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

                                  FORM 10-KSB/A
                                 AMENDMENT NO. 2

            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 $ 5,917,513 as determined by the closing price of $3.40 on
June 4, 2004.

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

As of June 7, 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]

<PAGE>


                                   XFONE, INC.

                                      INDEX

Part I.
Item 1.  Description of Business .......................................  3
Item 2.  Description of Property ....................................... 23
Item 3.  Legal Proceedings ............................................. 24
Item 4.  Submission of Matters to a Vote of Security Holders ........... 24

Part II.
Item 5.  Market for Common Equity and Related Stockholder Matters ...... 25
Item 6.  Management's Discussion and Analysis or Plan of Operation...... 39
Item 7.  Financial Statements .......................................... F-1
Item 8.  Changes in and Disagreements with Accountants
         and Financial Disclosure ...................................... 52
Item 8A. Controls and Procedures ....................................... 52

Part III.
Item 9.  Directors, Executive Officers, Promoters and Control
         Persons; Compliance with Section 16(a) of the Exchange Act .... 52
Item 10. Executive Compensation ........................................ 56
Item 11. Security Ownership of Certain Beneficial Owners and
         Management and Related Stockholder Matters .................... 58
Item 12. Certain Relationships and Related Transactions ................ 61
Item 13. Exhibits and Reports on Form 8-K .............................. 69
Item 14. Principal Accountant Fees and Services ........................ 70


                                        2

<PAGE>

                                    PART I.

ITEM 1. DESCRIPTION OF BUSINESS.

BUSINESS

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

         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.


                                       3
<PAGE>

         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.  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,
                  including sending and receiving customer facsimiles.

         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.

         o        Story  Telecom:  Initiates,  markets and  distributes  prepaid
                  calling cards that are served by our switch and systems. Story
                  supplies the prepaid  calling cards to retail  stores  through
                  its network of dealers.  These cards are sold in 5, 10, and 20
                  United Kingdom pound  denominations.  The calling card enables
                  the  holder to call  anywhere  in the world by  dialing a toll
                  free number from any  telephone  that routes the holder's call
                  to our Interactive  Voice Response  System that  automatically
                  asks for the  holder's  private pin code,  validates  the code
                  dialed by the  customer,  and tells the credit  balance of the
                  card.  The  holder  is then  instructed  to dial to his or her
                  desired  destination,  at  which  time our  Interactive  Voice
                  Response  System tells the holder how long he or she can speak
                  according  to the  balance  on the  card and what the cost per
                  minute is. The holder of the card can use the card  repeatedly
                  until the balance is zero.

                                       4
<PAGE>

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

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        Telesis  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.

                                       5
<PAGE>

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.

Discount Telephone Rates:

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

         o        For a call from the United  Kingdom to the United  States,  we
                  charge between 3 United Kingdom pence ($0.05) per minute while
                  British Telecom charges 17.5 to 20 United Kingdom pence ($0.32
                  to $0.36) per minute;

         o        For a call from the United  Kingdom to Australia,  we charge 3
                  United Kingdom pence ($0.05) per minute while British  Telecom
                  charges  33.30 to 41.70 United  Kingdom pence per minute ($0.6
                  to $0.74); and

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

Our Customers:

We have four major types of customers:

         o        Residential  - These  customers  either must dial a four digit
                  access code 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
                  Private Branch  Exchange Unit,  otherwise known as a PBX Unit,
                  which is a centralized answering and calling System also known
                  as a switchboard.  We program the PBX Unit of our customers so
                  that all of their calls are routed to us directly, and to save
                  the customer the need to dial a four digit access code.

         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 37 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.

                                       6
<PAGE>

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.

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.

                                       7
<PAGE>

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

         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.

                                       8
<PAGE>

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.

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.

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.

                                       9
<PAGE>

Material Agreements:

RESELLER AGREEMENTS

We have agreements with  approximately  20 resellers.  The following  agreements
represent our principal reseller agreements.

Worldnet Reseller Services Agreement

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

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;


                                       10
<PAGE>

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

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


                                       11
<PAGE>

Newco Agreement

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

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

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

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

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

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

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

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

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

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

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

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


                                       12
<PAGE>

Agreement between Dan Kirschner and Swiftnet, Ltd.

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

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

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

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

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

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

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

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

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

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

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

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

This bonus is subject to the following pre-conditions:

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

      (b)   Mr. Kirschner will still act as Auracall's Managing Director.

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

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


                                       13
<PAGE>

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

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

SUPPLIER AGREEMENTS

We have  approximately  10 agreements  with  suppliers of telephone  routing and
switching services. The following represent material supplier agreements.

Wholesale Master Services Agreement with WorldCom International, Ltd.

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

Open Air Agreement

Swiftnet has an April 2, 2003 agreement with Easyair Limited which is located in
London,  United Kingdom,  and is otherwise known as Openair.  In this agreement,
OpenAir  agrees to sell and Swiftnet  agrees to purchase goods and services that
Swiftnet orders according to OpenAir's price list. In practice,  this price list
has changed on a daily or weekly basis.  OpenAir  reserves the right, by written
notice to  Swiftnet,  to increase  the price of goods or services to reflect any


                                       14
<PAGE>

increase in  OpenAir's  cost.  Swiftnet is  required to pay  OpenAir's  invoices
within 45 days of the date of the invoice.  If Swiftnet fails to pay the invoice
within  that  45  day  period,  OpenAir  may  charge  Swiftnet  interest  on the
outstanding  amount at 4% per annum of the Yorkshire  Bank Plc base rate and may
suspend  delivery of goods and  services.  The agreement  further  provides that
Swiftnet is required to perform certain obligations to OpenAir,  including:  (a)
use its  reasonable  endeavors  to promote  the resale of goods and  services to
customers;  (b) conform and adhere to OpenAir's  manual for the  soliciting  and
processing  of orders  from  customers;  (c) inform  OpenAir  of any  changes in
Swiftnet's  ownership or  organization  or methods of doing business which might
affect  the  performance  of or  financial  ability  to comply  with  Swiftnet's
obligations under the agreement; and (d) cooperate fully with OpenAir to resolve
any complaints  from  customers.  Swiftnet and OpenAir are required to use their
best endeavors to keep secret and confidential all confidential information. The
terms of the  agreement  is one year and  continues  thereafter  unless  written
notice is provided.

British Telecommunications Agreement

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

Teleglobe International Agreement

Swiftnet  has a May 13, 1996  agreement  with  Teleglobe  International  (United
Kingdom) Ltd., a company located in London, England. In this agreement, Swiftnet
and   Teleglobe   agree  to  connect  and  keep   connected   their   respective
telecommunication  systems allowing  Swiftnet to convey  international  outbound
calls via Teleglobe.  Teleglobe  agrees to convey calls received from Swiftnet's
telecommunications   system  to  the  telephone  number  called  or  to  another
telecommunications  system  connected  to  Teleglobe's  system.  The term of the
agreement  is for an initial  term of 6 months and  continues  in effect  unless
terminated in writing by Swiftnet or Teleglobe by giving notice of not less than
6 months.  The rates  payable by Swiftnet to Teleglobe may vary upon thirty days


                                       15
<PAGE>

written  notice to  Swiftnet.  The billing of the services is based on the total
call seconds per month per  destination.  Teleglobe and Swiftnet are required to
keep in  confidence  all  confidential  information.  Teleglobe and Swiftnet may
terminate the agreement  without  prejudice to the other party by written notice
in the case of a material  breach of the agreement,  any license of either party
is revoked or is terminated,  or if there is an arrangement or composition  with
creditors generally or by a court application or bankruptcy order.

ITXC Corporation Services Agreement

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

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

CONSULTING AGREEMENT

Stern & Company Consulting Agreement

On January 9, 2004, we executed an agreement with Stern and Company,  a business
consultant,  to provide us with the following services: (a) become familiar with


                                       16
<PAGE>

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

PUBLIC RELATIONS AND INVESTOR RELATIONS AGREEMENT

Portfolio PR Agreement

On December 23, 2003,  we executed an agreement  with  Portfolio  PR, Inc.,  to
provide us with public  relations  and investor  relations  services.  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 cities; (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,


                                       17
<PAGE>

$3,500 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.  The warrant
exercise price of $6 and $10 are totally  arbitrary and bears no relationship to
the present or future fair market value of our common stock.

Subsequent to the reporting period ending December 31, 2003, on April 23, 2004,
we canceled our agreement with Portfolio PR Inc. "for cause". In June 2004,
Portfolio PR agreed to receive from us $7,209.09 in cash and 4,000 shares of our
common stock as total and final consideration and further agreed that we would
have no further obligation to pay it any additional cash, shares, warrants, or
any other consideration in connection with this agreement.

SELLING SHAREHOLDER RELATED AGREEMENTS

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

      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.

B. Governing Law

The  Shares  and  Warrant  Purchase  Agreement,   and  the  related  transaction


                                       18
<PAGE>

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

C. Liquidated Damages

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

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.

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


                                       19
<PAGE>

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  0.3% 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 United Kingdom pounds) during 2003,
compared  with a $4.1 billion  dollar long  distance and  international  telecom
market in the United Kingdom  (approximately 2.3 billion United Kingdom pounds),
according to the United Kingdom  regulatory  oversight of these  companies,  the
Office of Communications - United Kingdom, otherwise known as Ofcam, the website
of which may be accessed at www.ofcom.org.uk. Many of our existing and potential
competitors, including approximately 160 licensed telecom carriers in the United
Kingdom, have greater financial,  personnel, marketing, customer bases and other
financial resources significantly greater than ours. Our competitors include:

      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.


                                       20
<PAGE>

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:

Our principal suppliers of telephone routing and switching services according to
the percentage that each provides are:

         o        Teleglobe International -- 35%

         o        British Telecommunications -- 24%

         o        Worldcom -- 20%

         o        ITXC Corporation -- 15%

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 approximately 90%
of our revenues.  We do not anticipate that any other customers will account for
more than 10% of our revenues during 2004.


                                       21
<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.

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 $56,960 US on research and
development. During 2003, we spent $79,304 US on research and development.


                                       22
<PAGE>

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.

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.


                                       23
<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 September 6,
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


                                       24
<PAGE>

                                    PART II.

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

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

                  2004                        Low        High
                  ----                        ---        ----
            First Quarter                     $3.35      $5.75

                  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

                  2002                        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

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 are subject to rules that impose sales practice and
disclosure requirements on broker-dealers who engage in certain transactions
involving a penny stock.

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


                                       25
<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
shareholders to sell their shares in the secondary market and have the effect of
reducing the level of trading activity in the secondary market. These additional
sales practice and disclosure requirements could impede the sale of our
securities. In addition, the liquidity for our securities may be adversely
affected, with a corresponding decrease in the price of our securities. Our
shares are subject to such penny stock rules and our shareholders will, in all
likelihood, find it difficult to sell their securities.


                                       26
<PAGE>

HOLDERS.

At June 7, 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  August  21,  2003,  we  issued  400,000  options  to  acquire  shares of our
restricted common stock to Abraham Keinan.  These options were issued to Abraham
Keinan for services  rendered by Abraham  Keinan as the Chairman of our Board of
Directors.  These options are  exercisable at a price of $0.475 per share.  Each
option  is  convertible  into  one (1)  share of  stock.  These  options  vested
immediately  and expire on August 21,  2008.  We relied upon Section 4(2) of the
Act for the offers and sales to Abraham  Keinan.  We believed  that Section 4(2)
was available  because the offer and sale did not involve a public offering.  On
March 1, 2004, our Board of Directors cancelled these options. This cancellation
was in  accordance  with our August  21,  2003  board  resolution  signed by all
members of the Board of Directors,  including Messsrs Keinan and Nissenson,  the
proposed  recipients  of  the  options,  which  states  that  the  "options  are
cancelable  at the sole  discretion of Xfone for a period not exceeding 210 days
from the date these options are granted.

On  August  21,  2003,  we  issued  200,000  options  to  acquire  shares of our
restricted  common  stock to Guy  Nissenson.  These  options  were issued to Guy
Nissenson for services  rendered by Mr. Nissenson as our President and Principal
Executive Officer. These options are exercisable at a price of $0.475 per share.
Each option is  convertible  into one (1) share of stock.  These options  vested
immediately  and expire on August 21,  2008.  We relied upon Section 4(2) of the
Act for the offers and sales to Guy Nissenson. We believed that Section 4(2) was


                                       27
<PAGE>

available because the offer and sale did not involve a public offering. On March
1, 2004, our Board of Directors  cancelled these options.  This cancellation was
in accordance with our August 21, 2003 board resolution signed by all members of
the Board of Directors,  including  Messsrs Keinan and  Nissenson,  the proposed
recipients of the options,  which states that the "options are cancelable at the
sole discretion of Xfone for a period not exceeding 210 days from the date these
options are granted.

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

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

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

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

         ii. all certificates were marked with restrictive legends;

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

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

In  conjunction  with this  agreement,  from January 2004 to April 2004, we paid
Portfolio PR, Inc.  $7,000 but we made not stock issuances to Portfolio PR, Inc.
In addition,  Portfolio  PR, Inc. did not  exercise any  warrants.  On April 23,
2004, we cancelled the agreement  with  Portfolio PR, Inc. "for cause".  In June
2004,  Portfolio PR, Inc.  agreed to receive from us $7,209.09 in cash and 4,000
shares of our common stock as total and final  consideration  and further agreed
that we would have no further  obligation to pay it any additional cash, shares,
warrants, or other consideration in connection with this agreement.

On January 9, 2004,  we granted  17,500  restricted  shares of our common stock,
17,500 Warrants A, and 17,500 Warrants B to Stern & Company, a limited liability
company  registered in New York which is owned,  managed and  controlled by Shai
Stern, in exchange for strategic  planning related  services.  Each Warrant A is
exercisable  into one share of common  stock at an  exercise  price of $5.50 per
share.  Each  Warrant B is  exercisable  into one  share of  common  stock at an
exercise  price of $3.50 per share.  We agreed to register the 17,500  shares of
common stock, the 17,500 shares  underlying the Warrants A and the 17,500 shares
underlying  the  Warrants B. The Warrants A are  exercisable  at any time before
January 9, 2009.  The  Warrants B 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.  Stern  and  Company  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:


                                       28
<PAGE>

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

         ii. all certificates were marked with restrictive legends;

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

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

On January 9, 2004, in exchange for $300,000,  we sold 100,000 restricted shares
of our common  stock,  100,000  Warrants A, and  100,000  Warrants B to Platinum
Partners  Value  Arbitrage,  a Cayman  Islands based limited  partnership;  Mark
Nordlicht is the Managing Member of Platinum Management LLC, the General Partner
of this limited partnership,  which is a limited liability company registered in
new York.  Each  Warrant A is  exercisable  into one share of common stock at an
exercise price of $5.50 per share.  Each Warrant B is exercisable into one share
of common stock at an exercise  price of $3.50 per share.  We agreed to register
the 100,000 shares of common stock, the 100,000 shares underlying the Warrants A
and the 100,000 shares underlying the Warrants B. The Warrants A are exercisable
at any time before  January 9, 2009.  The Warrants B 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.  Platinum  Management LLC 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.  Countrywide  Partners  had a  preexisting  relationship  with  Guy
         Nissenson, our Principal Executive Officer and President.


                                       29
<PAGE>

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.  On or about  October 27 2003,  we sold an
additional  1,025 restricted  shares of our common stock to WorldNet  Global.com
Ltd. at a price of $2.43 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.

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

On January 15, 2004, we sold 8,500 restricted shares of our common stock,  8,500
Warrants A, and 8,500  Warrants B to Zwi Ecker in  exchange  for  $25,500.  Each
Warrant A is exercisable  into one share of common stock at an exercise price of
$5.50 per share. Each Warrant B is exercisable into one share of common stock at
an exercise price of $3.50 per share.  We agreed to register the 8,500 shares of
common stock,  the 8,500 shares  underlying  the Warrants A and the 8,500 shares
underlying  the  Warrants B. The Warrants A are  exercisable  at any time before
January 15, 2009.  The Warrants B 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. Zwi Ecker had a preexisting  relationship  with Guy Nissenson,  our
         Principal Executive Officer and President.


                                       30
<PAGE>

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

On January 15, 2004, we sold 5,000 restricted shares of our common stock,  5,000
Warrants A, and 5,000  Warrants B to Robert  Langbart in exchange  for  $15,000.
Each  Warrant A is  exercisable  into one share of common  stock at an  exercise
price of $5.50 per share. Each Warrant B is exercisable into one share of common
stock at an exercise  price of $3.50 per share.  We agreed to register the 5,000
shares of common stock, the 5,000 shares underlying the Warrants A and the 5,000
shares  underlying  the Warrants B. The Warrants A are  exercisable  at any time
before January 15, 2009. The Warrants B 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. Robert Langbart had a preexisting  relationship with Guy Nissenson,
         our Principal Executive Officer and President.


                                       31
<PAGE>

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

On January 15, 2004, we sold 7,000 restricted shares of our common stock,  7,000
Warrants A, and 7,000  Warrants B to Errol Derman in exchange for $21,000.  Each
Warrant A is exercisable  into one share of common stock at an exercise price of
$5.50 per share. Each Warrant B is exercisable into one share of common stock at
an exercise price of $3.50 per share.  We agreed to register the 7,000 shares of
common stock,  the 7,000 shares  underlying  the Warrants A and the 7,000 shares
underlying  the  Warrants B. The Warrants A are  exercisable  at any time before
January 15, 2009.  The Warrants B 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. Errol Derman had a preexisting relationship with Guy Nissenson, our
         Principal Executive Officer and President.

On January 15, 2004, we sold 8,000 restricted shares of our common stock,  8,000
Warrants A, and 8,000  Warrants B to Yuval Haim Sobel in exchange  for  $24,000.
Each  Warrant A is  exercisable  into one share of common  stock at an  exercise
price of $5.50 per share. Each Warrant B is exercisable into one share of common
stock at an exercise  price of $3.50 per share.  We agreed to register the 8,000
shares of common stock, the 8,000 shares underlying the Warrants A and the 8,000
shares  underlying  the Warrants B. The Warrants A are  exercisable  at any time
before January 15, 2009. The Warrants B 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:


                                       32
<PAGE>

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

         ii. all certificates were marked with restrictive legends;

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

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

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

On January 15, 2004, we sold 8,400 restricted shares of our common stock,  8,400
Warrants A, and 8,400  Warrants B to Tenram  Investments,  Ltd. in exchange  for
$25,200.  Each  Warrant A is  exercisable  into one share of common  stock at an
exercise price of $5.50 per share.  Each Warrant B is exercisable into one share
of common stock at an exercise  price of $3.50 per share.  We agreed to register
the 8,400 shares of common stock, the 8,400 shares underlying the Warrants A and
the 8,400 shares  underlying  the Warrants B. The Warrants A are  exercisable at
any time before  January 15,  2009.  The  Warrants B 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:


                                       33
<PAGE>

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

         ii. all certificates were marked with restrictive legends;

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

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

On January 15,  2004,  we sold  10,000  restricted  shares of our common  stock,
10,000  Warrants  A, and  10,000  Warrants  B to Michael  Zinn in  exchange  for
$30,000.  Each  Warrant A is  exercisable  into one share of common  stock at an
exercise price of $5.50 per share.  Each Warrant B is exercisable into one share
of common stock at an exercise  price of $3.50 per share.  We agreed to register
the 10,000 shares of common stock,  the 10,000 shares  underlying the Warrants A
and the 10,000 shares  underlying the Warrants B. The Warrants A are exercisable
at any time before  January 15, 2009. The Warrants B 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. Michael Zinn 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. Hamilton, Lehrer & Dargan, P.A. had a preexisting relationship with
         Guy Nissenson, our Principal Executive Officer and President.

On January 25,  2004,  we sold  20,000  restricted  shares of our common  stock,
20,000  Warrants  A, and  20,000  Warrants B to Michael  Weiss in  exchange  for
$60,000.  Each  Warrant A is  exercisable  into one share of common  stock at an
exercise price of $5.50 per share.  Each Warrant B is exercisable into one share
of common stock at an exercise  price of $3.50 per share.  We agreed to register
the 20,000 shares of common stock,  the 20,000 shares  underlying the Warrants A
and the 20,000 shares  underlying the Warrants B. The Warrants A are exercisable
at any time before  January 25, 2009. The Warrants B 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:


                                       34
<PAGE>

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

         ii. all certificates were marked with restrictive legends;

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

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

On January 30,  2004,  we sold  16,667  restricted  shares of our common  stock,
16,667 A Warrants,  and 16,667 B Warrants to Oded Levy in exchange  for $50,000.
Each A Warrant  is  exercisable  into one share of common  stock at an  exercise
price of $5.50 per share. Each B Warrant is exercisable into one share of common
stock at an exercise price of $3.50 per share.  We agreed to register the 16,667
shares of common  stock,  the 16,667  shares  underlying  the A Warrants and the
16,667 shares  underlying the B Warrants.  The A Warrants are exercisable at any
time before January 30, 2009. The B Warrants 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.

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


                                       35
<PAGE>

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

On January 30, 2004, we sold 6,667 restricted shares of our common stock,  6,667
Warrants A, and 6,667  Warrants B to Michael  Epstein in exchange  for  $20,000.
Each  Warrant A is  exercisable  into one share of common  stock at an  exercise
price of $5.50 per share. Each Warrant B is exercisable into one share of common
stock at an exercise  price of $3.50 per share.  We agreed to register the 6,667
shares of common stock, the 6,667 shares underlying the Warrants A and the 6,667
shares  underlying  the Warrants B. The Warrants A are  exercisable  at any time
before January 30, 2009. The Warrants B 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

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.


                                       36
<PAGE>

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

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.

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

On February 11, 2004, we sold 8,334 restricted shares of our common stock, 8,334
Warrants A, and 8,334  Warrants B to Joshua Kazam in exchange for $25,000.  Each
Warrant A is exercisable  into one share of common stock at an exercise price of
$5.50 per share. Each Warrant B is exercisable into one share of common stock at
an exercise price of $3.50 per share.  We agreed to register the 8,334 shares of
common stock,  the 8,334 shares  underlying  the Warrants A and the 8,334 shares
underlying  the  Warrants B. The Warrants A are  exercisable  at any time before
February 11, 2009. The Warrants B 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:


                                       37
<PAGE>

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

         ii. all certificates were marked with restrictive legends;

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

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

On February  12, 2004,  we sold 20,000  restricted  shares of our common  stock,
20,000  Warrants A, and 20,000  Warrants B to The Oberon  Group,  LLC, a limited
liability company registered in New York, which is owned, managed and controlled
by Adam Breslawsky,  in exchange for $60,000. Each Warrant A is exercisable into
one share of common stock at an exercise price of $5.50 per share.  Each Warrant
B is  exercisable  into one share of common stock at an exercise  price of $3.50
per share.  We agreed to register the 20,000 shares of common stock,  the 20,000
shares  underlying the Warrants A and the 20,000 shares  underlying the Warrants
B. The Warrants A are  exercisable  at any time before  February  12, 2009.  The
Warrants B 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. the  Oberon  Group,  LLC had a  preexisting  relationship  with Guy
         Nissenson, our Principal Executive Officer and President.

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

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

         ii. all certificates were marked with restrictive legends;

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

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


                                       38
<PAGE>

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.


                                       39
<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 United Kingdom based  telecommunication  service provider and
international licensed  telecommunication carrier. As of June 3, 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,  we acquired  Swiftnet  which had a business plan to provide
comprehensive telecommunication services and products by integrating new and old
products,  services and ideas through one website.  Swiftnet was incorporated in
1991 under the laws of the United  Kingdom.  Until 1999,  the main  revenues for
Swiftnet were derived from messaging and fax broadcast services. During the year
2000,  Swiftnet  shifted  its  business  focus  and our focus  has  remained  on
telephony voice services  offering  comprehensive  support packages to resellers
and new  services.  Utilizing  automation  and  proprietary  software  packages,
Swiftnet's  strategy is to grow without the need of heavy  investments  and with
lower expenses for operations and registration of new customers.

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 a special 4
                  digit  code to access  our  switch 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  4  digit  code
                  automatically.


                                       40
<PAGE>

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

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

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:


<TABLE>
<CAPTION>
Amounts in UK sterling
                                   Telephone &
                             messaging services          Mobile phones          Calling cards          Total
                           ---------------------- --------------------- ---------------------- ----------------
<S>                                 <C>                     <C>                  <C>              <C>
Commercial and Residential
Customers                           2,981,802.00            36,1517.00                   0.00     3,343,319.00
Story Telecom                                                                    2,715,231.00     2,715,231.00
Government agencies                     5,663.00                                                      5,663.00
Resellers                           1,009,317.00            141,958.00              66,693.00     1,217,968.00
                           ---------------------- --------------------- ---------------------- ----------------
Totals                              3,996,782.00            503,475.00           2,781,924.00     7,282,181.00
                           ====================== ===================== ====================== ================
</TABLE>

                                       41
<PAGE>
<TABLE>
<CAPTION>
Converted into US dollars for convenience

                                   Telephone &
                             messaging services        Mobile phones          Calling cards            Total
                           ---------------------- --------------------- ---------------------- ----------------
<S>                                 <C>                     <C>                  <C>             <C>
Commercial and Residential
Customers                           5,307,607.56            643,500.26                   0.00     5,951,107.82
Story Telecom                               0.00                  0.00           4,833,111.18     4,833,111.18
Government agencies                    10,080.14                  0.00                   0.00        10,080.14
Resellers                             1796584.26             252685.24              118713.54     2,167,983.04
                           ---------------------- --------------------- ---------------------- ----------------
Totals                              7,114,271.96            896,185.50           4,951,824.72    12,962,282.00
                           ====================== ===================== ====================== ================
</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.

Financial Information - Percentage of Revenues

                                             Year ended December 31
                               -------------------------------------------------
                                 2003         2002          2001          2000
                               -------      -------       -------       -------
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%


                                       42
<PAGE>

In April 2004, we plan on  introducing  our Broadband  Internet  connection  and
Wholesale  Line Rental  services;  however,  we do not expect our revenues to be
materially impacted with the introduction of these services until 2005, if ever.

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  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 and major resellers:

<TABLE>
<CAPTION>
                                                 2003                         2002
<S>                                <C>                                  <C>
Regular telephony voice service
and others:                       (pound)4,015,448 ($8,129,171)         (pound)3,737,720
Story Telecom                     (pound)2,715,231 ($4,833,111)         (pound)    3,716
Worldnet                            (pound)551,502 ($981,673)           (pound)  567,694
Total Revenues                    (pound)7,282,181 ($12,962,282)        (pound)3,741,436
</TABLE>

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.

For the year ended  December 31, 2003  approximately  4.4% of our revenues  were
generated by our affiliated entity, Auracall, as compared with 3.2% for the year
ended December 31, 2002.

Our revenues attributable to our affiliated Story Telecom amounted to 37% of our
revenues  during the year ended  December 31, 2003 as compared with 0.1% for the
year ended December 31, 2002. This increase is due to Story Telecom starting its
operations at the end of 2002.


                                       43
<PAGE>

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 will offer some new services and
billing  alternatives to stronger the connection  with our registered  customers
and to enable easy usage of our services to non registered  users. Our agreement
with resellers can be terminated  within a relatively short notice of 7-60 days.
Our largest non affiliated reseller is Worldnet that generated  approximately 6%
of our Revenues in 2003,  Worldnet can  terminate  the  agreement  with a 7 days
notice,  which would adversely  affect our Revenues.  We have  approximately  20
additional active resellers,  none of which generated more that 3% of our annual
revenues. We anticipate that Worldnet will continue to contribute  approximately
the same amount of UK Pounds to our Revenues.

Cost of Revenues.  Cost of revenues consists primarily of traffic time purchased
from telephone  companies and other related charges.  Cost of revenues increased
101% to (pound)4,427,939 ($7,881,731) for the year ended December 31, 2003, from
(pound)2,194,792 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% and for Worldnet is 55%, while the cost of
revenues as a percentage  of the rest of our revenues was 39% 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 new
and old  suppliers  and to the fact that we haven't  reduced  the prices for our
services proportionally.

Cost of revenues breakdown:

                                       44
<PAGE>
<TABLE>
<CAPTION>
                                                   2003                          2002
<S>                                <C>                                  <C>
Regular Telephony Services and others     1,563,293 ($2,782,662)               2,191,287
Story Telecom                             2,561,320 ($4,559,150)                   3,505
Worldnet                                    303,326   ($539,920)                (a)
Total:                             (pound)4,427,939 ($7,881,731)        (pound)2,194,792
</TABLE>

(a) We do not have the cost of revenues  related to Worldnet  for the year ended
December 31, 2002.

Cost of Revenues  attributable  to our affiliated  entity,  Auracall,  Ltd. were
approximately 2.8% of the total cost of revenues for the year ended December 31,
2003 as compared with approximately 1.9% for the year ended December 31, 2002.

Cost of revenues  attributable  to Story Telecom  accounted for 58% of our total
cost of revenues as compared  with 0.15% for the year ended  December  31, 2002.
This  increase is  attributable  to the growth in the revenues  related to Story
Telecom.

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

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 which represents
an 85% (105% in USD)  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.

Research and Development.  Research and development  expenses were (pound)44,553
($79,304)  and  (pound)32,000  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


                                       45
<PAGE>

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  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 agents that promote,  through our customer British Telecom,  the
usage of non  geographical  numbers  similar to 1-800 or 1-900 with no  specific
geographical place.

For the year ended  December  31,  2003 we paid  commissions  to our  affiliated
company  Auracall in the amount of UKP165,389  ($294,392)  that represent 17% of
the total  commissions  paid during the year ended  December 31, 2003.  For year
ended December 31, 2002  commissions  paid to Auracall  represented 42% of total
commissions. The decrease in the percentage of total commissions is attributable
to growth in commission related Revenues that are related to Auracall.

General  and  Administrative  Expenses.   General  and  administrative  expenses
increased by (pound)173,685 ($309,161) to (pound)1,052,310  ($1,873,112) for the
year  ended   December   31,   2003  from   (pound)878,624   ($1,563,951)   from
(pound)878,624  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
increase in our General and Administrative  Expenses is mainly  attributable to:
(a) an increase of  (pound)141,140  ($251,229) in the salaries and benefits paid
to our management and related  employees;  and (b) an increase of  (pound)81,224
($144,579) in the professional fees related to the growth in our operations, our
status  as  a  public  company  and  legal  fees.  Our  bad  debt  decreased  by
(pound)117,452  ($209,064) to (pound)109,532  ($194,966) from  (pound)226,984 in
the year ended December 31, 2002, the decrease of which is  attributable  to two
of our  customers  having filed for  bankruptcy  during  2002,  which caused the
increased bad debt figures for December 31, 2002.  The decrease in total General
and Administrative  expenses as a percentage of revenues is mainly  attributable
to: (a) our 95% growth in revenues; and (b) to the lesser increase of 20% in our
General and Administrative expenses, which was achieved from improvements in our
credit controls, controlling expenses and the usage of automation and computers.


                                       46
<PAGE>

Financing  Expenses.   Financing  expenses,   net,  increased  to  (pound)44,284
($78,824) for the year ended December 31, 2003 from  (pound)12,837  for the year
ended December 31, 2002.

Income  before Taxes.  Income before taxes for the year ended  December 31, 2003
increased by 103% to  (pound)637,901  ($1,135,464) from  (pound)313,794  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 8.6% 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 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  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   for  the  basic  weighted  average  5,030,444  shares  and
(pound)0.04 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 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)501,200
growth in our cash positions.


                                       47
<PAGE>

As of December 31, 2003 34% of our account  receivables are  attributable to our
affiliated company, Story Telecom as compared with less than 1% for December 31,
2002. The 34% of our receivables is due to the fact that 37% of our revenues are
generated by Story Telecom.

We provided Story Telecom a shareholder loan that balanced  UKP15,960  ($28,408)
and UKP14,725 ($26,210) for years ended December 31, 2003 and 2002 respectively.

As of December 31, 2003 our  Affiliated  Auracall  owed us UKP4,533  ($8,068) as
compared with UKP16,196  ($28,829) for December 31, 2002,  this debt is due to a
shareholders loan provided to Auracall for operations.

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  as of December  31,  2002.  The  decrease
represents a repayment of (pound)16,394 ($29,181).  There was an increase in the
loan amount that occurred  after  September 30, 2003 which was due to an expense
advance  provided to Mr.  Keinan,  which was later  expensed out of that account
when Mr. Keinan  submitted his expense report to us. We no longer permit expense
advances to be temporarily  assigned to the Loan to Shareholder  account. 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   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 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.  As of December 31, 2003 and 2002, trade payables to our
affiliated entity, Auracall, Ltd., accounted for 1% of the total trade payables.

Liquidity and Capital resources December 31 2003.

Cash as of December 31, 2003 amounted to (pound)977,008 ($1,739,074) as compared


                                       48
<PAGE>

with  (pound)471,963  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)152,757
for the purchase of equipment.

We have lease  commitments to pay  (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 approximately  (pound)600,000  ($1,000,000) in equipment,
infrastructure and software.

We shall continue to finance our operations and fund the current commitments for
capital  expenditures  mainly from the cash provided from operating  activities.
During  January and February  2004 we completed a private  placement in which we
raised gross proceeds that amounted to $2,907,711.  Net new cash proceeds of the
Financing,  approximately  $2.7  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,  Swiftnet.  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.

                                       49
<PAGE>

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.


                                       50
<PAGE>

ITEM 7. FINANCIAL STATEMENTS

                   ------------------------------------------
                           Xfone, Inc. and Subsidiary
                   ------------------------------------------

                        CONSOLIDATED FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 2003


                                       51
<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

              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.

              The FASB issued Interpretation No. 46 (FIN 46), "Consolidation of
              Variable Interest Entities," in January 2003 and amended the
              Interpretation in December 2003. FIN 46 requires an investor with
              a majority of the variable interests (primary beneficiary) in a
              variable interest entity (VIE) to consolidate the entity and also
              requires majority and significant variable interest investors to
              provide certain disclosures. A VIE is an entity in which the
              voting equity investors do not have a controlling financial
              interest or the equity investment at risk is insufficient to
              finance the entity's activities without receiving additional
              subordinated financial support from the other parties.
              Development-stage entities that have sufficient equity invested to
              finance the activities they are currently engaged in and entities
              that are businesses, as defined in the Interpretation, are not
              considered VIEs. The provisions of FIN 46 were effective
              immediately for all arrangements entered into with new VIEs
              created after January 31, 2003. Intel has completed a review of
              its investments to determine whether Xfone is the primary
              beneficiary of any such VIEs. The review did not identify any VIEs
              that would require consolidation or any significant exposure to
              VIEs that would require disclosure.


                                      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.)

NOTE  5 - FIXED ASSETS

<TABLE>
<CAPTION>
                                                            DECEMBER 31,                DECEMBER 31,
                                                         ----------------  -----------------------------------
                                                                2003                       2003
                                                         ----------------  -----------------------------------
                                                                           Convenience translation into U.S. $
                                                                           -----------------------------------
<S>                                                       <C>                           <C>
          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.)

NOTE 7 - OTHER LIABILITIES AND ACCRUED EXPENSES

<TABLE>
<CAPTION>
                                                                DECEMBER 31,                DECEMBER 31,
                                                             ----------------  -----------------------------------
                                                                    2003                       2003
                                                             ----------------  -----------------------------------
                                                                               Convenience translation into U.S. $
                                                                               -----------------------------------
<S>                                                           <C>                          <C>
          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

Refer to notes 4 and 11 for additional related party activity.

<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)318,774              --        $586,544              --

               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
--------------------------------------------------------------------------------


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. 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 for services additional 17,510
restricted shares of its common stock with 17,510 each of Warrants A and B
attached. During January and February 2004, the Company granted a total of
additional 150,000 Warrants A for services.


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)

Revenues and operating profit:

<TABLE>
<CAPTION>
                                                     YEARS ENDED                             YEARS ENDED
                                       -------------------------------------     -----------------------------------
                                                    DECEMBER 31,                             DECEMBER 31,
                                       -------------------------------------     -----------------------------------
                                                2003               2002             2003                   2002
                                       -------------------------------------     -----------------------------------
                                                                                 Convenience translation into U.S. $
                                                                                 -----------------------------------
<S>                                    <C>                   <C>                 <C>                      <C>
Telephone & Messaging                        3,996,732                           $7,114,183
Mobile                                         503,475                              896,185
calling cards                                2,781,974                            4,951,914
Total Revenues                        (pound)7,282,181      (pound)3,741,436     12,962,282               6,659,756

Direct Operating expenses
Telephone & Messaging                        2,370,941                            4,220,275
Mobile                                         416,918                              742,114
calling cards                                2,604,703                             4636,371
Total expenses                               5,392,562             2,369,627      9,598,760               4,217,936

Direct Operating Profit
Telephone & Messaging                        1,625,791                            2,893,908
Mobile                                          86,557                              154,071
calling cards                           (pound)177,271                              315,542
Total Profits                                1,889,619             1,371,809      3,363,522               2,441,820

Corporate and common operating
expenses.                                    1,223,252             1,056,207      2,177,388               1,880,048
Operating profit                               666,367               315,606      1,186,134                 561,771
                                        ==============      ================     ==========               =========
</TABLE>

Assets

The assets of the company are for common usage for all reportable segments.


                                      F-25

<PAGE>

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

NOTE 18 - SUBSEQUENT EVENTS

AGREEMENT AND PLAN OF ACQUISITION

On May 28, 2004,  we entered  into an  Agreement  to acquire WS Telecom  Inc., a
Mississippi  corporation,  through the statutory  merger of WS Telecom Inc. with
and into our wholly  owned  subsidiary  Xfone USA,  Inc. For the purposes of the
acquisition,  WS Telecom,  Inc. includes its wholly owned  subsidiaries  eXpeTel
Communications,  Inc. and Gulf Coast Utilities, Inc. The terms and conditions of
the Agreement provide that:

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

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

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

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

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

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

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

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

XFONE COMMUNICATION LTD.

On April 15, 2004, we established an Israel based subsidiary, Xfone
Communication Ltd. On May 9, 2004, Xfone Communication applied for a license to
become an international telecom service provider in Israel. On May 16, 2004, the
Government of Israel informed Xfone Communication that its application underwent
preliminary examination and appears to be acceptable. Therefore, on May 18,
2004, the Government of Israel granted Xfone Communication a Dialing Code
("018"); nevertheless, the Government of Israel has not yet granted Xfone
Communication the license. To date, Xfone Communication has no operating
activity and is not expected to have any operating activity until it will be
granted the license.

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

In accordance with the Israeli Government Regulations Xfone Communication issued
a bank guarantee in favor of the Government of Israel for the amount of
approximately $2.2 Million. In order to attain the Bank Guarantee , Xfone
Communication had to deposit in Bank Hapoalim B.M., an Israel based bank,
approximately $2.2 million and issue a Letter of Guarantee, unlimited in amount,
in favor of the bank, guaranteeing all debt and indebtedness of Xfone
Communication towards the bank. If Xfone Communication will fail to get the
License the Bank Guarantee and the Letter of Guarantee will be returned.

OFFERING

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.

AGREEMENT WITH PORTFOLIO PR, INC.

On January 1, 2004, the Company entered into a cancelable agreement with an
investment relations firm, Portfolio PR, Inc., 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.

In conjunction with this agreement, from January 2004 to April 2004, the Company
paid Portfolio PR, Inc. $7,000 but made no stock issuances to Portfolio PR, Inc.
In addition, Portfolio PR, Inc. did not exercise any warrants.

On April 23, 2004, the Company cancelled the agreement with Portfolio PR, Inc.
"for cause". In June 2004, Portfolio PR, Inc. agreed to receive from the Company
$7,209.09 in cash and 4,000 shares of our common stock as total and final
consideration and further agreed that the Company would have no further
obligation to pay it any additional cash, shares, warrants, or other
consideration in connection with this agreement.


                                      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:

                                       52
<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.


                                       53
<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.


                                       54
<PAGE>

FAMILY RELATIONSHIPS

Dr. Harish,  one of our directors,  is the brother-in-law of Mr. Abraham Keinan,
our Chairman of the Board.  On April 15, 2004,  we  established  an Israel based
subsidiary,  Xfone Communication Ltd. Xfone Communication is owned 74% by us and
26% by H.S.N.  Communication Investments Ltd., an Israeli based company, that is
owned: 40% by Mrs. Naama Harish, the wife of Dr. Eyal Harish.

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.


                                       55
<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.

<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>        <C>
Abraham Keinan   2003    $69,057(1)          $112,576             $97,900(2)                       400,000(3)
Chairman                 (40,622 Pound)        (63,245 Pound)      (55,000 Pound)

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

                 2001    $42,300                     0                  0                 0               0         0         0
                         (30000 Pound)

Guy Nissenson    2003    $74,820(4)                               $171,302(5)                      200,000(6)
Principal                (43,500 Pound)                           (96,237 Pound)
Executive
Officer          2002    $52,800
                         (33,000 Pound)

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

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

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

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

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

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


                                       56
<PAGE>

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

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

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

Options/SAR Grants 2003
--------------------------------------------------------------------------------
                                   % of Total
                        Number       Options
Name and              Securities    Granted To
Principle              Underlying   Employees    Exercise      Expiration
Position               Options       in 2003       Price         Date
--------------------------------------------------------------------------------
Abraham Keinan(1)       400,000        66.7%      $0.475     August 31, 2008
Chairman             common stock
of the Board            shares
--------------------------------------------------------------------------------
Guy Nissenson(2)        200,000        33.3%      $0.475     August 31, 2008
Principal            common stock
Executive               shares
Officer/Director
--------------------------------------------------------------------------------
TOTAL                                100.00%
--------------------------------------------------------------------------------

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

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

Aggregate Option/SAR Exercises in 2003 and Fiscal Year End Option/SAR Values

<TABLE>
<CAPTION>
                                                          Number of Securities Underlying     Value of Unexercised In-the
                                                        Unexercised Options/SARs at FY-End   Money Options/SARs at FY-End
                             Shares          Value                      (#)                               ($)
                          Acquired on        Realized   ----------------------------------   ----------------------------
Name                      Exercise (#)          ($)          Exercisable/Unexercisable         Exercisable/Unexercisable
<S>                       <C>                 <C>            <C>                             <C>
     Guy Nissenson,
  Principal Executive                        Not
   Officer, President    Not Applicable      Applicable           700,000 / 0 (1)                 $3,891,000 / $0 (2)

    Abraham Keinan,                          Not
 Chairman of the Board   Not Applicable      Applicable           400,000 / 0 (3)                 $2,202,000 / $0 (4)
</TABLE>

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

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

(3)      The options to purchase  400,000 shares of our common stock were issued
         to Abraham  Keinan,  our Chairman of the Board, on August 21, 2003, and
         on March 1, 2004, all 400,000 share options were cancelled by our Board
         of  Directors.  Abraham  Keinan  currently  owns no options to purchase
         shares of our common stock.

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


                                       57
<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 June 7, 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 June 7, 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.


                                       58
<PAGE>

Security Ownership of Beneficial Owners

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
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 consists
     of  the  following:  (a)  720,336  shares  of our  common  stock  owned  by
     Campbeltown Business Ltd., a British Virgin Islands  corporation,  in which
     Mr.  Nissenson owns 20% and his family are also  shareholders;  (b) 500,000
     options to purchase  shares of our common stock that  Campbeltown  Business
     Ltd has the right to acquire in accordance with a Stock Purchase Agreement,
     clarified  on July 30,  2001 in which  Campbeltown  Business,  Ltd.  has an
     option to 500,000  shares of our  outstanding  stock if we become listed on
     the OTC Bulletin  Board before  December 31, 2005.  We became listed on the
     OTC Bulletin Board on March 25, 2002.  Campbeltown  Business,  Ltd. has not
     exercised its option as of 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.


                                       59
<PAGE>

Security Ownership of Management:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
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 Harish                            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                                 79.93
                       as a group
---------------------------------------------------------------------------------------------------------------
</TABLE>

*        Our Chairman of the Board, Abraham Keinan's  direct/indirect  ownership
         of 3,644,644 shares of our common stock or 59.70% beneficial  ownership
         interest  consists of: (a) his direct  ownership of 2,342,333 shares of
         our common stock  individually  owned by Mr.  Keinan;  (b) his indirect
         ownership  of  1,302,331   shares  of  common  stock  owned  by  Vision
         Consultants,  a Nassau, Bahamas incorporated company that is 100% owned
         by Mr. Keinan,  and is located at Kings Court, POB N-3944,  Bay Street,
         Nassau,  Bahamas. The sole business purpose of Vision Consultants is to
         hold and manage Mr. Keinan's investments. On August 21, 2003, we issued
         400,000  options  to Mr.  Keinan,  but on March 1,  2004,  our Board of
         Directors cancelled these options.

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


                                       60
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

ABRAHAM KEINAN

Keinan Share Issuance

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

Keinan Stock Ownership Through Vision Consultants

Our Chairman of the Board, Abraham Keinan, has beneficial 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.

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

Keinan Loan

Since our inception in September  2000 through  December 31, 2000, we along with
our  subsidiary,  Swiftnet,  Ltd.) loaned  Abraham  Keinan,  our Chairman of the
Board,  a total of 216,133 Pound Sterling or  approximately  $322,586 based upon
the  exchange  rate at December  31,  2000,  $202,433 of which was loaned to Mr.
Keinan on September 29, 2000.  This loan originally was reflected in a September


                                       61
<PAGE>

29, 2000  promissory  note payable in ten equal  installments  of  approximately
$19,150  beginning  January 1, 2002 and ending on January 1, 2011.  This note is
non-interest  bearing. We provided the loan to Mr. Keinan to promote his loyalty
and continued service as our Chairman of the Board of Directors.  As of December
31, 2003, 286,736 pounds ($510,390) remain  outstanding  regarding this loan. On
March 2004 Mr. Keinan signed a note to repay his loan in four installments:

   2004 (pound)  54,070  ($96,245)
   2005 (pound) 116,333 ($207,073)
   2006 (pound) 116,333 ($207,073)

Keinan Bonus and Success Fee

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

GUY NISSENSON

Campbeltown Business, Ltd.

On May 5,  2000,  Swiftnet,  Ltd.,  which is now our  wholly  owned  subsidiary,
entered  into  an  18-month  renewable  consulting  agreement  with  Campbeltown
Business,  Ltd., a private  company  incorporated  in the British  Virgin Island
which is owned by Guy Nissenson,  our Principal Executive  Officer/President and
Director and four other relatives of Mr. Nissenson. This agreement provides that
Swiftnet  hires  Campbeltown  Business,  Ltd.  as  its  financial  and  business
development  consultant and will pay Campbeltown  Business,  Ltd. 2,000 UK Pound
Sterling  (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)
--------------------------------------------------------------------------------


                                       62
<PAGE>

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

The May 5, 2000 agreement is for 18 months,  but the agreement provides that the
agreement  will be renewed  by mutual  agreement  of  Swiftnet  and  Campbeltown
Business, Ltd.

On November 5, 2001 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 the (date) agreement, Campbeltown agreed to provide the following services to
us:

         o        analysis of proposed acquisitions;

         o        seek markets for our telecommunications services in additional
                  countries;

         o        formulate strategies for our future growth plans; and

         o        introduce potential customers to our business.

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

         o        Abraham Keinan  confirmed  that all his businesses  activities
                  and  initiatives  in  the  field  of  telecommunications   are
                  conducted through Swiftnet, and would continue for at least 18
                  months after the conclusion of this transaction.


                                       63
<PAGE>

         o        Campbeltown  declared  that it is not involved in any business
                  that  competes with Swiftnet and would not be involved in such
                  business  at least for 18 months  after  this  transaction  is
                  concluded.   This   agreement   term  has  been  satisfied  by
                  Campbeltown.

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

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

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

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

         o        Campbeltown  would have the right to nominate a vice president
                  in Swiftnet  and/or our common stock.  Mr. Guy  Nissenson  was
                  nominated  as of the time of the June 19, 2000  agreement.  If
                  for  any  reason  Guy  Nissenson   will  leave  his  position,
                  Campbeltown   and   Abraham   Keinan  will  agree  on  another
                  nominee.  The Vice President will be employed with
                  suitable conditions.

         o        Campbeltown  has the option to purchase  additional  shares of
                  Swiftnet  that will  represent  10% of all issued shares after


                                       64
<PAGE>

                  the  transaction  for  $200,000  US. This  transaction  can be
                  executed either by Swiftnet issuing new shares,  or by Abraham
                  Keinan  selling  his  private  shares  (as  long  as he has an
                  adequate  amount of shares),  as Abraham  Keinan will  decide.
                  This  option  will  expire on Dec 31,  2005.  Campbeltown  can
                  exercise this option in parts.

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

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

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

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

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


                                       65
<PAGE>

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

Guy Nissenson Employment Agreement

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

XFONE COMMUNICATION, LTD.

On  April  15,  2004,  we   established  an  Israel  based   subsidiary,   Xfone
Communication Ltd. On May 9, 2004, Xfone Communication  applied for a license to
become  an  international  telecom  service  provider  in  Israel.  The  Israeli
Government  Regulations  require  that at least 26% of an  applicant  company be
owned by Israeli citizens who reside in Israel. Xfone Communication is owned 74%
by us and  26% by  H.S.N.  Communication  Investments  Ltd.,  an  Israeli  based
company, that is owned: 40% by Mrs. Naama Harish, the wife of Dr. Eyal Harish, a
member of our Board of Directors,  40% by Dionysos  Investments  Ltd., a company
owned by members of the family of Mr. Guy


                                       66
<PAGE>

Nissenson,  our Chief Executive Officer,  and 20% by Margo Sport Ltd., a company
owned  by Mr.  Giora  Spigel  and his  wife.  In  accordance  with  the  Israeli
Government  Regulations Xfone Communication  issued a bank guarantee in favor of
the  Government  of  Israel  for  the  amount  of 10M NIS  (approximately,  $2.2
Million).  In order to attain the Bank  Guarantee , Xfone  Communication  had to
deposit in Bank Hapoalim B.M., an Israel based bank,  approximately $2.2 million
and issue a Letter of  Guarantee,  unlimited  in  amount,  in favor of the bank,
guaranteeing all debt and indebtedness of Xfone Communication  towards the bank.
If Xfone  Communication  will fail to get the License the Bank Guarantee and the
Letter of Guarantee will be returned.


AURACALL LIMITED

We have an investment  in and own 47.5% of a joint  business  venture,  Auracall
Limited.  Auracall  Limited's  services were introduced in  approximately  March
2002.  Our  Chairman  of the  Board,  Abraham  Keinan,  and our Chief  Executive
Officer/Director,  Guy Nissenson,  are both directors of Auracall  Limited.  Our
management will indirectly  benefit from revenues  generated by Auracall Limited
activities,  to the extent that Vision Consultants,  Inc., which is solely owned
by Mr. Keinan, and Campbeltown Business Limited, which is partially owned by our
Chief Executive Office, Guy Nissenson,  receives 1% of all our revenues,  except
revenue  generated by Story Telecom  activities,  if our entire monthly revenue,
except revenue generated by Story Telecom activities, exceeds $485,000. Auracall
accounted  for 4.4%  and 6.9% of our  revenues  for the 12 month  period  ending
December  31,  2003  and  the  three  month   period   ending  March  31,  2004,
respectively.  Auracall Limited accounted for 2.8% and 4.8% of our total cost of
revenues  for the 12 month period  ending  December 31, 2003 and the three month
period  ending  March  31,  2004,  respectively.  Commissions  paid to  Auracall
accounted for 17% and 22.3% of the total commissions that we paid out for the 12
month period  ending  December 31, 2003 and the three month period  ending March
31, 2004,  respectively.  We have made no guarantee or any other  commitment  on
behalf of Auracall, Ltd. and we are not committed to provide Auracall, Ltd. with
any further support.

STORY TELECOM

We have an investment in and own 40% of a joint business venture, Story Telecom,
which is a calling  card  service we offer that is  detailed  on page ( ). Story
Telecom purchases their telecommunications services from us. Our Chief Executive
Officer/Director,  Guy  Nissenson,  is a director of Story;  our Chairman of the
Board,  Abraham  Keinan,is not a director of Story Telecom.  Our management does
not benefit from revenues generated by Story Telecom  activities.  Story Telecom
accounted  for 37% and 43% of our total  revenues for the 12 month period ending
December  31,  2003  and  the  three  month   period   ending  March  31,  2004,
respectively.  Story  Telecom  accounted  for 58% and 60% of our  total  cost of
revenues  for the 12 month period  ending  December 31, 2003 and the three month
period  ending  March 31, 2004,  respectively.  We have made no guarantee or any
other  commitment on behalf of Story Telecom and we are not committed to provide
Story Telecom with any further support.

XFONE USA, INC.

Xfone USA, Inc. was  incorporated  in the State of  Mississippi  on May 28, 2004
especially  for the  purpose of  becoming  the  surviving  corporation  upon the
consummation of the merger. We are the sole shareholder of Xfone USA, Inc. Xfone
USA, Inc., upon completion of the acquisition,  will continue to be our   wholly


                                       67
<PAGE>

owned  subsidiary  and no change in our  control  will  occur as a result of the
acquisition.  Mr.  Abraham  Keinan,  our  Chairman  of the  Board,  and Mr.  Guy
Nissenson, our President/Chief Executive Officer/Director,  are the directors of
Xfone USA, Inc. Our President/Chief Executive  Officer/Director,  Guy Nissenson,
is also the President/Secretary/Treasurer of Xfone USA, Inc.

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.


                                       68
<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)

3.6       Bylaws of Xfone USA, Inc. (6)

3.7       Office of the Mississippi Secretary of State, Articles of Merger or
          Share Exchange Profit Corporation (6)

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)

10.16     As to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy,
          Warrant A, Warrant B and Registration Rights Agreement of Selling
          Shareholders Platinum Partners Value Arbitrage Fund LP, Countrywide
          Partners LLC and WEC Partners LLC. [3 investors](6)

10.17     As to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy,
          Warrant A, Warrant B and Registration Rights Agreement of Selling
          Shareholders Simon Langbart, Robert Langbart, Arik Ecker, Zwi Ecker,
          Michael Derman, Errol Derman,Yuval Haim Sobel, Zvi Sobel, Tenram
          Investment Ltd., Michael Zinn, Michael Weiss. [11 investors](6)

10.18     As to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy,
          Warrant A, Warrant B and Registration Rights Agreement of Selling
          Shareholders Southridge Partners LP and Southshore Capital Fund Ltd.
          [2 investors](6)

10.19     As to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy,
          Warrant A, Warrant B and Registration Rights Agreement of Selling
          Shareholders Crestview Capital Master LLC. [1 investors](6)

10.20     As to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy,
          Warrant A, Warrant B and Registration Rights Agreement of Selling
          Shareholders Adam Breslawsky, Oded Levy, Michael Epstein, Steven
          Frank, Joshua Lobel, Joshua Kazan and The Oberon Group LLC.
          [7 investors](6)

10.21     Agreement with Newco (Auracall Limited)(6)

10.22     Agreement with ITXC Corporation(6)

10.23     Agreement with Teleglobe International(6)

10.24     Agreement with British Telecommunications(6)

10.25     Agreement with Easyair Limited (OpenAir)(6)

10.26     Agreement with Worldnet(6)

10.27     Agreement with Portfolio PR(6)

10.28     Agreement with Stern and Company(6)

10.29     December 31, 2003 letter to Xfone from A. Keinan (6)

10.30     Agreement between Swiftnet, Ltd. and Dan Kirschner (8)

10.31     Agreement and Plan of Acquisition (7)

10.32     Escrow Agreement (7)

10.33     Release Agreement (7)

10.34     Employment Agreement between WS Telecom, Inc. and Wade Spooner (7)

10.35     Employment Agreement between WS Telecom, Inc. and Ted Parsons (7)

21.1      List of Subsidiaries (Amended) (8)

</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

(6)   Denotes previously filed exhibit: filed on April 15, 2004, with Xfone,
      Inc.'s SB-2 Amendment No. 1 registration statement.

(7)   Denotes previously filed exhibit: filed on June 1, 2004 with Xfone Inc.'s
      Form 8-K.

(8)   Denotes previously filed exhibit: filed on June 7, 2004 with Xfone, Inc.'s
      SB-2/Amendment 2 Registration Statement, file # 333-113020.


                                       69
<PAGE>

We hereby incorporate the following additional documents by reference:

(a)   our Forms 10-KSB/A for the year ended December 31, 2002 which was filed on
      June 9, 2004;

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

(c)   our Registration Statement on Form SB-2 and all amendments thereto which
      was filed on February 23, 2004 and amended on April 15, 2004 and June 7,
      2004;

(d)   our Forms 10-QSB for the periods ended March 31, 2002 which was filed on
      May 14, 2002, June 30, 2002 which was filed on August 13, 2002 and amended
      on August 20, 2002, September 30, 2002 which was filed on November 14,
      2002, March 31, 2003 which was filed on May 15, 2003, June 30, 2003 which
      was filed on August 14, 2003, September 30, 2003 which was filed on
      November 10, 2003, and filed on May 17, 2004 and March 31, 2004 which was
      amended on June 9, 2004.

      (b)   Reports on Form 8-K

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

On June 1, 2004, we filed a Form 8-K, Item 5. Other Events, to disclose an
agreement to acquire WS Telecom, Inc., a Mississippi corporation, through a
statutory merger of WS Telecom, Inc. with and into the Company's wholly owned
subsidiary, Xfone USA, Inc.

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. $30,500.

Audit-Related Fees

None.

Tax Fees

The aggregate fees billed for the fiscal year ended December 31, 2003 for
professional services rendered by the principal accountant for tax compliance,
tax advice and tax planning were estimated as follows: we paid our accountant,
Chaifetz & Schreiber, P.C. $2,500.

All Other Fees

None.

Audit Fees

The aggregate fees billed for the fiscal year ended December 31, 2002 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. $29,500.

Audit-Related Fees

None.

Tax Fees

The aggregate fees billed for the fiscal year ended December 31, 2002 for
professional services rendered by the principal accountant for tax compliance,
tax advice and tax planning were estimated as follows: we paid our accountant,
Chaifetz & Schreiber, P.C. $2,500.

All Other Fees

None.


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<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                                               June 10, 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                                               June 10, 2004
   -------------------------
   Guy Nissenson, President,
   Principal Executive Officer,Principal Financial Officer,
   Principal Accounting Officer, and Director

By /s/ Abraham Keinan                                              June 10, 2004
   -------------------------
   Abraham Keinan
   Chairman of the Board of Directors


By /s/ Eyal Harish                                                 June 10, 2004
   -------------------------
   Eyal Harish
   Director


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