290,891
                  
                  
                  15,474,206Israel
                  
                  
                  8,169,433
                  
                  
                  5,488,712Total
      revenues
                  
                  
                  44,723,934
                  
                  
                  37,914,037Cost
      of revenuesUnited
      Kingdom
                  
                  
                  10,696,915
                  
                  
                  11,834,466United
      States
                  
                  
                  5,904,797
                  
                  
                  7,684,708Israel
                  
                  
                  3,024,610
                  
                  
                  2,449,824Total
      cost of revenues
                  
                  
                  19,626,322
                  
                  
                  21,968,998Direct
      Gross Profit:United
      Kingdom
                  
                  
                  13,566,695
                  
                  
                  5,116,653United
      States
                  
                  
                  6,386,094
                  
                  
                  7,789,497Israel
                  
                  
                  5,144,823
                  
                  
                  3,038,88925,097,612
                  
                  
                  15,945,039Operating
      expenses:United
      Kingdom
                  
                  
                  12,556,993
                  
                  
                  3,582,173United
      States
                  
                  
                  6,466,501
                  
                  
                  6,658,270Israel
                  
                  
                  2,963,461
                  
                  
                  3,209,43621,986,955
                  
                  
                  13,449,879Operating
      Profit:United
      Kingdom
                  
                  
                  1,009,702
                  
                  
                  1,534,480United
      States
                  
                  
                  (80,406)
                  
                  
                  1,131,227Israel
                  
                  
                  2,181,362
                  
                  
                  (170,547
                  )3,110,657
                  
                  
                  2,495,160Non-
      recurring loss
                  
                  
                  2,856,803
                  
                  
                  -Expenses
      related to Headquarter in the US
                  
                  
                  1,283,297
                  
                  
                  1,460,138Operating
      Income (Loss)
                  
                  $
                  (1,029,442)
                  
                  $
                  1,035,022
 
 (*)
      Amounts were reclassified in order to present segment information without
      the effect of expenses related to operating a Headquarter in the
      US.
  
 
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                    DECEMBER
      31, 2007
 
 Note
18 - Subsequent Events
  Acquisition of
NTS Communications, Inc. (“NTS”)
 
 On
February 26, 2008 (the “Closing Date”), the Company completed its acquisition of
NTS pursuant to that certain Stock Purchase Agreement (the “Purchase Agreement”)
entered into on August 22, 2007 with NTS, and the equity owners of NTS as
sellers (the “NTS Shareholders”), as amended on February 14, 2008 and February
26, 2008 .
 
 The
acquisition closed on February 26, 2008.  Upon closing of the
acquisition, NTS and its six wholly owned subsidiaries, NTS Construction
Company, Garey M. Wallace Company, Inc., Midcom of Arizona, Inc., Communications
Brokers, Inc., NTS Telephone Company, LLC, and NTS Management Company, LLC,
became our wholly owned subsidiaries.
 
 The
purchase price for the acquisition was approximately $42,000,000 (excluding
acquisition related costs), plus (or less) (i) the difference between NTS’
estimated working capital and the working capital target for NTS as set forth in
the Purchase Agreement, and (ii) the difference between amounts allocated by NTS
for its fiber optic network build-out project anticipated in Texas and any
indebtedness incurred by NTS in connection with this project, each of which was
subject to the Company’s advance written approval.  After applying
this formula, the final aggregate purchase price was calculated as $41,900,000,
and was paid by the Company as follows: $35,414,715 was paid in cash;
and 2,366,892 shares of the Company’s common stock, were issued to certain
NTS Shareholders who elected to reinvest all or a portion of their allocable
sale price in the Company’s Common Stock, pursuant to the terms of the Purchase
Agreement. The Company’s Board of Directors determined, in accordance with the
Purchase Agreement, the number of shares of the Company’s Common Stock to be
delivered to each participating NTS Shareholder by dividing the portion of such
NTS Shareholder’s allocable sale price that the NTS Shareholder elected to
receive in shares of the Company’s Common Stock by 93% of the average closing
price of the Company’s Common Stock on the American Stock Exchange for the ten
consecutive trading days preceding the trading day immediately prior to the
Closing Date (i.e., $2.74). The aggregate sales price reinvested by all such NTS
Shareholders was $6,485,284.
 
 On
February 26, 2008, and in connection with the closing of the acquisition, the
parties entered into the following material definitive agreements, among
others:
 
 A.           Employment Agreements with
Barbara
Baldwin, Jerry Hoover and Brad Worthington.
 
 NTS
entered into Employment Agreements with each of Barbara Baldwin, who, prior to
the closing, served as NTS’ President and CEO, Jerry Hoover, who, prior to the
closing, served as NTS’ Executive Vice President - Chief Financial Officer, and
Brad Worthington, who, prior to the closing, served as NTS’ Executive Vice
President - Chief Operating Officer (each an “Officer,” and collectively the
“Officers”).  The Employment Agreements provide for continued
employment of the Officers with NTS in their respective capacities, and are for
five-year terms each, effective as of the Closing Date.
 
 The
Employment Agreements provide for initial annual salaries for Ms. Baldwin of
$273,000, and $243,840 for each of Messrs. Hoover and Worthington, and annual
salaries (not less than the Officer’s respective initial annual salary) to be
determined by NTS’ Board of Directors for each year of employment thereafter. In
addition, the Officers are entitled to one-time signing bonuses in the
amount of $500,000 for Ms. Baldwin and $243,840 for each of Messrs. Hoover and
Worthington on the effective date of the Employment Agreements.
 
 Pursuant
to the terms of the Employment Agreements, the Officers were granted the
following stock option awards under the Company’s 2007 Stock Incentive Plan on
the Closing Date: Ms. Baldwin was granted options to purchase 250,000 shares of
the Company’s Common Stock, and each of Messrs. Hoover and Worthington was
granted options to purchase 400,000 shares of the Company’s Common
Stock.  Each option is immediately exercisable, expires five years
from the grant date, and has an exercise price of $2.794, which is 10% over the
average closing price of the Company’s Common Stock for the ten trading days
immediately preceding August, 22, 2007, the execution date of the Purchase
Agreement.  Additionally, the Employment Agreements provide that at
the end of each Officer’s second year of his or her employment, he or she will
be granted options to purchase 267,000 shares of the Company’s Common Stock,
which will be immediately exercisable at $5.00 per share, and will expire five
years from such grant date.
 
 The
Employment Agreements also provide piggyback registration rights for the
Officers from the effective date of the Employment Agreement through the
expiration or termination of the Employment Agreements, to register for resale
the shares of the Company’s Common Stock they own as a result of exercising any
of the options granted pursuant to the Employment Agreements.  The
Company will pay the registration expenses with respect to such piggyback
registrations.
 
  
 
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                    DECEMBER
      31, 2007
 
 Note
18 - Subsequent Events  (Cont.)
 
 B.           Free Cash Flow Participation
Agreement.
 
 The
Company entered into a Free Cash Flow Participation Agreement (the
“Participation Agreement”) with NTS Holdings, pursuant to which NTS Holdings
will be entitled to a payment from the Company of an amount equal to 5% of
the aggregate excess free cash flow generated by the Company’s U.S.
Operations, which is defined in the Participation Agreement as the operations of
the Company and its U.S. subsidiaries, which include Xfone USA, Inc. and NTS,
and their respective subsidiaries, as well as any U.S. entity that the Company
acquires directly, or indirectly through its subsidiaries in the future (a
“Future Acquisition”).  NTS Holdings will be entitled to the
participation amount beginning at such time as the Company has received a
full return of its initial invested capital, plus an additional 8% return per
year, in connection with the NTS acquisition (as well as in connection with any
Future Acquisition).
 
 The
Participation Agreement will remain in effect in perpetuity, unless earlier
terminated in accordance with its terms.  Termination of the
Participation Agreement may occur upon a sale or buyout of the Company’s U.S.
Operations, at the option of the purchaser in any such transaction, and in the
limited circumstances set forth in the Participation Agreement.
 
 C.           Escrow
Agreement.
 
 In
accordance with the terms of the Purchase Agreement, the Company and certain
representatives of the NTS Shareholders (the “NTS Shareholder Representatives”)
entered into an Escrow Agreement with Trustmark National Bank, as escrow agent,
pursuant to which the Company deposited an amount of cash and shares of Common
Stock equal to $6,679,999 (15.9%) of the aggregate purchase price for the
acquisition, to be held and administered by the escrow agent in order to secure
certain obligations of the sellers under the Purchase Agreement. Each share of
Common Stock deposited with the escrow agent has an agreed value of $2.74, which
was determined by using the average per share closing price of the Common
Stock for the ten (10) consecutive trading days preceding the trading day
immediately prior to the Closing Date.
 
 D.           Issuance of Common Stock to
certain NTS Shareholders
 
 In
connection with the closing of the acquisition on February 26, 2008, the Company
issued 2,366,892 shares of the Company’s Common Stock to certain NTS
Shareholders who elected to reinvest all or a portion of their allocable sale
price in the Company’s Common Stock, pursuant to the terms of the Purchase
Agreement.  The Company’s Board of Directors determined, in accordance
with the Purchase Agreement, the number of shares of the Company’s Common Stock
to be delivered to each participating NTS Shareholder by dividing the portion of
such NTS Shareholder’s allocable sale price that the NTS Shareholder elected to
receive in shares of the Company’s Common Stock by 93% of the average closing
price of the Company’s Common Stock on the American Stock Exchange for the ten
consecutive trading days preceding the trading day immediately prior to the
Closing Date (i.e., $2.74).  The aggregate sales price reinvested by
all such NTS Shareholders was $6,485,284.
 
 E.           Issuance of Common Stock to
certain Accredited Investors pursuant to the December 13, 2007 Private
Placement
 
 On
February 26, 2008, the Company completed the issuance of 800,000 Units (as
defined below) to XFN-RLSI Investments, LLC, an entity affiliated with Richard
L. Scott Investments, LLC, a U.S. institutional investor, and 500,000 Units to
certain investors affiliated with or who are customers of Gagnon Securities LLC,
pursuant to Subscription Agreements entered into with each of the investors on
December 13, 2007.  Each “Unit” consists of two shares of the
Company’s Common Stock and one warrant to purchase one share of Common Stock,
exercisable for a period of five years from the date of issuance at an exercise
price of $3.10 per share.  The Units were sold at a price of $6.20 per
Unit, for an aggregate purchase price of $8,060,000, which was held in escrow
for the benefit of the Company pending the receipt by the Company of approvals
from the American Stock Exchange and the Tel Aviv Stock Exchange for the listing
of the shares (including those underlying the warrants), as well as the closing
of the acquisition of NTS.
 
 The
private placement was made by the Company acting without a placement
agent.
 
 
  
 
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                    DECEMBER
      31, 2007
 
 Note
18 - Subsequent Events  (Cont.)
 
 Letter
agreementwith
Oberon Securities, LLC
 
 On March
5, 2008, the Company entered into a letter agreement (the “March 5, 2008
Agreement”) with  Oberon Securities, LLC, a New York City-based
registered broker-dealer (“Oberon Securities”), pursuant to which the Company
will pay Oberon Securities $1,200,000 in cash for its services to the Company as
financial advisor in connection with the Company's acquisition of NTS, payable
as follows: (i) $400,000 no later than March 7, 2008 (ii) $400,000 no later than
May 1, 2008 and (iii) $400,000 no later than July 1, 2008. The March 5, 2008
Agreement sets forth the total and final fees due to Oberon Securities for
its services in connection with the NTS acquisition, pursuant to the Company’s
prior agreements with Oberon Securities and its affiliates.
 
 Agreement
of Principles with Tiv Taam Holdings 1 Ltd.
  On March
17, 2008, Xfone 018 entered into an Agreement of Principles with Tiv Taam
Holdings 1 Ltd., an Israeli public company (“Tiv Taam”), pursuant to which Xfone
018 agreed to purchase from Tiv Taam, and Tiv Taam agreed to sell to Xfone 018,
approximately 89% of the outstanding share capital (approximately 69% of its
fully diluted share capital) of Robomatix Technologies Ltd. (“Robomatix”) which
Tiv Taam currently owns.  Robomatix owns approximately 90% of the
issued share capital of Tadiran Telecom-Communication Services In Israel Ltd.
(“Tadiran Telecom”), which is the general partner of Tadiran
Telecom-Communication Services In Israel – Limited Partnership (“Tadiran Telecom
LP”), an Israeli entity dealing with the distribution, maintenance, assistance
services and sale of switchboards for the business community in
Israel.  Accordingly, upon consummation of the acquisition, Xfone 018
will also acquire control over Tadiran Telecom and Tadiron Telecom
LP.  The purchase price for the acquisition is NIS 44,000,000
(approximately $12,503,552), subject to adjustment as set forth in the
agreement, payable in three installments, as follows:
  o
                  On
      the closing date, NIS 15,500,000 (approximately $4,404,660) (the “First
      Installment”);
  o
                  By
      November 20, 2008, NIS 15,500,000 (approximately $4,404,660), subject to
      adjustment resulting from linkage to the Consumer Price
      Index  (the “Second Installment”);
and
  o
                  By
      November 1, 2009, NIS 13,000,000 (approximately $3,694,231), subject to
      adjustment resulting from linkage to the Consumer Price Index (the
      “Third Installment”).
  Xfone 018
will have all rights as a shareholder of Robomatix upon closing of the
acquisition and payment of the First Installment.
  We, as
the parent company of Xfone 018, have agreed to sign a letter of guarantee with
respect to the Second Installment and the Third Installment.  The
agreement provides for a 60-day period during which Xfone 018 shall perform a
legal and accounting due diligence examination of Robomatix, Tadiran Telecom and
Tadiran Telecom LP.  Xfone 018 has undertaken to maintain
confidentiality of all information delivered to Xfone 018, and has entered into
a Confidentiality Undertaking.
  The
closing of the transaction will occur on the later of (i) 75 days after the
execution of the Agreement (i.e, May 31, 2008), or (ii) 15 days after receipt of
necessary approvals of the General Director of the Antitrust Authority and other
Israeli governmental authorities.  In the event that the necessary
approvals are not received within 120 days of the date of execution of the
Agreement, or a reserved approval was received or an approval under conditions
which make it burdensome on Xfone 018 or significantly prejudice the
profitability of the transaction for Xfone 018, the Agreement will be null and
void as if it was never executed.
 
 
  
 
 
 
 Xfone,
      Inc. and SubsidiariesNOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                    DECEMBER
      31, 2007
 
 Note
18 - Subsequent Events  (Cont.)
 
 Acquisition ofadditional
30.4%ownership
interestinStory Telecom,
Inc.
 
 On July
12, 2007, Story Telecom UK notified Mr. Davison, its Managing Director, that it
was terminating his employment, effective as of September 10, 2007. On July 25,
2007, the Company received notification of a claim filed on July 23, 2007 by Mr.
Davison with the United Kingdom Employment Tribunals against Story Telecom UK,
alleging wrongful termination of his employment as Managing Director. The claim
did not seek any specific damages. On August 21, 2007, the Company responded to
the United Kingdom Employment Tribunal by rejecting Mr. Davison's
claim.
 
 On March
25, 2008, Story Telecom Limited (“Story Telecom UK”), the majority-owned U.K.
based subsidiary of the Company, settled the previously disclosed legal
proceeding in the U.K. initiated by Nir Davison, Story Telecom UK’s former
Managing Director.
 
 In
connection with the settlement, the Company purchased the shares of common stock
of Story Telecom, Inc., the parent company of Story Telecom UK ("Story Telecom
US"), owned by Mr. Davison and owned by Trecastle Holdings Limited, a company
owned and controlled by Mr. Davison (“Trecastle”), which increased the Company's
ownership interest in Story Telecom US from 69.6% to 100%.  As a
result, Story Telecom US became a wholly owned subsidiary of the
Company.
 
 As part
of the settlement, Story Telecom UK agreed to pay Mr. Davison ₤30,000 ($59,787)
as compensation for loss of employment, which payment was made without admission
of liability.  In addition, Mr. Davison agreed to file a Withdrawal of
Claim with the United Kingdom Employment Tribunal no later than March 26,
2008. The Withdrawal of Claim was filed on March 31, 2008.
 
 In
connection with the Compromise Agreement, Nir Davison, Trecastle and the Company
entered into a Securities Purchase Agreement (the “SPA”) on the same date,
pursuant to which Mr. Davison and Trecastle agreed to sell to the Company, and
the Company agreed to purchase from each of Mr. Davison and Trecastle, the
shares of common stock of Story Telecom US that each party owned, respectively,
for an aggregate purchase price of ₤270,000 ($538,083).


ITEM
      8.
            Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure




On
January 18, 2006, the Audit Committee of the Company, in accordance with its
rotation of independent auditor’s policy, replaced Chaifetz & Schreiber,
P.C. as our independent auditors and appointed Stark Winter Schenkein & Co.,
LLP (“SWS”), an independent member of BKR International, as independent auditors
of the Company. There were no reportable events, disagreements or
dissatisfaction with Chaifetz & Schreiber to report as defined in Regulation
S-B Item 304(a)(2). Chaifetz & Schreiber P.C. were replaced as part of the
Company policy of rotating its lead and reviewing audit partners after five
consecutive years. On January 31, 2006, we filed with the U.S. Securities and
Exchange Commission an amended current report on Form 8-K disclosing the
appointment of SWS as our new auditors. On December 28, 2006, our shareholders
approved the appointment of SWS as our Independent Certified Public Accountants
for the fiscal year ending December 31, 2006, and the first three quarters of
the fiscal year ending December 31, 2007. -36-




On
October 25, 2007, the Audit Committee of the Company approved the appointment of
SWS as the Company’s Independent Certified Public Accountants for the fiscal
year ending December 31, 2007, and the first three quarters of the fiscal year
ending December 31, 2008. On December 17, 2007, the shareholders of the Company
approved the appointment of SWS for the ensuing year at the annual meeting of
shareholders.




ITEM
      8A(T).
            Controlsand Procedures




(a)Management’s
Evaluation of Disclosure Controls and Procedures




As of the
end of the period covered by this Annual Report, we carried out an evaluation,
under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer/Principal Accounting Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures. Based
upon this evaluation, our Chief Executive Officer and Chief Financial
Officer/Principal Accounting Officer have concluded that information required to
be disclosed is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms,
and is accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer/Principal Accounting Officer, to allow for
timely decisions regarding required disclosure of material information required
to be disclosed in the reports that we file or submit under the Exchange Act.
Our disclosure controls and procedures are designed to provide reasonable
assurance of achieving these objectives and our Chief Executive Officer and
Chief Financial Officer/Principal Accounting Officer have concluded that our
disclosure controls and procedures are effective to a reasonable assurance level
of achieving such objectives. However, it should be noted that the design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote.




(b)Management’s
Report on Internal Control over Financial Reporting




Our
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s
internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. The Company’s internal control over financial
reporting includes those policies and procedures that:




(i)
            pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;




(ii)
            provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being
      made only in accordance with authorizations of our management and
      directors; and




(iii)
            provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.


-37-


Because
of the inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2007. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated Framework. Management’s
assessment included an evaluation of the design of our internal control over
financial reporting and testing of the operational effectiveness of these
controls.




Based on
this assessment, management has concluded that as of December 31, 2007, our
internal control over financial reporting was effective to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles.




This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.




(c)Changes
in Internal Control over Financial Reporting




There
were no changes in our internal control over financial reporting during our
fiscal quarter ended December 31, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.




ITEM
      8B.
            Other Information




None.


-38-




PART III




ITEM
      9.
            Directors,
      Executive Officers, Promoters and Control Persons and Corporate
      Governance; Compliance with Section 16(a) of the Exchange
    Act




On
October 25, 2007, the Company’s Board of Directors adopted amendments to the
Company’s Bylaws in order to, among other things, provide that the Board shall
be comprised of not less than two (2), and no more than eight (8) directors, and
to create a classified board by dividing the Board’s current membership into
three classes, Class A, Class B and Class C. Currently, Classes A and B are each
comprised of three (3) directors, and Class C has two (2) directors, as shown in
the table below:




Director
            ClassAbraham
      Keinan
            Class
      AGuy
      Nissenson
            Class
      AShemer
      Shimon Schwarz
            Class
      AEyal
      Josef Harish
            Class
      BAviu
      Ben-Horrin
            Class
      BItzhak
      Almog
            Class
      BMorris
      Mansour
            Class
      CIsrael
      Singer
            Class
      C





On
December 17, 2007, the Company’s stockholders re-elected the eight directors to
the classes shown above to serve until re-elected or the election and
qualification of their successors, or until their earlier resignation, removal
or death. In order to create a staggered board, the directors serving in Class A
of the Board will serve for one year, and then will be up for re-election for a
three year term at the 2008 annual meeting of stockholders, the directors
serving in Class B of the Board will serve for two years, and then will be up
for re-election for a three year term at the 2009 annual meeting of
stockholders, and the directors serving in Class C of the Board will serve for
three years, and then will be up for re-election for another three year term at
the 2010 annual meeting of stockholders.




Directors
are elected at the annual meeting of stockholders by a plurality of votes and a
separate vote for the election of directors will be held at each annual meeting
for each class of directors having nominees for election at such annual meeting.
Director may resign at any time by delivering his/her resignation to the
Chairman of the Board of Directors, such resignation to specify whether it will
be effective at a particular time, upon receipt or at the pleasure of the Board
of Directors (if no such specification is made, it shall be deemed effective at
the pleasure of the Board of Directors), and when one or more directors resigns
from the Board of Directors, effective at a future date, a majority of the
directors then in office, including those who have so resigned, shall have power
to fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective, and each director so chosen
shall hold office for the unexpired portion of the term of the director whose
place shall be vacated and until his/her successor shall have been duly elected
and qualified. Any director may be removed by the affirmative vote of not less
than eighty percent (80%) of the outstanding shares of the Company then entitled
to vote, with or without cause, at any time, at a special or an annual meeting
of stockholders, or by a written consent. -39-




Information
Regarding the Current Directors and Executive Officers




The
following table lists the current members of the Board of Directors and their
current positions with the Company. It also includes information about our
executive officers who are not also directors. Our Board of Directors elects our
executive officers. Biographical information for each director and officer is
provided below.




Name
            
            Age
            
            Director
      / OfficerAbraham
      Keinan
            
            
            58
            
            Chairman
      of the Board of Directors, since our inception.Guy
      Nissenson
            
            
            33
            
            Director,
      President and Chief Executive Officer since our
  inception.Eyal
      J. Harish
            
            
            55
            
            Director,
      since December 19, 2002.Shemer
      S. Schwartz
            
            
            33
            
            Director, since
      December 19, 2002, and is an independent director and a member of our
      Audit Committee and ourCompensationCommittee.Itzhak
      Almog
            
            
            69
            
            Director, since May
      18, 2006, and is an independent director and Chairman of our Audit
      Committee and ourNominatingCommittee.Aviu
      Ben-Horrin
            
            
            59
            
            Director,
      since November 23, 2004, and is an independent
director.Israel
      Singer
            
            
            59
            
            Director,
      since December 28, 2006, and is an independent director and a member of
      our Audit Committee.Morris
      Mansour
            
            
            60
            
            Director, since
      December 28, 2006, and is an independent directorand Chairman of ourCompensationCommittee and a member of ourNominatingCommittee.Niv
      Krikov
            
            
            37
            
            Principal
      Accounting Officer since May 9, 2007 and Treasurer and Chief Financial
      Officer since August 13, 2007.Alon
      Mualem
            
            
            40
            
            Had
      been our Treasurer, Chief Financial Officer and Principal Accounting
      Officer since June 8, 2005 and until March 1,
  2007.





Mr.
Abraham Keinan has been our Chairman of the Board of Directors since our
inception. Abraham Keinan founded Swiftnet in February 1990. Mr. Keinan has been
the Chairman of the Board of Directors of Swiftnet since its inception. From
1991 to October 2003, Mr. Keinan was Swiftnet’s Managing Director. In or about
January 2002, Mr. Keinan became a Director of Auracall. Mr. Keinan has been a
Director of Xfone 018 since its inception in April 2004. In March 2005, Mr.
Keinan became the Chairman of the Board of Directors of Xfone 018. Mr. Keinan
has been a Director of Xfone USA since its inception in May 2004. Mr. Keinan has
been a Director of Story Telecom since May 2006. Mr. Keinan has been a Director
of Equitalk.co.uk. since July 2006. In February 2008, Mr. Keinan became a
Director of NTS Communications. 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 and Director since our
inception. Mr. Nissenson joined Swiftnet in October 1999 and became a Director
of Swiftnet in May 2000. He had been the Managing Director of Swiftnet from
October 2003 until July 2006. In October 2002, Mr. Nissenson became a Director
of Story Telecom. In or about January 2002, Mr. Nissenson became a Director of
Auracall. Mr. Nissenson has been a Director of Xfone 018 since its inception in
April 2004. Mr. Nissenson has been a Director of Xfone USA since its inception
in May 2004. In March 2005, Mr. Nissenson became the Chairman of the Board of
Directors of Xfone USA. Mr. Nissenson has been a Director of Equitalk.co.uk.
since July 2006. In February 2008, Mr. Nissenson became a Director of NTS
Communications and its Chairman of the Board. Mr. Nissenson was a marketing
manager of RADA Electronic Industries Ltd. in Israel from May 1997 to October
1998. Mr. Nissenson was an audit and control officer with the rank of Lieutenant
of the Israel 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. -40-




Dr. Eyal
J. Harish has been a member of our Board of Directors since December 19, 2002.
Dr. Harish has been a Director of Xfone 018 since its inception in April 2004.
Dr. Harish had been a Director of Xfone USA from March 2005 until February 2008.
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 communications
company. Dr. Harish is the brother-in-law of Mr. Keinan, our Chairman of the
Board.




Mr.
Shemer S. Schwartz has been a member of our Board of Directors since December
19, 2002, and is an independent director and a member of the Audit Committee
andthe Compensation
Committee. Mr. Schwartz has been a Director of Xfone 018 since its inception in
April 2004. Mr. Schwartz had been a Director of Xfone USA from March 2005 until
February 2008. 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 Israel Defense
Forces Intelligence. In July 1995, Mr. Schwartz received a BS degree in Physics
and Mathematics from the Hebrew University in Jerusalem. In September 2003, Mr.
Schwartz received an MS degree in Computer science from the Tel-Aviv University
in Tel-Aviv, Israel.




Mr.
Itzhak Almog has been a member of our Board of Directors since May 18, 2006, and
is an independent director and Chairman of the Audit Committee andthe Nominating Committee.
From 2002 to present, Mr. Almog is an independent business consultant,
specializing in international marketing and management. From 1993 to 2002, Mr.
Almog was the President and CEO of Comverge Control Systems Ltd., an Israel
based start up company, which developed innovative solutions for Electric
Utilities. From 1990 to 1993, Mr. Almog was the President of Tasco Electronic
Services, Inc., a US based Hi-Tech company, specializing in Automatic Test
machines for commercial and military Aviation. Mr. Almog was an officer with the
rank of Rear Admiral in the Israel Defense Forces and served in various
commanding posts in the Israeli Navy. In 1980 Mr. Almog received a BA in Modern
Middle East History and Economics from the Tel Aviv University in Tel Aviv. In
1984 Mr. Almog received a Master of Business Administration from the Tel Aviv
University in Tel Aviv.




Mr. Aviu
Ben-Horrin has been a member of our Board of Directors since November 23, 2004,
and is an independent director. Mr. Ben-Hurrin had been a member of our Audit
Committee from November 24, 2004 until January 17, 2007. From 2001 to present,
Mr. Ben-Horrin directs, controls and manages various real estate 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 BS 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.




Mr.
Israel Singer has been a member of our Board of Directors since December 28,
2006, and is an independent director and a member of the Audit Committee since
January 17, 2007. Mr. Singer is an elected member of the Ramat Gan City council.
During 2006 Mr. Singer had been the managing director of the academic center
“Raanana College” in Israel. During the years 2004-2005 Mr. Singer was a
consultant to the Education Committee of the “Israeli Knesset” (the Israeli
Parliament). From 1985 to 2003, Mr. Singer was the principal of the “Blich High
School” in Ramat Gan. From 1992 to 1998 Mr. Singer was a member of the board of
directors of Rada Electronic Industries Ltd. In 1973, Mr. Singer received a
B.Sc. in Physics from the Tel Aviv University in Tel Aviv, Israel. In 1978, Mr.
Singer received an M.Sc. in High - Energy Physics from the Tel Aviv University
in Tel Aviv, Israel.




Mr.
Morris Mansour has been a member of our Board of Directors since December 28,
2006, and is an independent director and the Chairman of the Compensation
Committeeanda member of
the Nominating Committee.  Mr. Mansour has been a Director of
Superderivatives, Inc., a leading company in developing and marketing options
and derivatives pricing systems in forex, interest rates, commodities etc, since
2001. Since 2000 he has been a Director of Soffair Financial Services, a company
engaged in investment, property and finance. From 1995 to 1999 Mr. Mansour was a
financial advisor for several private companies which invested in hi-tech
start-up companies, and property. From 1986 to 1988 and from 1993 to 1994, Mr.
Mansour was Director and General Manager of “Le Shark Ltd.,” a major clothing
brand in the United Kingdom. From 1980 to 1985, Mr. Mansour was the Credit
Manager of Bank Hapoalim B.M. in the United Kingdom and a senior member of its
Management Committee. In 1972, Mr. Mansour received a B.A. in Economics and
International Relations from the Hebrew University in Jerusalem, Israel. -41-




Mr. Niv
Krikov has been our Vice President Finance since March 13, 2007, and our
Principal Accounting Officer since May 9, 2007. On August 13, 2007, in
accordance with a resolution of the Board of Directors of the Company, the
Company elected Mr. Krikov, as its Treasurer and Chief Financial Officer.
Following his election, Mr. Krikov no longer serves as Vice President Finance of
the Company, but continues to serve as its Principal Accounting Officer. Prior
to joining the Company, Mr. Krikov held the following financial and accounting
positions: Corporate Controller of Nur Macroprinter Ltd., a publicly traded
company (OTCBB: NURMF.PK) acting as a manufacturer of wide format digital
printers, where Mr. Krikov was responsible, among other duties, for the
preparation of all financial reports (2005 to March 2007); Controller and later
Credit and Revenues Manager of Alvarion Ltd. (NASDAQ: ALVR) (2002 to 2005);
Certified public accountant at the Israeli public accounting firm of Kost Forer
Gabbay & Kasierer, an affiliate of the international public accounting firm
Ernst & Young (1997 to 2001). Mr. Krikov holds a B.A. degree in Economics
and Accounting from the Tel Aviv University and is licensed as a CPA in Israel.
Mr. Krikov also holds a LL.M degree from the Faculty of Law at the Bar Ilan
University.




Mr. Alon
Mualem had been our Treasurer, Chief Financial Officer and Principal Accounting
Officer since June 8, 2005. On January 30, 2007, Mr. Alon Mualem submitted his
resignation to be effective as of March 1, 2007. The resignation of Mr. Mualem
was not the result of any disagreement on any matter relating to the Company’s
operations, policies, practices or historical financial statements.




Except as
set forth herein, no officer or director of the Company has, during the last
five years: (i) been convicted in or is currently subject to a pending
criminal proceeding (excluding traffic violations and other minor offenses);
(ii) been a party to a civil proceeding of a judicial or administrative
body of competent jurisdiction and as a result of such proceeding was or is
subject to a judgment, decree or final order enjoining future violations of, or
prohibiting or mandating activities subject to any federal or state securities
or banking laws including, without limitation, in any way limiting involvement
in any business activity, or finding any violation with respect to such law, nor
(iii) has any bankruptcy petition been filed by or against the business of
which such person was an executive officer or a general partner, whether at the
time of the bankruptcy of for the two years prior thereto.




Significant
Employees




Barbara
Baldwin, age 45, is President and Chief Executive Officer of Xfone USA, a
position she was appointed to on February 28, 2008 replacing Wade Spooner, and
is President and Chief Executive Officer of NTS Communications.  Ms.
Baldwin was appointed to the Board of Directors of Xfone USA on February 28,
2008, and to the Board of Directors of NTS Communications on
1991.  She also serves in the following capacities of the following
subsidiaries of NTS: Director and Managing Member of NTS Management Company,
LLC; President of Communications Brokers, Inc.; Director and President of NTS
Construction Company; President of Midcom of Arizona, Inc.; and Director and
President of Garey M. Wallace, Inc.  Ms. Baldwin also serves as
Director and President of NTS Properties, LC, a former subsidiary of NTS
Communications, and a Director of NTS Holdings Incorporated.  She has
been employed by NTS Communications since 1982, and has held a variety of
positions with NTS Communications, including being directly responsible for
sales and marketing, management information systems, customer service and
account administration.  She has served as President of NTS
Communications since 1994 and as President and CEO of NTS Communications since
2000. Ms. Baldwin holds a B.B.A. and an M.B.A. from Texas Tech University in
Lubbock, Texas.
  Brad
Worthington, age 42, is Executive Vice President and Chief Operating Officer of
NTS Communications.  Mr. Worthington was appointed to the Board of
Directors of NTS Communications on 1994. Mr. Worthington received his B.S. Ed.
From Southwest Texas State University in 1987 and his J.D. from Texas Tech
University School of Law in 1990.  He is licensed to practice law in
the State of Texas.  Mr. Worthington is a member of the State Bar of
Texas, and the Lubbock County Bar Association and is admitted to practice in the
Federal District Court for the Northern District of Texas.  Mr.
Worthington served as General Counsel for NTS Communications from 1990 until
2000.  As General Counsel Mr. Worthington was responsible for advising
senior staff on various legal and regulatory issues, preparation and review of
contracts, contract and business negotiations.  Mr. Worthington was
named Executive Vice President in 1994 and Chief Operating Officer in
2000.  Mr. Worthington also serves in the following capacities of the
following subsidiaries of NTS: Director and Managing Member of NTS Management
Company, LLC; Secretary of Communications Brokers, Inc.; Secretary of NTS
Construction Company; Secretary of Midcom of Arizona, Inc.; and Director and
Secretary of Garey M. Wallace Company, Inc.  Mr. Worthington also
serves as Director and Vice President of NTS Properties, LC, and Director of NTS
Holdings Incorporated.


-42-




Jerry E.
Hoover, age 59, is Executive Vice President, Treasurer and Chief Financial
Officer and NTS Communications. Mr. Hoover graduated from Texas Tech University
in 1971 and shortly afterward began a career in public
accounting.  Mr. Hoover has been a Certified Public Accountant for
over 30 years and for the last 20 years has worked with accounting issues unique
to the telecommunications industry.  In addition, he has also taught
accounting, taxation, and auditing at the university level.  Mr.
Hoover was a principal in a major Lubbock accounting firm where he began doing
work for NTS Communications in 1984.  He joined NTS Communications on
an in-house basis in 1994 as Executive Vice President and Treasurer, and was
named Chief Financial Officer in 2000.  Mr. Hoover also serves in the
following capacities of the following subsidiaries of NTS:
Director  and Manager of NTS Management Company, LLC; Treasurer of
Communications Brokers, Inc.; Treasurer of NTS Telephone Company, LLC; Treasurer
of Midcom of Arizona, Inc.; and Treasurer of Garey M. Wallace Company,
Inc.  Mr. Hoover also serves as the Sole Manager of NTS Telephone
Company, LLC; Director
and Secretary Treasurer of NTS Properties, LC, and as Director of NTS
Holdings Incorporated.




Mr. John
Mark Burton, 43 years of age, was appointed as the Managing Director of Swiftnet
at the completion of the acquisition of Equitalk.co.uk on July 3, 2006. He
founded Equitalk.co.uk, the UK’s first fully automated e-telco, in 2000 and has
been serving as its Managing Director since then. On August 3, 2006, Mr. Burton
was appointed to the Board of Directors of Swiftnet. On August 7, 2006, Mr.
Burton was elected as a Chairman to the Board of Directors of Story Telecom,
Inc. and Story Telecom Limited (collectively, "Story Telecom"), and on March 31,
2008 he was appointed as Story Telecom's Managing Director. On August 14, 2007,
Mr. Burton was appointed as Managing Director and appointed to the Board of
Directors of Auracall. Prior to founding Equitalk, Mr. Burton founded Nexus
Telecom Limited in 1995. Under his leadership as Managing Director, Nexus
designed an award-winning server-based soft switch that gained UK Regulatory and
IBM Approval. Prior to Nexus, Mr. Burton worked as Business Development Manager
for Griffin International (a telecom messaging company). He has also served as
R&D Manager at Nortel Networks with responsibility for engineers in the UK,
US and Far East designing a next generation, open architecture PBX. Mr. Burton
is a graduate of the University of Liverpool where he earned a BEng degree in
Electronic Engineering. He holds an MBA from Cranfield School of Management and
a CEng MIEE designation from the Institute of Electrical
Engineers.  He is a Member of the British Institute of
Directors.




Mr. Roni
Haliva, 42 years of age, was appointed as the Managing Director of our Israel
based subsidiary, Xfone 018, on August 26, 2007. Mr. Haliva has over 20 years of
experience in the telecommunication market. During the last two years, he was
Senior Vice President of Bezeq International Ltd., a leading telecommunication
services provider in Israel. Prior to this position, he established the
marketing and sales division of Malam Group, one of the major IT service
providers in Israel, and served as Senior Vice President with overall
responsibility for the business development, marketing & sales of the
company. Prior to Malam, Mr. Haliva worked as VP Marketing and Sales for Siemens
Israel, which is the Regional Company representing the global Siemens
conglomerate in Israel. He has also served in various managerial duties in
Bezeq, the local exchange carrier in Israel. Mr. Haliva received a Bsc. degree
in computers engineering from the Technion (The Israel Institute of Technology).
He also holds an MBA from the Ben Gurion University in Israel.




Mrs.
Bosmat Houston, 42 years of age, has been our Research and Development Manager
since our inception. She joined Swiftnet 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.




Family
Relationships




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




Mr. Iddo
Keinan, son of Mr. Abraham Keinan, our Chairman of the Board, has been employed
by our wholly owned UK based subsidiary, Swiftnet Limited since 1998. -43-




Mr. Guy
Nissenson, our President, Chief Executive Officer, and Director, and other
members of the Nissenson family own and control Campbeltown Business Ltd., our
major shareholder and a former consultant.




Mr. Haim
Nissenson, father of Mr. Guy Nissenson, President, Chief Executive Officer, and
Director is the Managing Director of Dionysos Investments (1999) Ltd., our
consultant. Dionysos Investments is owned and controlled by certain members of
the Nissenson family, other than Guy Nissenson.




Involvement
in Certain Legal Proceedings




No
director, person nominated to become a director, executive officer, promoter or
control person of the Company has, during the last five years: (i) been
convicted in or is currently subject to a pending a criminal proceeding
(excluding traffic violations and other minor offenses); (ii) been a party
to a civil proceeding of a judicial or administrative body of competent
jurisdiction and as a result of such proceeding was or is subject to a judgment,
decree or final order enjoining future violations of, or prohibiting or
mandating activities subject to any Federal or state securities or banking or
commodities laws including, without limitation, in any way limiting involvement
in any business activity, or finding any violation with respect to such law, nor
(iii) any bankruptcy petition been filed by or against the business of
which such person was an executive officer or a general partner, whether at the
time of the bankruptcy or for the two years prior thereto.




Board
Independence




The
Company applies the standards of the American Stock Exchange, the stock exchange
upon which the Company’s Common Stock is listed in the U.S., for determining the
independence of the members of its Board of Directors and Board committees. The
Board has determined that the following directors are independent within these
rules: Shemer S. Schwartz, Itzhak Almog, Aviu Ben-Horrin, Israel Singer and
Morris Mansour.




Committees
of the Board of Directors




We have
an Audit Committee that was formed in a November 24, 2004 Board of Directors
meeting. The Audit Committee is composed of three directors: Messrs. Almog,
Schwartz and Singer (all three are considered independent directors). Mr. Almog
who satisfies the “financial sophistication” requirement was appointed as the
Chairman of the Audit Committee. The Audit Committee makes decisions regarding
our audit, the appointment of auditors, and the inclusion of financial
statements in our periodic reports. Issues regarding our 2004 Stock Option Plan
and 2007 Stock Incentive Plan are decided by the entire Board of Directors,
including the members of the Audit Committee.


The Audit
Committee is governed by a charter which was originally adopted on November 24,
2004. On January 28, 2008, in accordance with its responsibility to annually
review the adequacy of its charter, the Audit Committee and the Board approved
amendments to the charter to update it to comply with rules and regulations
applicable to the Company that have changed since the charter was last reviewed
and to make certain technical, clarifying and non-substantive changes. A copy of
the Committee’s charter as amended is available on the Company’s website, at
www.xfone.com.


During
fiscal 2007, the Company’s Audit Committee held 6 physical and telephonic
meetings. The Audit Committee also approved certain actions by unanimous written
consent. All incumbent directors serving on the Audit Committee attended, either
in person or via telephone, at least 75% of all meetings of the Audit Committee
that were held in fiscal 2007 during the period in which they served on the
committee, with the exception of Mr. Singer, who attended 50% of such
meetings.




In
addition, we have a Nominating Committee of our Board of Directors, which was
established by our Board on December 30, 2007. The primary functions of the
Nominating Committee are to assist the Board by identifying individuals
qualified to become Board members, to recommend to the Board the director
nominees for the Company’s annual meetings of shareholders, and to recommend to
the Board director nominees for each Board committee. The Nominating Committee
is comprised of at least two members satisfying the independence requirements of
the U.S. Securities and Exchange Commission and the American Stock Exchange.
Messrs Itzhak Almog (Chairman) and Morris Mansour were appointed by the Board as
members of the Nominating Committee, to serve in such capacities until their
resignation, retirement, removal by the Board, or until their successors are
appointed. -44-




The
Nominating Committee is governed by a charter which was adopted by the Board on
December 30, 2007. A copy of the charter of the Nominating Committee is
available on the Company’s website, at www.xfone.com.




On
December 30, 2007, our Board of Directors also established a Compensation
Committee. The Compensation Committee was created to assist the Board in the
discharge of its responsibilities with respect to the compensation of the
Company’s directors and officers. The Compensation Committee is comprised of at
least two members satisfying the independence requirements of the U.S.
Securities and Exchange Commission and the American Stock Exchange. In addition,
each member of the Compensation Committee is required to be a “nonemployee
director,” within the meaning of Rule 16b-3 issued by the SEC, and an “outside
director,” within the meaning of Section 162(m) of the Internal Revenue Code of
1986, as amended. Messrs Morris Mansour (Chairman) and Shemer S. Schwartz were
appointed by the Board as members of the Nominating Committees, to serve in such
capacities until their resignation, retirement, removal by the Board, or until
their successors are appointed




The
Compensation Committee is governed by a charter which was adopted by the Board
on December 30, 2007. A copy of the charter of the Compensation Committee is
available on the Company’s website, at www.xfone.com.




Audit
Committee financial expert




Mr.
Itzhak Almog who satisfies the “financial sophistication” requirement is the
Audit Committee financial expert as defined by Item 407(d)(5) of Regulation S-B
of the Securities Exchange Act of 1934, as amended, and the Chairman of the
Audit Committee.




Section
16(a) Beneficial Ownership Reporting Compliance




Under the
securities laws of the United States, our directors, executive (and certain
other) officers, and any persons holding ten percent or more of our common stock
must report on their ownership of the common stock and any changes in that
ownership to the SEC. Specific due dates for these reports have been
established. During the fiscal year ended December 31, 2007, we believe that all
reports required to be filed by Section 16(a) were filed on a timely
basis.




Code
of Conduct and Ethics




The Audit
Committee of the Board of Directors of the Company has adopted and approved a
Code of Conduct and Ethics (the “Code”) to apply to all the directors, officers
and employees of the Company. The Code which was ratified by the Board of
Directors of the Company is intended to promote ethical conduct and compliance
with laws and regulations, to provide guidance with respect to the handling of
ethical issues, to implement mechanisms to report unethical conduct, to foster a
culture of honesty and accountability, to deter wrongdoing and to ensure fair
and accurate financial reporting. The Code became effective on August 15,
2006.




The Code
was previously filed on the Company’s Current Report on Form 8-K filed with the
SEC on August 15, 2006, and is also available on our website at www.xfone.com. -45-




ITEM
      10.
            ExecutiveCompensation




Summary
Compensation




The
following table summarizes all compensation received for services rendered to
the Company during the two fiscal years ended December 31, 2007 by our Chief
Executive Officer and two other executive officers other than our Chief
Executive Officer who were serving as our executive officers at December 31,
2007 (collectively, our “Named Executive Officers”).




Summary
Compensation Table




Name
      and Principal Position
            Year
            Salary
              ($)
            Bonus
              ($)
            Stock
      Awards
              ($)
            Option
      Awards
              ($)
            Non-Equity
      Incentive Plan Compensa-tion
              ($)
            Non-qualified
      Deferred Compensa-tion Earnings
              ($)
            All Other Compensa-tion(10)
              ($)
            Total
              ($)Abraham
      Keinan,
              Chairman
      of the Board
            2007
            96,043(1)
            
            
            
            254,350(2)
            
            18,796(3)
            369,1892006
            94,032(1)
            –
            –
            –
            100,710(4)
            –
            35,920(3)
            230,662Guy
      Nissenson,
              President,
      CEO, and Director
            2007
            96,043(5)
            
            
            
            242,490(6)
            
            31,294(7)
            338,5332006
            94,032(5)
            –
            –
            –
            163,381(8)
            –
            26,341(7)
            283,754Niv
      Krikov,
              Treasurer, CFO and Principal Accounting Officer(9)
            2007
            76,030
            3,650
            –
            –
            –
            –
            –
            79,6802006
            N/A
            N/A
            N/A
            N/A
            N/A
            N/A
            N/A
            N/A




(1)
            Salary
      paid to Mr. Keinan by our U.K. based wholly owned subsidiary, Swiftnet
      Limited, in connection with his employment as Chairman of the Board. Mr.
      Keinan has been the Chairman of the Board of Directors of Swiftnet since
      its inception in 1990. The amount shown in the table above for 2006 was
      paid in British Pound Sterling (£48,000) and has been translated into U.S.
      dollars for convenience purposes using the rate of exchange of the U.S.
      dollar at December 31, 2006. The representative rate of exchange of the £
      at December 31, 2006 was £1 = $1.959. The amount shown in the table above
      for 2007 was paid in British Pound Sterling (£48,000) and has been
      translated into U.S. dollars using the average rate of exchange of the
      U.S. dollar during 2007. The average rate of exchange of the £ during 2007
      was £1 = $2.001.




(2)
            Pursuant
      to a Company’s Board of Directors’ resolution dated December 25, 2006, on
      March 28, 2007, the Company and Mr. Keinan entered into a consulting
      agreement, effective as of January 1, 2007 (the “Keinan Consulting
      Agreement”). The Keinan Consulting Agreement provides that Mr. Keinan
      shall render the Company advisory, consulting and other services in
      relation to the business and operations of the Company (excluding its
      business and operations in the United Kingdom). In consideration of the
      performance of the Services pursuant to the Keinan Consulting Agreement,
      the Company agreed to pay Mr. Keinan a monthly fee of £10,000 ($19,987)
      (the “Fee”). Mr. Keinan invoices the Company at the end of each calendar
      month, and the Company make the monthly payments immediately upon receipt
      of such invoices.  The amount shown reflects payments to Mr.
      Keinan pursuant to the Keinan Consulting
  Agreement.




-46-




(3)
            The
      amount shown for 2006 reflects airfare expenses incurred by the Company
      for the travels of Mr. Keinan’s wife and payments for a leased car for Mr.
      Keinan’s use during 2006. The amount shown for 2007 reflects payments for
      a leased car for Mr. Keinan’s use in
2007.




(4)
            On
      April 2, 2002, our Board of Directors approved a bonus and success fee
      whereby if the Company receives monthly revenues in excess of $485,000
      then Mr. Keinan and our former consultant, Campbeltown Business Ltd. shall
      receive 1% of such monthly revenues, up to a maximum of one million
      dollars (the “Bonus and Success Fee”). On April 10, 2003, Mr. Keinan and
      Campbeltown Business waived their right to receive 1% of the revenues
      generated by Story Telecom. On February 8, 2007, an Agreement was entered
      by and between the Company, Swiftnet, Campbeltown Business, and Mr. Keinan
      (the “February 8, 2007 Agreement”). The February 8, 2007 Agreement
      provides that effective as of January 1, 2007, the Bonus and Success Fee
      is cancelled, and that Mr. Keinan and Campbeltown Business shall have no
      further right to any percentage of our revenues. Mr. Keinan agreed to
      receive a total amount of only $100,710 (£51,409) as Bonus and Success Fee
      for 2006, which is reflected in the table above, and waived the
      remainder.




(5)
            Salary
      paid to Mr. Nissenson by our U.K. based wholly owned subsidiary, Swiftnet,
      in connection with his employment as Director of Business Development. Mr.
      Nissenson joined Swiftnet in October 1999 and became a member of its Board
      of Directors in May 2000. Mr. Nissenson had been the Managing Director of
      Swiftnet from October 2003 until July 2006. The amount shown in the table
      above for 2006 was paid in British Pound Sterling (£48,000) and has been
      translated into U.S. dollars for convenience purposes using the rate of
      exchange of the U.S. dollar at December 31, 2006. The representative rate
      of exchange of the £ at December 31, 2006 was £1 = $1.959. The amount
      shown in the table above for 2007 was paid in British Pound Sterling
      (£48,000) and has been translated into U.S. dollars using the average rate
      of exchange of the U.S. dollar during 2007. The average rate of exchange
      of the £ during 2007 was £1 =
$2.001.




(6)
            Pursuant
      to a Company’s Board of Directors’ resolution dated December 25, 2006, on
      March 28, 2007, the Company and Mr. Nissenson entered into a consulting
      agreement, effective as of January 1, 2007 (the “Nissenson Consulting
      Agreement”). The Nissenson Consulting Agreement provides that Mr.
      Nissenson shall render the Company advisory, consulting and other services
      in relation to the business and operations of the Company (excluding its
      business and operations in the United Kingdom). In consideration of the
      performance of the Services pursuant to the Nissenson Consulting
      Agreement, the Company agreed to pay Mr. Nissenson a monthly fee of
      £10,000 ($19,987) (the “Fee”). Mr. Nissenson invoices the Company at the
      end of each calendar month, and the Company makes the monthly payments
      immediately upon receipt of such invoices.  The amount shown
      reflects payments to Mr. Nissenson pursuant to the Nissenson Consulting
      Agreement.




(7)
            The
      amount shown in the table above reflects airfare expenses incurred by the
      Company for the travels of Mr. Nissenson’s wife during 2006 and
      2007.




(8)
            On
      May 11, 2000, Swiftnet and Mr. Keinan entered into a consulting agreement
      with Campbeltown Business that provided that Swiftnet will hire
      Campbeltown Business as its financial and business development consultant
      and will pay Campbeltown Business £2,000 per month together with an
      additional monthly performance bonus based upon Swiftnet attaining certain
      revenue levels (the “Consulting Agreement”). On April 2, 2002, our Board
      of Directors approved a bonus and success fee whereby if the Company
      receives monthly revenues in excess of $485,000 then Mr. Keinan and
      Campbeltown Business shall receive 1% of such monthly revenues, up to a
      maximum of one million dollars (the “Bonus and Success Fee”). On April 10,
      2003, Mr. Keinan and Campbeltown Business waived their right to receive 1%
      of the revenues generated by Story Telecom. On February 8, 2007, an
      Agreement was entered by and between the Company, Swiftnet, Campbeltown
      Business, and Mr. Keinan (the “February 8, 2007 Agreement”). The February
      8, 2007 Agreement provides that effective as of January 1, 2007, the Bonus
      and Success Fee is cancelled, and that Mr. Keinan and Campbeltown Business
      shall have no further right to any percentage of our revenues. The
      February 8, 2007 Agreement further provides that effective as of January
      1, 2007, the Consulting Agreement is terminated. Campbeltown Business
      agreed to receive a total amount of only $163,381 (£83,400) as
      compensation under the Consulting Agreement and the Bonus and Success Fee
      for 2006, and waived the remainder. Campbeltown Business Ltd., a private
      company incorporated in the British Virgin Islands, is owned and
      controlled by Guy Nissenson and other members of the Nissenson family. Guy
      Nissenson owns 20% of Campbeltown Business. The compensation is shown in
      the table above as paid to Guy Nissenson due to his 20% ownership of
      Campbeltown Business.


-47-




(9)
            Mr.
      Niv Krikov has been our Vice President Finance since March 13, 2007, and
      our Principal Accounting Officer since May 9, 2007. On August 13, 2007, in
      accordance with a resolution of the Board of Directors of the Company, the
      Company elected Mr. Krikov as its Treasurer and Chief Financial Officer.
      Following his election, Mr. Krikov no longer serves as Vice President
      Finance of the Company, but continues to serve as its Principal Accounting
      Officer.




(10)
            The
      Company acknowledges that on several occasions, consultants may be
      required to travel frequently for a long duration around the world.
      Therefore, in order to enable the consultants’ spouses to accompany them
      on certain lengthy trips for a normal family life, the Company bears
      travel expenses for the consultants’
spouses.




Outstanding
Equity Awards at 2007 Fiscal Year-End




The
following table sets forth certain information concerning option awards and
stock awards held by our Named Executive Officers as of December 31, 2007. Our
Named Executive Officers did not hold any stock awards as of December 31,
2007.




Option
      Awards
            Stock
      AwardsName
            Number
      of Securities Underlying Unexercised Options
                (#)
      Exercisable
            Number
      of Securities Underlying Unexercised Options
                (#)
      Unexercis-able
            Equity
      Incentive Plan Awards: Number of Securities Underlying Unexercised
      Unearned Options
                (#)
            Option
      Exer-cise Price
                ($)
            Option
      Expiration Date
            Number
      of Shares or Units of Stock that Have Not Vested
                (#)
            Market
      Value of Shares or Units of Stock that Have Not Vested
                ($)
            Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
      that Have Not Vested
                (#)
            Equity
      Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
      Other Rights that Have Not Vested
                ($)Abraham
      Keinan
            1,500,000(1)
            –
            –
            3.50
            Nov.
      24, 2010
            –
            –
            –
            –Guy
      Nissenson
            1,500,000(1)
            –
            –
            3.50
            Nov.
      24, 2010
            –
            –
            –
            –Niv
      Krikov
            –
            –
            –
            –
            –
            –
            –
            –
            –




(1)
            These
      options were granted on November 24, 2004, vested in full on November 24,
      2005, and will expire on November 24,
2010.




-48-




Employment
Agreements; Termination of Employment and Change-in-Control
Arrangements




Executive
Officers




The
employment arrangements of Mr. Abraham Keinan, our Chairman of the Board, and
Mr. Guy Nissenson, our President, Chief Executive Officer, and Director, are
described in detail under the section captioned “Certain Relationships and
Related Transactions and Director Independence” of this Annual
Report.




Effective
August 13, 2007, in accordance with Board resolutions of the same date, the
Company elected Mr. Niv Krikov, its Vice President Finance and Principal
Accounting Officer, as the Company’s Treasurer and Chief Financial Officer.
Following his election, Mr. Krikov no longer serves as Vice President Finance of
the Company. For holding the positions of Treasurer, Chief Financial Officer and
Principal Accounting Officer, Mr. Krikov is entitled to the following employment
terms: A monthly gross salary of 33,000 NIS (approximately $9,378) (the
“Salary”); Executive insurance - the Company allocates 13.3% of the Salary (8.3%
for severance payments and 5% for remuneration), and Mr. Krikov allocates 5% of
the Salary. The insurance includes a loss of working capacity coverage (up to
2.5%) that is paid by the Company; Continuing education fund - the Company
allocates 7.5% of the Salary and Mr. Krikov allocates 2.5% of the Salary;
Company car, including fuel expenses; Company mobile phone; 19 days of paid
vacation per each employment year. The timing of the vacation will be
coordinated with the Company’s Chief Executive Officer. Recuperation payments as
provided by the applicable collective agreement in Israel. Mr. Krikov will be
granted options to purchase a certain amount of the Company’s shares of common
stock, as to be recommended by the Chief Executive Officer of the Company and
approved of the Board of Directors. Such options are intended to be granted
under and subject to the Company’s 2007 Stock Incentive Plan. The Company and
Mr. Krikov may terminate the employment of Mr. Krikov with the Company upon 30
days prior notice. Mr. Krikov is based at the Company’s subsidiary’s executive
offices in Israel.




Significant
Employees




Barbara
Baldwin, Jerry Hoover and Brad Worthington




NTS
Communications, Inc. ("NTS") entered into Employment Agreements with each of
Barbara Baldwin, who, prior to our acquisition of NTS, served as NTS’ President
and CEO, Jerry Hoover, who, prior to our acquisition of NTS, served as NTS’
Executive Vice President - Chief Financial Officer, and Brad Worthington, who,
prior to our acquisition of NTS, served as NTS’ Executive Vice President - Chief
Operating Officer (each an “NTS Officer,” and collectively the “NTS Officers”).
The Employment Agreements provide for continued employment of the NTS Officers
with NTS in their respective capacities, and are for five-year terms each,
effective as of February 26, 2008.




The
Employment Agreements provide for initial annual salaries for Ms. Baldwin of
$273,000, and $243,840 for each of Messrs. Hoover and Worthington, and annual
salaries (not less than the NTS Officer’s respective initial annual salary) to
be determined by NTS’ Board of Directors for each year of employment thereafter.
In addition, the NTS Officers are entitled to one-time signing bonuses in the
amount of $500,000 for Ms. Baldwin and $243,840 for each of Messrs. Hoover and
Worthington on the effective date of the Employment Agreements.




Pursuant
to the terms of the Employment Agreements, the NTS Officers were granted the
following stock option awards under the Company’s 2007 Stock Incentive Plan on
February 26, 2008: Ms. Baldwin was granted options to purchase 250,000 shares of
the Company’s Common Stock, and each of Messrs. Hoover and Worthington was
granted options to purchase 400,000 shares of the Company’s Common Stock. Each
option is immediately exercisable, expires five years from the grant date, and
has an exercise price of $2.794, which is 10% over the average closing price of
the Company’s Common Stock for the ten trading days immediately preceding August
22, 2007, the execution date of the Purchase Agreement. Additionally, the
Employment Agreements provide that at the end of each NTS Officer’s second year
of his or her employment, he or she will be granted options to purchase 267,000
shares of the Company’s Common Stock, which will be immediately exercisable at
$5.00 per share, and will expire five years from such grant date. -49-




The
Employment Agreements may be terminated upon the death of the NTS Officers, for
cause (immediately upon notice from NTS to the NTS Officer), for good reason
(following thirty days’ prior notice from NTS to the NTS Officer), for any
reason other than for good reason, or upon the disability of the NTS Officer,
each as defined in the Employment Agreements. The NTS Officers are entitled to
the following payments upon such termination:




1.
            If
      the NTS Officer terminates the Employment Agreement for good reason, NTS
      will pay the NTS Officer his or her salary for the remainder of the
      employment term, except that if the NTS Officer obtains other employment
      during that time, such salary payments will be reduced by the amount
      received with respect to such other
employment.




2.
            If
      the NTS Officer terminates his employment for any reason other than for
      good reason, the NTS Officer will be entitled to receive his or her salary
      only through the date such termination is effective, and any unexercised
      vested options to purchase the Company’s Common Stock and rights to
      receive any additional options to purchase the Company’s Common Stock
      shall be cancelled.




3.
            If
      NTS terminates the Employment Agreement for cause, the NTS Officer will be
      entitled to receive his or her salary through the date such termination is
      effective, and any options for the Company’s Common Stock issued in any
      year subsequent to Employment Year 1 shall be
  cancelled.




4.
            If
      the Employment Agreement is terminated because of the NTS Officer’s death,
      the NTS Officer will be entitled to receive his or her salary through the
      end of the calendar month in which his or her death occurs, and any right
      to receive any additional options to purchase the Company’s Common Stock
      shall be cancelled.




5.
            If
      the Employment Agreement expires after the performance of the full term
      and NTS and the NTS Officer cannot agree on the terms for an extension of
      the Employment Agreement or a new employment agreement to replace the
      Employment Agreement, and the NTS Officer terminates employment, then the
      NTS Officer will be entitled to receive as severance pay his or her salary
      for a period of three (3) months following the date of such
      termination.




6.
            If
      the Employment Agreement is terminated by either party as a result of the
      NTS Officer’s disability, NTS will pay the NTS Officer his or her s alary
      through the remainder of the calendar month during which such termination
      is effective and any right to receive any additional options for the
      Company’s Common Stock shall be
cancelled.




In the
event of any termination of employment by the NTS Officers for any reason other
than death, disability or for good reason, the NTS Officers have agreed to pay
to NTS the following amounts as liquidated damages:




Employment
      Year during which such termination occurs:
            
            Ms.
      Baldwin
            
            
            Mr.
      Hoover
            
            
            Mr.
      WorthingtonYear
      1
            
            $
            773,000
            
            
            $
            487,680
            
            
            $
            487,680Year
      2
            
            $
            618,400
            
            
            $
            390,144
            
            
            $
            390,144Year
      3
            
            $
            463,800
            
            
            $
            292,608
            
            
            $
            292,608Year
      4
            
            $
            309,200
            
            
            $
            195,072
            
            
            $
            195,072Year
      5
            
            $
            154,600
            
            
            $
            97,536
            
            
            $
            97,536





The NTS
Officers are permitted to participate in such life insurance, hospitalization,
major medical, and other executive benefit plans of NTS that may be in effect
from time to time. However, the NTS Officers’ accrual of, or participation in
plans providing for, such benefits will cease on the effective date of the
termination of the Employment Agreement, and the NTS Officer will be entitled to
accrued benefits pursuant to such plans only as provided in such plans. -50-




The NTS
Officers have also agreed to confidentiality and non-disclosure of confidential
information during and following the employment period, as well as customary
non-competition and non-interference for the greater of (i) 5 years from
the date of the Employment Agreement or (ii) the employment period and for
a period of two (2) years following the date that the employment
ends.




The
Employment Agreements also provide piggyback registration rights for the NTS
Officers from the effective date of the Employment Agreement through the
expiration or termination of the Employment Agreements, to register for resale
the shares of the Company’s Common Stock they own as a result of exercising any
of the options granted pursuant to the Employment Agreements. The Company will
pay the registration expenses with respect to such piggyback
registrations.




John
Mark Burton




A July 3,
2006 Service Agreement between the Company, Swiftnet Limited and John Mark
Burton (otherwise known as “Executive” in the service agreement), the Managing
Director of our UK based subsidiaries, Swiftnet, Equitalk.co.uk, Auracall, and
Story Telecom, provides for an employment term for Mr. Burton for an indefinite
period, terminable by either party giving to the other three months notice, if
given during the first six months of the agreement, and thereafter, Swiftnet
must provide Mr. Burton with no less than six months notice, and Mr. Burton must
provide Swiftnet with no less than three months written notice, to terminate the
agreement.




The
agreement provides that Mr. Burton is entitled to a salary at a rate of 70,000
pounds (approximately $139,912) per year, inclusive of any directors’ fees
payable to him, payable by equal monthly installments in arrears on the last day
of each month. In addition, Mr. Burton is entitled to bonus compensation as
follows:




1
            Within
      fourteen (14) days from the date of this agreement, the Company will grant
      the Executive, under its 2004 Stock Option Plan, 300,000 options for
      restricted shares of its common stock, at a strike price of $3.50 per
      share. Such options shall vest as follows: 75,000 options on the first
      anniversary of this agreement and 18,750 each quarter thereafter during
      which he is employed by Swiftnet. Such options may be exercised at any
      time before the tenth anniversary of the date of the
      agreement.




2
            On
      or before 31 August 2006, the Executive will be paid a bonus of £4,000 if
      he has produced a business plan that the Board approves for execution in
      writing.




3
            On
      or before 31 October 2006, the Executive will be paid a bonus equal to
      twelve per cent (12%) of the revenues referable for the month of September
      2006 from former customers of Equitalk, which have transferred to Swiftnet
      and whose CLIs and other details have been entered into Swiftnet’s system
      and set up so as to ensure that their calls are routed by means of
      Swiftnet’s switch by 30 September 2006. If such former customers have not
      paid in relation to such revenues by 31 December 2006, then the Executive
      shall repay to Swiftnet within thirty (30) days, the portion of the bonus
      that relates to the non-collected
revenues.




4
            If
      the share capital of Swiftnet, the Company or any Associated Company of
      either is admitted to a recognized investment exchange in the United
      Kingdom (a “Listing”) at any time during the course of the Executive’s
      employment, the Executive will be paid a bonus of one point thirty three
      per cent (1.33%) of the amount raised on such a Listing. Such bonus will
      be subject to any applicable law and appropriate approvals from the
      American Stock Exchange, SEC and/or UK Recognized Stock Exchange and shall
      be paid as soon as reasonably practicable following the date of the
      Listing by way of the grant of options or warrants (exercisable at any
      time within 5 years of the date of grant subject to any lock-in periods
      agreed as part of the Listing process) exercisable into restricted shares
      of common stock of the Company. Such options or warrants will be priced at
      the issue price of the Listing, according to the Black Scholes option -
      pricing model, with a volatility of ninety per cent
  (90%).


-51-


5
            If
      Swiftnet, the Company or any Associated Company acquires the shares,
      assets of undertaking of any company or business in the United Kingdom (an
      “Acquisition”) at any time during the course of the Executive’s
      employment, the Executive will be paid a bonus of one point thirty three
      per cent (1.33%) of the value of the Acquisition. Such bonus will be
      subject to any applicable law and appropriate approvals from the American
      Stock Exchange and/or SEC and shall be paid as soon as reasonably
      practicable following the date of the Acquisition and may be satisfied by
      Swiftnet by procuring that the Company allots restricted shares of common
      stock to the Executive to the value of such
  bonus.




6
            On
      or before 31 August 2006, the Executive and Swiftnet will agree a bonus
      scheme linked to his individual performance. An on-target bonus of £4,000
      per month will be payable for each month, such targets to be set so as to
      reward the Executive for improving the profitability and revenue of
      Swiftnet, whilst giving him a realistic chance of reaching them. The bonus
      will be paid monthly in arrears and there shall be no entitlement to
      receive any bonus once the Executive’s employment has terminated. The
      Executive and the Company will agree a formula to pay the Executive a
      reduced bonus if targets are not met and an increased bonus if targets are
      exceeded.




7
            The
      Executive is entitled to the same piggyback registration rights with
      respect to the securities of the Company allotted to the Executive under
      the service agreement, as those enumerated in Clause 3.5 and Schedule 13
      of the May 25, 2006 Agreement to purchase
  Equitalk.co.uk.




The
service agreement further provides for payment of a sum equal to 7.5% of the
Executive’s salary for way of a contribution to his personal pension scheme, and
provides for medical insurance, a company car, reimbursement for reasonable
business expenses, customary ancillary benefits. Mr. Burton has agreed to
preserve all confidential and proprietary information relating to Swiftnet’s
business during and after the term of his employment, and he has also agreed to
a non-competition provision that is in effect during the term of his employment
and for a period of 6 months after termination, and a non-solicitation
provisions that is in effect during the term of the service agreement and for a
period of 1 year after termination.




Swiftnet
may at any time and in its absolute discretion (whether or not any notice of
termination has been given by Swiftnet) terminate the service agreement with
immediate effect and make a payment in lieu of notice, for termination under
certain circumstances. This payment shall comprise the Executive’s basic salary
(at the rate payable when this option is exercised) and any bonus, pension
contributions or any other benefits and shall be subject to deductions for
income tax and national insurance contributions as appropriate (the “Payment in
Lieu”). The Executive will not, under any circumstances, have any right to
payment in lieu unless the Company has exercised its option to pay in lieu of
notice. The Payment in Lieu may, at Swiftnet’s sole discretion, be made at the
date that the termination of the Executive’s employment is effected by Swiftnet.
During any such period the Executive is required to keep Swiftnet informed on a
monthly basis as to his earnings and the Executive agrees that Swiftnet may
deduct any monies he earns as a consultant or employee during that period from
the Payment in Lieu.




Swiftnet
may also suspend the Executive for up to ninety (90) days on full pay to allow
it to investigate any complaint made against the Executive in relation to his
employment with Swiftnet.




On July
11, 2006, and in conjunction with his service agreement, the Company’s Board of
Directors approved the grant of 300,000 options, under and subject to its 2004
Stock Option Plan, to Mr. Burton. The options are convertible on a one to one
basis into restricted shares of our common stock, at an exercise price of $3.50,
and have a term of ten years. The vesting of the options will be over a period
of 4 years as follows: 75,000 options were vested on July 3, 2007. Thereafter,
18,750 options are vested every 3 months for the following 3 years. -52-




Roni
Haliva




An
employment contract dated August 26, 2007 (the “Contract”) between Xfone 018
Ltd., our majority-owned Israel based subsidiary, and Roni Haliva, its General
Manager, provides that Mr. Haliva will be paid a base salary of NIS 36,000
(approximately $10,230) per month, and will also be entitled to annual bonus
payments which will be determined based upon Xfone 018’s achievement of certain
performance targets related to its annual budget (the “Targets”) as proposed by
Mr. Haliva and fixed by Xfone 018’s Board of Directors annually.




Mr.
Haliva also was paid a budget preparation bonus of NIS 6,000 (approximately
$1,777) for the months of September, October and November of 2007. The Contract
also provides for allocations to a pension plan and continuing education fund
for Mr. Haliva’s benefit, as well as the receipt of convalescent pay, payments
in connection with a sale of Xfone 018’s shares or business under certain
circumstances, use of a company car, and other customary ancillary benefits. Mr.
Haliva has agreed to preserve all confidential and proprietary information
relating to Xfone 018’s business during and after the term of his employment,
and he has agreed to non-competition and non-solicitation provisions that are in
effect during the term of the Contract and for one year thereafter.




Mr.
Haliva will also be entitled to receive the following number of options to
purchase shares of the Company’s Common Stock under the Company’s 2007 Stock
Incentive Plan. The options are described in Appendix A to the Contract, which
was approved by the Company’s Board of Directors and entered into by the Company
on August 26, 2007:




1)
            Within
      30 days of adoption of the 2007 Stock Incentive Plan, Mr. Haliva will be
      granted options to purchase 300,000 shares of Common Stock, at an exercise
      price of $3.50 per share, of which (i) options to purchase 75,000
      shares will be exercisable after 12 months have elapsed from the
      commencement of his employment, but not before the qualifying date (the
      “First Exercise Date”); and (ii) options to purchase 18,750 shares
      will be exercisable at the end of every 3 month period, beginning after 3
      months have elapsed from the First Exercise
  Date.




2)
            At
      the end of each calendar year between 2008 and 2011, and upon the
      achievement by Xfone 018 100% of its Targets for each such year, Mr.
      Haliva will be granted options to purchase 25,000 shares of the
      Registrant’s Common Stock under the 2007 Stock Incentive Plan, for an
      exercise price of $3.50 per share, which will be exercisable 30 days after
      the Registrant publishes its annual financial statements for such
      year.




All
options will expire 120 days after termination of Mr. Haliva’s employment with
Xfone 018.




The
Contract may be terminated by either party at any time, upon 120 days prior
written notice during the first year of Mr. Haliva’s employment, and upon 180
days prior written notice during the second year of employment and
thereafter.




Bosmat
Houston




The
employment agreement dated January 1, 2000, as amended from time to time through
salary review letters, between Swiftnet Limited and Bosmat Houston, Research and
Development Manager, provides for employment for an unspecified term on an “at
will” basis. Either Swiftnet of Ms. Houston may terminate the agreement upon
three-months written notice; however, if Ms. Houston is in violation of the
agreement, Swiftnet may terminate her employment without notice. The agreement
provides that Ms. Houston be paid an annual salary of £54,000 (approximately
$107,932) payable monthly on the first day of each month. Ms. Houston has agreed
to preserve all confidential and proprietary information relating to the
company’s business during and for a period of 3 years after the term of her
employment. She has also agreed to non-competition provision for a period of one
year after termination of the agreement.




On
February 6, 2005, Ms. Houston was granted options to purchase 150,000 shares of
the Company’s Common Stock under the 2004 Stock Option Plan at an exercise price
of $3.50 per share, vesting 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. The options expire
5.5 years from the date of grant. -53-




Director
Compensation for 2007
  Compensation
for Board Services and Reimbursement of Expenses
  The
Company does not compensate Directors who also serve as executive officers of
the Company for their services on the Board. During fiscal 2007, the Company
compensated all its non-employed Directors for participation at meetings of the
Board and Committees of the Board as follows: (a) $250 - for physical
participation at each meeting of the Board or Committee of the Board; plus
(b) $100 - for participation via the telephone at each meeting of the Board
or Committee of the Board. In addition, the Company reimbursed its non-employed
Directors for expenses incurred in connection with Board services. These
expenses are reviewed and pre-approved by the President of the
Company.
  The
following table reflects all compensation awarded to, earned by or paid to the
Company’s Directors for the fiscal year ended December 31, 2007.
  Name
              Fees Earned or Paid in Cash(1)
                ($)
              Stock
      Awards
                ($)
              Options
      Awards
                ($)(9)
              Non-Equity
      Incentive Plan Compensation
                ($)
              Nonqualified
      Deferred Compensation Earnings
                ($)
              All
      Other Compensation
                ($)
              Total
                ($)Abraham Keinan(2)
              –
              –
              –
              –
              –
              –
              –Guy Nissenson(2)
              –
              –
              –
              –
              –
              –
              –Eyal J. Harish(3)
              1,250
              –
              –
              –
              –
              –
              450Shemer S. Schwartz(4)
              3,600
              –
              –
              –
              –
              –
              1,100Itzhak Almog(5)
              5,200
              –
              18,633
              –
              –
              –
              23,833Aviu Ben-Horrin(6)
              2,450
              –
              –
              –
              –
              –
              1,150Israel Singer(7)
              1,250
              –
              15,081
              –
              –
              –
              16,331Morris Mansour(8)
              1,250
              –
              15,081
              –
              –
              –
              16,331
  (1)
              These
      amounts were paid on February 11,
2008.
  (2)
              The
      Company does not compensate Directors who also serve as executive officers
      for their services on the Board. Accordingly, Mr. Keinan and Mr. Nissenson
      did not receive any compensation for their service on the Company’s Board
      during fiscal 2007.
  (3)
              As
      of December 31, 2007, Mr. Harish held 75,000 options, fully exercisable at
      an exercise price of $3.50 and with expiration date of November 24,
      2010.
  (4)
              As
      of December 31, 2007, Mr. Schwartz held 75,000 options, fully exercisable
      at an exercise price of $3.50 and with expiration date of November 24,
      2010.
  -54-
 (5)
              As
      of December 31, 2007, Mr. Almog held 25,000 options, fully exercisable at
      an exercise price of $3.50 and with expiration date of October 30,
      2012.
  (6)
              As
      of December 31, 2006, Mr. Ben-Horrin held 25,000 options, fully
      exercisable at an exercise price of $3.50 and with expiration date of
      November 24, 2010.
  (7)
              As
      of December 31, 2007, Mr. Singer held 20,000 options, which will vest in
      full on June 5, 2008, one year from grant date, are exercisable at an
      exercise price of $3.50, and will expire on June 5,
  2013.
  (8)
              As
      of December 31, 2007, Mr. Mansour held 20,000 options, which will vest in
      full on June 5, 2008, one year from grant date, are exercisable at an
      exercise price of $3.50, and will expire on June 5,
  2013.
  (9)
              The
      amount shown in the table reflects the dollar amount recognized for fiscal
      2007 financial statement reporting purposes of the outstanding stock
      options granted to the directors in accordance with FAS
    123R.
  ITEM
      11.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
  The
following tables sets forth, as of March 28, 2008, 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 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
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 18,434,820
shares issued and outstanding as of March 28, 2008. The following table sets
forth the ownership of our Common Stock as of the date of this Annual Report by:
stockholder known by us to own beneficially more than 5% of our common stock;
executive officer; director; and directors and executive officers as a
group.
  Title
                of
      Class
              Name,
      Title & Address of Beneficial Owner
              Amount
      of
                Beneficial
      Ownership
              Nature
      of
                Ownership
              Percent
                of
      ClassCommon
              Abraham
      Keinan(1)(3)
                Chairman
      of the Board
                4
      Wycombe Gardens
                London
      NW11 8AL
                United
      Kingdom
              4,878,000
              Direct
              24.47%Common
              Guy
      Nissenson(2)(3)
                President,
      Chief Executive Officer, and Director,
                3A
      Finchley Park
                London
      N12 9JS
                United
      Kingdom
              2,703,500
              Direct/Indirect
              13.56%Common
              Eyal J.
      Harish(4)
                Director
                18
      Bloch St.
                Tel
      Aviv, Israel
              90,000
              Direct
              0.49%Common
              Shemer S.
      Schwartz(5)
                Director
                5
      Israel Galili St.
                Kefar
      Saba, Israel
              75,000
              Direct
              0.41%Common
              Aviu
      Ben-Horrin(6)
                Director
                40
      Jabotinski St.
                Kefar
      Sava, Israel
              25,000
              Direct
              0.14%Common
              Itzhak
      Almog(7)
                Director
                7/A
      Moledet St.
                Hod
      Hasharon, Israel
              25,000
              Direct
              0.14%Common
              Morris
      Mansour(8)
                Director
                31
      Tenterden Gardens
                London
      NW4 1TG, United Kingdom
              0
              Direct
              0.00%Common
              Israel
      Singer(9)
                Director
                63
      Ben Eliezer St.
                Ramat
      Gan, Israel
              0
              Direct
              0.00%Common
              Directors
      and Executive Officers as a group (8 persons)
              7,836,500
              Direct
              36.15%Common
              Scott Richard L(10)
                700
      11th street South, Suite 101
                Naples,
      FL 34102
              2,800,000
              Indirect
              14.56%Common
              Gagnon Securities LLC(11)
                1370
      Ave. of the Americas, Suite 2400
                New
      York, NY 10019
              3,206,450
              Direct
              16.93%
 -55-
 (1)
              Until
      June 23, 2004, 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.
      Keinan as an individual. In addition, certain stockholders provided Mr.
      Keinan and Mr. Nissenson with irrevocable proxies representing a total of
      6.02% of our common stock. 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. Mr. Keinan’s 4,878,000
      shares of common stock include 1,500,000 shares issuable upon the exercise
      of options, exercisable within 60 days from the date of this Annual
      Report.
  (2)
              Guy
      Nissenson, our President, Chief Executive Officer, and Director, has
      indirect beneficial ownership of 1,203,500 shares of our common stock and
      direct beneficial ownership of 1,500,000 shares issuable upon the exercise
      of options, exercisable within 60 days from the date of this Annual
      Report. In addition, certain stockholders provided Mr. Nissenson and Mr.
      Keinan with irrevocable proxies representing a total of 6.02% of our
      common 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 so that the relative
      percentage ownership of Abraham Keinan and Campbeltown Business Ltd.
      remains the same. 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.
  (3)
              Our
      Chairman of the Board, Abraham Keinan, and our President, Chief Executive
      Officer, and 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.
  (4)
              Dr.
      Eyal J. Harish is the brother-in-law of Abraham Keinan, our Chairman of
      the Board. Dr. Harish holds 15,000 shares of our common stock and 75,000
      shares issuable upon the exercise of options, exercisable within 60 days
      from the date of this Annual
Report.
  (5)
              Mr.
      Shemer S. Schwartz holds 75,000 shares issuable upon the exercise of
      options, exercisable within 60 days from the date of this Annual
      Report.
  (6)
              Mr.
      Aviu Ben-Horrin holds 25,000 shares issuable upon the exercise of options,
      exercisable within 60 days from the date of this Annual
      Report.
  (7)
              Mr.
      Itzhak Almog holds 25,000 shares issuable upon the exercise of options,
      exercisable within 60 days from the date of this Annual
      Report.
  (8)
              Mr.
      Morris Mansour was granted options to purchase 20,000 shares of the
      Company’s common stock; however these options are not exercisable within
      60 days from the date of this Annual
Report.
  (9)
              Mr.
      Israel Singer was granted options to purchase 20,000 shares of the
      Company’s common stock; however these options are not exercisable within
      60 days from the date of this Annual
Report.
 (10)
                According
      to a Form 4 filed with the SEC on March 5, 2008, Scott Richard L the
      controlling member of XFN RLSI Investments, LLC, located at 700 11th
      street South, Suite 101 Naples, FL 34102, may be
      deemed to beneficially own 2,800,000shares and warrants.
  (11)
              According to a
      Schedule 13G filed with the SEC on March 27, 2008, Gagnon Securities LLC,
      a registered investment adviser located at1370 Ave. of the
      Americas, Suite 2400, New
      York, NY, in its capacity as investment advisor, may be deemed to
      beneficially own3,206,450 shares held of record bycustomer accounts, foundations, partnerships, trusts, and private
      investment funds to which it furnishes investment
      advice.
  -56-
  As of the
date of this Annual Report, our Chairman of the Board, Abraham Keinan,
beneficially owns 18.32% of our common stock (excluding options). Our President,
Chief Executive Officer, and Director, Guy Nissenson has significant influence
over an additional 6.53% of our common stock (excluding options), which is owned
by Campbeltown Business Ltd., an entity owned and controlled by Mr. Nissenson
and his family. In addition, certain stockholders provided Mr. Nissenson and Mr.
Keinan with irrevocable proxies representing a total of 6.02% of our common
stock. Eyal Harish, a director, beneficially owns 0.08% of our common stock
(excluding options). Our wholly owned subsidiary, Swiftnet Limited, beneficially
owns 0.71% of our common stock. Therefore, our management potentially may vote
31.66% of our common stock, without giving effect to the issuance of any shares
upon the exercise of outstanding warrants or options. As such, our management
may be able to exert significant control over the outcome of all matters
submitted to a vote of the holders of our common stock, including the election
of our directors, amendments to our articles of incorporation and bylaws and
approval of significant corporate transactions. Additionally, our management may
be able to delay, deter or prevent a change in our control that might be
beneficial to our other stockholders.
  ITEM
      12.
              Certain
      Relationships and Related Transactions and Director
      Independence
  Swiftnet
Limited
  General
Contract for Services
  A General
Contract for Services by and between the Company and its wholly owned
subsidiary, Swiftnet Limited, provides that as of January 1, 2005, the Company
will provide Swiftnet the following services: Marketing, Finance and Operational
Consultancy work related to customers and transactions that are based in and
outside the United Kingdom. In return for these services, Swiftnet will pay the
Company the following consideration: 5% of the total turnover of Swiftnet; 5% on
money raised from sources outside the United Kingdom; and expenses. The General
Contract for Services may be terminated by either party upon 30 days prior
written notice to the other party.
  On March
14, 2007, the Company and Swiftnet entered into a First Amendment to the General
Contract for Services (the “First Amendment”) to be effective as of January 1,
2006. The First Amendment provides that the Company will render Swiftnet the
following services; Day-to-day support to the Directors of Swiftnet in the
general management of the business (to include Marketing, Finance and
Operational advisory work), special projects (outside of the day-to-day
management of the business) required to achieve specific business development
goals (to include the new supplier relationships and the introduction of new
products and processes) and activities to secure financing for Swiftnet (from
outside the U.K.). In exchange for the services Swiftnet will pay the Company
according to the following schedule; 2.5% of the total turnover of Swiftnet, in
return for special projects: £750 per each Xfone executive per day, 5% of money
raised from sources outside the U.K., and expenses.
  Story
Telecom Limited
  Loan
  On July
17, 2007, Story Telecom Limited, at that time our majority-owned UK subsidiary
and as of March 25, 2008 a wholly-owned subsidiary, agreed to loan us up to
£400,000 ($843,820) that it had as cash surplus in its bank account. The loan
bears fixed interest rate at 4% over the interest payable by the bank for
deposits under the same terms. The loan is for a one-year term but can be
accelerated by Story Telecom if it requires additional financing to continue to
operate as a going concern. The loan is guaranteed by our wholly owned UK
subsidiary, Swiftnet Limited and by amounts owed to us by Story Telecom. In
addition, Story Telecom has the right to set-off repayments under the loan
against sums due to us by Story Telecom. The loan is pre-payable at any time
upon 30 days’ notice. On July 18, 2007 and on September 25, 2007, we borrowed
£350,000 ($738,342) and £50,000 ($105,477), respectively, of the loan. On
October 8, 2007, Story Telecom agreed to increase the loan ceiling by £300,000
to a maximum of £700,000. Further borrowings of £100,000 ($210,955) were made on
October 9, 2007. As of December 31, 2007, the aggregate outstanding borrowings
were £500,000 ($1,002,405) plus interest.
 -57-
 Xfone
018 Ltd.
  Investment
Agreement with a Minority Partner
  According
to an August 26, 2004 Investment Agreement between us, Xfone 018 Ltd. and our
26% minority interest partner in Xfone 018 (respectively, the “Investment
Agreement”, the “Minority Partner”), the Minority Partner provided in 2004 a
bank guarantee of 10,000,000 NIS ($2,546,473) to the Ministry of Communications
of the State of Israel which replaced an existing bank guarantee given by us in
connection with Xfone 018’s license to provide international telecom services in
Israel. As part of the Investment Agreement, we agreed to indemnify the Minority
Partner 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 018, provided that the said act or omission is performed against the
opinion of the Minority Partner or without his knowledge. Further, we agreed
that if at the end of the first two years of Xfone 018’s business activity, its
revenues shall be less than $2,000,000 or if it shall cease business activity
(at any time), we shall secure the return of the bank guarantee to the Minority
Partner.
  Pursuant
to the Investment Agreement, the Minority Partner provided in the fourth quarter
of year 2004, a shareholder loan of approximately $400,000 to Xfone 018 (the
“Minority Partner Loan”). The Minority Partner Loan is for four years with
annual interest of 4% and linkage to the Israeli consumer price index. As of
December 31, 2007, the balance of the Minority Partner Loan was NIS 1,891,294
($491,756).
  As of
December 31, 2007, Xfone, Inc. provided to Xfone 018 a shareholder loan in an
aggregate amount of NIS 4,848,550 ($1,260,673).
  The
Investment Agreement provides that we shall be entitled to receive from Xfone
018 management fees equivalent to 5% of the operating profit of Xfone 018, in
return for the management services provided by us to Xfone 018. As of December
31, 2007, management fees in the amount of $15,718 were due and
paid.
 Giora
Spigel Agreement
  Pursuant
to a verbal agreement between Mr. Giora Spigel and us, the Board of Directors of
Xfone 018 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 Xfone 018, will be transferred to Margo Pharma Ltd. (formerly
Margo Sport Ltd.)., a company owned by Mr. Spigel and his wife. 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.
  Xfone 018
is currently owned 69% by us, 26% by Newcall Ltd. (a company owned by the
Minority Partner), and 5% by Margo Pharma Ltd.
  Auracall
Limited
  Shareholders
Loan Agreement
  Auracall.
As part of this agreement, Swiftnet agreed to provide a loan of £24,000
($50,629) to Auracall, free of interest, to be repaid within one year. The loan
was funded on October 13, 2006, and repaid by Auracall in full on May 10,
2007.
 -58-
  Crestview
Capital Master, LLC
  Consultancy
Agreement with Crestview Capital Partners
  On
November 20, 2006, the Company and Crestview Capital Partners, LLP (the
“Consultant”) entered into a one-year Consultancy Agreement (the “Consultancy
Agreement”). During the term of the Consultancy Agreement, the Company will
engage the Consultant as its strategic consultant on United States capital
markets for micro-cap public companies. In return for its services pursuant to
the Consultancy Agreement, the Consultant was granted 117,676 warrants to
purchase restricted shares of the Company’s common stock, registered in the name
of Crestview Capital Master, LLC (the “Warrants”). The Warrants are exercisable
pursuant to the following terms: Vesting - 29,419 warrants immediately, 29,419
warrants on February 10, 2007, 29,419 warrants on May 10, 2007, and 29,419
warrants on August 10, 2007; Exercise Price - $3.50; Term - five
years.
  Crestview
Capital Master, LLC owns 319,500 shares of the Company’s common stock and a
total of 760,176 warrants to purchase shares of the Company’s common
stock.
  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.
Keinan as an individual.
  Redemption
of Keinan Shares
  On
December 29, 2005, the Board of Directors of the Company entered into an oral
stock purchase agreement with Mr. Keinan pursuant to which it repurchased
100,000 restricted shares of its common stock at a price of $2.50 per share
(market price at that day was $2.75 per share). The 100,000 shares were returned
to us for cancellation. The Agreement was approved by a majority of the
non-interested members of the Board of Directors.
  On
December 25, 2006, the Board of Directors of the Company entered into an oral
stock purchase agreement with Mr. Keinan, pursuant to which the Company
repurchased from Mr. Keinan 100,000 restricted shares of its common stock at a
price of $2.70 per share (market price at that day was $2.80 per share). The
100,000 shares were returned to us for cancellation on December 26, 2006. The
Agreement was approved by all non-interested members of the Board of Directors,
following a review and discussion by the Company’s Audit Committee.
 -59-
 Keinan
Employment with Swiftnet
  Our
Chairman of the Board, Mr. Abraham Keinan, has been employed by our wholly owned
UK based subsidiary, Swiftnet Limited since its inception in 1990. In 2005, Mr.
Keinan’s annual salary was £54,594 ($115,169). In 2006, Mr. Keinan’s annual
salary was £48,000 ($101,258). Mr. Keinan received in addition to his monthly
salary pension benefits and a company car. With respect to employment years
1990-2006, Mr. Keinan had no written employment agreement with
Swiftnet.
 Keinan
Employment Agreement with Swiftnet
  Pursuant
to a Company’s Board of Directors’ resolution dated December 25, 2006, on March
28, 2007, Swiftnet and Mr. Keinan entered into an employment agreement, to be
effective as of January 1, 2007 (the “Keinan Employment
Agreement”).
  The
Keinan Employment Agreement provides that Mr. Keinan shall be employed as the
Chairman of the Board of Directors of Swiftnet. Keinan Employment Agreement
shall be in effect for an initial fixed term of five years, beginning on January
1, 2007, (the “Initial Effective Term”), and thereafter shall automatically be
renewed for additional terms of three years (each, an “Additional Effective
Term”). Notwithstanding the foregoing, each of Swiftnet and Mr. Keinan shall
have the right to terminate the automatic renewal of Keinan Employment
Agreement, for any reason whatsoever, by a termination notice in writing, to be
provided to the other party not less than six months prior to: (i) the
expiration of the Initial Effective Term, or (ii) the expiration of any
Additional Effective Term (the “Notice Period”). Notwithstanding the foregoing,
Mr. Keinan shall have the right to terminate the Keinan Employment Agreement,
for any reason whatsoever, and at any time, including during the Initial
Effective Term (“Early Termination”). In the event of Early Termination, the
Notice Period shall be of not less than eight months.
  Under the
Keinan Employment Agreement, Swiftnet shall pay to Mr. Keinan during the term of
his engagement a salary at the rate of £48,000 ($101,258) per annum, such salary
to be paid in equal monthly installments in arrears on the last Friday of each
month. Swiftnet shall provide Mr. Keinan with an appropriate executive car or
car allowance with an effective annual cost to Swiftnet of up to £15,000
($31,643).
 Swiftnet
shall pay Mr. Keinan contributions to the following schemes: (i) Health
care for him and his immediate family; (ii) Permanent health;
(iii) Life insurance arrangements (up to a maximum of four times salary);
(iv) Pension rights - Swiftnet shall contribute a monthly sum equal to 7.5%
of his salary. (v) Travel insurance.
  Swiftnet
shall reimburse to Mr. Keinan all traveling, hotel, restaurant and other
expenses incurred by him in the proper performance of his duties under his
engagement.
  If during
the period of the employment under the Keinan Employment Agreement Mr. Keinan
shall cease to be a director of Swiftnet, his employment shall continue and the
terms of the Keinan Employment Agreement (other than those relating to the
holding of office of director / chairman) shall continue in full
force.
  The
Keinan Employment Agreement also contains special arrangements for sickness
benefits, holiday entitlement and provisions regarding non-competition;
intellectual property; confidentiality; conflict of interests and other standard
terms and conditions.
  The
Keinan Employment Agreement was approved by all non-interested members of the
Board of Directors, following a review and discussion by the Company’s Audit
Committee.
 -60-
 Keinan
Consulting Agreement
  Pursuant
to a Company’s Board of Directors’ resolution dated December 25, 2006, on March
28, 2007, the Company and Mr. Keinan entered into a consulting agreement, to be
effective as of January 1, 2007 (the “Keinan Consulting
Agreement”).
  The
Keinan Consulting Agreement provides that Mr. Keinan shall render the Company
advisory, consulting and other services in relation to the business and
operations of the Company (excluding its business and operations in the United
Kingdom).
  In
consideration of the performance of the Services pursuant to the Keinan
Consulting Agreement, the Company shall pay Mr. Keinan a monthly fee of £10,000
($21,095) (the “Fee”). Mr. Keinan shall invoice the Company at the end of each
calendar month and the Company shall make the monthly payment immediately upon
receiving such invoice. Once a calendar year, and no later than December 15, the
Company’s Board shall consider approving an increase to the Fee. Such Board
approval shall be subject to the prior review, oversight and recommendation to
the Board of both the Audit Committee and the Compensation Committee of the
Company (the “Compensation Committee”). However, in the event the Company has
not established a Compensation Committee, the review, oversight and
recommendation to the Board of the Audit Committee shall suffice. In connection
with the performance of this provision, the Audit Committee, the Compensation
Committee and the Board shall take into account, among other factors, growth in
the Company’s revenues and/or profits.
 The
Company’s Board shall, from time to time, and not less than once a calendar
year, consider approving a grant of success bonus to Mr. Keinan (the “Bonus”).
Such Board approval shall be subject to the prior review, oversight and
recommendation to the Board of both the Audit Committee and the Compensation
Committee. However, in the event the Company has not established a Compensation
Committee, the review, oversight and recommendation to the Board of the Audit
Committee shall suffice. In connection with the performance of this provision,
the Audit Committee, the Compensation Committee and the Board shall take into
account, among other factors, growth in the Company’s revenues and/or profits
and/or successful completion of transactions or activities by the Company (such
as, but not limited to, reorganization, mergers, acquisitions, capital raisings
and cost cuts). Any Board member, except Mr. Keinan, may, at any time and from
time to time, initiate a Bonus grant to Mr. Keinan, and in such an event the
approving process shall be set in motion.
  Immediately
upon the establishment by the Company of any new stock option or purchase plan
or other equity compensation arrangement pursuant to which options or stock may
be acquired by officers, directors, employees, or consultants of the Company
(collectively, “Plan”), the Company’s Board shall consider approving a grant of
an appropriate amount of options (or any other applicable rights) under the Plan
to Mr. Keinan. Such Board approval shall be subject to the prior review,
oversight and recommendation to the Board of both the Audit Committee and the
Compensation Committee. However, in the event the Company has not established a
Compensation Committee, the review, oversight and recommendation to the Board of
the Audit Committee shall suffice.
  In
addition to the Fee and the Bonus, the Company shall pay directly and/or
reimburse Mr. Keinan for his Expenses. For the purposes of the Keinan Consulting
Agreement, the term “Expenses” shall mean any and all amounts actually paid by
the Company and/or by Mr. Keinan, and/or to be paid by Mr. Keinan at his
direction, including, without limitation (i) costs associated with
telecommunication services and products, and (ii) costs associated with
transportation and/or travel (including, but not limited to, by plane, train,
rented car and taxi) and/or accommodation (including, but not limited to, at
rented flats and hotels) and/or any other board and lodging expenses (including,
but not limited to, food, restaurants and entertainment) which were and/or will
be incurred in connection with the performance of the Services pursuant to the
Keinan Consulting Agreement.
 -61-
 The
Company acknowledges that in order to render the Services pursuant to the Keinan
Consulting Agreement, Mr. Keinan may be required to travel frequently around the
world. Therefore, in order to enable Mr. Keinan a normal family life the Company
shall bear Expenses which are related to Mr. Keinan’s spouse.
  Mr.
Keinan shall hold and use, in his sole discretion, credit cards in the name of
the Company (the “Credit Cards”). Due to Mr. Keinan’s position with the Company
(i.e. Chairman of the Board) he may from time to time use the Credit Cards to
make certain Company payments and pay certain Company expenses.
  This
Keinan Consulting Agreement shall be in effect for an initial fixed term of five
years, beginning on January 1, 2007 (the “Initial Effective Term”), and
thereafter, unless terminated as provided below, shall automatically be renewed
for additional terms of three years (each, an “Additional Effective Term”).
Notwithstanding the foregoing, each of the Company and Mr. Keinan shall have the
right to terminate the automatic renewal of the Keinan Consulting Agreement, for
any reason whatsoever, by a termination notice in writing, to be provided to the
other party not less than six months prior to: (i) the expiration of the
Initial Effective Term, or (ii) the expiration of any Additional Effective
Term (the “Notice Period”). Notwithstanding the foregoing, as long as Mr. Keinan
shall command and/or control, directly and/or indirectly, including together
with others (as well as pursuant to that certain Voting Agreement dated
September 28, 2004, by and among Mr. Keinan, Guy Nissenson and Campbeltown
Business Ltd.) and/or by proxies, fifteen percent (15%) or more of the voting
rights of the Company, if the Company shall choose to exercise its right to
terminate the automatic renewal of the Keinan Consulting Agreement, the Notice
Period shall be of not less than twelve months. Notwithstanding the foregoing,
Mr. Keinan shall have the right to terminate the Keinan Consulting Agreement,
for any reason whatsoever, and at any time, including during the Initial
Effective Term (“Early Termination by Mr. Keinan “). In the event of Early
Termination by Mr. Keinan, the Notice Period shall be of not less than eight
months.
  The
Keinan Consulting Agreement further provided that no later than June 30, 2007,
the Company and Mr. Keinan shall enter into a severance agreement providing for
an appropriate severance package for Mr. Keinan (the “Severance Agreement”). The
Severance Agreement shall, inter alia, cover events of termination of the
automatic renewal of the Keinan Consulting Agreement by the Company or Mr.
Keinan, termination of the Keinan Consulting Agreement by Mr. Keinan, and
scheduled retirement by Mr. Keinan. The Company has not yet entered into any
such agreement.
  The
Keinan Consulting Agreement also contains provisions regarding non-competition;
intellectual property; confidentiality; conflict of interests; and other
standard terms and conditions.
  The
Keinan Consulting Agreement was approved by all non-interested members of the
Board of Directors, following a review and discussion by the Company’s Audit
Committee.
  Keinan
Bonus and Success Fee
  On April
2, 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 Campbeltown
Business shall receive 1% of such monthly revenues, up to a maximum of one
million dollars (the “Bonus and Success Fee”). On April 10, 2003, Mr. Keinan and
Campbeltown Business waived their right to receive 1% of the revenues generated
by Story Telecom. On February 8, 2007, an Agreement was entered by and between
the Company, Swiftnet, Campbeltown Business, and Mr. Keinan (the “February 8,
2007 Agreement”). The February 8, 2007 Agreement provides that effective as of
January 1, 2007, the Bonus and Success Fee is cancelled, and that Mr. Keinan and
Campbeltown Business shall have no further right to any percentage of our
revenues.
  On June
28, 2004, our Board of Directors approved a bonus of £5,000 ($10,548) to Mr.
Keinan for his efforts in connection with obtaining the license to become an
international telecom service provider in Israel by Xfone 018.
 -62-
 Keinan
Loan
  Since our
inception in September 2000, through December 31, 2000, we along with our
subsidiary, Swiftnet loaned Abraham Keinan, our Chairman of the Board. This loan
originally was reflected in a September 29, 2000 promissory note payable in ten
equal installments 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. On December 29, 2005, Mr. Keinan
repaid £123,966 ($261,512) which was due for the fiscal year ended December 31,
2005. On December 26, 2006 Mr. Abraham Keinan, repaid the final payment of
£123,965 ($261,510) under the terms of his loan.
  Indemnification
  Xfone 018
Ltd., Our Israeli subsidiary, has obtained certain credit facilities from Bank
Hapoalim B.M. The credit facilities are secured with a personal guarantee by
Abraham Keinan and Guy Nissenson, which includes a pledge on 1,000,000 shares of
common stock of the Company owned by Mr. Keinan, and an undertaking to provide
Bank Hapoalim with an additional financial guarantee of up to $500,000 under
certain circumstances. We agreed to indemnify Abraham Keinan and/or Guy
Nissenson on account of any damage and/or loss and/or expense (including legal
expenses) that they may incur in connection with the stock pledge and/or any
other obligation made by them to Bank Hapoalim in connection with the
collateral.
  Guy
Nissenson
  Campbeltown
Business Ltd.
  Consulting
Agreement
  On May
11, 2000, Swiftnet Limited, 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
President, Chief Executive Officer, and Director and other family members of Mr.
Nissenson. This agreement provided that Swiftnet will hire Campbeltown Business
as its financial and business development consultant and will pay Campbeltown
Business £2,000 per month, along with an additional monthly performance bonus
based upon Swiftnet attaining the following revenue levels, for consulting
services in the area of business development and management
activities:
 TARGET
      AMOUNT OF REVENUES PER MONTH
              ADDITIONAL
      MONTHLY BONUSLess
      than £125,000
              £0Between
      £125,000 - £150,000
                (approximately
      $254,856 -
      $305,828)
              £1,250
      (approximately $2,549)Between
      £150,000 - £175,000
                (approximately
      $305,828 -
      $356,799)
              £2,500
      (approximately $5,097)Over
      £175,000
                (approximately
      $356,799)
              £2,750
      (approximately $5,607)
 
 The
agreement with Campbeltown Business involving the aforementioned monthly payment
of £2000, along with an additional monthly performance bonus, was separate from
a bonus and success fee arrangement that was approved by our Board of Directors
on April 2, 2002.
 -63-
 The May
11, 2000 agreement was for 18 months, but provided that it will be renewed by
mutual agreement of Swiftnet and Campbeltown Business. On November 5, 2001, May
11, 2003, November 10, 2004, and May 11, 2006 we renewed this agreement for
additional 18-month periods. On February 8, 2007, an Agreement was entered by
and between the Company, Swiftnet, Campbeltown Business, and Mr. Keinan (the
“February 8, 2007 Agreement”). The February 8, 2007 Agreement provides that
effective as of January 1, 2007, the aforementioned consulting agreement is
terminated.
  Stock
Purchase Agreement
  On June
19, 2000, Swiftnet Limited entered into a Stock Purchase Agreement with Abraham
Keinan and Campbeltown Business Ltd. a company owned and controlled 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
      Business declared that it is not involved in any business that competes
      with Swiftnet and would not be involved in such business at least for 18
      months after this transaction is
concluded.
  ·
              Campbeltown
      Business would invest $100,000 in Swiftnet, in exchange for 20% of the
      total issued shares of Swiftnet;
  ·
              Campbeltown
      Business would also receive 5% of our issued and outstanding shares
      following our acquisition with Swiftnet. In June 2000, Campbeltown
      Business invested the $100,000 in Swiftnet. We acquired Swiftnet and
      Campbeltown received 720,336 shares of our common stock for its 20%
      interest in Swiftnet.
  ·
              Swiftnet
      and Abraham Keinan would guarantee that Campbeltown Business’ 20% interest
      in the outstanding shares of Swiftnet would be exchanged for at least 10%
      of our outstanding shares and that Campbeltown Business would have in
      total at least 15% of our total issued shares after our acquisition
      occurred.
  ·
              Campbeltown
      Business would have the right to nominate 33% of the members of our board
      of directors and Swiftnet’s board of directors. When Campbeltown Business
      ownership in our common stock was less than 7%, Campbeltown Business would
      have the right to nominate only 20% of our board members but always at
      least one member. In the case that Campbeltown Business ownership in our
      common stock was less than 2%, this right would
  expire.
  ·
              Campbeltown
      Business would have the right to nominate a vice president in Swiftnet.
      Mr. Guy Nissenson was nominated as of the time of the June 19, 2000
      agreement. If for any reason Guy Nissenson will leave his position,
      Campbeltown Business and Abraham Keinan will agree on another nominee. The
      Vice President will be employed with suitable
  conditions.
  ·
              Campbeltown
      Business will have the right to participate under the same terms and
      conditions in any investment or transaction that involve equity rights in
      Swiftnet or us conducted by Abraham Keinan at the relative ownership
      portion.
  ·
              Keinan
      and Campbeltown Business have signed a right of first refusal agreement
      for the sale of their shares.
  ·
              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 Business. This right expires when
      Campbeltown no longer owns any equity interest or shares in our company or
      our subsidiary, Swiftnet.
 -64-
 Bonus
and Success Fee
  On April
2, 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 Campbeltown
Business shall receive 1% of such monthly revenues, up to a maximum of one
million dollars (the “Bonus and Success Fee”). On April 10, 2003, Mr. Keinan and
Campbeltown Business waived their right to receive 1% of the revenues generated
by Story Telecom. This bonus and success fee was separate from our consulting
agreement with Campbeltown Business, involving a monthly payment of £2000, along
with an additional monthly performance bonus. On February 8, 2007, an Agreement
was entered by and between the Company, Swiftnet, Campbeltown Business, and Mr.
Keinan (the “February 8, 2007 Agreement”). The February 8, 2007 Agreement
provides that effective as of January 1, 2007, the Bonus and Success Fee is
cancelled, and that Mr. Keinan and Campbeltown Business shall have no further
right to any percentage of our revenues.
  Nissenson
Employment Agreements with Swiftnet
  May
11, 2000 Employment Agreement
  On May
11, 2000, Swiftnet Limited and our Chairman of the Board of Directors, Abraham
Keinan, entered into an employment agreement with Guy Nissenson, our President,
Chief Executive Officer, and Director (the “May 11, 2000 Employment Agreement”).
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
per month (approximately $2,110). The May 11, 2000 Employment Agreement provided
that when Swiftnet reaches average sales of £175,000 per month for a consecutive
three-month period, Mr. Nissenson’s salary will increase to £2,000
(approximately $4,219) per month. The May 11, 2000 Employment Agreement further
provided that Mr. Nissenson will receive an unspecified number of options to
acquire our stock that is limited to 50% of the options that Mr. Keinan
receives. As such, the agreement protected 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. Because the
average sales per month exceeded £120,000 within a twelve-month period of Mr.
Nissenson’s employment, Swiftnet cannot cancel these options.
 March
28, 2007 Employment Agreement
  Pursuant
to a Company’s Board of Directors’ resolution dated December 25, 2006, on March
28, 2007, Swiftnet and Mr. Nissenson entered into an employment agreement, to be
effective as of January 1, 2007 (the “Nissenson Employment
Agreement”).
  The
Nissenson Employment Agreement provides that Mr. Nissenson shall be employed as
Director of Business Development of Swiftnet. Nissenson Employment Agreement
shall be in effect for an initial fixed term of five years, beginning on January
1, 2007, (the “Initial Effective Term”), and thereafter shall automatically be
renewed for additional terms of three years (each, an “Additional Effective
Term”). Notwithstanding the foregoing, each of Swiftnet and Mr. Nissenson shall
have the right to terminate the automatic renewal of Nissenson Employment
Agreement, for any reason whatsoever, by a termination notice in writing, to be
provided to the other party not less than six months prior to: (i) the
expiration of the Initial Effective Term, or (ii) the expiration of any
Additional Effective Term (the “Notice Period”). Notwithstanding the foregoing,
Mr. Nissenson shall have the right to terminate the Nissenson Employment
Agreement, for any reason whatsoever, and at any time, including during the
Initial Effective Term (“Early Termination”). In the event of Early Termination,
the Notice Period shall be of not less than eight months.
 -65-
 Under the
Nissenson Employment Agreement, Swiftnet shall pay to Mr. Nissenson during the
term of his engagement a salary at the rate of £48,000 ($101,258) per annum,
such salary to be paid in equal monthly installments in arrears on the last
Friday of each month. Swiftnet shall provide Mr. Nissenson with an appropriate
executive car or car allowance with an effective annual cost to Swiftnet of up
to £15,000 ($31,643).
 Swiftnet
shall pay Mr. Nissenson contributions to the following schemes: (i) Health
care for him and his immediate family; (ii) Permanent health;
(iii) Life insurance arrangements (up to a maximum of four times salary);
(iv) Pension rights - Swiftnet shall contribute a monthly sum equal to 7.5%
of his salary. (v) Travel insurance.
  Swiftnet
shall reimburse to Mr. Nissenson all traveling, hotel, restaurant and other
expenses incurred by him in the proper performance of his duties under his
engagement.
  If during
the period of the employment under the Nissenson Employment Agreement Mr.
Nissenson shall cease to be a director of Swiftnet, his employment shall
continue and the terms of the Nissenson Employment Agreement (other than those
relating to the holding of office of director) shall continue in full
force.
  The
Nissenson Employment Agreement also contains special arrangements for sickness
benefits, holiday entitlement and provisions regarding non-competition;
intellectual property; confidentiality; conflict of interests and other standard
terms and conditions.
  The
Nissenson Employment Agreement supersedes the May 11, 2000 Employment
Agreement.
  The
Nissenson Employment Agreement was approved by all non-interested members of the
Board of Directors, following a review and discussion by the Company’s Audit
Committee.
  Nissenson
Consulting Agreement
  Pursuant
to a Company’s Board of Directors’ resolution dated December 25, 2006, on March
28, 2007, the Company and Mr. Nissenson entered into a consulting agreement, to
be effective as of January 1, 2007 (the “Nissenson Consulting
Agreement”).
  The
Nissenson Consulting Agreement provides that Mr. Nissenson shall render the
Company advisory, consulting and other services in relation to the business and
operations of the Company (excluding its business and operations in the United
Kingdom).
  In
consideration of the performance of the Services pursuant to the Nissenson
Consulting Agreement, the Company shall pay Mr. Nissenson a monthly fee of
£10,000 ($21,095)
(the “Fee”). Mr. Nissenson shall invoice the Company at the end of each calendar
month and the Company shall make the monthly payment immediately upon receiving
such invoice. Once a calendar year, and no later than December 15, the Company’s
Board shall consider approving an increase to the Fee. Such Board approval shall
be subject to the prior review, oversight and recommendation to the Board of
both the Audit Committee and the Compensation Committee of the Company (the
“Compensation Committee”). However, in the event the Company has not established
a Compensation Committee, the review, oversight and recommendation to the Board
of the Audit Committee shall suffice. In connection with the performance of this
provision, the Audit Committee, the Compensation Committee and the Board shall
take into account, among other factors, growth in the Company’s revenues and/or
profits.
 -66-
 The
Company’s Board shall, from time to time, and not less than once a calendar
year, consider approving a grant of success bonus to Mr. Nissenson (the
“Bonus”). Such Board approval shall be subject to the prior review, oversight
and recommendation to the Board of both the Audit Committee and the Compensation
Committee. However, in the event the Company has not established a Compensation
Committee, the review, oversight and recommendation to the Board of the Audit
Committee shall suffice. In connection with the performance of this provision,
the Audit Committee, the Compensation Committee and the Board shall take into
account, among other factors, growth in the Company’s revenues and/or profits
and/or successful completion of transactions or activities by the Company (such
as, but not limited to, reorganization, mergers, acquisitions, capital raisings
and cost cuts). Any Board member, except Mr. Nissenson, may, at any time and
from time to time, initiate a Bonus grant to Mr. Nissenson, and in such an event
the approving process shall be set in motion.
  Immediately
upon the establishment by the Company of any new stock option or purchase plan
or other equity compensation arrangement pursuant to which options or stock may
be acquired by officers, directors, employees, or consultants of the Company
(collectively, “Plan”), the Company’s Board shall consider approving a grant of
an appropriate amount of options (or any other applicable rights) under the Plan
to Mr. Nissenson. Such Board approval shall be subject to the prior review,
oversight and recommendation to the Board of both the Audit Committee and the
Compensation Committee. However, in the event the Company has not established a
Compensation Committee, the review, oversight and recommendation to the Board of
the Audit Committee shall suffice.
  In
addition to the Fee and the Bonus, the Company shall pay directly and/or
reimburse Mr. Nissenson for his Expenses. For the purposes of the Nissenson
Consulting Agreement, the term “Expenses” shall mean any and all amounts
actually paid by the Company and/or by Mr. Nissenson, and/or to be paid by Mr.
Nissenson at his direction, including, without limitation (i) costs
associated with telecommunication services and products, and (ii) costs
associated with transportation and/or travel (including, but not limited to, by
plane, train, rented car and taxi) and/or accommodation (including, but not
limited to, at rented flats and hotels) and/or any other board and lodging
expenses (including, but not limited to, food, restaurants and entertainment)
which were and/or will be incurred in connection with the performance of the
Services pursuant to the Nissenson Consulting Agreement.
  The
Company acknowledges that in order to render the Services pursuant to the
Nissenson Consulting Agreement, Mr. Nissenson may be required to travel
frequently around the world. Therefore, in order to enable Mr. Nissenson a
normal family life the Company shall bear Expenses which are related to Mr.
Nissenson’s spouse.
  Mr.
Nissenson shall hold and use, in his sole discretion, credit cards in the name
of the Company (the “Credit Cards”). Due to Mr. Nissenson’s position with the
Company (i.e. President and CEO) he may from time to time use the Credit Cards
to make certain Company payments and pay certain Company expenses.
  This
Nissenson Consulting Agreement shall be in effect for an initial fixed term of
five years, beginning on January 1, 2007 (the “Initial Effective Term”), and
thereafter, unless terminated as provided below, shall automatically be renewed
for additional terms of three years (each, an “Additional Effective Term”).
Notwithstanding the foregoing, each of the Company and Mr. Nissenson shall have
the right to terminate the automatic renewal of the Nissenson Consulting
Agreement, for any reason whatsoever, by a termination notice in writing, to be
provided to the other party not less than six months prior to: (i) the
expiration of the Initial Effective Term, or (ii) the expiration of any
Additional Effective Term (the “Notice Period”). Notwithstanding the foregoing,
as long as Mr. Nissenson shall command and/or control, directly and/or
indirectly, including together with others (as well as pursuant to that certain
Voting Agreement dated September 28, 2004, by and among Mr. Nissenson, Abraham
Keinan and Campbeltown Business Ltd.) and/or by proxies, fifteen percent (15%)
or more of the voting rights of the Company, if the Company shall choose to
exercise its right to terminate the automatic renewal of the Nissenson
Consulting Agreement, the Notice Period shall be of not less than twelve months.
Notwithstanding the foregoing, Mr. Nissenson shall have the right to terminate
the Nissenson Consulting Agreement, for any reason whatsoever, and at any time,
including during the Initial Effective Term (“Early Termination by Mr. Nissenson
“). In the event of Early Termination by Mr. Nissenson, the Notice Period shall
be of not less than eight months.
 -67-
 The
Nissenson Consulting Agreement further provided that no later than June 30,
2007, the Company and Mr. Nissenson shall enter into a severance agreement
providing for an appropriate severance package for Mr. Nissenson (the “Severance
Agreement”). The Severance Agreement shall, inter alia, cover events of
termination of the automatic renewal of the Nissenson Consulting Agreement by
the Company or Mr. Nissenson, termination of the Nissenson Consulting Agreement
by Mr. Nissenson, and scheduled retirement by Mr. Nissenson. The Company has not
yet entered into any such agreement.
  The
Nissenson Consulting Agreement also contains provisions regarding
non-competition; intellectual property; confidentiality; conflict of interests
and other standard terms and conditions.
  The
Nissenson Consulting Agreement was approved by all non-interested members of the
Board of Directors, following a review and discussion by the Company’s Audit
Committee.
  Nissenson
Bonus and Success Fee
  On
December 29, 2005, the Company’s Board of Directors granted a bonus to Mr.
Nissenson for an aggregate amount of $220,000 (the “Bonus”). The Company’s Board
of Directors with the exception of Mr. Nissenson and Mr. Keinan who abstained
from voting, resolved and granted the Bonus to Mr. Nissenson for his exceptional
efforts and professional abilities to achieve the Company’s goals and determined
that it was in the best interest of the Company, moreover, the Company believes
that the Bonus was fair and proportionate to its President and Chief Executive
Officer’s commitment and achievements.
  Mr.
Nissenson waived $22,610 of the Bonus.
  Dionysos
Investments (1999) Ltd. Financial Services and Business Development Consulting
Agreement
  A
Financial Services Consulting Agreement was entered into on November 18, 2004,
between Dionysos Investments (1999) Ltd., an Israeli company (“Dionysos
Investments”) and the Company with respect to certain services (the “Dionysos
Investments Consulting Agreement”). Mr. Haim Nissenson, father of Mr. Guy
Nissenson, our President, Chief Executive Officer, and Director, is the Managing
Director of Dionysos Investments. Dionysos Investments is owned and controlled
by certain members of the Nissenson family, other than Mr. Guy
Nissenson.
  Under the
Dionysos Investments Consulting Agreement, Dionysos Investments agrees to assist
the Company in connection with services related to financial activities,
financial reports, mergers & acquisitions and other business development
work (the “Services”). In the event the Company requests additional services,
the scope of such additional services shall be as agreed by the parties and
shall be governed by the Dionysos Investments Consulting Agreement.
  The
Dionysos Investments Consulting Agreement provided that Dionysos Investments
will be compensated by the Company for the Services provided to the Company in
the amount of £3,000 ($6,329)
per month beginning on the Effective Date of the Dionysos Investments Consulting
Agreement (the “Fees”). In addition, the Company will reimburse Dionysos
Investments, based on prior approval, for expenses incurred, which expenses
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 Investment for the Company shall be
as agreed by the parties.
 -68-
 The
Effective Date of the Dionysos Investments Consulting Agreement is January 1,
2005 (the “Effective Date”). The term of the Dionysos Investments Consulting
Agreement is two years (the “Term”). According to the Dionysos Investments
Consulting Agreement, the Term will be automatically renewed for successive
two-year periods, unless either party provides written notice at least ninety
days prior to the end of the Term that such party does not wish to renew the
Dionysos Investments Consulting Agreement.
  On
February 8, 2007, pursuant to the recommendations of the Audit Committee of the
Company and the resolutions of its Board of Directors dated December 25, 2006,
and February 4, 2007, the Company and Dionysos Investments entered into a First
Amendment to the of the Dionysos Investments Consulting Agreement (the “First
Amendment”).
  The First
Amendment provides that Section 2 of the Dionysos Investments Consulting
Agreement shall be amended in its entirety to provide as follows:
  (i)
              The
      parties agree that Dionysos Investments will be compensated by the Company
      for the Services provided to the Company in the amount of £8,000 ($16,876)
      per month, beginning on January 1,
2007;
  (ii)
              In
      addition, the Company will pay Dionysos Investments a one time success fee
      in the amount of £10,000 ($21,095),
      for initiating, establishing and developing the relationship between the
      Company and certain Israeli financial institutions during fiscal years
      2005-2006, relationships which resulted in significant investments made by
      certain Israeli financial
institutions;
  (iii)
              In
      addition, the Company will pay Dionysos Investments a success fee for any
      future investments in the Company made by Israeli investors during fiscal
      year 2007, provided such investments were a direct or indirect result of
      the Services provided to the Company. The success fee will be equal to
      0.5% (half percent) of the gross proceeds of such investments;
      and
  (iv)
              In
      addition, the Company will reimburse Dionysos Investments, based on prior
      approval by the Audit Committee of the Company, for expenses incurred,
      which expenses will include travel, hotel, meals, courier, report
      reproduction and other administrative costs when and where needed.
      Compensation for any additional services provided by Dionysos Investments
      for the Company shall be as agreed by the
  parties.
  The
parties agreed that the abovementioned compensation will only apply to fiscal
year 2007, and then be reviewed and reconsidered by the Audit Committee and
Board of Directors of the Company in December 2007. In the event the Board of
Directors of the Company, exercising sole discretion, decides not to approve the
abovementioned compensation for fiscal year 2008, Dionysos Investments will have
the option, in its sole discretion, to terminate the Dionysos Investments
Consulting Agreement, or continue and provide the Services in return for the
same compensation which was paid to it in fiscal years 2005-2006 (i.e. fee of
£3,000 per month plus reimbursement of expenses).”
  The First
Amendment further declares that the Audit Committee and Board of Directors of
the Company approved the automatic renewal of the Term for an additional
two-year period, ending on December 31, 2008.
  On
January 28, 2008, in accordance with the recommendation of the Audit Committee
and in recognition of and following the successful efforts of Dionysos in
raising capital for the Company in Israel during the Company’s 2007 fiscal year,
the Board of Directors of the Company approved and confirmed by resolution the
engagement of Dionysos to serve as the Company’s consultant for the fiscal year
ended December 31, 2008 at the same level of compensation which was agreed to
and paid for the fiscal year ended December 31, 2007.
 -69-
 Voting
Agreement
  Our
Chairman of the Board, Abraham Keinan, and our President, Chief Executive
Officer, and 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.
  Iddo
Keinan
 Mr. Iddo
Keinan, son of Mr. Abraham Keinan, our Chairman of the Board, has been employed
by our wholly owned UK based subsidiary, Swiftnet limited since
1998.
  In 2006
Mr. Iddo Keinan served as the Commercial Director of Swiftnet, and his annual
salary was £54,459 ($114,884). On December 25, 2006, our Board of Directors
approved the continuing employment of Mr. Iddo Keinan by Swiftnet Limited, at an
annual salary of £36,000. Accordingly, in 2007 his annual salary was £36,000
($75,944).
 Wade
Spooner
  In
connection with the acquisition of WS Telecom, Inc. we issued a promissory note
to Wade Spooner, who was President, Chief Executive Officer and shareholder of
WS Telecom; the promissory note replaced a $200,000 note issued by WS Telecom in
favor of Mr. Spooner. This note was amended to provide for quarterly payment
beginning in October 2004, provided that such payment shall not exceed 50% of
the net profits of Xfone USA, Inc. Until March 11, 2008, Mr. Spooner was the
President and Chief Executive Officer of our wholly owned subsidiary, Xfone USA,
Inc. Final payment on the note was made to Mr. Spooner February 14,
2007.
  Free
Cash Flow Participation Agreement with NTS Holdings, Inc.
  The
Company entered into a Free Cash Flow Participation Agreement (the
“Participation Agreement”) with NTS Holdings, pursuant to which NTS Holdings
will be entitled to a payment from the Company of an amount equal to 5% of the
aggregate excess free cash flow generated by the Company’s U.S. Operations,
which is defined in the Participation Agreement as the operations of the Company
and its U.S. subsidiaries, which include Xfone USA, Inc. and NTS, and their
respective subsidiaries, as well as any U.S. entity that the Company acquires
directly, or indirectly through its subsidiaries in the future (a “Future
Acquisition”). NTS Holdings will be entitled to the participation amount
beginning at such time as the Company has received a full return of its initial
invested capital, plus an additional 8% return per year, in connection with the
NTS acquisition (as well as in connection with any Future
Acquisition).
  The
Participation Agreement will remain in effect in perpetuity, unless earlier
terminated in accordance with its terms. Termination of the Participation
Agreement may occur upon a sale or buyout of the Company’s U.S. Operations, at
the option of the purchaser in any such transaction, and in the limited
circumstances set forth in the Participation Agreement.
 -70-
 Shareholder
Value, Ltd.
  Shareholder
Value, Ltd. is a Texas limited partnership which owns 100% of the building in
Lubbock, Texas, from which NTS Communications leases its corporate offices,
Network Control Center, Customer Care and Internet help desk locations. See
“Item 2 – Description of Property” above. NTS Properties, LC is a Texas limited
liability company that serves as the general partner of Shareholder Value,
Ltd., and, in that capacity, owns 1% of Shareholder Value, Ltd.  The
remaining 99% of Shareholder Value, Ltd. is owned by a small group of investors,
which includes several former shareholders of NTS Communications who sold their
respective interests in NTS Communications to Xfone in connection with Xfone’s
acquisition of NTS Communications in February 2008.  Such shareholders
include Telephone Electronics Corporation (“TEC”), NTS Communications’ former
majority shareholder, which owns approximately 49.5% of Shareholder Value Ltd.,
Barbara Baldwin, President and CEO of NTS Communications and Xfone USA, who owns
approximately 7.425% of Shareholder Value, Ltd., Jerry Hoover, Executive Vice
President, Treasurer and Chief Financial Officer of NTS Communications, who owns
approximately 4.95% of Shareholder Value, Ltd., and Brad Worthington, Executive
Vice President and Chief Operating Officer of NTS Communications, who owns
approximately 4.95% of Shareholder Value, Ltd.
  NTS Properties, LC, was a wholly owned subsidiary of NTS Communications
prior to the consummation of Xfone’s acquisition of NTS Communications in
February 2008.  As a closing condition of the acquisition transaction,
NTS Communication’s ownership interest in NTS Properties, LC was distributed
pro-rata to former shareholders of NTS Communications, including TEC, which
currently owns approximately 63.47% of NTS Properties, LC, and Ms. Baldwin, Mr.
Hoover and Mr. Worthington who currently own approximately 5.52%, 0.08% and
0.37% of NTS Properties, LC, respectively.
  ITEM
      13.
              Exhibits
  Exhibit
      Number
              Description2.
              Agreement and plan of reorganization dated September 20, 2000,
      between the Company and Swiftnet Limited.(1)3.1
              Articles of Incorporation of the Company.(1)3.2a
              Bylaws of the Company.(1)3.2b
              Amended Bylaws of the Company.(4)3.3
              Memorandum of Association of Swiftnet Limited.(1)3.4
              Articles of Association of Swiftnet Limited.(1)3.6
              Bylaws of Xfone USA, Inc.(7)3.8.
              Amended and Restated Bylaws of the Company dated March 12,
      2006.(22)3.9
              Reamended and Restated Bylaws of the Company dated February 5,
      2007.(32)4.
              Specimen Stock Certificate.(1)5.
              Opinion
      of Gersten Savage LLP.(30)
      (21.1)10.1
              Agreement dated May 11, 2000, between Swiftnet Limited and Guy
      Nissenson.(1)
 -71-
 10.2
              Employment Agreement dated January 1, 2000 with Bosmat
      Houston.(1)10.3
              Loan Agreement dated August 5, 2000, with Swiftnet Limited, Guy
      Nissenson, and Nissim Levy.(1)10.4
              Promissory Note dated September 29, 2000, between the Company and
      Abraham Keinan.(1)10.5
              Stock Purchase Agreement dated June 19, 2000, between Swiftnet
      Limited, Abraham Keinan, and Campbeltown Business Ltd.(1)10.6
              Consulting Agreement dated May 11, 2000 between Swiftnet Limited
      and Campbeltown Business Ltd.(1)10.7
              Agreement dated July 30, 2001, with Campbeltown Business Ltd.(1)10.8
              Contract dated June 20, 1998, with WorldCom International
      Ltd.(1)10.9
              Contract dated April 11, 2000, with VoiceNet Inc.(1)10.10
              Contract dated April 25, 2000, with InTouchUK.com Ltd.(1)10.11
              Letter of Understanding dated July 30, 2001, from Campbeltown
      Business Ltd. to the Company.(2)10.12
              Agreement dated April 6, 2000, between Adar International,
      Inc./Mr. Sidney J. Golub and Swiftnet Limited.(2)10.13
              Lease Agreement dated December 4, 1991, between Elmtree
      Investments Ltd. and Swiftnet Limited.(2)10.14
              Lease Agreement dated October 8, 2001, between Postwick Property
      Holdings Limited and Swiftnet Limited.(2)10.15
              Agreement dated September 30, 2002, between the Company, Swiftnet
      Limited., and Nir Davison.(5)10.16
              As to Form: Shares and Warrant Purchase Agreement, Irrevocable
      Proxy, Warrant A, Warrant B and Registration Rights Agreement of Selling
      Shareholders Platinum Partners Value Arbitrage Fund LP, Countrywide
      Partners LLC and WEC Partners LLC.(6)10.17
              As to Form: Shares and Warrant Purchase Agreement, Irrevocable
      Proxy, Warrant A, Warrant B and Registration Rights Agreement of Selling
      Shareholders Simon Langbart, Robert Langbart, Arik Ecker, Zwi Ecker,
      Michael Derman, Errol Derman, Yuval Haim Sobel, Zvi Sobel, Tenram
      Investment Ltd., Michael Zinn, Michael Weiss.(6)10.18
              As to Form: Shares and Warrant Purchase Agreement, Irrevocable
      Proxy, Warrant A, Warrant B and Registration Rights Agreement of Selling
      Shareholders Southridge Partners LP and Southshore Capital Fund Ltd.(6)10.19
              As to Form: Shares and Warrant Purchase Agreement, Irrevocable
      Proxy, Warrant A, Warrant B and Registration Rights Agreement of Selling
      Shareholders Crestview Capital Master LLC.(6)10.20
              As to Form: Shares and Warrant Purchase Agreement, Irrevocable
      Proxy, Warrant A, Warrant B and Registration Rights Agreement of Selling
      Shareholders Adam Breslawsky, Oded Levy, Michael Epstein, Steven Frank,
      Joshua Lobel, Joshua Kazan and The Oberon Group LLC.(6)10.21
              Newco (Auracall Limited) Formation Agreement.(6)10.22
              Agreement with ITXC Corporation.(6)10.23
              Agreement with Teleglobe International.(6)10.23.1
              Amendment to Agreement with Teleglobe International.(6)
 -72-
 10.24
              Agreement with British Telecommunications.(6)10.25
              Agreement with Easyair Limited (OpenAir).(6)10.26
              Agreement with Worldnet.(6)10.27
              Agreement with Portfolio PR.(6)10.28
              Agreement with Stern and Company.(6)10.29
              Letter to the Company dated December 31, 2003, from Abraham
      Keinan.(6)10.30
              Agreement between Swiftnet Limited and Dan Kirschner.(8)10.31
              Agreement and Plan of Merger.(7)10.32
              Escrow Agreement.(7)10.33
              Release Agreement.(7)10.34
              Employment Agreement date March 10, 2005, between Xfone USA, Inc.
      and Wade Spooner.(7)10.35
              Employment Agreement date March 10, 2005, between Xfone USA, Inc.
      and Ted Parsons.(7)10.36
              First Amendment to Agreement and Plan of Merger (to acquire WS
      Telecom, Inc.).(11)10.37
              Finders Agreement with The Oberon Group, LLC.(11)10.38
              Agreement with The Oberon Group, LLC.(11)10.39
              Management Agreement between WS Telecom, Inc. and Xfone USA,
      Inc.(8)10.40
              Engagement Letter to Tommy R. Ferguson, Confidentiality Agreement,
      and Executive Inventions Agreement dated August 19, 2004.(11)10.41
              Voting Agreement dated September 28, 2004.(11)10.42
              Novation Agreement executed September 27, 2004.(11)10.43
              Novation Agreement executed September 28, 2004.(11)10.44
              Investment Agreement dated August 26, 2004, with Ilan
      Shoshani.(12)10.44.1
              Addendum and Clarification to the Investment Agreement with Ilan
      Shoshani dated September 13, 2004.(12)10.45
              Agreement dated November 16, 2004, with Elite Financial
      Communications Group.(13)10.46
              Financial Services and Business Development Consulting Agreement
      dated November 18, 2004, with Dionysos Investments (1999) Ltd.(13)10.47
              Agreement and Plan of Merger to acquire I-55 Internet Services,
      Inc. dated August 18, 2005.(14)10.48
              Agreement and Plan of Merger to acquire I-55 Telecommunications,
      LLC dated August 26, 2005.(15)10.49
              Securities Purchase Agreement, dated September 27, 2005, by and
      between the Company and Laurus Master Fund, Ltd.(16)10.50
              Secured Convertible Term Note, dated September 27, 2005, by the
      Company in favor of Laurus Master Fund, Ltd.; Adjustment Provision Waiver
      Agreement, dated September 27, 2005, by and between the Company and Laurus
      Fund, Ltd.(16)10.51
              Common Stock Purchase Warrant, dated September 27, 2005, by the
      Company in favor of Laurus Master Fund, Ltd.(16)
 -73-
 10.52
              Registration Rights Agreement, dated September 27, 2005, by and
      between the Company and Laurus Master Fund, Ltd.(16)10.53
              Master Security Agreement, dated September 27, 2005, by and
      between the Company, Xfone USA, Inc., eXpeTel Communications, Inc., Gulf
      Coast Utilities, Inc., and Laurus Master Fund, Ltd.(16)10.54
              Stock Pledge Agreement, dated September 27, 2005, by and between
      the Company, Xfone USA, Inc., and Laurus Master Fund, Ltd.(16)10.55
              Subsidiary Guarantee dated September 27, 2005, by Xfone USA, Inc.,
      eXpeTel Communications, Inc. and Gulf Coast Utilities, Inc. in favor of
      Laurus Master Fund, Ltd.(16)10.56
              Funds Escrow Agreement, dated September 27, 2005, by and between
      the Company, Laurus Master Fund, Ltd. and Loeb & Loeb LLP;
      Disbursement Letter, dated September 27, 2005.(16)10.57
              Incremental Funding Side Letter, dated September 27, 2005, by and
      between the Company and Laurus Master Fund, Ltd.(16)10.58
              Securities Purchase Agreement dated September 28, 2005, by and
      between the Company and Crestview Capital Mater, LLC, Burlingame Equity
      Investors, LP, Burlingame Equity Investors II, LP, Burlingame Equity
      Investors (Offshore), Ltd., and Mercantile Discount - Provident
      Funds.(16)10.59
              Registration Rights Agreement, dated September 28, 2005, by and
      between the Company and Crestview Capital Mater, LLC, Burlingame Equity
      Investors, LP, Burlingame Equity Investors II, LP, Burlingame Equity
      Investors (Offshore), Ltd., and Mercantile Discount - Provident
      Funds.(16)10.60
              Common Stock Purchase Warrant, dated September 28, 2005, by the
      Company in favor of the Crestview Capital Mater, LLC, Burlingame Equity
      Investors, LP, Burlingame Equity Investors II, LP, Burlingame Equity
      Investors (Offshore), Ltd., and Mercantile Discount - Provident
      Funds.(16)10.61
              Escrow Agreement, dated September 28, 2005, by and between the
      Company, the Purchasers and Feldman Weinstein LLP.(16)10.62
              Management Agreement dated October 11, 2005.(17)10.63
              First Amendment to Agreement and Plan of Merger (to acquire I-55
      Internet Services, Inc.), dated October 10, 2005.(17)10.64
              Letter Agreement with MCG Capital Corporation dated October 10,
      2005.(17)10.65
              Securities Purchase Agreement, dated November 23, 2005, between
      the Company and Mercantile Discount - Provident Funds, Hadar Insurance
      Company Ltd., The Israeli Phoenix Assurance Company Ltd. and Gaon Gemel
      Ltd.(18)10.66
              Registration Rights Agreement, dated November 23, 2005, between
      the Company and Mercantile Discount - Provident Funds, Hadar Insurance
      Company Ltd., The Israeli Phoenix Assurance Company Ltd. and Gaon Gemel
      Ltd.(18)10.67
              Common Stock Purchase Warrant, dated November 23, 2005, by the
      Company in favor of Mercantile Discount - Provident Funds, Hadar Insurance
      Company Ltd., The Israeli Phoenix Assurance Company Ltd. and Gaon Gemel
      Ltd.(18)10.68
              Escrow Agreement, dated November 23, 2005, between the Company,
      the Escrow Agent, and Mercantile Discount - Provident Funds, Hadar
      Insurance Company Ltd., The Israeli Phoenix Assurance Company Ltd. and
      Gaon Gemel Ltd.(18)10.69
              Management Agreement with I-55 Telecommunications, LLC dated
      October 12, 2005.(19)10.70
              Agreement - General Terms and Conditions with EBI Comm, Inc.,
      dated January 1, 2006.(21)10.71
              Asset Purchase Agreement with Canufly.net, Inc., dated January 10,
      2006.(21)
 -74-
 10.72
              Stock Purchase Agreement dated May 10, 2006, by and among the
      Company, Story Telecom, Inc., Story Telecom Limited, Story Telecom
      (Ireland) Limited, Nir Davison, and Trecastle Holdings Limited.(23)10.73
              Agreement dated May 25, 2006, by and among the Company and the
      shareholders of Equitalk.co.uk Limited.(24)10.74
              Securities Purchase Agreement, dated June 19, 2006, by and between
      the Company and the Purchasers.(25)10.75
              Registration Rights Agreement, dated June 19, 2006, by and between
      the Company and the Purchasers.(25)10.76
              Common Stock Purchase Warrant, dated June 19, 2006, by the Company
      in favor of the Purchasers.(25)10.77
              Escrow Agreement, dated June 19, 2006, by and between the Company,
      the Escrow Agent, and the Purchasers.(25)10.78
              Form of Indemnification Agreement between the Company and its
      Directors and Officers.(27)10.79
              Agreement to Purchase Promissory Note dated October 31, 2005, with
      Randall Wade James Tricou.(27)10.80
              Agreement to Purchase Promissory Note dated October 31, 2005, with
      Rene Tricou - Tricou Construction.(27)10.81
              Agreement to Purchase Promissory Note dated October 31, 2005, with
      Rene Tricou - Bon Aire Estates.(27)10.82
              Agreement to Purchase Promissory Note dated October 31, 2005, with
      Rene Tricou - Bon Aire Utility.(27)10.83
              Agreement to Purchase Promissory Note dated February 3, 2006, with
      Danny Acosta.(27)10.84
              Letter Agreement dated November 15, 2005, with Oberon Securities,
      LLC.(27)10.85
              Letter Agreement dated June 15, 2006, with Oberon Securities,
      LLC.(27)10.86
              Second Amendment to Agreement and Plan of Merger (to acquire WS
      Telecom, Inc.), dated June 28, 2006.(27)10.87
              General Contract for Services dated January 1, 2005, by and
      between the Company and Swiftnet Limited.(27)10.88
              Service Agreement dated December 6, 2005, by and between the
      Company and Elite Financial Communications Group, LLC.(27)10.89
              Agreement for Market Making in Securities dated July 31, 2006, by
      and between the Company and Excellence Nessuah Stock Exchange Services
      Ltd.(27)10.90
              Shareholders Loan Agreement, dated September 27, 2006, by and
      between Auracall Limited, Swiftnet Limited, and Dan Kirschner.(28)10.91
              Service Agreement, dated November 7, 2006, by and between the
      Company and Institutional Marketing Services, Inc.(28)10.92
              Consultancy Agreement, dated November 20, 2006, by and between the
      Company and Crestview Capital Partners, LLP.(29)10.93
              Agreement dated December 24, 2006, by and between the Company,
      Halman-Aldubi Provident Funds Ltd., and Halman-Aldubi Pension Funds Ltd.
      [translation from Hebrew].(31)10.94
              First Amendment to Financial Services and Business Development
      Consulting Agreement dated February 8, 2007, by and between the Company
      and Dionysos Investments (1999) Ltd.(33)10.95
              Agreement dated February 8, 2007, by and between the Company,
      Swiftnet Limited, Campbeltown Business, Ltd., and Mr. Abraham Keinan.(33)10.96
              First Amendment to General Contract for Services, dated March 14,
      2007, by and between the Company and Swiftnet Limited.(34)10.97
              Employment Agreement, dated March 28, 2007, between Swiftnet
      Limited and Abraham Keinan.(34)
 -75-
 10.98
              Consulting Agreement, dated March 28, 2007, between the Company
      and Abraham Keinan. (34)10.99
              Employment Agreement, dated March 28, 2007, between Swiftnet
      Limited and Guy Nissenson.(34)10.100
              Consulting Agreement, dated March 28, 2007, between the Company
      and Guy Nissenson.(34)10.101
              Settlement Agreement and Release dated May 31, 2007, by and among
      Embarq Logistics, Inc, Xfone USA, Inc. and the Company.(35)10.102
              Promissory Note dated May 31, 2007, by Xfone USA, Inc.(35)10.103
              Parent Guarantee dated as of May 31, 2007 by the Company in favor
      of Embarq Logistics, Inc.(35)10.104
              Share Purchase Agreement dated August 15, 2007, by and between Dan
      Kirschner, as Seller, Swiftnet Limited, as Buyer, and Xfone, Inc.(36)10.105
              Inter-Company Loan Agreement dated August 15, 2007, by and between
      Auracall Limited, as Lender, and Swiftnet Limited, as Borrower.(36)10.106
              Stock Purchase Agreement dated August [20], 2007, by and among the
      Company, NTS Communications, Inc., and the Shareholders of NTS
      Communications, Inc.(37)10.107
              Letter of Joint Venture dated June 15, 2007, by and among the
      Company and NTS Holdings, Inc.(37)10.107.1
              Form of Free Cash Flow Participation Agreement to be Entered into
      between the Company and NTS Holdings, Inc. Upon Consummation of the
      Acquisition.(37)10.107.2
              Form of Employment Agreement to be entered into between NTS
      Communications, Inc. and Barbara Baldwin upon Consummation of the
      Acquisition.(37)10.107.3
              Form of Employment Agreement to be entered into between NTS
      Communications, Inc. and Jerry Hoover upon Consummation of the
      Acquisition.(37)10.107.4
              Form of Employment Agreement to be entered into between NTS
      Communications, Inc. and Brad Worthington upon Consummation of the
      Acquisition.(37)10.108
              Employment Contract signed on August 26, 2007, by and between the
      Company’s Israeli based Subsidiary Xfone 018 ltd. and Roni Haliva.(38)10.109
              Subscription Agreement for the Purchase of Shares of Common Stock
      of the Company Dated October 23, 2007.(39)10.110
              Subscription Agreement for the Purchase of Shares of Common Stock
      of the Company Dated November 1, 2007.(41)10.111
              Form of Subscription Agreement for the Purchase of Units
      Consisting of Two Shares of Common Stock and One Common Stock Purchase
      Warrant.(42)10.112
              Form of Common Stock Purchase Warrant.(42)10.113
              First Amendment to Stock Purchase Agreement.(43)10.114.1
              Employment agreement dated as of February 26, 2008, by and
      among NTS Communications, Inc. and Barbara Baldwin.(44)10.114.2
              Employment agreement dated as of February 26, 2008, by and
      among NTS Communications, Inc. and Jerry Hoover.(44)10.114.3
              Employment agreement dated as of February 26, 2008, by and
      among NTS Communications, Inc. and Brad Worthington.(44)10.115
              Free cash flow participation agreement dated as of February 26,
      2008, by and among Xfone, Inc. and NTS Holdings, Inc.(44)10.116
              Escrow agreement dated as of February 26, 2008, by and among
      Xfone, Inc., Chris Chelette, Robert Healea and Kevin Buxkemper the NTS
      shareholders representatives, and Trustmark National Bank, as Escrow
      Agent.(44)10.117
              Release, effective as of February 26, 2008, entered into by
      each of Barbara Baldwin, Jerry Hoover and Brad Worthington(44)
 -76-
 10.118
              Noncompetition, nondisclosure and nonsolicitation agreement dated
      as of February 26, 2008, by and among Xfone, Inc., Telephone Electronics
      Corporation, Joseph D. Fail, Chris Chelette, Robert Healea, Joey Garner,
      and Walter Frank.(44)10.119
              Second amendment to stock purchase agreement entered into by
      each of February 26, 2008 by and among Xfone, Inc., NTS Communications,
      Inc. and Chris Chelette, Robert Healea and Kevin Buxkemper, as the NTS
      shareholders representatives.(44)10.120
              Modification of Financial Consulting Agreement between Xfone, Inc.
      and Oberon Securities, LLC in connection with NTS Communications
      Transaction.(45)10.121
              Fees Due to Oberon Securities, LLC from Xfone, Inc. in connection
      with services provided in conjunction with the acquisition of NTS
      Communications, Inc.(45)10.122
              Agreement of Principles dated March 17, 2008 by and between Xfone
      018 Ltd. and Tiv Taam Holdings 1 Ltd. [Free Translation from Hebrew].(46)10.123
              Compromise Agreement dated March 25, 2008, between Xfone, Inc.,
      Story Telecom, Inc., Story Telecom Limited, Trecastle Holdings Limited and
      Nir Davison.(47)10.124
              Securities Purchase Agreement dated March 25, 2008, between Xfone,
      Inc., Trecastle Holdings Limited and Nir Davison.(47)16.1
              Letter dated January 31, 2006 from Chaifetz & Schreiber, P.C.
      to the Securities and Exchange Commission.(20)21.1
              List of Subsidiaries (Amended as of March 31,
      2008)23
              Consent of Stark, Winter, Schenkein
      &Co., LLP23.1
              Consent of Chaifetz & Schreiber, P.C.(30) (22.1)23.2
              Consent
      of Gersten Savage LLP - incorporated in the legal opinion filed as Exhibit
      5.23.3
              Consent of Postlethwaite & Netterville, APAC dated February 7,
      2006.(21.1)23.4
              Consent of Postlethwaite & Netterville, APAC dated February 7,
      2006.(21.1)31.1
              Certification pursuant to section 302 of the
      Sarbanes - Oxley Act of 2002.31.2
              Certification pursuant to section 302 of the
      Sarbanes - Oxley Act of 2002.32.1
              Certification of Officer pursuant to section 906
      of the Sarbanes - Oxley Act of 2002.32.2
              Certification of Officer pursuant to section 906
      of the Sarbanes - Oxley Act of
2002.
  (1)
              Denotes
      previously filed exhibits: filed on August 10, 2001 with Xfone, Inc.’s
      SB-2 registration statement.
  (2)
              Denotes
      previously filed exhibits: filed on October 16, 2001 with Xfone, Inc.’s
      SB-2/Amendment 1 registration
statement.
  (4)
              Denotes
      previously filed exhibit: filed on December 5, 2002 with Xfone, Inc.’s
      Form 8-K.
  (5)
              Denotes
      previously filed exhibit: filed on March 3, 2003 with Xfone, Inc.’s
      SB-2/Post Effective Amendment 2 registration
  statement.
  (6)
              Denotes
      previously filed exhibit: filed on April 15, 2004 with Xfone’s, Inc. SB-2
      Amendment 1 Registration Statement.
 -77-
 (7)
              Denotes
      previously filed exhibit: filed on June 1, 2004 with Xfone, Inc.’s Form
      8-K.
  (8)
              Denotes
      previously filed exhibit: filed on June 7, 2004 with Xfone, Inc.’s
      SB-2/Amendment 2 Registration
Statement.
  (9)
              Denotes
      previously filed exhibit: filed on August 11, 2004 with Xfone’s, Inc. SB-2
      Amendment 3 Registration Statement.
  (10)
              Denotes
      previously filed exhibit: filed on September 13, 2004 with Xfone’s, Inc.
      SB-2 Amendment 4 Registration
Statement.
  (11)
              Denotes
      previously filed exhibits: filed on October 4, 2004 with Xfone, Inc.’s
      Form 8-K
  (12)
              Denotes
      previously filed exhibits: filed on November 29, 2004 with Xfone, Inc.’s
      Form 8-K.
  (13)
              Denotes
      previously filed exhibits; filed on March 31, 2005 with Xfone, Inc.’s Form
      10-KSB.
  (14)
              Denotes
      previously filed exhibit: filed on August 22, 2005 with Xfone, Inc.’s Form
      8-K.
  (15)
              Denotes
      previously filed exhibit: filed on August 31, 2005 with Xfone, Inc.’s Form
      8-K.
  (16)
              Denotes
      previously filed exhibits: filed on October 3, 2005 with Xfone, Inc.’s
      Form 8-K.
  (17)
              Denotes
      previously filed exhibits: filed on October 11, 2005 with Xfone, Inc.’s
      Form 8-K/A #1.
  (18)
              Denotes
      previously filed exhibits: filed on November 29, 2005 with Xfone, Inc.’s
      Form 8-K.
  (19)
              Denotes
      previously filed exhibit: filed on January 23, 2006 with Xfone, Inc.’s
      Form 8-K/A #3.
  (20)
              Denotes
      previously filed exhibit: filed on January 31, 2006 with Xfone, Inc.’s
      Form 8-K/A #1.
  (21)
              Denotes
      previously filed exhibit: filed on January 31, 2006 with Xfone, Inc.’s
      Form 8-K.
 (21.1)
                Denotes
      previously filed exhibits: filed on February 7, 2006 with Xfone, Inc.’s
      Form SB-2 Amendment 3.
 (22)
              Denotes
      previously filed exhibit: filed on March 15, 2006 with Xfone, Inc.’s Form
      8-K.
 (22.1)
                Denotes
      previously filed exhibit: filed on March 31, 2006 with Xfone, Inc.’s Form
      10-KSB.
  -78-
  (23)
              Denotes
      previously filed exhibit: filed on May 16, 2006 with Xfone, Inc.’s Form
      8-K.
  (24)
              Denotes
      previously filed exhibit: filed on May 30, 2006 with Xfone, Inc.’s Form
      8-K.
  (25)
              Denotes
      previously filed exhibits: filed on June 20, 2006 with Xfone, Inc.’s Form
      8-K.
  (26)
              [Reserved.]
  (27)
              Denotes
      previously filed exhibits: filed on July 31, 2006 with Xfone, Inc.’s Form
      8-K.
  (28)
              Denotes
      previously filed exhibits: filed on November 14, 2006 with Xfone, Inc.’s
      Form 10-QSB.
  (29)
              Denotes
      previously filed exhibit: filed on November 22, 2006 with Xfone, Inc.’s
      Form 8-K.
  (30)
              Denotes
      previously filed exhibits: filed on November 30, 2006 with Xfone, Inc.’s
      Form SB-2.
  (31)
              Denotes
      previously filed exhibit: filed on December 28, 2006 with Xfone, Inc.’s
      Form 8-K.
  (32)
              Denotes
      previously filed exhibit: filed on February 5, 2007 with Xfone, Inc.’s
      Form 8-K.
  (33)
              Denotes
      previously filed exhibits: filed on February 8, 2007 with Xfone, Inc.’s
      Form 8-K.
  (34)
              Denotes
      previously filed exhibits; filed on March 30, 2007 with Xfone, Inc.’s Form
      10-KSB.
  (35)
              Denotes
      previously filed exhibits: filed on May 31, 2007 with Xfone, Inc.’s Form
      8-K.
  (36)
              Denotes
      previously filed exhibits: filed on August 15, 2007 with Xfone, Inc.’s
      Form 8-K.
  (37)
              Denotes
      previously filed exhibits: filed on August 22, 2007 with Xfone, Inc.’s
      Form 8-K.
  (38)
              Denotes
      previously filed exhibit: filed on August 27, 2007 with Xfone, Inc.’s Form
      8-K.
  (39)
              Denotes
      previously filed exhibit: filed on October 23, 2007 with Xfone, Inc.’s
      Form 8-K.
  (40)
              Denotes
      previously filed exhibit: filed on October 25, 2007 with Xfone, Inc.’s
      Form 8-K.
  (41)
              Denotes
      previously filed exhibit: filed on November 5, 2007 with Xfone, Inc.’s
      Form 8-K.
  (42)
              Denotes
      previously filed exhibits: filed on December 14, 2007 with Xfone, Inc.’s
      Form 8-K.
 -79-
 (43)
              Denotes
      previously filed exhibit: filed on February 14, 2008 with Xfone, Inc.’s
      Form 8-K.
  (44)
              Denotes
      previously filed exhibits: filed on February 26, 2008 with Xfone, Inc.’s
      Form 8-K.
  (45)
              Denotes
      previously filed exhibits: filed on March 6, 2008 with Xfone, Inc.’s Form
      8-K.
 (46)
                Denotes
      previously filed exhibit: filed on March 17, 2008 with Xfone, Inc.’s Form
      8-K.
 (47)
              Denotes
      previously filed exhibits: filed on March 25 with Xfone, Inc.’s Form
      8-K.
  ITEM
      14.
              Principal
      Accountant Fees and Services
  Our Audit
Committee pre-approved all audit and non-audit services provided to us and
during the periods listed below. The Audit Committee approves discrete projects
on a case-by-case basis that may have a material effect on our operations and
also considers whether proposed services are compatible with the independence of
the public accountants.
  Audit
Fees
  The
aggregate fees billed for the fiscal year ended December 31, 2007, for
professional services rendered by the principal accountant for the audit of our
annual financial statements and review of the interim 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 as follows: we paid Stark Winter Schenkein &
Co., LLP $122,300.
  Audit-Related
Fees
  None
  Tax
Fees
  The
aggregate fees billed for the fiscal year ended December 31, 2007, for
professional services rendered by the principal accountant, related to the
filing of tax reports of Xfone, Inc. and Xfone USA, Inc. in the United States,
were as follows: we paid Stark Winter Schenkein & Co., LLP
$28,500.
  All
Other Fees
  The
aggregate fees billed for the fiscal year ended December 31, 2007, for
professional services rendered by the principal accountant, related to the
filing of the Company’s registration statement on Form SB-2, Current Reports on
form 8-K and 14A proxy statement during 2007, were as follows: we paid Stark
Winter Schenkein & Co., LLP $7,000.
  -80-
 2006
  Audit
Fees
  The
aggregate fees billed for the fiscal year ended December 31, 2006, 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, Stark Winter
Schenkein & Co., LLP $72,000.
  Audit-Related
Fees
  None
  Tax
Fees
  None
  All
Other Fees
  None
 -81-
   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.
  XFONE,
      INC.Date:
      March 31, 2008
              By:
              /s/
      Guy NissensonGuy
      Nissenson President, Chief Executive 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.
  Signature
              Title
              Date/s/
      Abraham Keinan
              Chairman
      of the Board
              March
      31, 2008Abraham
      Keinan/s/Guy
      Nissenson
              President,
      Chief Executive Officer, and Director
              March
      31, 2008Guy
      Nissenson/s/
      Itzhak Almog
              Director
      and Chairman of the Audit Committee and the Nominating
      Committee
              March
      31, 2008Itzhak
      Almog/s/Eyal
      J. Harish
              Director
              March
      31, 2008Eyal
      J. Harish/s/
      Israel Singer
              Director
      and member of the Audit Committee
              March
      31, 2008Israel
      Singer/s/
      Niv Krikov
              Treasurer,
      Chief Financial Officer, and Principal Accounting Officer
              March
      31, 2008Niv
      Krikov
 
   -82-
  INDEX
TO EXHIBITS
  Exhibit
      Number
                Description2.
                Agreement and plan of reorganization dated September 20, 2000,
      between the Company and Swiftnet Limited.(1)3.1
                Articles of Incorporation of the Company.(1)3.2a
                Bylaws of the Company.(1)3.2b
                Amended Bylaws of the Company.(4)3.3
                Memorandum of Association of Swiftnet Limited.(1)3.4
                Articles of Association of Swiftnet Limited.(1)3.6
                Bylaws of Xfone USA, Inc.(7)3.8.
                Amended and Restated Bylaws of the Company dated March 12,
      2006.(22)3.9
                Reamended and Restated Bylaws of the Company dated February 5,
      2007.(32)4.
                Specimen Stock Certificate.(1)5.
                Opinion
      of Gersten Savage LLP.(30)
      (21.1)10.1
                Agreement dated May 11, 2000, between Swiftnet Limited and Guy
      Nissenson.(1)
 -83-
 10.2
                Employment Agreement dated January 1, 2000 with Bosmat
      Houston.(1)10.3
                Loan Agreement dated August 5, 2000, with Swiftnet Limited, Guy
      Nissenson, and Nissim Levy.(1)10.4
                Promissory Note dated September 29, 2000, between the Company and
      Abraham Keinan.(1)10.5
                Stock Purchase Agreement dated June 19, 2000, between Swiftnet
      Limited, Abraham Keinan, and Campbeltown Business Ltd.(1)10.6
                Consulting Agreement dated May 11, 2000 between Swiftnet Limited
      and Campbeltown Business Ltd.(1)10.7
                Agreement dated July 30, 2001, with Campbeltown Business Ltd.(1)10.8
                Contract dated June 20, 1998, with WorldCom International
      Ltd.(1)10.9
                Contract dated April 11, 2000, with VoiceNet Inc.(1)10.10
                Contract dated April 25, 2000, with InTouchUK.com Ltd.(1)10.11
                Letter of Understanding dated July 30, 2001, from Campbeltown
      Business Ltd. to the Company.(2)10.12
                Agreement dated April 6, 2000, between Adar International,
      Inc./Mr. Sidney J. Golub and Swiftnet Limited.(2)10.13
                Lease Agreement dated December 4, 1991, between Elmtree
      Investments Ltd. and Swiftnet Limited.(2)10.14
                Lease Agreement dated October 8, 2001, between Postwick Property
      Holdings Limited and Swiftnet Limited.(2)10.15
                Agreement dated September 30, 2002, between the Company, Swiftnet
      Limited., and Nir Davison.(5)10.16
                As to Form: Shares and Warrant Purchase Agreement, Irrevocable
      Proxy, Warrant A, Warrant B and Registration Rights Agreement of Selling
      Shareholders Platinum Partners Value Arbitrage Fund LP, Countrywide
      Partners LLC and WEC Partners LLC.(6)10.17
                As to Form: Shares and Warrant Purchase Agreement, Irrevocable
      Proxy, Warrant A, Warrant B and Registration Rights Agreement of Selling
      Shareholders Simon Langbart, Robert Langbart, Arik Ecker, Zwi Ecker,
      Michael Derman, Errol Derman, Yuval Haim Sobel, Zvi Sobel, Tenram
      Investment Ltd., Michael Zinn, Michael Weiss.(6)10.18
                As to Form: Shares and Warrant Purchase Agreement, Irrevocable
      Proxy, Warrant A, Warrant B and Registration Rights Agreement of Selling
      Shareholders Southridge Partners LP and Southshore Capital Fund Ltd.(6)10.19
                As to Form: Shares and Warrant Purchase Agreement, Irrevocable
      Proxy, Warrant A, Warrant B and Registration Rights Agreement of Selling
      Shareholders Crestview Capital Master LLC.(6)10.20
                As to Form: Shares and Warrant Purchase Agreement, Irrevocable
      Proxy, Warrant A, Warrant B and Registration Rights Agreement of Selling
      Shareholders Adam Breslawsky, Oded Levy, Michael Epstein, Steven Frank,
      Joshua Lobel, Joshua Kazan and The Oberon Group LLC.(6)10.21
                Newco (Auracall Limited) Formation Agreement.(6)10.22
                Agreement with ITXC Corporation.(6)10.23
                Agreement with Teleglobe International.(6)10.23.1
                Amendment to Agreement with Teleglobe International.(6)
 -84-
 10.24
                Agreement with British Telecommunications.(6)10.25
                Agreement with Easyair Limited (OpenAir).(6)10.26
                Agreement with Worldnet.(6)10.27
                Agreement with Portfolio PR.(6)10.28
                Agreement with Stern and Company.(6)10.29
                Letter to the Company dated December 31, 2003, from Abraham
      Keinan.(6)10.30
                Agreement between Swiftnet Limited and Dan Kirschner.(8)10.31
                Agreement and Plan of Merger.(7)10.32
                Escrow Agreement.(7)10.33
                Release Agreement.(7)10.34
                Employment Agreement date March 10, 2005, between Xfone USA, Inc.
      and Wade Spooner.(7)10.35
                Employment Agreement date March 10, 2005, between Xfone USA, Inc.
      and Ted Parsons.(7)10.36
                First Amendment to Agreement and Plan of Merger (to acquire WS
      Telecom, Inc.).(11)10.37
                Finders Agreement with The Oberon Group, LLC.(11)10.38
                Agreement with The Oberon Group, LLC.(11)10.39
                Management Agreement between WS Telecom, Inc. and Xfone USA,
      Inc.(8)10.40
                Engagement Letter to Tommy R. Ferguson, Confidentiality Agreement,
      and Executive Inventions Agreement dated August 19, 2004.(11)10.41
                Voting Agreement dated September 28, 2004.(11)10.42
                Novation Agreement executed September 27, 2004.(11)10.43
                Novation Agreement executed September 28, 2004.(11)10.44
                Investment Agreement dated August 26, 2004, with Ilan
      Shoshani.(12)10.44.1
                Addendum and Clarification to the Investment Agreement with Ilan
      Shoshani dated September 13, 2004.(12)10.45
                Agreement dated November 16, 2004, with Elite Financial
      Communications Group.(13)10.46
                Financial Services and Business Development Consulting Agreement
      dated November 18, 2004, with Dionysos Investments (1999) Ltd.(13)10.47
                Agreement and Plan of Merger to acquire I-55 Internet Services,
      Inc. dated August 18, 2005.(14)10.48
                Agreement and Plan of Merger to acquire I-55 Telecommunications,
      LLC dated August 26, 2005.(15)10.49
                Securities Purchase Agreement, dated September 27, 2005, by and
      between the Company and Laurus Master Fund, Ltd.(16)10.50
                Secured Convertible Term Note, dated September 27, 2005, by the
      Company in favor of Laurus Master Fund, Ltd.; Adjustment Provision Waiver
      Agreement, dated September 27, 2005, by and between the Company and Laurus
      Fund, Ltd.(16)10.51
                Common Stock Purchase Warrant, dated September 27, 2005, by the
      Company in favor of Laurus Master Fund, Ltd.(16)
 -85-
 10.52
                Registration Rights Agreement, dated September 27, 2005, by and
      between the Company and Laurus Master Fund, Ltd.(16)10.53
                Master Security Agreement, dated September 27, 2005, by and
      between the Company, Xfone USA, Inc., eXpeTel Communications, Inc., Gulf
      Coast Utilities, Inc., and Laurus Master Fund, Ltd.(16)10.54
                Stock Pledge Agreement, dated September 27, 2005, by and between
      the Company, Xfone USA, Inc., and Laurus Master Fund, Ltd.(16)10.55
                Subsidiary Guarantee dated September 27, 2005, by Xfone USA, Inc.,
      eXpeTel Communications, Inc. and Gulf Coast Utilities, Inc. in favor of
      Laurus Master Fund, Ltd.(16)10.56
                Funds Escrow Agreement, dated September 27, 2005, by and between
      the Company, Laurus Master Fund, Ltd. and Loeb & Loeb LLP;
      Disbursement Letter, dated September 27, 2005.(16)10.57
                Incremental Funding Side Letter, dated September 27, 2005, by and
      between the Company and Laurus Master Fund, Ltd.(16)10.58
                Securities Purchase Agreement dated September 28, 2005, by and
      between the Company and Crestview Capital Mater, LLC, Burlingame Equity
      Investors, LP, Burlingame Equity Investors II, LP, Burlingame Equity
      Investors (Offshore), Ltd., and Mercantile Discount - Provident
      Funds.(16)10.59
                Registration Rights Agreement, dated September 28, 2005, by and
      between the Company and Crestview Capital Mater, LLC, Burlingame Equity
      Investors, LP, Burlingame Equity Investors II, LP, Burlingame Equity
      Investors (Offshore), Ltd., and Mercantile Discount - Provident
      Funds.(16)10.60
                Common Stock Purchase Warrant, dated September 28, 2005, by the
      Company in favor of the Crestview Capital Mater, LLC, Burlingame Equity
      Investors, LP, Burlingame Equity Investors II, LP, Burlingame Equity
      Investors (Offshore), Ltd., and Mercantile Discount - Provident
      Funds.(16)10.61
                Escrow Agreement, dated September 28, 2005, by and between the
      Company, the Purchasers and Feldman Weinstein LLP.(16)10.62
                Management Agreement dated October 11, 2005.(17)10.63
                First Amendment to Agreement and Plan of Merger (to acquire I-55
      Internet Services, Inc.), dated October 10, 2005.(17)10.64
                Letter Agreement with MCG Capital Corporation dated October 10,
      2005.(17)10.65
                Securities Purchase Agreement, dated November 23, 2005, between
      the Company and Mercantile Discount - Provident Funds, Hadar Insurance
      Company Ltd., The Israeli Phoenix Assurance Company Ltd. and Gaon Gemel
      Ltd.(18)10.66
                Registration Rights Agreement, dated November 23, 2005, between
      the Company and Mercantile Discount - Provident Funds, Hadar Insurance
      Company Ltd., The Israeli Phoenix Assurance Company Ltd. and Gaon Gemel
      Ltd.(18)10.67
                Common Stock Purchase Warrant, dated November 23, 2005, by the
      Company in favor of Mercantile Discount - Provident Funds, Hadar Insurance
      Company Ltd., The Israeli Phoenix Assurance Company Ltd. and Gaon Gemel
      Ltd.(18)10.68
                Escrow Agreement, dated November 23, 2005, between the Company,
      the Escrow Agent, and Mercantile Discount - Provident Funds, Hadar
      Insurance Company Ltd., The Israeli Phoenix Assurance Company Ltd. and
      Gaon Gemel Ltd.(18)10.69
                Management Agreement with I-55 Telecommunications, LLC dated
      October 12, 2005.(19)10.70
                Agreement - General Terms and Conditions with EBI Comm, Inc.,
      dated January 1, 2006.(21)10.71
                Asset Purchase Agreement with Canufly.net, Inc., dated January 10,
      2006.(21)
 -86-
 10.72
                Stock Purchase Agreement dated May 10, 2006, by and among the
      Company, Story Telecom, Inc., Story Telecom Limited, Story Telecom
      (Ireland) Limited, Nir Davison, and Trecastle Holdings Limited.(23)10.73
                Agreement dated May 25, 2006, by and among the Company and the
      shareholders of Equitalk.co.uk Limited.(24)10.74
                Securities Purchase Agreement, dated June 19, 2006, by and between
      the Company and the Purchasers.(25)10.75
                Registration Rights Agreement, dated June 19, 2006, by and between
      the Company and the Purchasers.(25)10.76
                Common Stock Purchase Warrant, dated June 19, 2006, by the Company
      in favor of the Purchasers.(25)10.77
                Escrow Agreement, dated June 19, 2006, by and between the Company,
      the Escrow Agent, and the Purchasers.(25)10.78
                Form of Indemnification Agreement between the Company and its
      Directors and Officers.(27)10.79
                Agreement to Purchase Promissory Note dated October 31, 2005, with
      Randall Wade James Tricou.(27)10.80
                Agreement to Purchase Promissory Note dated October 31, 2005, with
      Rene Tricou - Tricou Construction.(27)10.81
                Agreement to Purchase Promissory Note dated October 31, 2005, with
      Rene Tricou - Bon Aire Estates.(27)10.82
                Agreement to Purchase Promissory Note dated October 31, 2005, with
      Rene Tricou - Bon Aire Utility.(27)10.83
                Agreement to Purchase Promissory Note dated February 3, 2006, with
      Danny Acosta.(27)10.84
                Letter Agreement dated November 15, 2005, with Oberon Securities,
      LLC.(27)10.85
                Letter Agreement dated June 15, 2006, with Oberon Securities,
      LLC.(27)10.86
                Second Amendment to Agreement and Plan of Merger (to acquire WS
      Telecom, Inc.), dated June 28, 2006.(27)10.87
                General Contract for Services dated January 1, 2005, by and
      between the Company and Swiftnet Limited.(27)10.88
                Service Agreement dated December 6, 2005, by and between the
      Company and Elite Financial Communications Group, LLC.(27)10.89
                Agreement for Market Making in Securities dated July 31, 2006, by
      and between the Company and Excellence Nessuah Stock Exchange Services
      Ltd.(27)10.90
                Shareholders Loan Agreement, dated September 27, 2006, by and
      between Auracall Limited, Swiftnet Limited, and Dan Kirschner.(28)10.91
                Service Agreement, dated November 7, 2006, by and between the
      Company and Institutional Marketing Services, Inc.(28)10.92
                Consultancy Agreement, dated November 20, 2006, by and between the
      Company and Crestview Capital Partners, LLP.(29)10.93
                Agreement dated December 24, 2006, by and between the Company,
      Halman-Aldubi Provident Funds Ltd., and Halman-Aldubi Pension Funds Ltd.
      [translation from Hebrew].(31)10.94
                First Amendment to Financial Services and Business Development
      Consulting Agreement dated February 8, 2007, by and between the Company
      and Dionysos Investments (1999) Ltd.(33)10.95
                Agreement dated February 8, 2007, by and between the Company,
      Swiftnet Limited, Campbeltown Business, Ltd., and Mr. Abraham Keinan.(33)10.96
                First Amendment to General Contract for Services, dated March 14,
      2007, by and between the Company and Swiftnet Limited.(34)10.97
                Employment Agreement, dated March 28, 2007, between Swiftnet
      Limited and Abraham Keinan.(34)
 -87-
 10.98
                Consulting Agreement, dated March 28, 2007, between the Company
      and Abraham Keinan. (34)10.99
                Employment Agreement, dated March 28, 2007, between Swiftnet
      Limited and Guy Nissenson.(34)10.100
                Consulting Agreement, dated March 28, 2007, between the Company
      and Guy Nissenson.(34)10.101
                Settlement Agreement and Release dated May 31, 2007, by and among
      Embarq Logistics, Inc, Xfone USA, Inc. and the Company.(35)10.102
                Promissory Note dated May 31, 2007, by Xfone USA, Inc.(35)10.103
                Parent Guarantee dated as of May 31, 2007 by the Company in favor
      of Embarq Logistics, Inc.(35)10.104
                Share Purchase Agreement dated August 15, 2007, by and between Dan
      Kirschner, as Seller, Swiftnet Limited, as Buyer, and Xfone, Inc.(36)10.105
                Inter-Company Loan Agreement dated August 15, 2007, by and between
      Auracall Limited, as Lender, and Swiftnet Limited, as Borrower.(36)10.106
                Stock Purchase Agreement dated August [20], 2007, by and among the
      Company, NTS Communications, Inc., and the Shareholders of NTS
      Communications, Inc.(37)10.107
                Letter of Joint Venture dated June 15, 2007, by and among the
      Company and NTS Holdings, Inc.(37)10.107.1
                Form of Free Cash Flow Participation Agreement to be Entered into
      between the Company and NTS Holdings, Inc. Upon Consummation of the
      Acquisition.(37)10.107.2
                Form of Employment Agreement to be entered into between NTS
      Communications, Inc. and Barbara Baldwin upon Consummation of the
      Acquisition.(37)10.107.3
                Form of Employment Agreement to be entered into between NTS
      Communications, Inc. and Jerry Hoover upon Consummation of the
      Acquisition.(37)10.107.4
                Form of Employment Agreement to be entered into between NTS
      Communications, Inc. and Brad Worthington upon Consummation of the
      Acquisition.(37)10.108
                Employment Contract signed on August 26, 2007, by and between the
      Company’s Israeli based Subsidiary Xfone 018 ltd. and Roni Haliva.(38)10.109
                Subscription Agreement for the Purchase of Shares of Common Stock
      of the Company Dated October 23, 2007.(39)10.110
                Subscription Agreement for the Purchase of Shares of Common Stock
      of the Company Dated November 1, 2007.(41)10.111
                Form of Subscription Agreement for the Purchase of Units
      Consisting of Two Shares of Common Stock and One Common Stock Purchase
      Warrant.(42)10.112
                Form of Common Stock Purchase Warrant.(42)10.113
                First Amendment to Stock Purchase Agreement.(43)10.114.1
                Employment agreement dated as of February 26, 2008, by and
      among NTS Communications, Inc. and Barbara Baldwin.(44)10.114.2
                Employment agreement dated as of February 26, 2008, by and
      among NTS Communications, Inc. and Jerry Hoover.(44)10.114.3
                Employment agreement dated as of February 26, 2008, by and
      among NTS Communications, Inc. and Brad Worthington.(44)10.115
                Free cash flow participation agreement dated as of February 26,
      2008, by and among Xfone, Inc. and NTS Holdings, Inc.(44)10.116
                Escrow agreement dated as of February 26, 2008, by and among
      Xfone, Inc., Chris Chelette, Robert Healea and Kevin Buxkemper the NTS
      shareholders representatives, and Trustmark National Bank, as Escrow
      Agent.(44)10.117
                Release, effective as of February 26, 2008, entered into by
      each of Barbara Baldwin, Jerry Hoover and Brad Worthington(44)
 -88-
 10.118
                Noncompetition, nondisclosure and nonsolicitation agreement dated
      as of February 26, 2008, by and among Xfone, Inc., Telephone Electronics
      Corporation, Joseph D. Fail, Chris Chelette, Robert Healea, Joey Garner,
      and Walter Frank.(44)10.119
                Second amendment to stock purchase agreement entered into by
      each of February 26, 2008 by and among Xfone, Inc., NTS Communications,
      Inc. and Chris Chelette, Robert Healea and Kevin Buxkemper, as the NTS
      shareholders representatives.(44)10.120
                Modification of Financial Consulting Agreement between Xfone, Inc.
      and Oberon Securities, LLC in connection with NTS Communications
      Transaction.(45)10.121
                Fees Due to Oberon Securities, LLC from Xfone, Inc. in connection
      with services provided in conjunction with the acquisition of NTS
      Communications, Inc.(45)10.122
                Agreement of Principles dated March 17, 2008 by and between Xfone
      018 Ltd. and Tiv Taam Holdings 1 Ltd. [Free Translation from Hebrew].(46)10.123
                Compromise Agreement dated March 25, 2008, between Xfone, Inc.,
      Story Telecom, Inc., Story Telecom Limited, Trecastle Holdings Limited and
      Nir Davison.(47)10.124
                Securities Purchase Agreement dated March 25, 2008, between Xfone,
      Inc., Trecastle Holdings Limited and Nir Davison.(47)16.1
                Letter dated January 31, 2006 from Chaifetz & Schreiber, P.C.
      to the Securities and Exchange Commission.(20)21.1
                List of Subsidiaries (Amended as of March 31,
      2008)23
                Consent of Stark, Winter, Schenkein
      &Co., LLP23.1
                Consent of Chaifetz & Schreiber, P.C.(30) (22.1)23.2
                Consent
      of Gersten Savage LLP - incorporated in the legal opinion filed as Exhibit
      5.23.3
                Consent of Postlethwaite & Netterville, APAC dated February 7,
      2006.(21.1)23.4
                Consent of Postlethwaite & Netterville, APAC dated February 7,
      2006.(21.1)31.1
                Certification pursuant to section 302 of the
      Sarbanes - Oxley Act of 2002.31.2
                Certification pursuant to section 302 of the
      Sarbanes - Oxley Act of 2002.32.1
                Certification of Officer pursuant to section 906
      of the Sarbanes - Oxley Act of 2002.32.2
                Certification of Officer pursuant to section 906
      of the Sarbanes - Oxley Act of
2002.
  (1)
                Denotes
      previously filed exhibits: filed on August 10, 2001 with Xfone, Inc.’s
      SB-2 registration statement.
  (2)
                Denotes
      previously filed exhibits: filed on October 16, 2001 with Xfone, Inc.’s
      SB-2/Amendment 1 registration
statement.
  (4)
                Denotes
      previously filed exhibit: filed on December 5, 2002 with Xfone, Inc.’s
      Form 8-K.
  (5)
                Denotes
      previously filed exhibit: filed on March 3, 2003 with Xfone, Inc.’s
      SB-2/Post Effective Amendment 2 registration
  statement.
  (6)
                Denotes
      previously filed exhibit: filed on April 15, 2004 with Xfone’s, Inc. SB-2
      Amendment 1 Registration Statement.
 -89-
 (7)
                Denotes
      previously filed exhibit: filed on June 1, 2004 with Xfone, Inc.’s Form
      8-K.
  (8)
                Denotes
      previously filed exhibit: filed on June 7, 2004 with Xfone, Inc.’s
      SB-2/Amendment 2 Registration
Statement.
  (9)
                Denotes
      previously filed exhibit: filed on August 11, 2004 with Xfone’s, Inc. SB-2
      Amendment 3 Registration Statement.
  (10)
                Denotes
      previously filed exhibit: filed on September 13, 2004 with Xfone’s, Inc.
      SB-2 Amendment 4 Registration
Statement.
  (11)
                Denotes
      previously filed exhibits: filed on October 4, 2004 with Xfone, Inc.’s
      Form 8-K
  (12)
                Denotes
      previously filed exhibits: filed on November 29, 2004 with Xfone, Inc.’s
      Form 8-K.
  (13)
                Denotes
      previously filed exhibits; filed on March 31, 2005 with Xfone, Inc.’s Form
      10-KSB.
  (14)
                Denotes
      previously filed exhibit: filed on August 22, 2005 with Xfone, Inc.’s Form
      8-K.
  (15)
                Denotes
      previously filed exhibit: filed on August 31, 2005 with Xfone, Inc.’s Form
      8-K.
  (16)
                Denotes
      previously filed exhibits: filed on October 3, 2005 with Xfone, Inc.’s
      Form 8-K.
  (17)
                Denotes
      previously filed exhibits: filed on October 11, 2005 with Xfone, Inc.’s
      Form 8-K/A #1.
  (18)
                Denotes
      previously filed exhibits: filed on November 29, 2005 with Xfone, Inc.’s
      Form 8-K.
  (19)
                Denotes
      previously filed exhibit: filed on January 23, 2006 with Xfone, Inc.’s
      Form 8-K/A #3.
  (20)
                Denotes
      previously filed exhibit: filed on January 31, 2006 with Xfone, Inc.’s
      Form 8-K/A #1.
  (21)
                Denotes
      previously filed exhibit: filed on January 31, 2006 with Xfone, Inc.’s
      Form 8-K.
 (21.1)
                  Denotes
      previously filed exhibits: filed on February 7, 2006 with Xfone, Inc.’s
      Form SB-2 Amendment 3.
 (22)
                Denotes
      previously filed exhibit: filed on March 15, 2006 with Xfone, Inc.’s Form
      8-K.
 (22.1)
                  Denotes
      previously filed exhibit: filed on March 31, 2006 with Xfone, Inc.’s Form
      10-KSB.
  -90-
  (23)
                Denotes
      previously filed exhibit: filed on May 16, 2006 with Xfone, Inc.’s Form
      8-K.
  (24)
                Denotes
      previously filed exhibit: filed on May 30, 2006 with Xfone, Inc.’s Form
      8-K.
  (25)
                Denotes
      previously filed exhibits: filed on June 20, 2006 with Xfone, Inc.’s Form
      8-K.
  (26)
                [Reserved.]
  (27)
                Denotes
      previously filed exhibits: filed on July 31, 2006 with Xfone, Inc.’s Form
      8-K.
  (28)
                Denotes
      previously filed exhibits: filed on November 14, 2006 with Xfone, Inc.’s
      Form 10-QSB.
  (29)
                Denotes
      previously filed exhibit: filed on November 22, 2006 with Xfone, Inc.’s
      Form 8-K.
  (30)
                Denotes
      previously filed exhibits: filed on November 30, 2006 with Xfone, Inc.’s
      Form SB-2.
  (31)
                Denotes
      previously filed exhibit: filed on December 28, 2006 with Xfone, Inc.’s
      Form 8-K.
  (32)
                Denotes
      previously filed exhibit: filed on February 5, 2007 with Xfone, Inc.’s
      Form 8-K.
  (33)
                Denotes
      previously filed exhibits: filed on February 8, 2007 with Xfone, Inc.’s
      Form 8-K.
  (34)
                Denotes
      previously filed exhibits; filed on March 30, 2007 with Xfone, Inc.’s Form
      10-KSB.
  (35)
                Denotes
      previously filed exhibits: filed on May 31, 2007 with Xfone, Inc.’s Form
      8-K.
  (36)
                Denotes
      previously filed exhibits: filed on August 15, 2007 with Xfone, Inc.’s
      Form 8-K.
  (37)
                Denotes
      previously filed exhibits: filed on August 22, 2007 with Xfone, Inc.’s
      Form 8-K.
  (38)
                Denotes
      previously filed exhibit: filed on August 27, 2007 with Xfone, Inc.’s Form
      8-K.
  (39)
                Denotes
      previously filed exhibit: filed on October 23, 2007 with Xfone, Inc.’s
      Form 8-K.
  (40)
                Denotes
      previously filed exhibit: filed on October 25, 2007 with Xfone, Inc.’s
      Form 8-K.
  (41)
                Denotes
      previously filed exhibit: filed on November 5, 2007 with Xfone, Inc.’s
      Form 8-K.
  (42)
                Denotes
      previously filed exhibits: filed on December 14, 2007 with Xfone, Inc.’s
      Form 8-K.
 -91-
 (43)
                Denotes
      previously filed exhibit: filed on February 14, 2008 with Xfone, Inc.’s
      Form 8-K.
  (44)
                Denotes
      previously filed exhibits: filed on February 26, 2008 with Xfone, Inc.’s
      Form 8-K.
  (45)
                Denotes
      previously filed exhibits: filed on March 6, 2008 with Xfone, Inc.’s Form
      8-K.
 (46)
                  Denotes
      previously filed exhibit: filed on March 17, 2008 with Xfone, Inc.’s Form
      8-K.
 (47)
                Denotes
      previously filed exhibits: filed on March 25 with Xfone, Inc.’s Form
      8-K.
  -92-