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, 2003

                        COMMISSION FILE NUMBER 333-67232

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

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

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

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

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

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

The aggregate market value of the voting and non-voting common equity held by
non-affiliates was $6,004,535 as determined by the closing price of $3.45 on
March 30, 2004.

The issuer's revenues for its most recent fiscal year were 7,282,181 United
Kingdom Pounds ($12,962,282)

As of March 30, 2004, there were 6,105,445 shares of our common stock issued and
outstanding.

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

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

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                                   XFONE, INC.

                                      INDEX

Part I.
Item 1.  Description of Business .......................................  3
Item 2.  Description of Property ....................................... 20
Item 3.  Legal Proceedings ............................................. 21
Item 4.  Submission of Matters to a Vote of Security Holders ........... 21

Part II.
Item 5.  Market for Common Equity and Related Stockholder Matters ...... 21
Item 6.  Management's Discussion and Analysis or Plan of Operation...... 33
Item 7.  Financial Statements .......................................... F-1
Item 8.  Changes in and Disagreements with Accountants
         and Financial Disclosure ...................................... 45
Item 8A. Controls and Procedures ....................................... 45

Part III.
Item 9.  Directors, Executive Officers, Promoters and Control
         Persons; Compliance with Section 16(a) of the Exchange Act .... 45
Item 10. Executive Compensation ........................................ 49
Item 11. Security Ownership of Certain Beneficial Owners and
         Management and Related Stockholder Matters .................... 52
Item 12. Certain Relationships and Related Transactions ................ 55
Item 13. Exhibits and Reports on Form 8-K .............................. 57
Item 14. Principal Accountant Fees and Services ........................ 58



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                                    PART I.

ITEM 1. DESCRIPTION OF BUSINESS.

BUSINESS DEVELOPMENT

We were incorporated in the State of Nevada on September 1, 2000 to acquire our
wholly owned subsidiary, Swiftnet, Ltd. and to conduct Swiftnet's
telecommunications business. Swiftnet was incorporated under the laws of the
United Kingdom on February 12, 1990. We completed the acquisition of Swiftnet on
October 4, 2000 whereby we acquired all of Swiftnet's issued and outstanding
stock in exchange for 2.4 million shares of our newly issued common stock. At
the time of the acquisition, the 2.4 million shares represented 55% of our
issued and outstanding common stock. As a result, Swiftnet became our
subsidiary, the members of Swiftnet's board of directors were appointed to our
board of directors and Swiftnet's officers became our officers. We are
authorized to issue 25,000,000 shares of common stock. As of March 25, 2004,
there are 6,105,445 shares of common stock issued and outstanding. We are
authorized to issue 50,000,000 shares of preferred stock, no shares of which are
issued and outstanding.

We have never been the subject of a bankruptcy, receivership or similar
proceeding.

Our principal executive offices are located at Britannia House, 960 High Road,
London, United Kingdom N12 9RY. Our telephone number is 011.44.845.1087777

BUSINESS

We provide long distance voice and data communications services solely through
our subsidiary, Swiftnet, Ltd., which has conducted communications service
operations in the United Kingdom since 1990. Swiftnet's business consists of
selling various telecommunication related services, including telephone,
facsimile, e-mail, calling cards, and Internet driven applications. Because our
operations are conducted solely through Swiftnet, we have provided the same
services since our inception. Our customers are located in 75 countries in
Europe, Australia, North America, South America, Asia, and Africa. At least 85%
of our revenues are derived from our customers located in the United Kingdom.

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

OUR PRINCIPAL SERVICES AND THEIR MARKETS:

Although we have our own switch which connects to other telephone operators, our
long distance voice and data communications services require the services of
other telephone operators that operate switches, which are electronic devices
that receive calls from customers on one side and move them on to their
destination on the other side. We use the network switching and transport
facilities of long distance providers in which calls are transferred either by
more established large telephone operators or smaller telephone operators. The
more established large telephone operators typically provide a better quality of


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communications, such as better sound, less interference, and less sudden
disconnections; however, the large telephone operators are more expensive
compared with small telephone operators which have lower cost prices, but
typically less service quality in these areas.

We operate a live customer service center that operates 24 hours a day, 7 days a
week.

We provide the following telecommunication services:

      o     Indirect telephone service: Using 1XXX access we resell telephone
            services provided by other carriers or through the use of our own
            platform. 1XXX access is a code number that people in Great Britain
            can dial in order to reach certain other carriers. This enables us
            to take calls originated by customers and route them to different
            destinations.

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

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

      o     Email to Facsimile service: Our Email2Fax service allows customers
            with an Internet Email account to send facsimiles at a discounted
            cost. The email arrives at our Internet server which we send via
            facsimile through high-speed facsimile modems to the proper
            destination. We issue a confirmation every 15 minutes indicating:

            (a)   all successful or failed facsimile transmissions; and

            (b)   a complete list of transmissions, including date and time of
                  delivery, destination number, pages, duration, subject, and
                  answerback of the transmission. Email2Fax will send a
                  facsimile based on a pre-defined table of retries.


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                  If a facsimile does not go through within the pre-defined
                  time, Email2Fax will cancel the facsimile and a report of the
                  failed transmission will be included in the next status
                  report.

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

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

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

      o     Nodal Services: This service enables our business customers to use a
            small platform located in their respective country, to establish
            their own messaging services within that country delivery.

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


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      o     International Toll Free Calling Card Service: We began offering
            international toll free calling card service during approximately
            June 2002 from the United States, Canada, France, Germany, Greece,
            Israel, Chile, Columbia, Japan, Thailand, Hong Kong, Indonesia,
            Australia, New Zealand, Belgium, Netherlands, Austria, Italy,
            Switzerland, Spain, Poland, Hungary, Ireland, Norway, Philippines,
            South Korea and Sweden. We also offer Story Telecom Ltd.'s branded
            calling cards.

      o     Internet Based Customer Service and Billing Interface. In June 2002,
            we completed the creation of our Internet based customer service and
            billing interface at www.xfone.com, which includes on-line
            registration, full account control, and payment and billing
            functions and information retrieval. To complete our Internet based
            customer service and billing interface, we enhanced our Internet
            operations by, among other things, fine-tuning our website which
            consisted of integrating and adding more services, perfecting our
            billing system, and launching our Internet operations in beta
            format. During 2003, we plan to continue enhancing this service at
            an estimated cost of $100,000.

Carrier Pre Select Service - In October 2003, we initiated our carrier pre
select service. With this service, we instruct our carrier, British Telecom, to
route the customer's telephone number to Swiftnet, which allows customers to
route their telephone calls through a carrier without dialing a special 4 digit
access code and without our having to program a switchboard.

DISCONTINUED SERVICE:

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

OUR PLATFORMS:

A platform generally could be any personal computer with telecommunications
applications, such as calling cards and transferring call applications. We
operate the following platforms in our business: o Telsis Switch that enables us
to interconnect with other telephone carriers; o Calling cards and prepay
platforms that enable us to use voice prompts and to accept pin numbers; and o
Messaging platform that manages facsimile broadcasts and messaging applications.


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REVENUES:

The percentage of our revenues are derived from the following:

      o     Approximately 60% from our telephone services;

      o     Approximately 10% from our messaging services, including facsimile,
            nodal and e-mail related services; and

      o     Approximately 30% from our calling cards, including 0800 and pin
            access.

OUR CUSTOMERS:

We have four major types of customers:

      o     Residential - These customers either must dial 1XXX or acquire a box
            that dials automatically.

      o     Commercial - Smaller businesses are treated the same as residential
            customers. Larger businesses have the need for a PBX unit (Private
            Branch Exchange Unit), which is a centralized answering and calling
            system, otherwise known as a switchboard. We program the PBX Unit of
            our customers in order that all of their calls are routed to us
            directly, and to save the customer the need to dial a four digit
            access code.

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

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

OUR BILLING PRACTICES:

We charge our customers based on usage by full or partial minutes. Our rates
vary with distance, duration, time, and type of call, but are not dependent upon
the facilities selected for the call transmission. The standard terms for our
regular telephone customers require that payments are due 21 days from the date
of the invoice. Our prepay telephone services represent around 20 percent of our
revenues. Our supplier's standard terms are payment within 30 days from invoice
date; however, some new suppliers ask for shorter payment terms.


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DIVISIONS:

We operate the following divisions:

      o     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. We currently have 20 active resellers and
            21 active agents.

      o     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.

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

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

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

GEOGRAPHIC MARKETS:

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


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OUR DISTRIBUTION AND MARKETING METHODS:

We use the following distribution methods to market our services:

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

      o     We use direct marketing, primarily using facsimile broadcasts and
            newspaper advertisements;

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

      o     We attend telecommunications trade shows in the United Kingdom to
            promote our services;

      o     We advertise on a monthly basis in "Comms Dealer", a
            telecommunications agents/resellers trade magazine; and

      o     We utilize the Internet as an additional distribution channel for
            our services. We utilize Xfone.com as our brand name for our new
            e-commerce telecommunications operations. We plan to build a brand
            name with "xfone.com" by advertising our Internet services,
            partnering with other websites, and offering attractive rates and
            quality of lines.


We do not have in-house sales personnel.

FUTURE BUSINESS PLANS

Our future business plans during 2004 will include the following.

RECRUITMENT

We plan to accelerate our program of recruiting resellers and agents during
2004, as follows:

      o     advertising in telecoms trade publications;

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

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


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

We estimate that our recruitment related costs will be approximately $5,000 per
month.

NEW PRODUCTS

SWIFTNET DIAL DIRECT

Swiftnet Dial Direct is a new service where residential and small business
clients can immediately have access to low cost international calls without
setting up an account, prepayment, or the purchase of a calling card. As this
service is totally automatic and requires no billing or account maintenance, we
can offer low prices coupled with low cost to us. In March 2004, we plan to
recruit self employed agents to sell this service. We estimate that our costs
pertaining to this new service will be approximately $3,000 per month.

WHOLESALE LINE RENTAL

Beginning in April 2004, we will be able to take over British Telecom's BT line,
which is the telephone line supplied by British Telecom that connects the client
with the national telephone network. We will accomplish this by purchasing the
BT line at wholesale rates and then reselling the line to our clients. We will
bill our customers with one bill for their telephone line and their calls. This
gives us complete control of the client, who only has one place to go to order
additional lines and services, as well as calls. This will also give us the
opportunity to offer bundled packages which for a fixed amount per month will
offer line rental, a mobile phone handset, and inclusive mobile and fixed line
minutes. We estimate that our costs associated with the wholesale line rental
will be approximately $8,000 per month.

BROADBAND INTERNET CONNECTION

Beginning in April 2004, we will be offering a Swiftnet branded broadband
Internet connection to our existing residential and business clients. We
estimate that our costs associated with the Broadband Internet Connection will
be approximately $2,000 per month.


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NEW SOFTWARE

New software to supply SMS broadcasting to mobile phones is being developed by a
specialized software house. SMS broadcasting allows the simultaneous sending of
a text message to several thousand recipients. We plan to supply SMS
broadcasting to our reseller and client base in approximately May 2004. We
estimate total costs of approximately $20,000 associated with the new software.

NEW MARKETING INITIATIVES

We will be seeking partnerships with charities and groups or entities with a
loyal client or supporter base, providing that they have a minimum of 1000
supporters. We will initially target over 1000 soccer clubs located in the
United Kingdom to offer affinity deals, where supporters receive low cost
telephone calls and the clubs receive a monthly percentage of the call revenue.
We will also be looking at other opportunities in the sporting arena together
with retailers who have their own loyalty card customer base and credit card
companies.

Direct fax broadcasting and email and SMS marketing will continue to be used as
tools to attract new end user clients. We are also considering setting up an
outbound telemarketing operation which will be outsourced to a specialist call
centre in Asia.

We estimate that our costs associated with the new marketing initiatives will be
approximately $10,000 per month.

NEW EQUIPMENT

We will continue to invest in new equipment if our traffic increases and will
embrace new technology such as VOIP (Voice over Internet Protocol) to increase
the added value we can offer our clients. Our current switch is expandable to
double its current capacity without any significant increase in overhead cost.

CARRIERS AND NEGOTIATING LOWER RATES

Our increased sales in 2003 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. Should our sales increase, we will continue
to negotiate for lower rates should our sales increase.


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IT AND SOFTWARE DEVELOPMENT

We are in the process of upgrading our database which the core of our client
maintenance and billing system. This will give us daily access to sales and
profitability per client and enable us to check carrier rates on a daily basis.
We are also introducing new Customer Relationship Management software to track
our prospects and clients. We estimate that our IT and software development
related costs will be approximately $30,000, which we plan to fund from our
operations.

MATERIAL AGREEMENTS:

RESELLER AGREEMENTS

We have agreements with approximately 20 resellers, including VSAT, Story
Telecom, Auracall, and Worldnet.

Our reseller agreement with Voicenet may be terminated with 60 days notice, and
our reseller agreement with Worldnet may be terminated with 7 days notice. The
Voicenet agreement requires that Voicenet make minimum monthly payments to us of
10,000 pounds UK (approximately $14,730 US). Our reseller agreement with VSAT
provides that we receive payment directly from a customer secured by VSAT and we
then remit to VSAT their portion of the sale. Our reseller agreement with
InTouchUK.com provides that company with an exclusive right to sell our fax
broadcast services in the United Kingdom, including Northern Ireland, provided
that InTouchUK.com makes certain minimum monthly revenue payments to us of
35,000 pounds UK (approximately $51,555) to us, in order to maintain their
exclusivity rights under their reseller agreement.

STORY TELECOM LTD. AGREEMENT

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

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

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

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

            (c)   Technical help service (24 Hours/7 Days a week); and (d) Use
                  of relevant software and hardware including switch, billing,
                  and an Interactive Voice Response System. An Interactive Voice
                  Response System is a voice recognition system that allows the
                  customer to listen to the amount of minutes remaining on an
                  individual's calling card and dial a desired telephone number
                  without the need for an operator.

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

            (a)   Marketing and sales;

            (b)   Distribution channels; and

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

In addition, the agreement provides that Nir Davidson will have the option to
purchase our shares of common stock within a 12 month period after the September
30, 2002 agreement, according to the formula specified in paragraph 28 of the
agreement. Nir Davidson's rights to exercise the option have terminated because
he failed to fulfill the conditions necessary to be entitled to exercise the
option.

SUPPLIER AGREEMENTS

Our agreement with WorldCom International, Ltd. may be terminated by either
party with thirty days notice. In addition, the contract may be terminated
immediately if either other party has committed a material breach of the
agreement that is incapable of remedy. Any breach capable of remedy must be
corrected within 15 days. To our knowledge, we are in compliance with all
material terms of the agreement. We do not have an exclusive agreement with
WorldCom International, Ltd.; Worldcom International, Ltd. provides these same
services to our competitors.


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We also have agreements with British Telecom, ITXC, Ibasis, Openair, Wavecrest,
and Teleglobe as suppliers of telephone routing and switching services.

PORTFOLIO PR AGREEMENT

As of January 1, 2004, we have an agreement with Portfolio PR, Inc., which can
be terminated with a 30 day written notification by either party to the
agreement within 30 days notice. The agreement provides that Portfolio PR
provide us with public relations and investor relations services. Under the
Agreement. Portfolio PR agrees to provide the following services during the
first two months of the agreement: (a) develop a branding statement and "story"
pertaining to us; (b) incorporate into a strategic corporate profile and power
point presentation; and (c) advise our management on how to make our website
more investor-friendly; produce a marketing-oriented and cost-effective annual
report. Further, under the agreement, Portfolio PR agrees to provide us with the
following additional services: (a) develop a strategic press release program;
(b) build a media campaign around our cost-effective services; (c) work with
management to demonstrate its expertise by developing articles and white papers
for distribution to trade groups and organizations, conferences, and trade
shows; (d) build an appropriate investor database; (e) plan, arrange, and manage
road shows with targeted money managers, investors, retail brokers, and media in
major financial citites; (f) if appropriate, develop a virtual road show
program; (g) update the corporate profile and media fact sheet quarterly or as
needed; (h) be available on a special projects basis to handle event programming
opportunities; and (i) serve as investor relations counsel to address a range of
issues, such as Regulation FD disclosure.

In return for the above services that entitles us to 50 hours of services per
month, we agree to pay Portfolio PR: (a) until we are listed on NASDAQ, if ever,
$3,000 a month and 1000 shares per month; (b) if we are listed on NASDAQ, $4,000
per month and 1,200 shares per month. In addition, we agree to provide Portfolio
PR with the following warrants: (a) 50,000 warrants to buy shares for $10 per
shares; (b) if we become listed on NASDAQ within 6 months, an additional: (i)
50,000 warrants to buy shares for $6 per share; and (ii) 100,000 warrants to buy
shares for $10 per share. The warrants expire within twelve months.


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SELLING SHAREHOLDER RELATED AGREEMENTS

In connection with our January/February 2004 private placement, we entered into
the following agreements with Selling Shareholders that are listed in the Form
SB-2 Registration Statement we filed on February 23, 2004 with the Securities
and Exchange Commission, which registration statement to date has not been
declared effective:

      o     Shares and Warrant Purchase Agreement;

      o     Registration Rights Agreement;

      o     Warrant A Agreement; and

      o     Warrant B Agreement

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

SHARES AND WARRANT PURCHASE AGREEMENT

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

A. SUCCESSORS AND ASSIGNS

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


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B. GOVERNING LAW

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

C. PENALTIES

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

A. LEGEND REMOVAL FAILURE - We agreed to remove the restrictive legends on the
selling shareholder certificates in compliance with state and federal laws. The
penalties vary among the selling shareholders, but are either:

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

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


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B. RIGHTS OF PARTICIPATION IN ADDITIONAL FINANCING - We may be required to allow
selling shareholders the right to participate in any subsequent financings that
we may offer. The terms vary as to the maximum percentage of the financings in
which each selling shareholder may participate, and, if our subsequent financing
has the effect of issuing shares below the $3.00 per share price paid by the
selling shareholders, we may be required to adjust the selling shareholder's
purchase price to that same lower price.

REGISTRATION RIGHTS AGREEMENT

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

WARRANT A AGREEMENT

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

WARRANT B AGREEMENT

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

COMPETITIVE BUSINESS CONDITIONS

The communications and information services industry is highly competitive and
varied. We have only approximately .06% of the market share of the United
Kingdom based long distance and international telecom market, based on our
revenues of $12,962,282 (approximately 7.3 million United Kingdom pounds) during
2003 compared with a 21 billion dollar market (12 billion United Kingdom pounds)
in the United Kingdom. Many of our existing and potential competitors, including
approximately 160 licensed telecom carriers in the United Kingdom, have greater
financial, personnel, marketing, customer bases and other financial resources
significantly greater than ours. Our competitors include:


                                       16
<PAGE>


      o     Large regional carriers in the United Kingdom such as British
            Telecom;

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

      o     Smaller regional carriers such as Quip.com;

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

      o     International carriers.

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

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

      o     Enhancing our personal contact with our customers and local agents;

      o     Providing our customers with the option to control and see their
            account over the Internet;

      o     Negotiating volume discounts with our underlying carriers; and

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

PRINCIPAL SUPPLIERS:

WorldCom International, Ltd. is our principal supplier of telephone routing and
switching services, representing approximately 25% of such services to us. Our
other suppliers are British Telecom and Teleglobe, both of which supply
telephone routing and switching services. These companies furnish us with less
than 35% of these type of services to us.

DEPENDENCE ON MAJOR CUSTOMERS:

During 2003, there were two customers that accounted for more than 10% of our
revenues: (a) our affiliate, Story Telecom, represented approximately 36% of our
total revenues; and (b) British Telecom represented approximately 18% of our
total revenues. Collectively, the United Kingdom accounts for at least 85% of
our revenues. We do not anticipate than any other customers will account for
more than 10% of our revenues during 2004.


                                       17
<PAGE>


PATENTS, TRADEMARKS AND LICENSES:

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. We do not have any other patents or
trademarks, nor have we filed any other applications for patents or trademarks.
Our subsidiary, Swiftnet, Ltd., is licensed in the United Kingdom as an
international telecommunication carrier.

REGULATORY MATTERS:

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

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

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

Since only messaging services but no calls by our customers originate in the
United States, we do not believe that we are subject to any telecommunications
laws or regulations in the United States. In the future, if our services expand,
it is possible that we will become subject to the telecommunications laws and
regulations of the United States. If this occurs, compliance with such laws will
involve higher costs than we now have in Europe.


                                       18
<PAGE>


COST OF COMPLIANCE WITH ENVIRONMENTAL LAWS

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

RESEARCH AND DEVELOPMENT:

Other than developing and expanding our telecommunications applications and our
website, we do not intend to undertake any significant research and development
activities. During fiscal year 2002, we spent $51,200 US on research and
development. During the first three quarters of 2003, from January 1, 2003 to
September 30, 2003, we spent approximately $49,000 US on research and
development

Employees

We have 12 full-time employees consisting of:

      o     1 Chief Executive Officer/President that directs our overall
            operations;

      o     1 Chairman of the Board, whose duties apart from being our Chairman
            of the Board, are to initiate and assist with telecom related
            projects;

      o     1 Research and Development Manager that directs and initiates
            various technological and software related projects;

      o     1 Marketing Manager, that directs our marketing initiatives,
            including marketing pertaining to resellers and agents, advertising
            and direct marketing;

      o     1 Operational Manager, that directs the technical and operational
            aspects of all telecom related matters pertaining to our business;

      o     1 Financial Controller, that directs our financial operations; and

      o     6 employees in our administration department that perform
            secretarial, filings, and other administrative duties and provide
            our customers with technical and billing information and support.


                                       19
<PAGE>


We also have 3 part-time employees that operate in shifts, assisting our
administrative employees.

REPORTS TO SECURITY HOLDERS

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

ITEM 2. DESCRIPTION OF PROPERTY.

Our corporate headquarters are located at 960 High Road, London N12 9RY - United
Kingdom. This 3,000 square foot facility has seven offices, one board room, one
computer room, one operation room that controls the computer room, entrance
hall, main hall, accounting, secretarial and administration and 2 kitchens. Our
office is located on the fifth floor of a six floor building with a concierge,
two elevators and parking facilities. Our premises were leased on a 5 year term,
which was due to expire on December 12, 2001. The yearly lease payments are
approximately $23,421.00 (15,900 Pound Sterling). On December 20, 2002, we
renewed our lease for a period of 10 years, with a five year cancellation
option. Our current lease expires on December 20, 2012. The yearly lease
payments have been increased to $34,320 (24,000 Pound Sterling).

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

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


                                       20
<PAGE>


ITEM 3. LEGAL PROCEEDINGS.

In August 2002, we filed a summary procedure lawsuit in the court of Tel - Aviv,
Israel against MG Telecom Ltd. and its Chief Executive Officer, Mr. Avner Shur.
In this lawsuit, we allege an unpaid debt due to us in the amount of $50,000
from MG Telecom for services rendered by us to MG Telecom. The debt arose from
an agreement between us and MG Telecom, a provider of calling card services, in
which traffic originating from MG Telecom calling cards was delivered through
our system in London, England. Mr. Shur signed a personal guarantee agreement to
secure MG Telecom's obligations under the agreement. During October 2002, Mr.
Shur filed a request for leave to defend. The court has not rendered a judgment
in the matter and we are unable to determine the future disposition of this
matter. The court session for the hearing of the evidence was scheduled for
February 24, 2004, but postponed to March 22, 2004, at which time an evidentiary
hearing was held. An additional evidentiary hearing will be held on May 19,
2004.

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


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

Not Applicable

                                    PART II.

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

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

                      2003                     Low       High
                 ----------------------------------------------
                 Fourth Quarter               $3.15$     6.25
                 Third Quarter                $0.51$     3.60
                 Second Quarter               $0.30$     0.64
                 First Quarter                $0.30$     0.77

                      2003                     Low       High
                 ----------------------------------------------
                 Fourth Quarter               $0.66$     1.45
                 Third Quarter                $0.70$     1.33
                 Second Quarter               $0.70$     3.65
                 First Quarter                $0.00$     0.00

                      2003                     Low       High
                 ----------------------------------------------
                 Fourth Quarter               $0.00$     0.00
                 Third Quarter                $0.00$     0.00
                 Second Quarter               $0.00$     0.00
                 First Quarter                $0.00$     0.00


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

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

PENNY STOCK CONSIDERATIONS.

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

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


                                       21
<PAGE>


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


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

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

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

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

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


                                       22
<PAGE>


HOLDERS.

At March 30, 2004, there were 145 holders of record of our common stock. We have
one class of common stock outstanding.

DIVIDENDS.

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

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

Securities Authorized for Issuance under Equity Compensation Plans.
Not applicable.

RECENT SALES OF UNREGISTERED SECURITIES.

On January 1, 2003, we granted the following warrants to Portfolio PR, a New
York corporation owned and controlled by Paul Holm, in exchange for services:
(a) 50,000 warrants to purchase 50,000 shares of our common stock at an exercise
price of $6.00 per share; and (b) 50,000 warrants to purchase 50,000 shares of
our common stock at an exercise price of $10 per share. The warrants expire on
January 1, 2005. We relied upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933. We believed Section 4(2) was
available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.


                                       23
<PAGE>


On August 21, 2003, we issued 400,000 options to acquire shares of our
restricted common stock to Abraham Keinan. These options were issued to Abraham
Keinan for services rendered by Abraham Keinan as the Chairman of our Board of
Directors. These options are exercisable at a price of $0.475 per share. Each
option is convertible into one (1) share of stock. These options vested
immediately and expire on August 21, 2008. We relied upon Section 4(2) of the
Act for the offers and sales to Abraham Keinan. We believed that Section 4(2)
was available because the offer and sale did not involve a public offering. The
options are cancelable at our sole discretion for a period of 210 days from the
date of issuance. On March 1, 2004, our Board of Directors cancelled these
options.

On August 21, 2003, we issued 200,000 options to acquire shares of our
restricted common stock to Guy Nissenson. These options were issued to Guy
Nissenson for services rendered by Mr. Nissenson as our President and Principal
Executive Officer. These options are exercisable at a price of $0.475 per share.
Each option is convertible into one (1) share of stock. These options vested
immediately and expire on August 21, 2008. We relied upon Section 4(2) of the
Act for the offers and sales to Guy Nissenson. We believed that Section 4(2) was
available because the offer and sale did not involve a public offering. The
options are cancelable at our sole discretion for a period of 210 days from the
date of issuance. On March 1, 2004, our Board of Directors cancelled these
options.

On January 9, 2004, we granted 17,500 restricted shares of our common stock,
17,500 Warrants A, and 17,500 Warrants B to Stern & Company, a limited liability
company registered in New York which is owned, managed and controlled by Shai
Stern, in exchange for strategic planning related services. Each Warrant A is
exercisable into one share of common stock at an exercise price of $5.50 per
share. Each Warrant B is exercisable into one share of common stock at an
exercise price of $3.50 per share. We agreed to register the 17,500 shares of
common stock, the 17,500 shares underlying the Warrants A and the 17,500 shares
underlying the Warrants B. The Warrants A are exercisable at any time before
January 9, 2009. The Warrants B are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933. We believed Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.

On January 9, 2004, we sold 16,667 restricted shares of our common stock, 16,667
Warrants A, and 16,667 Warrants B to WEC Partners, LLC, a Delaware limited
liability company owned and controlled by Ethan Benovitz, Daniel Saks, and Jaime
Hartman, in exchange for $50,000. Each Warrant A is exercisable into one share
of common stock at an exercise price of $5.50 per share. Each Warrant B is
exercisable into one share of common stock at an exercise price of $3.50 per
share. We agreed to register the 16,667 shares of common stock, the 16,667
shares underlying the Warrants A and the 16,667 shares underlying the Warrants
B. The Warrants A are exercisable at any time before January 9, 2009. The
Warrants B are exercisable until the earlier of 10 days after this registration
statement is effective or 10 days after our common stock is traded on the NASDAQ
Small Cap or the American Stock Exchange or up until the date that is 375 days
following the date of purchase. We relied upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933. We believed Section 4(2)
was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.


                                       24
<PAGE>


On January 9, 2004, in exchange for $300,000, we sold 100,000 restricted shares
of our common stock, 100,000 Warrants A, and 100,000 Warrants B to Platinum
Partners Value Arbitrage, a Cayman Islands based limited partnership; Mark
Nordlicht is the Managing Member of Platinum Management LLC, the General Partner
of this limited partnership, which is a limited liability company registered in
new York. Each Warrant A is exercisable into one share of common stock at an
exercise price of $5.50 per share. Each Warrant B is exercisable into one share
of common stock at an exercise price of $3.50 per share. We agreed to register
the 100,000 shares of common stock, the 100,000 shares underlying the Warrants A
and the 100,000 shares underlying the Warrants B. The Warrants A are exercisable
at any time before January 9, 2009. The Warrants B are exercisable until the
earlier of 10 days after this registration statement is effective or 10 days
after our common stock is traded on the NASDAQ Small Cap or the American Stock
Exchange or up until the date that is 375 days following the date of purchase.
We relied upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. We believed Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.

On January 9, 2004, we sold 50,000 restricted shares of our common stock, 50,000
Warrants A, and 50,000 Warrants B to Countrywide Partners, LLC, a Delaware
limited liability company owned, managed, and controlled by Harry Adler, in
exchange for $150,000. Each Warrant A is exercisable into one share of common
stock at an exercise price of $5.50 per share. Each Warrant B is exercisable
into one share of common stock at an exercise price of $3.50 per share. We
agreed to register the 50,000 shares of common stock, the 50,000 shares
underlying the Warrants A and the 50,000 shares underlying the Warrants B. The
Warrants A are exercisable at any time before January 9, 2009. The Warrants B
are exercisable until the earlier of 10 days after this registration statement
is effective or 10 days after our common stock is traded on the NASDAQ Small Cap
or the American Stock Exchange or up until the date that is 375 days following
the date of purchase. We relied upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933. We believed Section 4(2) was
available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.

On or about January 15, 2003, we sold 5,000 restricted shares of our common
stock to WorldNet Global.com Ltd., a United Kingdom corporation controlled by
Vic Chhabria, at a price of $0.50 per share or an aggregate purchase price of
$2,500. On or about February 17, 2003, we sold an additional 5,650 restricted
shares of our common stock to WorldNet Global.com Ltd. at a price of $0.44 per
share or an aggregate purchase price of $2,500. On or about April 24, 2003, we
sold an additional 20,000 restricted shares of our common stock to WorldNet
Global.com Ltd. at a price of $0.25 per share or an aggregate purchase price of
$5,000. On or about May 16, 2003, we sold an additional 9,615 restricted shares
of our common stock to WorldNet Global.com Ltd. at a price of $0.26 per share or
an aggregate purchase price of $2,500. On or about August 28, 2003, we sold an
additional 11,750 restricted shares of our common stock to WorldNet Global.com
Ltd. at a price of $0.425 per share or an aggregate purchase price of $5,000. On
or about September 3, 2003, we sold an additional 4,780 restricted shares of our
common stock to WorldNet Global.com Ltd. at a price of $0.523 per share or an
aggregate purchase price of $2,500. We relied upon Section 4(2) of the Act for
the offers and sales to WorldNet Global.com, Ltd. We believed that Section 4(2)
was available because the sales did not involve a public offering and there was
no general solicitation or general advertising involved in the sales. WorldNet
Global.com Ltd. had a pre-existing relationship with us as a reseller of our
telecommunications services. We placed legends on the stock certificates stating
that the securities were not registered under the Securities Act of 1933 and set
forth the restrictions on their transferability and sale.


                                       25
<PAGE>


On January 15, 2004, we sold 5,000 restricted shares of our common stock, 5,000
Warrants A, and 5,000 Warrants B to Arik Ecker in exchange for $15,000. Each
Warrant A is exercisable into one share of common stock at an exercise price of
$5.50 per share. Each Warrant B is exercisable into one share of common stock at
an exercise price of $3.50 per share. We agreed to register the 5,000 shares of
common stock, the 5,000 shares underlying the Warrants A and the 5,000 shares
underlying the Warrants B. The Warrants A are exercisable at any time before
January 15, 2009. The Warrants B are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933. We believed Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.

On January 15, 2004, we sold 8,500 restricted shares of our common stock, 8,500
Warrants A, and 8,500 Warrants B to Zwi Ecker in exchange for $25,500. Each
Warrant A is exercisable into one share of common stock at an exercise price of
$5.50 per share. Each Warrant B is exercisable into one share of common stock at
an exercise price of $3.50 per share. We agreed to register the 8,500 shares of
common stock, the 8,500 shares underlying the Warrants A and the 8,500 shares
underlying the Warrants B. The Warrants A are exercisable at any time before
January 15, 2009. The Warrants B are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933. We believed Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.

On January 15, 2004, we sold 13,000 restricted shares of our common stock,
13,000 Warrants A, and 13,000 Warrants B to Simon Langbart in exchange for
$39,000. Each Warrant A is exercisable into one share of common stock at an
exercise price of $5.50 per share. Each Warrant B is exercisable into one share
of common stock at an exercise price of $3.50 per share. We agreed to register
the 13,000 shares of common stock, the 13,000 shares underlying the Warrants A
and the 13,000 shares underlying the Warrants B. The Warrants A are exercisable
at any time before January 15, 2009. The Warrants B are exercisable until the
earlier of 10 days after this registration statement is effective or 10 days
after our common stock is traded on the NASDAQ Small Cap or the American Stock
Exchange or up until the date that is 375 days following the date of purchase.
We relied upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. We believed Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.


                                       26
<PAGE>


On January 15, 2004, we sold 5,000 restricted shares of our common stock, 5,000
Warrants A, and 5,000 Warrants B to Robert Langbart in exchange for $15,000.
Each Warrant A is exercisable into one share of common stock at an exercise
price of $5.50 per share. Each Warrant B is exercisable into one share of common
stock at an exercise price of $3.50 per share. We agreed to register the 5,000
shares of common stock, the 5,000 shares underlying the Warrants A and the 5,000
shares underlying the Warrants B. The Warrants A are exercisable at any time
before January 15, 2009. The Warrants B are exercisable until the earlier of 10
days after this registration statement is effective or 10 days after our common
stock is traded on the NASDAQ Small Cap or the American Stock Exchange or up
until the date that is 375 days following the date of purchase. We relied upon
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933. We believed Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.

On January 15, 2004, we sold 3,000 restricted shares of our common stock, 3,000
Warrants A, and 3,000 Warrants B to Michael Derman in exchange for $9,000. Each
Warrant A is exercisable into one share of common stock at an exercise price of
$5.50 per share. Each Warrant B is exercisable into one share of common stock at
an exercise price of $3.50 per share. We agreed to register the 3,000 shares
ofcommon stock, the 3,000 shares underlying the Warrants A and the 3,000 shares
underlying the Warrants B. The Warrants A are exercisable at any time before
January 15, 2009. The Warrants B are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933. We believed Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.

On January 15, 2004, we sold 7,000 restricted shares of our common stock, 7,000
Warrants A, and 7,000 Warrants B to Errol Derman in exchange for $21,000. Each
Warrant A is exercisable into one share of common stock at an exercise price of
$5.50 per share. Each Warrant B is exercisable into one share of common stock at
an exercise price of $3.50 per share. We agreed to register the 7,000 shares of
common stock, the 7,000 shares underlying the Warrants A and the 7,000 shares
underlying the Warrants B. The Warrants A are exercisable at any time before
January 15, 2009. The Warrants B are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933. We believed Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.


                                       27
<PAGE>


On January 15, 2004, we sold 8,000 restricted shares of our common stock, 8,000
Warrants A, and 8,000 Warrants B to Yuval Haim Sobel in exchange for $24,000.
Each Warrant A is exercisable into one share of common stock at an exercise
price of $5.50 per share. Each Warrant B is exercisable into one share of common
stock at an exercise price of $3.50 per share. We agreed to register the 8,000
shares of common stock, the 8,000 shares underlying the Warrants A and the 8,000
shares underlying the Warrants B. The Warrants A are exercisable at any time
before January 15, 2009. The Warrants B are exercisable until the earlier of 10
days after this registration statement is effective or 10 days after our common
stock is traded on the NASDAQ Small Cap or the American Stock Exchange or up
until the date that is 375 days following the date of purchase. We relied upon
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933. We believed Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.

On January 15, 2004, we sold 8,000 restricted shares of our common stock, 8,000
Warrants A, and 8,000 Warrants B to Zvi Sobel in exchange for $24,000. Each
Warrant A is exercisable into one share of common stock at an exercise price of
$5.50 per share. Each Warrant B is exercisable into one share of common stock at
an exercise price of $3.50 per share. We agreed to register the 8,000 shares of
common stock, the 8,000 shares underlying the Warrants A and the 8,000 shares
underlying the Warrants B. The Warrants A are exercisable at any time before
January 15, 2009. The Warrants B are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933. We believed Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.

On January 15, 2004, we sold 8,400 restricted shares of our common stock, 8,400
Warrants A, and 8,400 Warrants B to Tenram Investments, Ltd. in exchange for
$25,200. Each Warrant A is exercisable into one share of common stock at an
exercise price of $5.50 per share. Each Warrant B is exercisable into one share
of common stock at an exercise price of $3.50 per share. We agreed to register
the 8,400 shares of common stock, the 8,400 shares underlying the Warrants A and
the 8,400 shares underlying the Warrants B. The Warrants A are exercisable at
any time before January 15, 2009. The Warrants B are exercisable until the
earlier of 10 days after this registration statement is effective or 10 days
after our common stock is traded on the NASDAQ Small Cap or the American Stock
Exchange or up until the date that is 375 days following the date of purchase.
We relied upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. We believed Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.


                                       28
<PAGE>

On January 15, 2004, we sold 10,000 restricted shares of our common stock,
10,000 Warrants A, and 10,000 Warrants B to Michael Zinn in exchange for
$30,000. Each Warrant A is exercisable into one share of common stock at an
exercise price of $5.50 per share. Each Warrant B is exercisable into one share
of common stock at an exercise price of $3.50 per share. We agreed to register
the 10,000 shares of common stock, the 10,000 shares underlying the Warrants A
and the 10,000 shares underlying the Warrants B. The Warrants A are exercisable
at any time before January 15, 2009. The Warrants B are exercisable until the
earlier of 10 days after this registration statement is effective or 10 days
after our common stock is traded on the NASDAQ Small Cap or the American Stock
Exchange or up until the date that is 375 days following the date of purchase.
We relied upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. We believed Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.

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

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.

On January 25, 2004, we sold 20,000 restricted shares of our common stock,
20,000 Warrants A, and 20,000 Warrants B to Michael Weiss in exchange for
$60,000. Each Warrant A is exercisable into one share of common stock at an
exercise price of $5.50 per share. Each Warrant B is exercisable into one share
of common stock at an exercise price of $3.50 per share. We agreed to register
the 20,000 shares of common stock, the 20,000 shares underlying the Warrants A
and the 20,000 shares underlying the Warrants B. The Warrants A are exercisable
at any time before January 25, 2009. The Warrants B are exercisable until the
earlier of 10 days after this registration statement is effective or 10 days
after our common stock is traded on the NASDAQ Small Cap or the American Stock
Exchange or up until the date that is 375 days following the date of purchase.
We relied upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. We believed Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.


                                       29
<PAGE>


On January 30, 2004, we sold 16,667 restricted shares of our common stock,
16,667 A Warrants, and 16,667 B Warrants to Oded Levy in exchange for $50,000.
Each A Warrant is exercisable into one share of common stock at an exercise
price of $5.50 per share. Each B Warrant is exercisable into one share of common
stock at an exercise price of $3.50 per share. We agreed to register the 16,667
shares of common stock, the 16,667 shares underlying the A Warrants and the
16,667 shares underlying the B Warrants. The A Warrants are exercisable at any
time before January 30, 2009. The B Warrants are exercisable until the earlier
of 10 days after this registration statement is effective or 10 days after our
common stock is traded on the NASDAQ Small Cap or the American Stock Exchange or
up until the date that is 375 days following the date of purchase. We paid a
finders fee in the amount of $4,000 to Oberon Group, LLC, a limited liability
company registered in New York, which is owned, managed and controlled by Adam
Breslawsky, in connection with the sale. We relied upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933. We believed
Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.

On January 30, 2004, we sold 66,667 restricted shares of our common stock,
66,667 A Warrants, and 66,667 B Warrants to Southridge Partners, LP, a limited
partnership registered in Delaware, in exchange for $200,000. Stephen Nicks is
the President of the limited partnership's general partner, Southridge Capital
Management. Each A Warrant is exercisable into one share of common stock at an
exercise price of $5.50 per share. Each B Warrant is exercisable into one share
of common stock at an exercise price of $3.50 per share. We agreed to register
the 66,667 shares of common stock, the 66,667 shares underlying the A Warrants
and the 66,667 shares underlying the B Warrants. The A Warrants are exercisable
at any time before January 30, 2009. The B Warrants are exercisable until the
earlier of 10 days after this registration statement is effective or 10 days
after our common stock is traded on the NASDAQ Small Cap or the American Stock
Exchange or up until the date that is 375 days following the date of purchase.
We paid a finders fee in the amount of $16,000 to Oberon Group, LLC, a limited
liability company registered in New York, which is owned, managed and controlled
by Adam Breslawsky, in connection with the sale. We relied upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933. We
believed Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.

On January 30, 2004,we sold 5,000 restricted shares of our common stock, 5,000 A
Warrants, and 5,000 B Warrants to Adam Breslawsky in exchange for $15,000. Each
A Warrant is exercisable into one share of common stock at an exercise price of
$5.50 per share. Each B Warrant is exercisable into one share of common stock at
an exercise price of $3.50 per share. We agreed to register the 5,000 shares of
common stock, the 5,000 shares underlying the A Warrants and the 5,000 shares
underlying the B Warrants. The A Warrants are exercisable at any time before
January 30, 2009. The B Warrants are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. We paid a finders fee in
the amount of $1,200 to Oberon Group, LLC, a limited liability company
registered in New York, which is owned, managed and controlled by Adam
Breslawsky, in connection with the sale. We relied upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933. We believed
Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.


                                       30
<PAGE>


On January 30, 2004, we sold 6,667 restricted shares of our common stock, 6,667
Warrants A, and 6,667 Warrants B to Michael Epstein in exchange for $20,000.
Each Warrant A is exercisable into one share of common stock at an exercise
price of $5.50 per share. Each Warrant B is exercisable into one share of common
stock at an exercise price of $3.50 per share. We agreed to register the 6,667
shares of common stock, the 6,667 shares underlying the Warrants A and the 6,667
shares underlying the Warrants B. The Warrants A are exercisable at any time
before January 30, 2009. The Warrants B are exercisable until the earlier of 10
days after this registration statement is effective or 10 days after our common
stock is traded on the NASDAQ Small Cap or the American Stock Exchange or up
until the date that is 375 days following the date of purchase. We paid a
finders fee in the amount of $1,600 to Oberon Group, LLC, a limited liability
company registered in New York, which is owned, managed and controlled by Adam
Breslawsky, in connection with the sale. We relied upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933. We believed
Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.

On January 30, 2004, we sold 13,334 restricted shares of our common stock,
13,334 Warrants A, and 13,334 Warrants B to Stephen Frank in exchange for
$40,000. Each Warrant A is exercisable into one share of common stock at an
exercise price of $5.50 per share. Each Warrant B is exercisable into one share
of common stock at an exercise price of $3.50 per share. We agreed to register
the 13,334 shares of common stock, the 13,334 shares underlying the Warrants A
and the 13,334 shares underlying the Warrants B. The Warrants A are exercisable
at any time before January 30, 2009. The Warrants B are exercisable until the
earlier of 10 days after this registration statement is effective or 10 days
after our common stock is traded on the NASDAQ Small Cap or the American Stock
Exchange or up until the date that is 375 days following the date of purchase.
We paid a finders fee in the amount of $3,200 to Oberon Group, LLC, a limited
liability company registered in New York, which is owned, managed and controlled
by Adam Breslawsky, in connection with the sale. We relied upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933. We
believed Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.

On January 30, 2004, we sold 66,667 restricted shares of our common stock,
66,667 Warrants A, and 66,667 Warrants B to Southshore Capital Fund LTD, a
Cayman Islands corporation, in exchange for $200,000. Navigator Management is
the Corporate Director of Southshore Capital Fund, Ltd. and the Director and
control person of Navigator Management is David Sims. Each Warrant A is
exercisable into one share of common stock at an exercise price of $5.50 per
share. Each Warrant B is exercisable into one share of common stock at an
exercise price of $3.50 per share. We agreed to register the 66,667 shares of
common stock, the 66,667 shares underlying the Warrants A and the 66,667 shares
underlying the Warrants B. The Warrants A are exercisable at any time before
January 30, 2009. The Warrants B are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. We paid a finders fee in
the amount of $16,000 to Oberon Group, LLC, a limited liability company
registered in New York, which is owned, managed and controlled by Adam
Breslawsky, in connection with the sale. We relied upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933. We believed
Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.


                                       31
<PAGE>


On February 2, 2004, we sold 500,000 restricted shares of our common stock,
500,000 Warrants A, and 500,000 Warrants B to Crestview Capital Master, LLC, a
limited liability company registered in Delaware which is controlled by Richard
Levy and Stuart Flink, in exchange for $1,500,000. Each Warrant A is exercisable
into one share of common stock at an exercise price of $5.50 per share. Each
Warrant B is exercisable into one share of common stock at an exercise price of
$3.50 per share. We agreed to register the 500,000 shares of common stock, the
500,000 shares underlying the Warrants A and the 500,000 shares underlying the
Warrants B. The Warrants A are exercisable at any time before February 2, 2009.
The Warrants B are exercisable until the earlier of 10 days after this
registration statement is effective or 10 days after our common stock is traded
on the NASDAQ Small Cap or the American Stock Exchange or up until the date that
is 375 days following the date of purchase. We paid a finders fee in the amount
of $120,000 to Oberon Group, LLC, a limited liability company registered in New
York, which is owned, managed and controlled by Adam Breslawsky, in connection
with the sale. We relied upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933. We believed Section 4(2) was
available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.

On February 11, 2004, we sold 3,334 restricted shares of our common stock, 3,334
Warrants A, and 3,334 Warrants B to Joshua Lobel in exchange for $10,000. Each
Warrant A is exercisable into one share of common stock at an exercise price of
$5.50 per share. Each Warrant B is exercisable into one share of common stock at
an exercise price of $3.50 per share. We agreed to register the 3,334 shares of
common stock, the 3,334 shares underlying the Warrants A and the 3,334 shares
underlying the Warrants B. The Warrants A are exercisable at any time before
February 11, 2009. The Warrants B are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. We paid a finders fee in
the amount of $800 in connection with the sale. We relied upon the exemption
from registration provided by Section 4(2) of the Securities Act of 1933. We
believed Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.

On February 11, 2004, we sold 8,334 restricted shares of our common stock, 8,334
Warrants A, and 8,334 Warrants B to Joshua Kazam in exchange for $25,000. Each
Warrant A is exercisable into one share of common stock at an exercise price of
$5.50 per share. Each Warrant B is exercisable into one share of common stock at
an exercise price of $3.50 per share. We agreed to register the 8,334 shares of
common stock, the 8,334 shares underlying the Warrants A and the 8,334 shares
underlying the Warrants B. The Warrants A are exercisable at any time before
February 11, 2009. The Warrants B are exercisable until the earlier of 10 days
after this registration statement is effective or 10 days after our common stock
is traded on the NASDAQ Small Cap or the American Stock Exchange or up until the
date that is 375 days following the date of purchase. We relied upon the
exemption from registration provided by Section 4(2) of the Securities Act of
1933. We believed Section 4(2) was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.


                                       32
<PAGE>


On February 12, 2004, we sold 20,000 restricted shares of our common stock,
20,000 Warrants A, and 20,000 Warrants B to The Oberon Group, LLC, a limited
liability company registered in New York, which is owned, managed and controlled
by Adam Breslawsky, in exchange for $60,000. Each Warrant A is exercisable into
one share of common stock at an exercise price of $5.50 per share. Each Warrant
B is exercisable into one share of common stock at an exercise price of $3.50
per share. We agreed to register the 20,000 shares of common stock, the 20,000
shares underlying the Warrants A and the 20,000 shares underlying the Warrants
B. The Warrants A are exercisable at any time before February 12, 2009. The
Warrants B are exercisable until the earlier of 10 days after this registration
statement is effective or 10 days after our common stock is traded on the NASDAQ
Small Cap or the American Stock Exchange or up until the date that is 375 days
following the date of purchase. We relied upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933. We believed Section 4(2)
was available because:

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.

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

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

      ii.   all certificates were marked with restrictive legends;

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

      iv.   each investor had a preexisting relationship with Guy Nissenson, our
            Principal Executive Officer and President.

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

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


                                       33
<PAGE>


DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW.

We are a holding company that operates entirely through our subsidiary,
Swiftnet, Ltd., a U.K. based telecommunication service provider and
international licensed telecommunication carrier. As of March 30, 2004,
Swiftnet, Ltd. is and has been our source of income. Through Swiftnet, we sell
and develop telecommunication services, including telephony, fax messages,
calling cards, and Internet driven applications and mainly in the United Kingdom
and Europe. In addition, Swiftnet provides services and telecom solutions to
resellers and partners worldwide. On October 4, 2000, Xfone acquired Swiftnet
which had a business plan to provide comprehensive telecommunication services
and products by integrating new and old products, services and ideas through one
website. Swiftnet was incorporated in 1991 under the laws of the United Kingdom.
Until 1999, the main revenues for Swiftnet were derived from messaging and fax
broadcast services. During the year 2000, Swiftnet shifted its business focus
and our focus has remained on telephony voice services offering comprehensive
support packages to resellers and new services. Utilizing automation and
proprietary software packages, Swiftnet's strategy is to grow without the need
of heavy investments and with lower expenses for operations and registration of
new customers.

Approximately 90% of our revenues are derived from our customers located in the
United Kingdom. Our integrated revenue approach led to revenue from each source
as described below and is partially driven by the activities of other revenue
sources. Our revenues are dependent upon the following factors:

      o     Price competition in telephone rates;

      o     Demand for our services;

      o     Individual economic conditions in our markets

      o     Our ability to market our services


We have four major types of customers:

      o     Residential - These customers either must dial 1XXX or acquire a box
            that dials automatically.

      o     Commercial - Smaller business are treated the same as residential
            customers. Larger businesses' PBX (Telephony system) units are
            programmed to dial the 1XXX automatically.

      o     Governmental agencies - Includes the United Nations World Economic
            Forum, the Argentine Embassy and the Israeli Embassy.

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


                                       34
<PAGE>


Our revenues are derived from the following:

      o     55% from our telephone minute billing plus messaging services,
            including facsimile, nodal, and e-mail related services.

      o     7% from our mobile phone services.

      o     38% from calling cards.

The breakdown of our revenues is reflected in the table below:

Amounts in UK sterling

<TABLE>
<CAPTION>
                               Telephone &
                           messaging services   Mobile phones    Calling cards          Total
                           ------------------ ---------------- ------------------  ----------------
<S>                        <C>                <C>              <C>                 <C>
Residential &
Commercial Customers                2,981,802          361,517                  0       3,343,319
Story Telecom                                                           2,715,231       2,715,231
Government agencies                     5,663                                              5,663
Resellers                           1,009,317          141,958             66,693       1,217,968
                           ------------------ ---------------- ------------------  ----------------
Totals                              3,996,782          503,475          2,781,924      7,282,181
                           ================== ================ ==================  ================
</TABLE>


Converted into US dollars for convenience

<TABLE>
<CAPTION>
                            Telephone &
                         messaging services    Mobile phones      Calling cards           Total
                         ------------------ -----------------  ------------------      ------------
<S>                      <C>                <C>                         <C>              <C>
Residential &
Commercial Customers            5,307,607             643,500                   0         5,951,108
Story Telecom                           0                   0           4,833,111         4,833,111
Government agencies                10,080                   0                   0           10,080
Resellers                       1,796,584             252,685             118,713         2,167,983
                         ----------------    ------------------ ------------------     ------------
Totals                          7,114,272             896,185           4,951,825        12,962,282
                         ================    ================== ==================     ============
</TABLE>

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


                                       35
<PAGE>


Financial Information - Percentage of Revenues

<TABLE>
<CAPTION>
                                   Year ended December 31            Year ended December 31
                                 --------------------------       ---------------------------

                                   2001              2000           2003               2002
                                 --------          --------       --------           --------
<S>                               <C>               <C>            <C>                <C>
Revenues                         100.0%             100.00%        100.00%            100.00%
Cost of Revenues                - 60.8              -58.66%        -61.29%            -64.90%
Gross Profit                      39.2%              41.34%         38.71%             35.10%
Operating Expenses:
Research and Development          -0.6%              -0.86%         -1.16%             -2.15%
Marketing and Selling            -15.0%              -8.56%         -8.24%             -8.29%
General and Administrative       -14.5%             -23.48%        -20.46%            -17.45%
Total Operating Expenses         -30.0%             -32.90%        -29.86%            -27.89%
Income before Taxes                8.6%               8.39%          7.72%              6.34%
Net Income                         5.8%               6.44%          5.48%              5.13%
</TABLE>


YEARS ENDED DECEMBER 31, 2003 AND 2002


The US Dollars amounts for 2003 and 2002 are presented herein at the then
current rate of (pound)1 to $1.78.


CONSOLIDATED STATEMENT OF OPERATIONS

REVENUES. Revenues for the year ended December 31, 2003 increased 95% to
(pound)7,282,181 ($12,962,282) from (pound)3,741,436 ($6,659,756) for the same
period in 2002. The increase in our Revenues is primarily attributable to the
revenues that derive from the usage of calling cards sold by our affiliate,
Story Telecom. All traffic generated by the Story Telecom calling cards is
delivered through our systems. The following table reflects a breakdown of our
Revenues according to cost of revenues characteristics:


<TABLE>
<CAPTION>
                                                  2003                                 2002
                                                  ----                                 ----
<S>                                    <C>                                 <C>
Regular telephony voice service
and others:                            (pound)4,566,950 ($8,129,171)       (pound)3,737,720 ($6,653,142)
Story Telecom                          (pound)2,715,231 ($4,833,111)       (pound)3,716 ($6,614)

Total Revenues                         (pound)7,282,181 ($12,962,282)      (pound)3,741,436 ($6,659,756)
</TABLE>


                                       36
<PAGE>


Story Telecom started its operations in September 2002 and contributed only
(pound)3,716 during fiscal year 2002. The 22% growth in the regular telephony
services is mainly attributable to an increase of approximately 450 customers in
fiscal year 2003.

In the year ended December 31, 2003, the percentage of our revenues is derived
from the following:

      o     55% from our telephone minute billing plus messaging services,
            including facsimile, nodal, and e-mail related services.

      o     7% from our mobile phone services.

      o     38% from calling cards.


We believe that during the year 2004 same type of services and customers will
continue to generate most of our Revenues, we shall offer some new services and
billing alternatives to stronger the connection with our registered customers
and to enable easy usage of our services to non registered users.


COST OF REVENUES. Cost of revenues consists primarily of traffic time purchased
from telephone companies and other related charges. Cost of revenues increased
101% to (pound)4,427,939 ($7,881,731) for the year ended December 31, 2003, from
(pound)2,194,792 ($3,906,730) for the year ended December 31, 2002, representing
60.8% and 58.7% of the total revenues for the year ended December 31, 2003 and
December 31, 2002, respectively. The increase in the cost of revenues as a
percentage of revenues is attributable to the increase of our revenues that
derive from the Story Telecom project that currently focuses on Calling Cards
services. The Story Telecom Project, which accounts for approximately 37% of our
Revenues in the year ended December 31, 2003 and less than 1% in the year ended
December 31, 2002, our cost of revenues as a percentage of revenues in the Story
Telecom project is approximately 94% while the cost of revenues as a percentage
of the rest of our revenues was 40.8% for the year ended December 31, 2003 and
58.6% for the year ended December 31, 2002. This decrease of the cost of
revenues as a percentage of revenues for non Story Telecom related revenues is
mainly attributable to lower prices negotiated with our suppliers.

<TABLE>
<CAPTION>
Cost of revenues breakdown:


                                                        2003                            2002
                                                       ------                          ------
<S>                                           <C>                              <C>
Regular Telephony Services and others                1,866,619 ($3,322,581)           2,191,287 ($3,900,490)
Story Telecom                                        2,561,320 ($4,559,150)           3,505 ($6,239)
Total:                                        (pound)4,427,939 ($7,881,731)    (pound)2,194,792 ($3,906,730)
</TABLE>


                                       37
<PAGE>


Should Story Telecom calling cards related revenues continue to grow faster than
our other business segments, our Cost of Revenues as a percentage of Revenues
will continue to increase.

GROSS PROFIT. Gross profit is total revenues less cost of revenues. Gross profit
excludes general corporate expenses, finance expenses and income tax. For the
year ended December 31, 2003 and 2002, respectively, gross profit was
(pound)2,854,242 ($5,080,551) and (pound)1,546,644 ($2,753,026) which represents
an 85% increase. The gross profit as a percentage of revenues decreased to 39.2%
for the year ended December 31 2003, from 41.3% for the year ended December 31,
2002. Our new project with our affiliate, Story Telecom, reduced our gross
profit margin. The impact is partially negated by lower rates that we received
from our suppliers that relate to all our services.

RESEARCH AND DEVELOPMENT. Research and development expenses were (pound)44,553
($79,304) and (pound)32,000 ($56,960) for the year ended December 31, 2003 and
2002, respectively. Which Represents 0.6% and 1% of revenues for the years ended
December 31, 2003 and 2002, for the same periods, respectively. These expenses
consist of labor costs of our research and development manager and other related
costs. Main developments relate to the development of the Xfone web site and its
interconnections, the upgrade of software for our telephone platforms, billing
systems, messaging services and the resellers support package.

MARKETING AND SELLING EXPENSES. Marketing and selling expenses increased to
(pound)1,091,012 ($1,942,001) from (pound)320,418 ($570,344) for the year ended
December 31, 2003 and 2002, respectively. Marketing and selling expenses as
percentage of revenues were 15% and 8.6% for the year ended December 31, 2003
and 2002, respectively. The increase in marketing expenses is attributable to
the increasing revenues derived from commission related activities, including
commissions for resellers of numbers similar to 1-800 or 1-900 with no specific
geographical place. Our agreement with resellers can be terminated within a
relatively short notice 7-60 days. Our bigger non affiliated reseller is
Worldnet that generated app 6% of our Revenues in 2003, Worldnet can terminate
the agreement with a 7 days notice should he decides to terminate is agreement
our Revenues will be affected accordingly.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to (pound)1,052,309 ($1,873,110) from (pound)878,624 ($1,563,951) for
the year ended December 31, 2003 from (pound)878,624 ($1,563,951)for the year
ended December 31,2002. As a percentage of revenues, general and administrative
expenses decreased to 14.5% for the year ended December 31, 2003 from 23.5% for
the year ended December 31, 2002. The decrease in administrative expenses as a
percentage of revenues is mainly attributable to our growth in revenues and to
our ability to control our administrative expenses utilizing improved
computerization efficiencies. Our bad debt decreased to (pound)109,532
($194,966) from (pound)226,984 ($404,031) in the year ended December 31, 2002.
In the year 2002, two of our customers filed for bankruptcy, which caused the
increased bad debt figures.


                                       38
<PAGE>


FINANCING EXPENSES. Financing expenses, net, increased to (pound)44,283
($78,823) for the year ended December 31, 2003 from (pound)12,837 ($22,850) for
the year ended December 31, 2002.

INCOME BEFORE TAXES. Income before taxes for the year ended December 31, 2002
increased by 103% to (pound)637,902 ($1,135,465) from (pound)313,794
($558,554)for the year ended December 31, 2002. The increase of the income
before taxes is attributable primarily to the increase of 95% in our revenues.
Income before taxes as a percentage of revenues was 8.8% for the year ended
December 31, 2003 and 8.4% for the year ended December 31, 2002.

TAXES ON INCOME. United Kingdom companies are usually subject to income tax at
the corporate rate of 20%-30%. Taxes on income for the year ended December 31,
2003, amounted to (pound)216,456 ($385,292) which represents 34% of the income
before taxes as compared with (pound)72,813 ($129,607) for the year ended
December 31, 2002 that represents 23% of the income before taxes. . The increase
in the percentage of taxes on such income before taxes is attributable primarily
to the higher tax brackets that we are due to pay for our income in the year
ended December 31, 2003 and the lower Net operating loss carry forward in the
year ended December 31, 2003.

NET INCOME. Net income for the year ended December 31, 2003 increased by 75% to
(pound)421,445 ($750,173) as compared to (pound)240,981 ($428,947) for the year
ended December 31, 2002. Net income as percentage of revenues were 5.8% and 6.4%
for the years ended December 31, 2003 and 2002 respectively.

EARNING PER SHARE

The earning per share of common stock for the year ended December 31, 2003 was
(pound)0.08 ($0.15) for the basic weighted average 5,089,286 Shares and
(pound)0.08 ($0.13) for diluted number of shares, including the options to buy
500,000 shares. Earning per share for the year ended December 31, 2002 was
(pound)0.05 ($o.o9) for the basic weighted average 5,030,444 shares and
(pound)0.04 ($0.08) for the diluted 5,530,444 shares.


BALANCE SHEET

Current Assets. Current assets amounted to(pound)2,635,846 ($4,691,806) as of
December 30, 2003 as compared to (pound)1,658,835 ($2,952,726) as of December
31, 2002. This increase in our current assets is mainly attributable to the
growth of(pound)303,095 ($539,509) in the account receivables and to
the(pound)505,045 ($898,980) growth in our cash positions.


                                       39
<PAGE>


Loan to shareholder. Loan to the shareholder, Mr. Keinan our Chairman of the
Board of Directors amounted to (pound)286,736 ($510,390) as of December 31,
2003, as compared to (pound)303,130 ($539,571) as of December 31, 2002. The
decrease represents a repayment of (pound)16,394 ($29,181).Out of the total
amount, (pound)54,070 are classified as current assets as Mr. Keinan agreed with
the company to repay this amount during fiscal year 2004. On March 2004 Mr.
Keinan signed a note to repay his loan in four installments:
   2004 (pound)  54,070  ($96,245)
   2005 (pound) 116,333 ($207,073)
   2006 (pound) 116,333 ($207,073)

Fixed assets. Fixed assets after accumulated depreciation increased to (pound)
421,715 ($750,652) as of December 31, 2003 as compared with (pound) 252,894
($450,151) as of December 31, 2002. Growth in fix assets reflects investments in
equipment and systems to enhance our efficiency and throughput.

Current Liabilities. As of December 31, 2003, current liabilities increased to
(pound)2,174,283 ($3,870,224) as compared with (pound)1,462,027 ($2,602,408) as
of December 31, 2002. The increase in our current liabilities results mainly
from an increase of (pound)461,247 ($821,020) in our trade payables attributable
to the growth in our revenues.

Liquidity and Capital resources December 31 2003.
Cash as of December 31, 2003 amounted to (pound)977,008 ($1,739,075) as compared
with (pound)471,963 ($840,094) for the year ended December 31, 2002 an increase
of (pound)505,045, the increase was generated by net cash provided by operating
activities.

Net cash provided by operating activities for the Twelve month ended December
31, 2003 was (pound)719,604 ($1,280,895). The cash provided by operating
activities was mainly attributable to the (pound)180,464 increase in our net
income, the (pound)461,247 ($821,019) increase in trade payables and
(pound)183,271 ($326,222) increase in other trade payables that mainly consists
Income Taxes.

During fiscal year 2003 we used (pound)108,270 ($192,721) for the purchase of
capital equipment and (pound)55,862 ($99,434) for the repayment of capital lease
obligations. In the year ended December 31, 2002 we used (pound)71,553
($127,364) for the purchase of equipment.

We have lease obligations to repay (pound)78,091 ($139,002) during fiscal year
2004 and additional (pound)99,488 ($177,089) till the end of 2007. Our capital
investments are primarily for the purchase of equipment and software for
services that we provide or intend to provide. In the fiscal year 2004 we may
procure additional equipment to enhance our capacity in the UK for the amount of
app (pound)100,000 ($178,000). In case that we manage to establish or acquire an
operation in a new country, we anticipate an investment of app (pound)600,000
($1,000,000) in equipment, infrastructure and software.


                                       40
<PAGE>


We shall continue to finance our operations and fund the current commitments for
capital expenditures mainly from the cash provided from operating activities.
During January and February 2004 we completed a private placement in which we
raised gross proceeds that amounted to $2,907,711. Net new cash proceeds of the
Financing, approximately $2.7 million are expected to be used for general
working capital and/or investment in equipment and/or for acquisitions and/or
business development. We are currently looking for possible acquisitions of
United States companies that provide telecom services preferably of the same
nature of the current services provided by our subsidiary in the U.K. We are
also evaluating the establishment of subsidiaries or affiliates in two countries
to provide Telecom services of the same nature that we provide through our
United Kingdom subsidiary, Switfnet. The establishment of a subsidiary might
require, in addition to an investment in equipment and working capital, bank
guarantees as required by local authorities. We may use our cash to enable the
Bank Guarantee. As of March 29, 2004, we have no formal or informal agreements
to conduct or proceed with an acquisition or establish a subsidiary.
We believe that our future cash flow from operations together with our current
cash will be sufficient to finance our operation activities through the years
2004 and 2005. We will consider raising additional capital through a public or
private placement to fund possible acquisitions and business development
activities.

IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS.

As of December 31, 2003 our functional currency remains the U.K. Pound, we do
business also with U.S. Dollars. Even when we do business in other countries
rather than the United Kingdom or the United States we sell and buy in either
U.K. Pounds or U.S. Dollars.

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

Our cost of revenues is all in British Pounds, most of our liabilities,
operating and financing expenses are in U.K. Pounds. The remainder of the
assets, liabilities, revenues and expenditures are in U.S. Dollars.

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

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

Inflation would affect our operational results if we shall not be able to match
our Revenues with growing expenses caused by inflation.

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


                                       41
<PAGE>


YEARS ENDED DECEMBER 31, 2002 AND 2001

CONSOLIDATED STATEMENT OF OPERATIONS

REVENUES. Revenues for the year ended December 31, 2002 increased 41% to
(pound)3,741,436, from (pound)2,658,905 for the same period in 2001. The
increase in revenues is attributed mainly to growth in revenues generated from
our voice telephony services.

COST OF REVENUES. Cost of revenues consists primarily of traffic time purchased
from telephone companies and other related charges. Cost of revenues increased
35% to (pound)2,194,792 for the year ended December 31, 2002, from
(pound)1,629,604 for the year ended December 31, 2001, representing 58.7% and
61.3% of the total revenues for the year ended December 31, 2002 and December
31, 2001, respectively. The decrease in cost of revenues is attributable to
lower rates that the company negotiated and concluded with its suppliers.

GROSS PROFIT. Gross profit is total revenues less cost of revenues. Gross profit
excludes general corporate expenses, finance expenses and income tax. For the
year ended December 31, 2002 and 2001, respectively, gross profit was
(pound)1,546,644 and (pound)1,029,301 which represents a 50% increase. The gross
profit as percentage of revenues increased to 41.3% for the year ended December
31 2002, from 38.7% for the year ended December 31, 2001. The increase of the
gross profit as percentage of revenues is attributed to the lower rates that the
company paid in the year ended December 31, 2002.

RESEARCH AND DEVELOPMENT. Research and development expenses were (pound)32,000
and (pound)30,791 for the year ended December 31, 2002 and 2001, respectively.
Which Represents 1% and 1.2% of revenues for the years ended December 31, 2002
and 2001, for the same periods, respectively. These expenses consist of labor
costs of our research and development manager and other related costs. Main
developments relate to the development of the Xfone web site and its
interconnections, the upgrade of software for our telephone platforms, billing
systems, messaging services and the resellers support package.

MARKETING AND SELLING EXPENSES. Marketing and selling expenses increased to
(pound)320,418 from (pound)219,238 for the year ended December 31, 2002 and
2001, respectively. Marketing and selling expenses as percentage of revenues
were 8.6% and 8.2% for the year ended December 31, 2002 and 2001, respectively.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to (pound)878,624 for the year ended December 31, 2002 from
(pound)543,936 for the year ended December 31,2001. As a percentage of revenues,
general and administrative expenses increased to 23.5% for the year ended
December 31, 2002 from 20.5% for the year ended December 31, 2001. This increase
is mainly attributable to expenses related to the growth in our operations and
our status as public company.

FINANCING EXPENSES. Financing expenses, net, decreased to (pound)12,837 for the
year ended December 31, 2002 from (pound)30,982 for the year ended December 31,
2001.


                                       42
<PAGE>


INCOME BEFORE TAXES. Income before taxes for the year ended December 31, 2002
increased by 53% to (pound)313,794 from (pound)205,363 for the year ended
December 31, 2001. The increase of the income before taxes is attributable
primarily to the increase of 41% in our revenues and the lesser increase of 35%
in our cost of revenues. Income before taxes as a percentage of revenues was 8.4
for the year ended December 31, 2002 and 7.7% for the year ended December 31,
2001.


TAXES ON INCOME. United Kingdom companies are usually subject to income tax at
the corporate rate of 20%-30%. Taxes on income for the year ended December 31,
2002, amounted to (pound)72,813 which represents 23% of the income before taxes
as compared with (pound)59,757 for the year ended December 31, 2001 that
represents 29% of the income before taxes. The decrease in the percentage of
taxes on such income before taxes is attributable primarily to the carry forward
loss of the parent company.


NET INCOME. Net income for the year ended December 31, 2002 amounted to
(pound)240,981 and represents 6.4% of the revenues, as compared with
(pound)145,606 , 5.4% of the revenues for the year ended December 31, 2001. The
increase in the net income is mainly attributable to the 53% growth in our
Income before taxes and our lesser increase of 22% in the taxes on income.

EARNING PER SHARE

The earning per share of common stock for the year ended December 31, 2002
was (pound)0.05 for the basic 5,030,444 weighted average shares of common stock
and (pound)0.04 for diluted number of shares of common stock including the
option to buy 500,000 shares of common stock.

BALANCE SHEET

CURRENT ASSETS. Current Assets amounted to (pound)1,658,835 as of December 31,
2002 as compared to (pound)1,194,762 as of December 31, 2001. This increase is
mainly attributable to a 32% increase in account receivable and a 64% increase
in cash both of which are a result of our growth in business activities and
profitability.

LOAN TO SHAREHOLDER . Loan to our major shareholder, Mr. Abraham Keinan our
Chairman of the Board of Directors, amounted to (pound)303,130 as of December
31, 2002, as compared to (pound)282,347 as of December 31,2001. As of December
31, 2002, (pound)45,558 of the loan is classified as a current asset.

FIXED ASSETS. Fixed assets after accumulated depreciation increased to
(pound)252,894 as of December 31, 2002 as compared with (pound)158,437 as of
December 31,2001. Purchase of equipment during the year ended December 31, 2001
amounted to (pound)152,757; depreciation for the same period amounted to
(pound)58,300.


                                       43
<PAGE>


CURRENT LIABILITIES. As of December 31, 2002, current Liabilities increased by
(pound)347,697 to (pound)1,462,027 as compared with (pound)1,114,330 as of
December 31, 2001. The increase is mainly attributable to an increase of
(pound)214,607 in trade payables that increased as a result of the 35% growth in
cost of revenues.

LIQUIDITY AND CAPITAL RESOURCES SEPTEMBER 30, 2002.

Net cash provided by operating activities for the year ended December 31, 2002
was (pound)345,379.The cash provided by operating activities was primarily
attributable to our net Income of (pound)240,981 complemented by depreciation
for the amount of (pound)58,300.

Investment activities used (pound)153,272 primarily for purchase of equipment.
Net financing activities used (pound)613 ($981). Cash at December 31, 2002
amounted to (pound)471,963 ($755,141), an increase of (pound)192,720 since
December 31,2001. Our current assets for December 31, 2002 are higher than our
current liabilities by (pound)196,808

Our commitments for capital expenditures as of December 31, 2002 were
(pound)41,193, the purpose of these commitments was buying new equipment. We
shall continue to finance our operations and fund the commitments for capital
expenditures mainly from the cash provided from operating activities. We also
have an unused $200,000 credit facility that a United Kingdom bank made
available to our subsidiary, Swiftnet.
We believe that our future cash flow from operations together with our current
cash and the unused bank facility will be sufficient to finance our activities
through the years 2003 and 2004. For business expansion purposes requiring
additional capital, we intend to raise funds through a public or private
placement sale of our securities and/or by obtaining financing from a financial
institution; however, there are no assurances that we will be successful in
obtaining funding through any means.

IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS.

As of December 31, 2002, we deal with only two currencies British Pounds and
United States dollars. Even when we do business in other countries rather than
the United Kingdom or the United States we sell and buy in either United Kingdom
pounds or United States dollars.

Most of our revenues and current assets are in United Kingdom pounds, the
long-term loan to a shareholder is all in U.K. Pounds. Our cost of revenues is
all in British Pounds. Most of our liabilities, operating and financing expenses
are in United Kingdom pounds. The reminder of the assets, liabilities, revenues
and expenditures are in United States dollars.

A devaluation of the United Kingdom pound in relation to the United States
dollar will have the effect of decreasing the dollar value of all assets or
liabilities that are in United Kingdom pounds. Conversely, any increase in the
value of the United Kingdom pound in relation to the United States dollar has
the effect of increasing the dollar value of all United Kingdom pounds assets
and the dollar amounts of any United Kingdom liabilities and expenses.
If we are unable to match our revenues with our expenses, inflation would affect
our operational results. If the rate of inflation will cause a raise in salaries
or other expenses and the market conditions will not allow us to raise prices
proportionally it will have a negative effect on the value of our assets and our
profitability.


                                       44
<PAGE>


ITEM 7. FINANCIAL STATEMENTS.


--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------


                        CONSOLIDATED FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 2003



<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------


                        CONSOLIDATED FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 2003




                                    CONTENTS


                                                                         PAGE
                                                                         ----

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                  F-1

    Balance Sheet                                                     F-2 - F-3

    Statements of Operations                                              F- 4

    Statement of Changes in Shareholders' Equity                          F-5

    Statements of Cash Flows                                          F-6 - F-7

    Notes to Consolidated Financial Statements                        F-8 - F-26

<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors and Shareholders of
Xfone, Inc. and Subsidiary
--------------------------

We have audited the accompanying consolidated balance sheet of Xfone, Inc. and
Subsidiary as of December 31, 2003 the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the two
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the 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 in
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, such financial statements present fairly, in all material
respects, the consolidated financial position of Xfone, Inc. and Subsidiary as
of December 31, 2003 and the results of their operations and their cash flows
for each of the two years in the period ended December 31, 2003 in conformity
with accounting principles generally accepted in the United States of America.



CHAIFETZ & SCHREIBER, P.C.
21 Harbor Park Drive N.
Port Washington, NY 11050
March 31, 2004



                                       F-1

<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                   DECEMBER 31,                DECEMBER 31,
                                                ----------------  -----------------------------------
                                                       2003                       2003
                                                ----------------  -----------------------------------
                                                                  Convenience translation into U.S. $
                                                                  -----------------------------------
<S>                                               <C>                        <C>
CURRENT ASSETS
Cash                                              (pound)977,008             $ 1,739,074
Accounts receivable, net                               1,263,824               2,249,607
Prepaid expenses, other receivables and deposits         340,944                 606,880
Loan to shareholder                                       54,070                  96,245
                                                ----------------             -----------
TOTAL CURRENT ASSETS                                   2,635,846               4,691,806
                                                ----------------             -----------
Loan to shareholder                                      232,666                 414,145
                                                ----------------             -----------

FIXED ASSETS
Cost                                                     559,786                 996,419
Less  - accumulated depreciation                        (138,071)               (245,767)
                                                ----------------             -----------
TOTAL FIXED ASSETS                                       421,715                 750,652
                                                ----------------             -----------
TOTAL ASSETS                                    (pound)3,290,227              $5,856,603
</TABLE>


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

                                       F-2


<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>

                                                            DECEMBER 31,                DECEMBER 31,
                                                         ----------------  -----------------------------------
                                                                2003                       2003
                                                         ----------------  -----------------------------------
                                                                           Convenience translation into U.S. $
                                                                           -----------------------------------
<S>                                                      <C>                          <C>
CURRENT LIABILITIES
Trade payables                                           (pound)1,637,430              $ 2,914,625
Dividend payable                                                   86,270                  153,561
Notes payable - current portion                                     4,000                    7,120
Other liabilities and accrued expenses                            379,809                  676,060
Obligations under capital leases - current portion                 66,774                  118,858
                                                        ----------------              -----------
TOTAL CURRENT LIABILITIES                                       2,174,283                3,870,224
Deferred taxes                                                     36,109                   64,274
Notes payable                                                       3,166                    5,635
Obligation under capital leases                                    86,563                  154,082
                                                        ----------------              -----------
TOTAL LIABILITIES                                               2,300,121                4,094,215
                                                        ----------------              -----------
SHAREHOLDERS' EQUITY
Preferred stock - 50,000,000 shares authorized,
  none issued

Common stock:
25,000,000 shares authorized,(pound).0006896 par value;
5,117,684 issued and outstanding                                   3,530                    6,283
Contributions in excess of shares                                193,514                  344,455
Retained earnings                                                793,062                1,411,650
                                                        ----------------              -----------
TOTAL SHAREHOLDERS' EQUITY                                       990,106                1,762,388
                                                        ----------------              -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY              (pound)3,290,227               $5,856,603
                                                        ================              ===========
</TABLE>


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

                                       F-3

<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                        YEARS ENDED                         YEARS ENDED
                                             -------------------------------   -----------------------------------
                                                       DECEMBER 31,                         DECEMBER 31,
                                             -------------------------------   -----------------------------------
                                                   2003            2002              2003             2002
                                             -------------------------------   -----------------------------------
                                                                               Convenience translation into U.S. $
                                                                               -----------------------------------
<S>                                        <C>               <C>                 <C>              <C>
Revenues                                   (pound)7,282,181 (pound)3,741,436     $ 12,962,282     $  6,659,756
Cost of revenues (exclusive of depreciation
      shown separately in Note (13))             (4,427,939)      (2,194,792)      (7,881,731)      (3,906,730)
                                             --------------   --------------     ------------     ------------
                                                  2,854,242        1,546,644        5,080,551        2,753,026
                                             --------------   --------------     ------------     ------------

OPERATING EXPENSES:
Research and development                            (44,553)         (32,000)         (79,304)         (56,960)
Marketing and selling                            (1,091,012)        (320,418)      (1,942,001)        (570,344)
General and administrative                       (1,052,310)        (878,624)      (1,873,112)      (1,563,951)
                                             --------------   --------------     ------------     ------------
Total operating expenses                         (2,187,875)      (1,231,042)      (3,894,417)      (2,191,255)
                                             --------------   --------------     ------------     ------------
                                                                     315,602        1,186,134          561,771
Operating profit                                    666,367          315,602        1,186,134          561,771
Financing expenses -  net                           (44,283)         (12,837)         (78,824)         (22,850)
Other income                                         15,817           11,029           28,154           19,632
                                             --------------   --------------     ------------     ------------
Income before taxes                                 637,901          313,794        1,135,464          558,553
Taxes on income                                    (216,456)         (72,813)        (385,292)        (129,607)
                                             --------------   --------------     ------------     ------------
Net income                                   (pound)421,445   (pound)240,981     $    750,172     $    428,946
                                             ==============   ==============     ============     ============

EARNINGS PER SHARE:
Basic                                           (pound)0.08      (pound)0.05            $0.15            $0.09
                                                ===========      ===========            =====            =====
Diluted                                         (pound)0.08      (pound)0.04            $0.13            $0.08
                                                ===========      ===========            =====            =====
</TABLE>


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

                                       F-4


<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                           NUMBER OF                    CONTRIBUTIONS                        TOTAL
                                           ORDINARY         SHARE       IN EXCESS OF      RETAINED       SHAREHOLDERS'
                                            SHARES         CAPITAL       PAR VALUE        EARNINGS          EQUITY
                                         -----------     -----------   -------------     -----------    --------------
<S>                                        <C>          <C>           <C>             <C>              <C>
Balance at January 1, 2002                 5,000,000    (pound)3,448  (pound)140,903  (pound)280,167   (pound)424,518
Issuance of shares                            60,889              42          39,316              --           39,358
Net income                                        --              --              --         240,981          240,981
Dividend                                          --              --              --         (63,261)         (63,261)
                                         -----------     -----------     -----------     -----------      -----------
Balance at December 31, 2002               5,060,889    (pound)3,490  (pound)180,219  (pound)457,887   (pound)641,596
                                         -----------     -----------     -----------     -----------      -----------

Balance at January 1, 2003                 5,060,889           3,490         180,219         457,887          641,596
Issuance of shares                            56,795              40          13,295              --           13,335
Net income                                        --              --              --         421,445          421,445
Dividend                                          --              --              --         (86,270)         (86,270)
                                         -----------     -----------     -----------     -----------      -----------
Balance at December 31, 2003               5,117,684    (pound)3,530  (pound)193,514  (pound)793,062   (pound)990,106
                                         ===========     ===========     ===========     ===========      ===========
CONVENIENCE TRANSLATION INTO U.S. $:
Balance at January 1, 2003                 5,060,889     $     6,212     $   320,790     $   815,039      $ 1,142,041
Issuance of shares                            56,795              71          23,665              --           23,736
Net income                                        --              --              --         750,172          750,172
Dividend                                          --              --              --        (153,561)        (153,561)
Balance at December 31, 2003               5,117,684     $     6,283     $   344,455     $ 1,411,650      $ 1,762,388
                                         ===========     ===========     ===========     ===========      ===========
</TABLE>


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

                                       F-5

<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                             YEARS ENDED                         YEARS ENDED
                                                  -------------------------------   -----------------------------------
                                                            DECEMBER 31,                         DECEMBER 31,
                                                  -------------------------------   -----------------------------------
                                                        2003            2002              2003             2002
                                                  -------------------------------   -----------------------------------
                                                                                    Convenience translation into U.S. $
                                                                                    -----------------------------------
<S>                                               <C>               <C>                 <C>              <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income                                        (pound)421,445   (pound)240,981      $   750,172      $   428,946
Adjustments to reconcile net income to net cash
      provided by operating activities                   298,159           48,145          530,723           85,698
                                                  --------------   --------------      -----------      -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES                719,604          289,126        1,280,895          514,644
                                                  --------------   --------------      -----------      -----------
CASH FLOW FROM INVESTING ACTIVITIES
Investments                                                   --             (515)              --             (917)
Purchase of equipment                                   (108,270)         (71,553)        (192,721)        (127,364)
                                                  --------------   --------------      -----------      -----------
NET CASH USED IN INVESTING ACTIVITIES                   (108,270)         (72,068)        (192,721)        (128,281)
                                                  --------------   --------------      -----------      -----------
CASH FLOW FROM FINANCING ACTIVITIES
Repayment of long term debt                               (4,001)         (34,921)          (7,122)         (62,159)
Repayment of capital lease obligation                    (55,862)              --          (99,434)              --
Proceeds from sale of fixed assets                         3,500               --            6,230               --
Proceeds from issuance of common stock                    13,335           10,583           23,736           18,838
Dividend paid                                            (63,261)              --         (112,605)              --
                                                  --------------   --------------      -----------      -----------
NET CASH USED IN FINANCING ACTIVITIES                   (106,289)         (24,338)        (189,195)         (42,322)
                                                  --------------   --------------      -----------      -----------
Net increase in cash                                     505,045          192,720          898,980          343,042
Cash, beginning of year                                  471,963          279,243          840,094          497,053
                                                  --------------   --------------      -----------      -----------
Cash, at end of year                              (pound)977,008   (pound)471,963      $ 1,739,074      $   840,094
                                                  ==============   ==============      ===========      ===========
Supplement disclosures of cash flow information:
NET CASH PAID DURING THE YEAR FOR:
Income taxes                                       (pound)14,044    (pound)41,723          $24,998          $74,267
                                                  ==============   ==============      ===========      ===========
Interest                                           (pound)11,213    (pound)12,816          $19,959          $ 2,812
                                                  ==============   ==============      ===========      ===========


<CAPTION>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
For the year ended December 31:
                                                        2003            2002              2003             2002
                                                  -------------------------------   -----------------------------------
                                                                                    Convenience translation into U.S. $
                                                                                    -----------------------------------
<S>                                                <C>               <C>                 <C>              <C>
Convenience translation into U.S.$
Acquired equipment under capital lease obligation  (pound)86,316    (pound)26,002         $153,642          $46,283
Issuance of 45,014 shares of common stock for                 --           28,775               --           51,220
     Compensation for professional services
</TABLE>


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

                                       F-6


<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

                  CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)

(1) ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:

<TABLE>
<CAPTION>
                                                       YEARS ENDED                          YEARS ENDED
                                            -------------------------------    -----------------------------------
                                                      DECEMBER 31,                          DECEMBER 31,
                                            -------------------------------    -----------------------------------
                                                  2003            2002               2003             2002
                                            -------------------------------    -----------------------------------
                                                                               Convenience translation into U.S. $
                                                                               -----------------------------------
<S>                                         <C>               <C>                <C>               <C>
Depreciation                                (pound)89,592     (pound)58,300      $    159,474      $    103,774
Bad debt expense                                  109,532           226,984           194,967           404,032
Stock issued for professional services                 --            28,775                --            51,220
                                             ------------      ------------      ------------      ------------
                                                  199,124           314,059           354,441           559,026
                                             ------------      ------------      ------------      ------------
CHANGES IN ASSETS AND LIABILITIES:
Increase in accounts  receivable                 (412,627)         (460,754)         (734,476)         (820,142)
Increase in other receivables                    (160,359)          (65,570)         (285,439)
Decrease (increase) in shareholder loans           16,394           (20,783)           29,181
Increase in trade payables                        461,247           214,607           821,020
Increase in other payables                        183,271            61,586           326,222           109,623
Increase in deferred taxes                         11,109             5,000            19,774             8,900
                                             ------------      ------------      ------------      ------------
Total adjustments                                  99,035          (265,914)          176,282          (473,328)
                                             ------------      ------------      ------------      ------------
                                           (pound)298,159     (pound)48,145      $    530,723      $     85,698
                                             ============      ============      ============      ============
</TABLE>


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

                                       F-7

<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -    ORGANIZATION AND NATURE OF BUSINESS

             A.   Xfone, Inc. ("Xfone") was incorporated in Nevada, U.S.A. in
                  September, 2000 and is a provider of long distance voice and
                  data telecommunications services, primarily in the United
                  Kingdom. The financial statements consolidate the operations
                  of Xfone and Swiftnet, Limited ("Swiftnet"), its wholly owned
                  U.K. subsidiary, (collectively the "Company") .

             B.   The financial statements of the Company have been prepared in
                  Sterling ("(pound)") since this is the currency of the prime
                  economic environment , the U.K., in which the operations of
                  the Company are conducted. Transactions and balances
                  denominated in Sterling are presented at their original
                  amounts. Transactions and balances in other currencies are
                  translated into Sterling in accordance with Statement of
                  Financial Accounting Standards ("SFAS") No. 52 of the U.S.
                  Financial Accounting Standards Board ("FASB"). Accordingly,
                  items have been translated as follows:
                  Monetary items - at the exchange rate effective at the balance
                  sheet date.
                  Revenues and expense items - at the exchange rates in effect
                  at the date of recognition of those items.
                  Exchange gains and losses from the aforementioned translation
                  are included in financing expenses, net.

             C.   The financial statements have been translated into U.S.
                  dollars using the rate of exchange of the U.S. dollar at
                  December 31, 2003. The translation was made solely for the
                  convenience of the readers. It should be noted that the
                  (pound) figures do not necessarily represent the current cost
                  amounts of the various elements presented and that the
                  translated U.S. dollar figures should not be construed as a
                  representation that the (pound) currency amounts actually
                  represented, or could be converted into, U.S. dollars. The
                  representative rate of exchange of the (pound) at December 31,
                  2003 was (pound)1 = 1.78 U.S.$.


                                       F-8

<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)


NOTE 2 -    SIGNIFICANT ACCOUNTING POLICIES

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

            A.   Principles of Consolidation and Basis of Financial Statement
                 Presentation

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

            B.   Accounts Receivable

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

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

                 At December 31, 2003 accounts receivable had a net balance in
                 the amount of (pound)1,263,824, net of an allowance balance of
                 (pound)142,993 .

            C.   Investments

                 Investments in companies in which the Company has a 20% to 50%
                 interest are carried at cost, adjusted for the Company's
                 proportionate share of their undistributed earnings or losses.


                                       F-9

<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)


NOTE 2 -    SIGNIFICANT ACCOUNTING POLICIES (CONT.)

            D.   Equipment

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

                                                      Method         Useful Life
                                                 ----------------    -----------
                     Switching equipment         straight line        10 years
                     Machinery and equipment     reducing balance      4 years
                     Furniture and fixtures      reducing balance      4 years
                     Motor vehicles              reducing balance      4 years

            E.   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.

                 Management believes that the Company's revenue recognition
                 policies are in accordance with the Securities and Exchange
                 Commission Staff Accounting Bulletin No. 101, "Revenue
                 Recognition in Financial Statements" (SAB 101).

            F.   Reclassification

                 Certain reclassification of 2002 amounts have been made to
                 conform to the 2003 presentation.

            G.   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.


                                      F-10

<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)


NOTE 2 -    SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          H.  Earnings Per Share

              Earnings per share are calculated and reported in accordance with
              Statement of Financial Accounting Standards No. 128, Earnings Per
              Share ("EPS") ("SFAS 128"). Basic 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.

          I.  Income Taxes

              Income taxes are accounted for under Statement of Financial
              Accounting Standards No. 109, "Accounting for Income Taxes," which
              is an asset and liability approach that requires the recognition
              of deferred tax assets and liabilities for the expected future tax
              consequences of events that have been recognized in the Company's
              financial statements or tax returns.

          J.  Stock-Based Compensation

              The Company accounts for equity-based compensation arrangements in
              accordance with the provisions of Accounting Principles Board
              ("APB") Opinion No. 25, "Accounting for Stock Issued to
              Employees," and related interpretations, and complies with the
              disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
              Compensation." All equity-based awards to non-employees are
              accounted for at their fair value in accordance with SFAS No. 123.
              Under APB No. 25, compensation expense is based upon the
              difference, if any, on the date of grant, between the fair value
              of the Company's stock and the exercise price.

         K.   New Accounting Pronouncements

<PAGE>




              In December 2002, the FASB issued SFAS No. 148 "Accounting for
              Stock-Based Compensation - "Transition and Disclosure" which
              provides alternative methods of transition for a voluntary change
              to fair value based method of accounting for stock-based employee
              compensation. The Company does not have any formal equity based
              compensation arrangements. However, when it does issue equity as
              compensation it continues to account for such transactions in
              accordance with provisions of APB No. 25 as permitted under the
              provisions of SFAS No. 123 (see item J above). The effect of this
              statement is not expected to have a material impact on the
              Company's financial condition, results of operations or cash
              flows.


                                      F-11
<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)


NOTE 3 -    PREPAID EXPENSES, OTHER RECEIVABLES AND DEPOSITS

<TABLE>
<CAPTION>
                                               DECEMBER 31,                DECEMBER 31,
                                            ----------------  -----------------------------------
                                                   2003                       2003
                                            ----------------  -----------------------------------
                                                              Convenience translation into U.S. $
                                                              -----------------------------------
<S>                                          <C>                            <C>
                                             (pound)37,687                  $ 67,083
Due from Swiftglobal, Limited
(nonaffiliated entity)

Other prepaid expenses                             117,650                   209,416

Due from Story Telecom Limited  ("Story")
(affiliated entity)                                 15,960                    28,409

Others receivables                                 169,647                   301,972
                                            --------------                 ---------
                                            (pound)340,944                  $606,880
                                            ==============                   =========
</TABLE>

NOTE 4 -    LOAN TO SHAREHOLDER

            The Company has a non-interest bearing demand loan of (pound)54,070
            due from a shareholder. In addition, the Company has a non-interest
            bearing loan of (pound)232,666, due from such shareholder. Which has
            been classified as noncurrent and is to be repaid as follows.:


                 2004                  (pound) 54,070
                 2005                         116,333
                 2006                         116,333
                                            ---------
                                       (pound)286,736



                                      F-12
<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)


<TABLE>
<CAPTION>
                                                            DECEMBER 31,                DECEMBER 31,
                                                         ----------------  -----------------------------------
                                                                2003                       2003
                                                         ----------------  -----------------------------------
                                                                           Convenience translation into U.S. $
                                                                           -----------------------------------
<S>                                                       <C>                           <C>
NOTE  5 - FIXED ASSETS
          COST
          Equipment  held under capital lease                  364,577                  $   648,946
          Office furniture and equipment                        26,593                       47,336
          Development costs                                     32,060                       57,067
          Computer  equipment                                  136,556                      243,070
                                                           -----------                  -----------
                                                               559,786                  $   996,419
                                                           ===========                  ===========
          ACCUMULATED DEPRECIATION UNDER CAPITAL LEASE
          Equipment  held under capital lease                   61,869                  $   110,128
          Office furniture and equipment                         9,730                       17,319
          Development costs                                     16,030                       28,533
          Computer  equipment                                   50,442                       89,787
                                                           -----------                  -----------
                                                               138,071                  $   245,767
                                                           ===========                  ===========
</TABLE>


NOTE  6 - INVESTMENTS

          The Company has investments in two business ventures of approximately
          47 1/2% of Auracall Limited and 40% of Story, both start up entities
          in the U.K. Through December 31, 2003, these entities cumulative
          respective net losses have exceeded the Company's investments therein,
          respectively. Accordingly, such investments have been reduced to zero.
          Story and Auracall Limited buy their telecommunications services from
          the Company.



                                      F-13

<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

<TABLE>
<CAPTION>
                                                                DECEMBER 31,                DECEMBER 31,
                                                             ----------------  -----------------------------------
                                                                    2003                       2003
                                                             ----------------  -----------------------------------
                                                                               Convenience translation into U.S. $
                                                                               -----------------------------------
<S>                                                           <C>                          <C>
NOTE 7 - OTHER LIABILITIES AND ACCRUED EXPENSES
          Corporate taxes                                          289,777                 $    515,802
          Professional fees                                         29,545                       52,590
          Payroll and other  taxes                                  48,452                       86,245
          Due to Auracall Limited (Affiliated entity)                  275                          490
          Others                                                    11,760                       20,933
                                                              ------------                 ------------
                                                                   379,809                 $    676,060
                                                              ============                 ============

<CAPTION>
NOTE 8 - NOTES PAYABLE
                                                                DECEMBER 31,                DECEMBER 31,
                                                             ----------------  -----------------------------------
                                                                    2003                       2003
                                                             ----------------  -----------------------------------
                                                                               Convenience translation into U.S. $
                                                                               -----------------------------------
<S>                                                           <C>                          <C>
           First National Finance - maturity 2005, annual
              Interest rate 7.16%                                    4,000                 $      7,120
           Newcourt - maturity 2005, annual interest rate
                  7.16%                                              3,166                        5,635
                                                              ------------                 ------------
                                                                     7,166                       12,755

           Less: current portion                                    (4,000)                      (7,120)
                                                              ------------                 ------------
           Notes payable - non current                               3,166                 $      5,635
                                                              ============                 ============
</TABLE>


                                      F-14

<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)


NOTE 8 - NOTES PAYABLE (cont.)

<TABLE>
<CAPTION>
                                                                               Convenience translation into U.S. $
                                                                               -----------------------------------
<S>                                                           <C>                          <C>

            B. MATURITIES OF NOTES PAYABLE ARE AS FOLLOWS:

             December 31
                2004                                           (pound)4,000                  $7,120
                2005                                                  3,166                   5,635
                                                             --------------               ---------
                                                               (pound)7,166                 $12,755
                                                             ==============               =========
</TABLE>

NOTE 9 -    CAPITAL LEASE OBLIGATIONS

            The Company is the lessee of switching equipment under capital
            leases expiring in various years through 2007. The assets and
            liabilities under capital leases are recorded at the lower of the
            present value of the minimum lease payments or the fair value of the
            asset. The assets are depreciated over their estimated productive
            lives. Depreciation of assets under capital leases is included in
            depreciation expense for 2003.

            Minimum future lease payments under capital leases as of December
31, 2003 for each of the next four years are:

<TABLE>
<CAPTION>
                                                                               Convenience translation into U.S. $
                                                                               -----------------------------------
<S>                                                           <C>                          <C>
           December 31
               2004                                           (pound)78,091                $139,002
               2005                                                  67,987                 121,017
               2006                                                  15,688                  27,925
               2007                                                  15,813                  28,147
                                                             --------------               ---------
           Total minimum lease payments                             177,579                 316,091
           Less: amount representing interest                       (24,242)                (43,151)
                                                             --------------               ---------
           Present value of net minimum lease payment        (pound)153,337                $272,940
                                                             ==============               =========

           Interest rates on capitalized leases vary up to 9.6%, per annum.
</TABLE>


                                      F-15

<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)


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 carryforward. The Company does not file consolidated tax
            returns.

            The following table reflects the Company's deferred tax liabilities
            at December 31, 2003:

<TABLE>
<CAPTION>
                                                                               Convenience translation into U.S. $
                                                                               -----------------------------------
<S>                                                           <C>                          <C>
             Accelerated tax writeoff of fixed assets         (pound)36,109                 $64,274
                                                             --------------               ---------
             Deferred tax liability                           (pound)36,109                 $64,274
                                                             ==============               =========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                  YEARS ENDED                         YEARS ENDED
                                                       -------------------------------   -----------------------------------
                                                                 DECEMBER 31,                         DECEMBER 31,
                                                       -------------------------------   -----------------------------------
                                                             2003            2002              2003             2002
                                                       -------------------------------   -----------------------------------
                                                                                         Convenience translation into U.S. $
                                                                                         -----------------------------------
<S>                                                    <C>               <C>                 <C>              <C>
           Income tax computed at statutory rate             160,550          73,066         $  285,779      $  130,057
           Effect of tax authority adjustments                12,435              --             22,134              --
           Other                                               1,638              --              2,916              --
           Effect of permanent differences (including
             effect of nonconsolidated tax filings)           42,656           6,663             75,928          11,860

           Utilization of net operating loss                    (823)         (6,916)            (1,465)        (12,310
                                                          ----------      ----------         ----------      ----------
           Provision for income taxes                        216,456          72,813         $  385,292      $  129,607
                                                          ==========      ==========         ==========      ==========
</TABLE>


                                      F-16
<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)


NOTE 11 -  CAPITAL STRUCTURE, STOCK OPTIONS AND DIVIDEND

            Campbeltown Business Limited ("Campbeltown"), an entity owned by
            the Nissenson family including the Company's President and
            Principal Executive Officer, a shareholder, holds options from the
            Company and one of its directors to purchase 500,000 additional
            shares of the Company for the amount of $200,000. This transaction
            can be executed either by the Company issuing new shares, or by the
            director selling his private shares as long as he has an adequate
            amount of shares, as the director will decide. This option will
            expire on December 31, 2005.

            The holders of common stock are entitled to one vote for each share
            held of record on all matters submitted to a vote of the
            stockholders. The common stock has no pre-emptive or conversion
            rights or other subscription rights. There are no sinking fund
            provisions applicable to the common stock.

            In 2002, the Company issued 45,014 shares of common stock at a value
            of (pound)28,775 as compensation for professional services rendered
            to the Company.

            On August 21, 2003, the Company issued 400,000 and 200,000 options
            to acquire shares of its restricted common stock, respectively, to
            its Chairman of the Board and to its President and Principal
            Executive Officer exercisable as at $0.475 per share. Each option
            convertible into one share of common stock. The options are
            cancelable at the sole discretion of the Company for a period of 210
            days from the date of issuance. On March 1, 2004 these options were
            cancelled by the Company. No related compensation cost was
            recognized by the Company due to this unilateral cancellation
            clause.

            On December 30, 2003, the Company declared a dividend of $0.03 per
            share , totaling $153,561, to stockholders of record on December 31,
            2003, payable on February 16, 2004.


                                      F-17

<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)


NOTE 11 -  CAPITAL STRUCTURE, STOCK OPTIONS AND DIVIDEND (CONTINUED)

             The following restricted stock was issued, in U.S. dollars, to
             WorldNet Global.com Limited during 2003 for a total of
             (pound)13,335 as follows:

             Month Issued   Number of Shares  Price Per Share  Total Issue Price
             ------------   ----------------  ---------------  -----------------
             January             5,000             $0.50             $2,500
             February            5,650              0.44              2,500
             April              20,000              0.25              5,000
             May                 9,615              0.26              2,500
             August             11,750              0.43              5,000
             September           4,780              0.52              2,500
                             ---------                            ---------
                                56,795                              $20,000
                             =========                            =========


                                      F-18

<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                      2003
                                              -------------------------------------------------------------------------------------
                                                                                Weighted Average
                                              -------------------------------------------------------------------------------------
                                                  INCOME            SHARES          PER SHARE                PER SHARE
                                                (NUMERATOR)      (DENOMINATOR)       AMOUNTS                  AMOUNTS
                                              -------------------------------------------------------------------------------------
                                                                                                Convenience translation into U.S. $
                                                                                               -------------------------------------
<S>                                           <C>                   <C>          <C>                                          <C>
Net Income                                    (pound) 421,445

BASIC EPS:
Income available to common stockholders       (pound) 421,445       5,089,286    (pound) 0.08                                 $0.15
Effect of dilutive securities:

        Options                                            --         500,000              --                                    --

DILUTED EPS:
Income available to common stockholders       (pound) 421,445       5,589,286      (pound)0.08                                $0.13
</TABLE>


<TABLE>
<CAPTION>
                                                                                      2002
                                              -------------------------------------------------------------------------------------
                                                                                Weighted Average
                                              -------------------------------------------------------------------------------------
                                                  INCOME            SHARES          PER SHARE                PER SHARE
                                                (NUMERATOR)      (DENOMINATOR)       AMOUNTS                  AMOUNTS
                                              -------------------------------------------------------------------------------------
                                                                                                Convenience translation into U.S. $
                                                                                               -------------------------------------
<S>                                           <C>                   <C>          <C>                                          <C>
Net Income                                    (pound) 240,981

BASIC EPS:
Income available to common stockholders       (pound) 240,981          5,030,444      (pound) 0.05                            $0.09
Effect of dilutive securities:

        Options                                            --            500,000                --                               --

DILUTED EPS:
Income available to common stockholders       (pound) 240,981          5,530,444      (pound) 0.04                            $0.08
</TABLE>


                                      F-19

<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)


NOTE 13 - SELECTED STATEMENT OF OPERATIONS DATA

<TABLE>
<CAPTION>
                                                        YEARS ENDED                         YEARS ENDED
                                             -------------------------------   -----------------------------------
                                                       DECEMBER 31,                         DECEMBER 31,
                                             -------------------------------   -----------------------------------
                                                   2003            2002              2003             2002
                                             -------------------------------   -----------------------------------
                                                                               Convenience translation into U.S. $
                                                                               -----------------------------------
<S>                                        <C>               <C>                 <C>              <C>
         A. MARKETING & SELLING:
             Advertising                      (pound)25,365   (pound)22,401         $45,150          $39,874
             Consultancy                             83,970          59,372         149,467          105,682
             Commissions                            964,623         174,835       1,717,028          311,206
             Others                                  17,054          63,810          30,356          113,582
                                           ----------------  --------------     -----------        ---------
                                           (pound)1,091,012  (pound)320,418      $1,942,001         $570,344
                                           ================  ==============     ===========        =========

         B. GENERAL & ADMINISTRATIVE:
             Salaries & benefits             (pound)410,024  (pound)268,884        $729,843         $478,614
             Rent & maintenance                      84,121          90,916         149,735          161,830
             Communications                           4,830          11,539           8,597           20,539
             Professional fees                      224,087         142,863         398,875          254,296
             Bad debts                              109,532         226,984         194,967          404,032
             Depreciation                            89,592          58,300         159,474          103,774
             Others                                 130,124          79,138         231,621          140,866
                                           ----------------  --------------     -----------        ---------
                                           (pound)1,052,310  (pound)878,624      $1,873,112       $1,583,951
                                           ================  ==============     ===========        =========
</TABLE>


                                      F-20

<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)


NOTE 13 - SELECTED STATEMENT OF OPERATIONS DATA (cont.)

<TABLE>
<CAPTION>
                                                        YEARS ENDED                         YEARS ENDED
                                             -------------------------------   -----------------------------------
                                                       DECEMBER 31,                         DECEMBER 31,
                                             -------------------------------   -----------------------------------
                                                   2003            2002              2003             2002
                                             -------------------------------   -----------------------------------
                                                                               Convenience translation into U.S. $
                                                                               -----------------------------------
<S>                                        <C>                <C>                  <C>               <C>
         C. FINANCING EXPENSES, NET:
             Bank charges and interest    (pound)31,013      (pound)1,607          $55,203           $2,860
             Interest on capital lease            9,578             8,476           17,049           15,087
             Foreign currency exchange            2,305                21            4,103               37
             Other interest and charges           1,387             2,733            2,469            4,865
                                          -------------     -------------         --------         --------
                                          (pound)44,283     (pound)12,837          $78,824          $22,850
                                          =============     =============         ========         ========

</TABLE>

                                      F-21
<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------


NOTE 14 - RELATED PARTY TRANSACTIONS

<TABLE>
<CAPTION>
                                                        YEARS ENDED                         YEARS ENDED
                                             -------------------------------   -----------------------------------
                                                       DECEMBER 31,                         DECEMBER 31,
                                             -------------------------------   -----------------------------------
                                                   2003            2002              2003             2002
                                             -------------------------------   -----------------------------------
                                                                               Convenience translation into U.S. $
                                                                               -----------------------------------
<S>                                        <C>               <C>                 <C>              <C>
          Shareholders' salaries             (pound)147,407  (pound) 63,448        $262,384        $112,937

          Campbeltown Business Limited.:
                                              (pound)55,000  (pound) 25,000         $97,900        $44,500
               Fees
               Consultancy                    (pound)41,237   (pound)34,372         $73,402        $61,182
                  Trade payables               (pound)6,950              --         $12,371             --

          Vision Consultants Limited:
               Fees                          (pound) 55,000  (pound) 25,000         $97,900        $44,500

          Story Telecom Limited :
               Accounts receivable,  net     (pound)429,604  (pound)  3,606        $764,695         $6,419

               Due from related entities      (pound)15,960   (pound)14,725         $28,409        $26,211
                  Conversion expense          (pound)38,930              --         $69,295             --

               Revenues                    (pound)2,715,231  (pound)  3,716      $4,833,111         $6,614
                  Trade payables              (pound)22,771              --         $40,532             --

          Auracall Limited :
               Due from  related entities      (pound)4,533   (pound)16,196          $8,069        $28,829
               Revenues                       (pound)18,883              --         $33,612             --

               Trade payables                 (pound)18,040   (pound)12,362         $32,111        $22,004
               Commission expense            (pound)171,234   (pound)73,661        $304,797       $131,117
</TABLE>


                                      F-22

<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------


NOTE 15 -     FINANCIAL COMMITMENTS

              The Company has annual rent commitments under a non-cancellable
              operating lease of (pound)38,200, which terminates in December
              2012. Rent expense for the two years ended December 31, 2003 and
              2002, were (pound)49,500 and (pound)69,100, respectively.

              The Company has a performance based incentive agreement with its
              Chairman of the Board and Campbeltown for which sets an amount due
              to such person/entity amounting to 1% of the Company's revenues
              exclusive of revenues resulting from Story.

              The Company has an 18 month renewable consulting agreement with
              Campbeltown, which is to expire on November 11, 2004 and is
              expected to be renewed. Under this agreement Campbeltown agrees to
              provide (a) analysis of proposed acquisitions; (b) such markets
              for the Company's telecommunications services in additional
              countries; (c) formulate strategies for the Company's future
              growth plans; and (d) introduce potential customers to the
              Company's business. The Company is obligated to pay Campbeltown
              (pound)2,000 ($3,560) per month plus an additional performance
              bonus based upon monthly revenue targets as follows:

<TABLE>
<CAPTION>
              Target Monthly Revenue                   Monthly Bonus    Convenience Translation US$
              ----------------------                  --------------    ---------------------------
<S>                                                     <C>                       <C>
              Up to(pound)125,000                         (pound)--                  $--
              From(pound)125,000 to(pound)150,000      (pound)1,250               $2,225
              From(pound)150,000 to(pound)175,000      (pound)2,500               $4,450
              Over(pound)175,000                       (pound)2,750               $4,895
</TABLE>

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

             The Company anticipates annual maintenance of equipment to be
             approximately(pound)50,000 ($89,000).


                                      F-23
<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------


NOTE 16 -  ECONOMIC DEPENDENCY AND CREDIT RISK

              Approximately, 36% and 18% of total 2003 revenues were derived,
              respectively, from two customers and approximately 14% and 13% of
              total 2002 revenues were derived, respectively, from two
              customers.

              Approximately, 12% and 11% of the total accounts receivable at
2003 were due from two customers.

              Approximately, 31%, 24%, 20% and 15% of the Company's purchases
              are from four suppliers for the year ended December 31, 2003, and
              75% and 19% are from two suppliers for the year ended December 31,
              2002.

              The Company may periodically maintain cash balances at a
              commercial bank in excess of the Federal Deposit Insurance
              Corporation insurance limit of $100,000.

NOTE 17 -     SEGMENT INFORMATION

              The percentage of the Company's revenues is derived from the
              following segments. The Company's operations were not segmented in
              2002.

              Telephone minute billing plus messaging services,
                including facsimile, nodal, and e-mail related services    55%
              Mobile phone services                                         7%
              Calling cards                                                38%
                                                                        ------
                                                                          100%
                                                                        ======

              The Company has four major types of customers:

               o    Residential - These customers either must dial "dial 1
                    service" or acquire a box that dials automatically.

               o    Commercial - Smaller business are treated the same as
                    residential customers. Larger businesses' PBX units are
                    programmed.

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

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



                                      F-24
<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------


NOTE 17 -     SEGMENT INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
                                            TELEPHONE AND
                                              MESSAGING
                                              SERVICES                MOBILE PHONES          CALLING CARDS             TOTAL
                                          ----------------            --------------       ----------------       ----------------
<S>                                       <C>                         <C>                  <C>                     <C>
            Commercial and residential    (pound)2,981,802            (pound)361,517              (pound)--       (pound)3,343,319
            Story Telecom Limited                       --                        --              2,715,231              2,715,231
            Governmental agencies                    5,663                        --                     --                  5,663
            Resellers                            1,009,317                   141,958                 66,693              1,217,968
            Totals                        (pound)3,996,782            (pound)503,475       (pound)2,781,924       (pound)7,282,181

<CAPTION>
                                                                         Converted into U.S. dollars  for convenience
                                                                         --------------------------------------------
                                            TELEPHONE AND
                                              MESSAGING
                                              SERVICES                MOBILE PHONES          CALLING CARDS             TOTAL
                                          ----------------            --------------       ----------------       ----------------
<S>                                       <C>                         <C>                  <C>                     <C>
           Commercial and residential           $5,307,608                  $643,500                    $--             $5,951,108
           Story Telecom Limited                        --                        --              4,833,111              4,833,111
           Governmental agencies                    10,080                        --                     --                 10,080
           Resellers                             1,796,584                   252,685                118,714              2,167,983
           Totals                               $7,114,272                  $896,185             $4,951,825            $12,962,282
</TABLE>


              Residential and commercial customers are combined as one segment
              due to both having similar economic characteristics.

              Originally, the Company's revenue was derived from just telephone
              minute billing and messaging services. As the Company expanded and
              technology improved additional revenue segments were introduced to
              monitor the mobile phone and calling card services.



                                      F-25


<PAGE>

--------------------------------------------------------------------------------
                           XFONE, INC. AND SUBSIDIARY
--------------------------------------------------------------------------------


NOTE 18 -    SUBSEQUENT EVENTS

             On February 12, 2004, the Company closed an offering of 986,737
             restricted shares of common stock, with 1,136,737 Warrants A and
             986,737 Warrants B. The Company sold 969,237 shares of common
             stock with a Warrant A and B attached for aggregate proceeds of
             $2,907,700. Each Warrant A, which is not freely transferable,
             entitles the owner to purchase one share, until not later than
             January/February 2009 at an exercise price of $5.50. Each Warrant
             B, which is not freely transferable, entitles the owner to
             purchase one share, until not later than until the earlier of 10
             days after this registration statement is effective or 10 days
             after our common stock is traded on the NASDAQ Small Cap or the
             American Stock Exchange. The Warrants B are exercisable at an
             exercise price of $3.50 and expire 375 days from the date of
             purchase of the attached shares of restricted common stock. The
             Company sold shares with attached Warrants A and B to a total of
             16 persons and 8 entities. During January 2004, the Company
             granted 17,510 restricted shares of its common stock with 17,500
             each of Warrants A and B attached. During January and February
             2004, the Company granted a total of 150,000 Warrants A.

             On January 1, 2004, the Company entered into a cancelable agreement
             with an investment relations firm which is cancelable on a month's
             notice and is renewable annually. This agreement provides a monthly
             payment of $3,500 per month plus 1,000 shares of the Company's
             common stock increasing to $4,500 plus 1,200 shares per month of
             the Company's stock when it becomes listed on NASDAQ.



                                      F-26

<PAGE>


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

Not Applicable

ITEM 8A.  CONTROLS AND PROCEDURES.

As of December 31, 2003, an evaluation was performed under the supervision and
with the participation of our management, including our Chief Executive Officer
and Principal Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on that evaluation,
our management, including our Chief Executive Officer and Principal Financial
Officer, concluded that our disclosure controls and procedures were effective as
of December 31, 2003.

There have been no significant changes in our internal control over financial
reporting during the fiscal year ended December 31, 2003, or subsequent to
December 31, 2003, that have materially affected or are reasonably likely to
materially affect, our internal control over financial reporting.

                                   PART III.

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

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


                                       45
<PAGE>

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
 Name                   Age    Position                                  Term of Office
---------------------------------------------------------------------------------------------------------------------
<S>                   <C>      <C>                                       <C>
Abraham Keinan          54     Chairman of the Board of Directors        One Year (or until replaced by a new
Director)
---------------------------------------------------------------------------------------------------------------------
Guy Nissenson           29     President, Principal Executive Officer,
                               Principal Financial Officer,
                               Principal Accounting Officer and          One Year (or until replaced by a new
Director)
                               Director
---------------------------------------------------------------------------------------------------------------------
Eyal Harish             51     Director                                  One Year (or until replaced by a new
Director)
----------------------------------------------------------------------------------------------------------------------
Shemer Schwartz         29     Director                                  One Year (or until replaced by a new
Director)
----------------------------------------------------------------------------------------------------------------------
</TABLE>

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

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


                                       46
<PAGE>


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

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

SIGNIFICANT EMPLOYEES

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

Mr. Bryan Franks, 60 years of age, has been the Marketing Manager of Swiftnet,
Ltd's Partner Division since April 2001. As our Marketing Manager, he has been
responsible for recruiting and managing Swiftnet's resellers and agents. In May
2003, Mr. Franks became Swiftnet's Director of Sales and Marketing. From April
1998 to April 2001, Mr. Franks was employed as a Director of Sales and Marketing
with Specialist DIY, Ltd., an import and distributor of a do it yourself
products firm located in Manchester, United Kingdom.

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


                                       47
<PAGE>


FAMILY RELATIONSHIPS

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

On May 5, 2000, Swiftnet, Ltd. entered into an 18-month renewable consulting
agreement with Campbeltown Business, Ltd., a private company incorporated in the
British Virgin Island which is owned by Guy Nissenson, our Principal Executive
Officer/President and Director, and his family. On November 5, 2001 and May 11,
2003, we renewed this agreement for additional 18 month periods. Guy Nissenson,
our Principal Executive Officer/President, has beneficial ownership of 19.99% or
1,220,336 shares of our common stock, which consist of the following: (a)
720,336 shares of our common stock owned by Campbeltown Business Ltd., a British
Virgin Islands corporation, in which Mr. Nissenson owns 20% and his family are
also shareholders; (b) 500,000 options to purchase shares of our common stock
that Campbeltown Business Ltd has the right to acquire.

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

LEGAL PROCEEDINGS

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

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

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

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

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

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


                                       48
<PAGE>


COMMITTEES OF THE BOARD OF DIRECTORS

We presently do not have an audit committee, compensation committee, nominating
committee, an executive committee of our board of directors, stock plan
committee or any other committees. However, our board of directors is
considering establish various committees during the current fiscal year.
Currently, our Board of Directors makes the decisions regarding compensation,
our audit, the appointment of auditors, and the inclusion of financial
statements in our periodic reports.

AUDIT COMMITTEE FINANCIAL EXPERT

We have no financial expert. We believe the cost related to retaining a
financial expert at this time is prohibitive.

CODE OF ETHICS

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

ITEM 10. EXECUTIVE COMPENSATION.

The following table sets forth summary information concerning the compensation
received for services rendered to it during the current year and the years ended
December 31, 2001 and 2002, and 2003 respectively by our Chairman of the Board,
Abraham Keinan who is the managing director of Swiftnet, and Guy Nissenson, who
is our Principal Executive Officer/ President. Abraham Keinan is our only
executive officer who received aggregate compensation during our last fiscal
year which exceeded, or would exceed on an annualized basis, $100,000.


                                       49
<PAGE>


<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Summary Compensation Chart
--------------------------------------------------------------------------------------------------------------------------
                         Annual Compensation                                         Long Term Compensation
--------------------------------------------------------------------------------------------------------------------------
Name &           Year  Salary ($)        Bonus($)         Other($)           Restricted    Options($)  L/Tip($)   All
Position                                                                     Stock Awards                        Other
--------------------------------------------------------------------------------------------------------------------------
<S>              <C>                   <C>             <C>                   <C>           <C>         <C>       <C>
Abraham Keinan   2003 (pound)40,622*   (pound)60,000   (pound)16,691              0           0          0         0
Chairman               ($69,057)       ($102,000)      ($28,884)

                 2002 (pound)30,000    (pound)6,372    (pound)45,000              0           0          0         0
                       ($51,000)        ($9,588)        ($67,500)

                 2001 (pound)30,000         0                0                    0           0          0         0
                       ($42,300)

Guy Nissenson    2003 (pound)43,500**       0                0                    0           0          0         0

Principal              ($74,820)
Executive
Officer          2002(pound)33,000          0                0                    0           0          0         0
                       ($52,800)

                 2001(pound)21,000          0                0                    0           0          0         0
                       ($30,450)
--------------------------------------------------------------------------------------------------------------------------
</TABLE>


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

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


                                       50
<PAGE>


**On April 15, 1003, our Board of Directors approved of a salary increase for
our Principal Executive Officer from UKP2,500 ($4,300) to UKP4,000 ($6,800) per
month. Guy Nissenson's total salary of $73,950 is composed of: (a) $4,250 per
month from January to March 2003; and (b) $6,800 per month from April 2003 to
December 2003. On May 11, 2000, we entered into a written employment agreement
with our Principal Executive Officer/President, Guy Nissenson. Under the
agreement, Mr. Nissenson will work on business development, sales and marketing.
At that time, we agreed to pay him a salary of $1,473 (1000 Pound Sterling) per
month, subject to a future increase of $1,473 (1000 Pound Sterling) if Swiftnet
reaches average sales of $257,775 (175,000 Pound Sterling) per month. In
addition, we have agreed that if we grant options to Abraham Keinan, we will
grant Mr. Nissenson options to buy Swiftnet or us according to the following
formula: 50% of the options with same price and conditions that Mr. Keinan will
receive, subject to our reaching a benchmark of $176,760 (120,000 Pound
Sterling) average sales per month during Mr. Nissenson activities or in the 12
months thereafter. The agreement with Mr. Nissenson can be terminated by either
party with one month notice.

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

On August 21, 2003, we issued 400,000 options to acquire shares of our
restricted common stock to Abraham Keinan. These options were issued to Abraham
Keinan for services rendered by Mr. Keinan as the Chairman of our Board of
Directors. On March 1, 2004, our Board of Directors cancelled the options issued
to Mr. Keinan.

On August 21, 2003, we issued 200,000 options to acquire shares of our
restricted common stock to Guy Nissenson. These options were issued to Guy
Nissenson for services rendered by Mr. Nissenson as our President and Principal
Executive Officer. On March 1, 2004, our Board of Directors cancelled the
options issued to Mr. Nissenson.


                                       51
<PAGE>


BOARD COMPENSATION

Other than provide above our directors do not receive any compensation for their
services as directors, although some directors are reimbursed for reasonable
expenses incurred in attending board or committee meetings.

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

The following tables sets forth, as of March 30, 2004, certain information with
respect to the beneficial ownership of our common stock by each stockholder
known by us to be the beneficial owner of more than 5% of our common stock and
by each of our current directors and executive officers. Each person has sole
voting and investment power with respect to the shares of common stock, except
as otherwise indicated. Information relating to beneficial ownership of common
stock by our principal stockholders and management is based upon information
furnished by each person using "beneficial ownership" concepts under the rules
of the Securities and Exchange Commission. Under these rules, a person is deemed
to be a beneficial owner of a security if that person has or shares voting
power, which includes the power to vote or direct the voting of the security, or
investment power, which includes the power to vote or direct the voting of the
security. The person is also deemed to be a beneficial owner of any security of
which that person has a right to acquire beneficial ownership within 60 days.
Under the Securities and Exchange Commission rules, more than one person may be
deemed to be a beneficial owner of the same securities, and a person may be
deemed to be a beneficial owner of securities as to which he or she may not have
any pecuniary beneficial interest. We are unaware of any contract or arrangement
which could result in a change in control of our company.

The following table assumes, based on our stock records, that there are
6,105,445 shares issued and outstanding as of March 31, 2004.

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

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

      o     Each executive officer;

      o     Each director or nominee to become a director; and o All directors
            and executive officers as a group.


                                       52
<PAGE>

<TABLE>
<CAPTION>
Security Ownership of Beneficial Owners
------------------------------------------------------------------------------------------------------------------
Title of               Name & Address of                   Amount of Beneficial   Nature of             Percent of
Class                  Beneficial Owner                    Ownership              Ownership             Class
------------------------------------------------------------------------------------------------------------------
<S>                    <C>                                 <C>
Common                 Abraham Keinan                      3,644,664            Direct/Indirect*        59.70
                       Chairman of the Board
                       4 Wycombe Gardens
                       London Nw11 8al
                       United Kingdom
------------------------------------------------------------------------------------------------------------------
Common                 Crestview Capital                     500,000            Direct                   8.19**
                       Master LLC**
                       95 Revere Drive, Suite F
                       Northbrook, Illinois 60062
------------------------------------------------------------------------------------------------------------------
Common                 Guy Nissenson                       1,220,336            Direct/Indirect***      19.99
                       Principal Executive Officer
                       President/Director
                       3A Finchley Park
                       London N12 9JS
                       United Kingdom

------------------------------------------------------------------------------------------------------------------
Total                                                      5,365,000                                    87.88
</TABLE>

*    Our Chairman of the Board, Abraham Keinan's 59.70% beneficial ownership
     consists of (a) 2,342,333 shares of our common stock individually owned by
     Mr. Keinan; and (b) ownership of 1,302,331 shares of common stock owned by
     Vision Consultants, a Nassau, Bahamas incorporated company that is 100%
     owned by Mr. Keinan, and is located at Kings Court, POB N-3944, Bay
     Street, Nassau, Bahamas. The sole business purpose of Vision Consultants
     is to hold and manage Mr. Keinan's investments. On August 21, 2003, we
     issued 400,000 options to Mr. Keinan, but on March 1, 2004, our Board of
     Directors cancelled these options.

**   Crestview Capital Master LLC, a selling shareholder, owns 500,000 shares
     of our common stock; however, upon the exercise of Warrants A and B issued
     to Crestview Capital Master, it will offer an additional 1,000,000 shares
     of our common stock. With a total of 1,500,000 shares that Crestview
     Capital Master LLC will offer, its beneficial ownership would be 24.60%.

***  Guy Nissenson, our Principal Executive Officer/President, has beneficial
     ownership of 19.99% or 1,220,336 shares of our common stock, which consist
     of the following: (a) 720,336 shares of our common stock owned by
     Campbeltown Business Ltd., a British Virgin Islands corporation, in which
     Mr. Nissenson owns 20% and his family are also shareholders; (b) 500,000
     options to purchase shares of our common stock that Campbeltown Business
     Ltd has the right to acquire in accordance with a Stock Purchase
     Agreement, clarified on July 30, 2001 in which Cambeltown Business, Ltd.
     has an option to 500,000 shares of our outstanding stock if we become
     listed on the OTC Bulletin Board before December 31, 2005. We became
     listed on the OTC Bulletin Board on March 25, 2002. Campbeltown Business,
     Ltd. has not exercised its option as of March 31, 2004, and Campbeltown
     Business, Ltd. has until December 31, 2005 to exercise its option.
     Campbeltown Business, Ltd. also has a first right of refusal on any of our
     securities offerings until December 31, 2005, so long as Campbeltown
     Business, Ltd. owns more than 4% of our outstanding stock. To the extent
     that we issue any shares to Abraham Keinan. Campbeltown Business, Ltd. has
     the right to purchase or acquire such number of our shares on the same
     terms and conditions as Abraham Keinan such that the relative percentage
     ownership of Abraham Keinan and Campbeltown Business, Ltd. remains the
     same. On August 21, 2003, we issued 200,000 options to acquire our shares
     to Mr. Nissenson, but on March 1, 2004 these options were cancelled by our
     Board of Directors.


                                       53
<PAGE>

<TABLE>
<CAPTION>
Security Ownership of Management:
---------------------------------------------------------------------------------------------------------------
Title of               Name & Address of                Amount of Beneficial   Nature of             Percent of
Class                  Beneficial Owner                 Ownership              Ownership             Class
---------------------------------------------------------------------------------------------------------------
<S>                    <C>                              <C>                   <C>                    <C>
Common                 Abraham Keinan                      3,644,664          Direct/Indirect*       59.70
                       Chairman of the Board
                       4 Wycombe Gardens
                       London NW11 8AL
                       United Kingdom
---------------------------------------------------------------------------------------------------------------
Common                 Guy Nissenson                       1,220,336          Direct/Indirect**      19.99
                       Principal Executive Officer
                       President/Director
                       3A Finchley Park
                       London N12 9JS
                       United Kingdom

---------------------------------------------------------------------------------------------------------------
Common                 Eyal Harrish                           15,000          Direct                  0.25
                       Director
                       3 Moshe Dayan Street
                       Raanana, Israel
---------------------------------------------------------------------------------------------------------------
Common                 Shemer Schwartz                             0          Not Applicable          0.0
                       Director
                       8 Haamoraim Street
                       Tel-Aviv, Israel
---------------------------------------------------------------------------------------------------------------
Common                 All directors and
                       executive officers                  4,880,000                                 79.94
                       as a group
---------------------------------------------------------------------------------------------------------------
</TABLE>


*   Our Chairman of the Board, Abraham Keinan's 66.25% beneficial ownership
    consists of: (a) ownership of 1,302,331 shares of common stock owned by
    Vision Consultants, a Nassau, Bahamas incorporated company that is 100%
    owned by Mr. Keinan, and is located at Kings Court, POB N-3944, Bay
    Street, Nassau, Bahamas. The sole business purpose of Vision Consultants
    is to hold and manage Mr. Keinan's investments. On August 21, 2003, we
    issued 400,000 options to Mr. Keinan, but on March 1, 2004, our Board of
    Directors cancelled these options.

**  Guy Nissenson, our Principal Executive Officer/President, has beneficial
    ownership of 19.99% or 1,220,336 shares of our common stock, which
    consists of the following: (a) 720,336 shares of our common stock owned by
    Campbeltown Business Ltd., a British Virgin Islands corporation, in which
    Mr. Nissenson has a 20% and his family are also shareholders; (b) 500,000
    options to purchase shares of our common stock that Campbeltown Business
    Ltd has the right to acquire in accordance with a Stock Purchase
    Agreement, clarified on July 30, 2001 in which Cambeltown Business, Ltd.
    has an option to 500,000 shares of our outstanding stock if we become
    listed on the OTC Bulletin Board before December 31, 2005. We became
    listed on the OTC Bulletin Board on March 25, 2002. Campbeltown Business,
    Ltd. has not exercised its option as of March 31, 2004, and Campbeltown
    Business, Ltd. has until December 31, 2005 to exercise its option.
    Campbeltown Business, Ltd. also has a first right of refusal on any of our
    securities offerings until December 31, 2005, so long as Campbeltown
    Business, Ltd. owns more than 4% of our outstanding stock. To the extent
    that we issue any shares to Abraham Keinan. Campbeltown Business, Ltd. has
    the right to purchase or acquire such number of our shares on the same
    terms and conditions as Abraham Keinan such that the relative percentage
    ownership of Abraham Keinan and Campbeltown Business, Ltd. remains the
    same. On August 21, 2003, we issued 200,000 options to acquire our shares
    to Mr. Nissenson, but on March 1, 2004 these options were cancelled by our
    Board of Directors.

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



                                       54
<PAGE>


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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.

We have, along with our subsidiary, Swiftnet, Ltd., provided a loan to Abraham
Keinan. As of November 30, 2003, a total of 293,534 Pound Sterling or
approximately $504,879 as of November 30, 2003. We provided the loan to Mr.
Keinan to promote his loyalty and continued service as our Chairman of the Board
of Directors. This loan is reflected in a promissory note payable in ten equal
installments of approximately $19,150 beginning January 1, 2002 and ending on
January 1, 2011. This note is a non-interest bearing note. As of December 31,
2003, the loan amounted to (pound)286,736 ($510,390). In March 2004 Mr. Keinan
signed a note to repay his loan in three installments:

2007 (pound)  54,070      $ 96,244
2008 (pound) 116,333      $207,072
2009 (pound) 116,333      $207,072

On May 5, 2000, Swiftnet, Ltd. entered into an 18-month renewable consulting
agreement with Campbeltown Business, Ltd., a private company incorporated in the
British Virgin Island which is owned by Guy Nissenson, our Principal Executive
Officer/President and Director, and his family. On November 5, 2001 and May 11,
2003, we renewed this agreement for additional 18 month periods. We plan to
renew this agreement for an additional 18 month term after the expiration of the
current term on November 11, 2004. Under the terms of this agreement,
Campbeltown Business, Ltd. agreed to provide the following services to us: (a)
analysis of proposed acquisitions; (b) seek markets for our telecommunications
services in additional countries; (c) formulate strategies for our future growth
plans; and (d) introduce potential customers to our business. We are obligated
to pay Campbeltown Business, Ltd. 2,000 UK Pound Sterling (approximately $2,946)
per month, along with an additional monthly performance bonus based upon
Swiftnet, Ltd., attaining the following revenue levels for consulting services
in the area of business development and management activities:

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


                                       55
<PAGE>


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

On June 19th, 2000, Swiftnet, Ltd. entered into a Stock Purchase Agreement with
Abraham Keinan and Campbeltown Business, Ltd., a company owned by Guy Nissenson
and his family. This agreement provided that if Campbeltown Business, Ltd. was
to invest $100,000 in Swiftnet, it would receive in exchange 20% of the total
shares of Swiftnet. In June 2000, Campbeltown Business Ltd. invested the
$100,000 in Swiftnet. We acquired Swiftnet, Ltd. and Campbeltown received
720,336 shares of our common stock for its 20% interest in Swiftnet, Ltd.

Campbeltown Business, Ltd. has the option to purchase additional shares of our
common stock that will represent 10% of all issued shares after the transaction
for $200,000 US. This transaction can be executed either by Swiftnet issuing new
shares, or by Abraham Keinan selling his private shares (as long as he has an
adequate amount of shares), as Abraham Keinan will decide. This option will
expire on December 31, 2005. Campbeltown Business, Ltd. can exercise this option
in parts. If this option is exercised before the conclusion of Adar Group
transaction Mr. Keinan and Swiftnet will make sure and guarantee that the shares
owned by Campbeltown Business, Ltd. because of exercising this option will be
exchanged by the same percentage of ownership in our common stock. It is agreed
that if Campbeltown Business, Ltd. exercised only part of the option buying our
shares it will have the right to exercise the remainder of the option for our
shares at the same terms. As long as Swiftnet is not a public company or is
merged/bought/taken over by a third party only half of the option above could be
taken.

Campbeltown Business, Ltd. will have the right to participate under the same
terms and conditions in any investment or transaction that involve equity rights
in Swiftnet or us conducted by Abraham Keinan at the relative ownership portion.

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

On October 15, 2002, our Board of Directors approved a bonus and success fee
whereby if we receive monthly revenues in excess of $485,000 then Mr. Keinan and
our consultant, Campbeltown Business, Ltd. shall receive 1% of the revenues for
each month where our revenues reach $485,000 up to a maximum of one million
dollars. On April 10, 2003, Mr. Keinan and Campbeltown Business Ltd waived their
right to receive 1% of the revenues generated that are derived from Story
Telecom.

Other than the above transactions, we have not entered into any material
transactions with any director, executive officer, and nominee for director,
beneficial owner of five percent or more of our common stock, or family members
of such persons within the last five years and we have not other than the above
transactions, we have not entered into any material transactions with any
promoter within the last five years.


                                       56
<PAGE>


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

<TABLE>
<CAPTION>
Exhibit
 Number                            Description
-------                            -----------
<S>       <C>
2.        Agreement and plan or reorganization between Xfone, Inc. and Swiftnet Ltd.
          dated September 20, 2000 (1)

3.1       Articles of Incorporation of Xfone, Inc.(1)

3.2a      Bylaws of Xfone, Inc.(1)

3.2b      Amended Bylaws of Xfone, Inc.(4)

3.3       Articles of Incorporation of Swiftnet, Ltd.(1)

3.4       Bylaws of Swiftnet, Ltd.(1)

3.5       Amended bylaws of Xfone, Inc.(3)

4.        Specimen Stock Certificate(1)

5.        Opinion of Hamilton, Lehrer & Dargan, P.A.

10.1      Agreement between Swiftnet Ltd. and Guy Nissenson dated May 11, 2000(1)

10.2      Employment Agreement with Bosmat Houston dated January 1, 2000(1)

10.3      Loan Agreement with Swiftnet Ltd., Guy Nissenson, and Nissim Levy dated
          August 5, 2000(1)

10.4      Promissory Note executed between Xfone and Swiftnet Ltd. dated September
          29, 2000(1)

10.5      Stock Purchase Agreement between Swiftnet, Ltd, Abraham Keinan, and
          Campbeltown Business, Ltd. dated June 19, 2000(1)

10.6      Consulting Agreement between Swiftnet, Ltd. and Campbeltown Business, Ltd.
          dated May 5, 2000(1)

10.7      Agreement with Campbeltown Business Ltd. dated July 30, 2001(1)

10.8      Contract with WorldCom International, Ltd. dated June 20, 1998(1)

10.9      Contract with VoiceNet Inc. dated April 11, 2000(1)

10.10     Contract with InTouchUK.com Ltd. dated April 25, 2000(1)

10.11     Letter of Understanding from Campbeltown Business, Ltd. to Xfone, Inc.
          dated July 30, 2001 (2)

10.12     Agreement between Adar International, Inc./Mr. Sidney J. Golub and
          Swiftnet dated April 6, 2000 (2)

10.13     Lease Agreement between Elmtree Investments, Ltd. and Swiftnet, Ltd. dated
          December 4, 1991 (2)

10.14     Lease Agreement between Postwick Property Holdings Limited and Swiftnet,
          Ltd. dated October 8, 2001.(2)

10.15     Agreement between Xfone, Inc., Swiftnet, Ltd., and Nir Davidson dated
          September 30, 2002 (5)


21.       List of Subsidiaries(1) 23. Consent of Chaifetz & Schreiber, P.C. 24.
          Consent of Hamilton, Lehrer & Dargan, P.A. included in Exhibit 5
</TABLE>


----------

(1)   Denotes previously filed exhibits: filed on August 10, 2001 with Xfone,
      Inc.'s SB-2 registration statement, file # 333-67232.

(2)   Denotes previously filed exhibits: filed on October 16, 2001 with Xfone,
      Inc.'s SB-2/Amendment 1 registration statement, file # 333-67232.

(3)   Denotes previously filed exhibit: filed on November 28, 2001 with Xfone,
      Inc.'s SB-2/Amendment 2 registration statement, file # 333-67232.

(4)   Denotes previously filed exhibit: filed on December 5, 2002 with Xfone,
      Inc.'s Form 8-K.

(5)   Denotes previously filed exhibit: filed on March 3, 2003 with Xfone,
      Inc.'s SB-2/Post Effective Amendment No. 2 registration statement, file #
      333-67232


                                       57
<PAGE>


We hereby incorporate the following additional documents by reference:

(a)   our Forms 10-KSB for the year ended December 31, 2001 which was filed on
      March 27, 2002, and for the year ended December 31, 2002 which was filed
      on March 31, 2003;

(b)   our Registration Statement on Form SB-2 and all amendments thereto which
      was filed on August 10, 2001 and amended on October 16, 2001, November 28,
      2001, December 27, 2001, December 28, 2001, February 4, 2002, March 3,
      2003, and April 8, 2003;

(c)   our Forms 10-QSB for the periods ended March 31, 2002 which was filed on
      May 14, 2002, June 30, 2002 which was filed on August 13, 2002 and amended
      on August 20, 2002, September 30, 2002 which was filed on November 14,
      2002, March 31, 2003 which was filed on May 15, 2003, June 30, 2003 which
      was filed on August 14, 2003, and September 30, 2003 which was filed on
      November 10, 2003.

      (b)   Reports on Form 8-K

We filed a Form 8-K on February 18, 2004 pertaining to Item 5 - Other Events,
which disclosed completion of our private placement during January and February
2004, in which we sold to certain investors an aggregate of 969,237 shares of
common stock (the "Shares") at a purchase price of $3.00 per share (the
"Financing") and each investor in the financing was also granted a Warrant A and
Warrant B to purchase a number of shares of common stock equal to one hundred
percent (100%) of the Shares purchased by that investor in the Financing.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

AUDIT FEES
The aggregate fees billed for the fiscal year ended December 31, 2003 for
professional services rendered by the principal accountant for the audit of our
annual financial statements and review of the financial statements included in
our Form 10-KSB or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for these fiscal
periods were estimated as follows: We paid our accountant, Chaifetz & Schreiber,
P.C., $33,000.


                                       58
<PAGE>


                                   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.

By /s/Guy Nissenson                                      _________________, 2004
   -------------------------
   Guy Nissenson, President,
   Principal Executive Officer,Principal Financial Officer,
   Principal Accounting Officer, and Director


In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.


By /s/Guy Nissenson                                      _________________, 2004
   -------------------------
   Guy Nissenson, President,
   Principal Executive Officer,Principal Financial Officer,
   Principal Accounting Officer, and Director

By /s/ Abraham Keinan                                  ___________________, 2004
   -------------------------
   Abraham Keinan
   Chairman of the Board of Directors