**FORM      10-KSB **

**DECEMBER      31, 2005**

**333-67232      **

**XFONE,      INC.**

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

**c/o      Swiftnet Limited**

**Britannia      House, 960 High Road **

**London      N12 9RY, United Kingdom **

**011.44.845.1087777**

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**INDEX**

|                                                                                                             |                   |
|------------------------------------------------------------------------------------------------------------------|------------------------|
| Part                I                                                                                            |                   |
| Item                1. Description of Business                                                                   | 2                 |
| Item                2. Description of Property                                                                   | 14                |
| Item                3. Legal Proceedings                                                                         | 15                |
| Item                4. Submission of Matters to a Vote of Security                Holders                        | 17                |
|                                                                                                             |                   |
| Part                II                                                                                           |                   |
| Item                5. Market for Common Equity and Related Stockholder                Matters                   | 18                |
| Item                6. Management's Discussion and Analysis or Plan of                Operation                  | 22                |
| Item                7. Financial Statements                                                                      | F-1                    |
| Item                8. Changes in and Disagreements with                Accountants                              |         |
|     and                Financial Disclosure                                                  |  39          |
| Item                8A. Controls and Procedures                                                                  |  39          |
| Item                8B. Other Information                                                                        |  39          |
|                                                                                                             |                   |
| Part                III                                                                                          |                   |
| Item                9. Directors, Executive Officers, Promoters and                Control                       |                   |
|     Persons;                Compliance with Section 16(a) of the Exchange                Act | 40                |
| Item                10. Executive Compensation                                                                   | 44                |
| Item                11. Security Ownership of Certain Beneficial Owners                and                       |              |
|      Management                and Related Stockholder Matters                          | 52                |
| Item                12. Certain Relationships and Related                Transactions                            |                   |
| Item                13. Exhibits                                                                                 | 59                |
| Item                14. Principal Accountant Fees and                Services                                    | 65                |

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**PART      I.**

RIPT

**Background **

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**Recent      Business Developments**

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**Principal      Products and Services and their Markets**

| • | Carrier                Pre Select (CPS):                CPS is a telephony service which enables customers to benefit from                our low                call usage charges, whilst not having to make any changes to their                existing telephone lines or numbers. The service allows customers                to route                all their outgoing calls over our network. This gives them access                to                competitive call rates and a wide range of services. Customers using                CPS                only pay line rental to their service operator, while we bill them                for all                call charges. CPS is available nationally provided the customer is                connected to a BT local exchange. |
|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  • | Indirect                Access: This is a telephony service which enables customers to benefit                from our low call usage charges, whilst not having to make any changes                to                their existing telephone lines or numbers. The service allows customers                to                route a specific outgoing call over our network by using the prefix                code                "1689". |
|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

| • | Email/Fax                Broadcast: This service allows the user to send multiplied personalized                faxes and emails to thousands of users in                minutes. |
|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| • | Story                Telecom: Initiates, markets and distributes Prepaid Calling Cards                that are                served by our switch and systems. Story Telecom supplies the Prepaid                Calling Cards to retail stores through its network of dealers. The                Calling                Card enables the holder to call anywhere in the world by dialing                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. |
|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| • | Our                Internet based customer service and billing interface (found at                www.xfone.com) includes on-line registration, full account control,                and                payment and billing functions and information                retrieval. |
|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

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

| • | XFONECARD:                We provide an international toll free calling card service, available                from                the United States, Canada, the United Kingdom, France, Netherlands,                Germany, Austria,  Belgium, Ireland, Italy, Switzerland, Denmark,                Finland,  Norway, Sweden, Greece, Israel, Jordan, Croatia, Poland,                Hungary, Ukraine, Slovakia, Chile, Columbia, Japan, Thailand, Hong                Kong                and Australia. XFONECARD has a unique feature which allows its user                to                receive messages to a personal message box. |
|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| • | SIMPLE:                The SIMPLE is a pre programmed, rechargeable, mobile SIM card which                can be                used with any unlocked GMS (Global System for Mobiles) mobile phone                virtually anywhere in the world. SIMPLE allows us to deliver call                savings,                by diverting the customer dialing command away from the local mobile                operator that the phone is connected to, and instead, it sends the                call to                one of the UK's largest mobile operators with whom we hold a special                agreement. We offer for sell or rent two types of SIM Cards - a local                SIM                Card which may be used only from a specific country, and a global                SIM Card                which may be used from over then 85 countries around the                globe. |
|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Distribution      and Marketing Methods **

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

| • | We                use direct marketing, including by newspaper, radio and television                advertisements; |
|---------|---------------------------------------------------------------------------------------------------------------------|

| • | We                utilize agents that sell our services directly to customers at our                established prices; these agents receive a commission of approximately                5%-10% of the total sale amount less any bad debts; |
|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| • | We                cooperate with major companies and worker's councils. |
|---------|-------------------------------------------------------------------------|

| • | We                attend telecommunications trade shows to promote our services; |
|---------|----------------------------------------------------------------------------------|

| • | 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. |
|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Billing      Practices **

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**Carriers      and Negotiating Lower Rates**

**Discontinued      Service **

**Divisions      **

| • | Sales                and Marketing - Our Sales and Marketing Division is responsible for                our                marketing and selling campaigns that target potential and existing                customers. |
|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

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

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

| • | 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. |
|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**Geographic      Markets **

**Competitive      Business Conditions**

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**Principal      Suppliers **

| • | BellSouth                Telecommunications  - 21% |
|---------|---------------------------------------------------------|

| • | Teleglobe                International -16% |
|---------|---------------------------------------------|

| • | British                Telecommunications - 15% |
|---------|-------------------------------------------------|

| • | MCI                (WorldCom) - 11%  |
|---------|--------------------------------------|
|    |                                 |
| • | ITXC                Corporation - 6% |

| • | Bezeq                The Israel Telecommunication Corp -                5% |
|---------|----------------------------------------------------------------------------|

**Dependence      on Major Customers **

|   | • | Residential                - including customers who must dial a special code to access our                switch or                acquire a box that dials automatically. |
|--------|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Commercial                - Smaller business are treated the same as residential customers.                Larger                businesses’ PBX (Telephony system) units are programmed to dial the                special code automatically or connect directly through a T1 (24 telephone                channels / lines). |
|--------|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Governmental                agencies - Including the United Nations World Economic Forum, the                Argentine Embassy, the Spanish Embassy and the Israeli Embassy. |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | • | Resellers                - We provide them with our telephone and messaging services for a                wholesale price. |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------|

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** **

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

|   | • | Demand                for our services; |
|--------|---------|-----------------------------------------|

|   | • | Individual                economic conditions in our markets; |
|--------|---------|---------------------------------------------------------------|

|   | • | Our                ability to market our services. |
|--------|---------|----------------------------------------------------|

**Patents      and trademarks**

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**Regulatory      Matters**

**.**
**.**

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**Research      and Development Activities **

**Costs      and effects of Compliance with Environmental Laws**

**Employees**

**Reports      to Security Holders**

ITEM      2. DESCRIPTION 

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      3. LEGAL 

**I.      MG Telecom Ltd. **

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**II.      Ryfcom Ltd. **

**III.      MCI WorldCom Limited **

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**IV.      **
**Opal      Telecom Limited**

SUBMISSION OF 

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**PART      II.**

ITEM      5. MARKET 

**Market      Information**

| **Period**                          | **Low**           | **High**          |
|-------------------------------------|-------------------|-------------------|
| **2005**                            |              |              |
| Fourth                Quarter       | $2.30             | $3.09             |
| Third                Quarter        | $2.90   | $3.40             |
| Second                Quarter       | $2.80   | $3.30             |
| First                Quarter        | $2.50   | $4.29        |
| **2004**                            |              |              |
| Fourth                Quarter  | $1.95   | $3.35   |
| Third                Quarter        | $2.90             | $3.75             |
| Second                Quarter       | $2.80             | $3.90             |
| First                Quarter        | $3.35             | $5.75             |

----

**Holders**

**Dividends**

**Securities      Authorized For Issuance Under Equity Compensation Plans **

| **Plan                category**                                          | **Number                of securities to be issued upon exercise of outstanding options,                warrants                and rights** | **Weighted                average exercise price of outstanding options, warrants and rights** | **Number                of securities remaining available for future issuance under the                plan** |
|---------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|
|                                                                      | (a)                                                                                                                                          | (b)                                                                                            | (c)                                                                                                           |
| Equity                compensation plans approved by security holders     | 5,130,000*                                                                                                                                   | $3.70                                                                                          | 370,000*                                                                                                      |
| Equity                compensation plans not approved by security holders | 11,400**                                                                                                                                     | $3.00                                                                                          | N/A                                                                                                           |
| Total                                                                     | 5,141,400                                                                                                                                    | $3.70                                                                                          | 370,000                                                                                                       |

----

**Recent      Sales Of Unregistered Securities **

On      February 6, 2005, the Company’s board of directors approved a grant to      past/current employees of 730,000 options under and subject to the 2004 Stock      Option Plan of the Company according to the following terms: Option exercise      price of $3.50; Vesting Date **-**      the      vesting of the options will be over a period of 4 years as follows: 25% of      the      options are vested after a year from the Date of Grant. Thereafter, 1/16 of      the      options are vested every 3 months for the following 3 years; Expiration      Date**-**      5.5      years from the Grant Date. 

**      -**
**      -**

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----

AND 

**FORWARD-LOOKING      STATEMENTS**

**OVERVIEW**

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----

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**RESULTS      OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2005**

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----

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**COMPARISON      OF THE YEARS ENDED DECEMBER 31, 2005 AND 2004 **

**Comparison      Financial Information Years ended December 31, 2005, 2004, 2003,2002 and 2001      -      Percentage of Revenues:**

|                                      |   | **2005**                    |    |  **2004**               |    |   |  **2003**               |    |   |  **2002**               |    |   |  **2001**              |    |
|-------------------------------------------|--------|-----------------------------|---------|------------------------------|---------|--------|------------------------------|---------|--------|------------------------------|---------|--------|-----------------------------|---------|
| Revenues                                  |   |                  100.0 | %       |                  100.0  | %       |   |                  100.00 | %       |   | 100.00                       | %       |   | 100.00                      | %       |
| Cost                of Revenues           |   | -65.57                      |  % |                  -70.53 |  % |   |                  -61.36 |  % |   |                  -58.66 |  % |   |  -61.29                | %       |
| Gross                Profit               |   | 34.43                       |  % |  29.47                  |  % |   | 38.64                        |  % |   | 41.34                        |  % |   |                  38.71 |  % |
| Operating                Expenses:        |   |                        |    |                         |    |   |                         |    |   |                         |    |   |                        |    |
| Research                and Development   |   | -0.05                       | %       | -0.23                        | %       |   | -0.61                        | %       |   | -0.86                        | %       |   | -1.16                       | %       |
| Marketing                and Selling      |   | -8.94                       | %       | -14.35                       | %       |   | -14.98                       | %       |   | -8.56                        | %       |   | -8.24                       | %       |
| General                and Administrative |   | -25.76                      | %       | -13.89                       | %       |   | -13.89                       | %       |   | -23.48                       | %       |   | -20.46                      | %       |
| Total                Operating Expenses   |   | -34.75                      | %       | -28.47                       | %       |   | -29.49                       | %       |   | -32.90                       | %       |   | -29.86                      | %       |
| Income                before Taxes        |   | -0.32%                      | %       | 0.63                         | %       |   | 8.76                         | %       |   | 8.39                         | %       |   | 7.72                        | %       |
| Net                Income                 |   | 0.18                        | %       | 0.35                         | %       |   | 5.79                         | %       |   | 6.44                         | %       |   | 5.48                        | %       |

**Years      ended December 31, 2005 and 2004:**

**Revenues.**

----

|                                            | **2005**         | **2004**         |
|-------------------------------------------------|------------------|------------------|
| Telephone                and messaging services | 9,425,451        | 5,930,541   |
| Mobile                phones                    | 437,573          | 480,451     |
| Internet                                        | 814,267          |             |
| Calling                Cards                    | 3,436,457        | 4,919,124   |
| Total                                           | 14,113,748  | 11,330,116  |

|                                            | **2005**   | **2004**         |
|-------------------------------------------------|------------|------------------|
| Telephone                and messaging services | 16,256,903 | 11,445,944  |
| Mobile                phones                    | 754,813    | 927,270     |
| Internet                                        | 1,406,611  |             |
| Calling                Cards                    | 5,927,888  | 9,493,910   |
| Total                                           | 24,346,215 | 21,867,124  |

----

|                                           |   | **2005**     |       | **2004** |         |
|------------------------------------------------|--------|--------------|------------|----------|--------------|
| Regular                telephony voice service |   |         |       |     |         |
| and                other related services:     |   |  £ | 9,575,731  |     |  £ | 5,852,720 |   |
| Internet                                       |   |  £ | 814,267    |     |         |   |   |
| Story                Telecom                   |   |  £ | 3,203,663  |     |  £ | 4,778,564 |   |
| WorldNet                                       |   |  £ | 520,087    |     |  £ | 698,832 |   |
| Total                Revenues                  |   |  £ | 14,113,748 |     |  £ | 11,330,116 |   |

|                                           |   | **2005** |       | **2004** |   |
|------------------------------------------------|--------|----------|------------|----------|--------|
| Regular                telephony voice service |   |     |       |     |   |
| and                other related services:     |   | $        | 16,516,135 |     | $      | 11,295,750 |   |
| Internet                                       |   | $        | 1,406,611  |     |   |   |   |
| Story                Telecom                   |   | $        | 5,526,319  |     | $      | 9,222,629 |   |
| WorldNet                                       |   | $        | 897,150    |     | $      | 1,348,745 |   |
| Total                Revenues                  |   | $        | 24,346,215 |     | $      | 21,867,124 |   |

----

**Cost      of Revenues **

|                                                 |   | **2005**     |      | **2004** |         |
|------------------------------------------------------|--------|--------------|-----------|----------|--------------|
| Regular                Telephony Services and others |   |  £ | 5,835,915 |     |  £ | 3,098,938 |   |
| Story                Telecom                         |   |  £ | 3,022,324 |     |  £ | 4,508,079 |   |
| Worldnet                                             |   |  £ | 396,358   |     |  £ | 384,358 |   |
| Total:                                               |   |  £ | 9,254,597 |     |  £ | 7,991,375 |   |

----

|                                                       |   | **2005** |       | **2004** |    |
|------------------------------------------------------------|--------|----------|------------|----------|---------|
| Regular                Telephony Services and others  |   |  $  | 10,066,953 |     |  $ | 5,980,950 |   |
| Story                Telecom                          |   |  $  | 5,213,509  |     | $       | 8,700,592 |   |
| Worldnet                                                   |   |  $  | 683,718    |     |  $ | 741,811 |   |
| Total:                                                |   | $        | 15,964,180 |     | $       | 15,423,353 |   |

**GENERAL      ANALYSIS**

**Research      and Development**

**Marketing      and Selling Expenses. **

**General      and Administrative Expenses**

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**Financing      Expenses. **

**Equity      in Income of Affiliated Company. **

**Loss      from Hurricane Katrina**

**Income      before Taxes. **

**Taxes      on Income. **

**Net      Income. **

**Earning      Per Share. **

**BALANCE      SHEET **

**Comparison      of the balance sheet as of December 31, 2005 and December 31, 2004**

**Current      Assets**

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**Loan      to Shareholder**

**Fixed      Assets. **

**Current      Liabilities. **

**Long-term      liabilities.**

**LIQUIDITY      AND CAPITAL RESOURCES**

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| 2006 |   |  £ | 100,432 |   | $ | 173,245 |   |
|------|--------|--------------|---------|--------|---|---------|--------|

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**IMPACT      OF INFLATION AND CURRENCY FLUCTUATIONS **

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FINANCIAL STATEMENTS

| **Xfone,                Inc. and Subsidiaries**      |
|------------------------------------------------------|
|                                                 |   |   |   |   |   |   |   |
|                                                 |   |   |   |   |   |   |   |
| **CONSOLIDATED                FINANCIAL STATEMENTS** |
|                                                 |   |   |   |   |   |   |   |
| **As                of December 31, 2005**           |

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| **Xfone,                Inc. and Subsidiaries**      |
|------------------------------------------------------|
|                                                 |   |   |   |   |   |   |   |
|                                                 |   |   |   |   |   |   |   |
| **CONSOLIDATED                FINANCIAL STATEMENTS** |
|                                                 |   |   |   |   |   |   |   |
| **As                Of December 31, 2005**           |
|                                                 |   |   |   |   |   |   |   |
|                                                 |   |   |   |   |   |   |   |
|                                                 |   |   |   |   |   |   |   |
|                                                 |   |   |   |   |   |   |   |
|                                                 |   |   |   |   |   |   |   |
| **CONTENTS**                                         |
|                                                 |   |   |   |   |   |   |   |
|                                                 |   |   |   |   |   |   |   |

|                                                                                  |   | PAGE   |   |
|---------------------------------------------------------------------------------------|--------|--------|--------|
|                                                                                  |   |   |   |
| Report                of Independent Registered Public Accounting                Firm |   |   | F-1    |   |
|                                                                                  |   |   |   |   |
|    Report              of Registered Public Accounting Firm                 |   |   | F-2    |   |
|                                                                                  |   |   |   |   |
| Balance                Sheet                                                          |   |   | F-3    |   |
|                                                                                  |   |   |   |   |
| Statements                of Income                                                   |   |   | F-5    |   |
|                                                                                  |   |   |   |   |
| Statements                of Changes in Shareholders'                Equity           |   |   | F-6    |   |
|                                                                                  |   |   |   |   |
| Statements                of Cash Flows                                               |   |   | F-7    |   |
|                                                                                  |   |   |   |   |
| Notes                to Consolidated Financial                Statements              |   |   | F-8    |   |

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stered Public Accounting 

|                                   |                                                 |                                                        |
|----------------------------------------|------------------------------------------------------|-------------------------------------------------------------|
|                                   |                                                 |
|                              |                                            |                                                   |
| Date: March              29, 2006 | By:                                        | /s/ Stark              Winter Schenkein & Co., LLP |
|                                   | Stark                Winter Schenkein & Co., LLP |
|                                   | Denver,                Colorado                      |

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

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| **Xfone,                Inc. and Subsidiaries** |
|-------------------------------------------------|
|                                            |   |   |   |   |   |   |   |   |   |   |   |   |
| **CONSOLIDATED                BALANCE SHEET**   |
|                                            |   |   |   |   |   |   |   |   |   |   |   |   |

|                                                                                                                 |       |  **December                31,** |       |  **December                31,** |       |
|----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
|                                                                                                                 |       | ** 2005**                        | ** ** | ** 2005**                        | ** ** |
| ** **                                                                                                           | ** ** | **  **                      | ** ** | ** U.S.$**                       |       |
| **Current                assets**                                                                                    |       |                                  |       |                                  |       |   |   |
|                                                                                                                 |       |                                  |       |                                  |       |   |   |
| Cash                                                                                                                 |       |  £                          | 2,494,923  |                                  | $          | 4,303,742 |   |
|                                                                                                                 |       |                                  |       |                                  |       |   |   |
| Accounts                receivable, net                                                                              |       |                                  | 3,533,830  |                                  |       | 6,095,857 |   |
|                                                                                                                 |       |                                  |       |                                  |       |   |   |
| Prepaid                expenses and other receivables                                                                |       |                                  | 742,874    |                                  |       | 1,281,458 |   |
|                                                                                                                 |       |                                  |       |                                  |       |   |   |
| Loan                to shareholder                                                                                   |       |                                  | 123,965    |                                  |       | 213,840 |   |
|                                                                                                                 |       |                                  |       |                                  |       |  |   |
| **Total                Current Assets**                                                                              |       |                                  | 6,895,592  |                                  |       | 11,894,897 |   |
|                                                                                                                 |       |                                  |       |                                  |       |   |   |
| **Fixed                assets**                                                                                      |       |                                  |       |                                  |       |   |   |
|                                                                                                                 |       |                                  |       |                                  |       |   |   |
| Cost                                                                                                                 |       |                                  | 2,535,989  |                                  |       | 4,374,581 |   |
|                                                                                                                 |       |                                  |       |                                  |       |   |   |
| Less                - accumulated depreciation                                                                       |       |                                  | (484,674   | )                                     |       | (836,063 | ) |
|                                                                                                                 |       |                                  |       |                                  |       |   |   |
| **Total                fixed assets**                                                                                |       |                                  | 2,051,315  |                                  |       | 3,538,518 |   |
|                                                                                                                 |       |                                  |       |                                  |       |   |   |
| **Investments**                                                                                                      |       |                                  | 97,685     |                                  |       | 168,507 |   |
|                                                                                                                 |       |                                  |       |                                  |       |   |   |
| **Minority                Interest**                                                                                 |       |                                  | 113,960    |                                  |       | 196,581 |   |
|                                                                                                                 |       |                                  |       |                                  |       |   |   |
| **Long                Term Receivables**                                                                             |       |                                  | 283,229    |                                  |       | 488,570 |   |
|                                                                                                                 |       |                                  |       |                                  |       |   |   |
|                                                                                                                 |       |                                  |       |                                  |       |   |   |
| **Other                Assets**                                                                                      |       |                                  | 2,465,333  |                                  |       | 4,252,699 |   |
|                                                                                                                 |       |                                  |       |                                  |       |   |   |
| **Total                assets**                                                                                      |       |  £                          | 11,907,114 |                                  | $          | 20,539,772 |   |
|                                                                                                                 |       |                                  |       |                                  |       |   |   |
| The                accompanying notes are an integral part of these consolidated financial                statements |       |                                  |

----

| **Xfone,                Inc. and Subsidiaries**                                                                      |   |
|----------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                 |   |    |   |    |   |
| **CONSOLIDATED                BALANCE SHEET (Continued)**                                                            |   |
|                                                                                                                 |   |  **December                31,** |   |  **December                31,** |   |
|                                                                                                                 |   | ** 2005** | ** ** | ** 2005** |   |
|                                                                                                                 |   |    |   |  **U.S.$** |   |
| **Current                liabilities**                                                                               |   |   |   |   |   |   |   |
| Notes                payable - current portion                                                                       |   | £ | 769,356 |   | $ | 1,327,139 |   |
| Trade                payables                                                                                        |   |   | 3,266,078 |   |   | 5,633,985 |   |
| Other                liabilities and accrued expenses                                                                |   |   | 1,288,085 |   |   | 2,221,946 |   |
| Obligations                under capital leases - current portion                                                    |   |   | 100,432 |   |   | 173,245 |   |
|                                                                                                                 |   |   |   |   |   |  |   |
| **Total                current liabilities**                                                                         |   |   | 5,423,951 |   |   | 9,356,315 |   |
|                                                                                                                 |   |   |   |   |   |   |   |
| Deferred                taxes                                                                                        |   |   | 82,131 |   |   | 141,676 |   |
| Notes                payable                                                                                         |   |   | 1,370,240 |   |   | 2,363,664 |   |
| Severance                pay                                                                                         |   |   | 18,840 |   |   | 32,499 |   |
|                                                                                                                 |   |   |   |   |   |  |   |
| **Total                liabilities**                                                                                 |   |   | 6,895,162 |   |   | 11,894,154 |   |
|                                                                                                                 |   |   |   |   |   |   |   |
| Guarantees,                Commitments & Liens                                                                   |   |   |   |   |   |   |   |
|                                                                                                                 |   |   |   |   |   |   |   |
| **Shareholders'                equity**                                                                         |   |   |   |   |   |   |   |
| Preferred                stock - 50,000,000 shares authorised, none issued                                           |   |   |   |   |   |   |   |
| Common                stock:                                                                                         |   |   |   |   |   |   |   |
| 25,000,000                shares authorised, £.0006896 ($0.001) par value;                                      |   |   |   |   |   |   |   |
| 8,172,671                issued and outstanding                                                                      |   |   | 5,448 |   |   | 9,398 |   |
| Foreign                currency translation adjustment                                                               |   |   | (116,408 | ) |   | (200,804 | ) |
| Contributions                in excess of shares                                                                     |   |   | 4,406,064 |   |   | 7,600,461 |   |
| Treasury                stock, at cost                                                                               |   |   | (142,166 | ) |   | (245,236 | ) |
| Retained                earnings                                                                                     |   |   | 859,014 |   |   | 1,481,799 |   |
|                                                                                                                 |   |   |   |   |   |  |   |
| **Total                shareholders' equity**                                                                        |   |   | 5,011,952 |   |   | 8,645,618 |   |
|                                                                                                                 |   |   |   |   |   |   |   |
| **Total                liabilities and shareholders' equity**                                                        |   | £ | £11,907,114 |   | $ | 20,539,772 |   |
|                                                                                                                 |   |   |   |   |   |   |   |
| The                accompanying notes are an integral part of these consolidated financial                statements |

----

| **Xfone,                Inc.****Subsidiaries**                                                                       |   |
|----------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                 |   |   |   |   |   |   |   |
| **CONSOLIDATED                STATEMENTS OF INCOME**                                                                 |   |
|                                                                                                                 |   | **Years                Ended** |   | **Year                Ended** |   |
|                                                                                                                 |   | **December                31** |   | **December                31** |   |
|                                                                                                                 |   | **2005** |   | **2004** |   | **2005** |   |
|                                                                                                                 |   |   |   |   |   | **U.S.$** |   |
| Revenues                                                                                                             |   | £ | 14,113,748 |   |  £ | 11,330,116 |   |  $ | 24,346,215 |   |
| Cost                of revenues                                                                                      |   |   | (9,254,597 | ) |   | (7,991,375 | ) |   | (15,964,180 | ) |
|                                                                                                                 |   |   |  |   |   |  |   |   |  |   |
| Gross                profit                                                                                          |   |   | 4,859,151 |   |   | 3,338,741 |   |   | 8,382,035 |   |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |
| **Operating                expenses:**                                                                          |   |   |   |   |   |   |   |   |   |   |
| Research                and development                                                                              |   |   | (6,896 | ) |   | (25,945 | ) |   | (11,896 | ) |
| Marketing                and selling                                                                                 |   |   | (1,262,182 | ) |   | (1,626,288 | ) |   | (2,177,264 | ) |
| General                and administrative                                                                            |   |   | (3,635,819 | ) |   | (1,573,726 | ) |   | (6,271,788 | ) |
|                                                                                                                 |   |   |   |   |   |   |   |   |  |   |
| Total                operating expenses                                                                              |   |   | (4,904,897 | ) |   | (3,225,959 | ) |   | (8,460,948 | ) |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |
| Operating                profit (loss)                                                                               |   |   | (45,746 | ) |   | 112,782 |   |   | (78,913 | ) |
| Financing                expenses - net                                                                              |   |   | (122,338 | ) |   | (83,403 | ) |   | (211,033 | ) |
| Equity                in income of affiliated company                                                                |   |   | 76,800 |   |   | 20,885 |   |   | 132,480 |   |
| Loss                from hurricane Katrina                                                                           |   |   | (38,703 | ) |   | - |   |   | (66,763 | ) |
| Other                income                                                                                          |   |   | 104,646 |   |   | 21,128 |   |   | 180,514 |   |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |
| Income                before minority interest and taxes                                                             |   |   | (25,341 | ) |   | 71,392 |   |   | (43,715 | ) |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |
| Minority                Interest                                                                                     |   |   | 113,960 |   |   | - |   |   | 196,581 |   |
|                                                                                                                 |   |   |   |   |   |   |   |   |  |   |
| Income                before taxes                                                                                   |   |   | 88,619 |   |   | 71,392 |   |   | 152,866 |   |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |
| Taxes                on income                                                                                       |   |   | (62,541 | ) |   | (31,518 | ) |   | (107,883 | ) |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |
| Net                income                                                                                            |   | £ | 26,078 |   | £ | 39,874 |   |  $ | 44,983 |   |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |
| **Earnings                Per Share:**                                                                               |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                |   |  £ | 0.004 |   |  £ | 0.007 |   | $ | 0.007 |   |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |
| Diluted                                                                                                              |   |  £ | 0.003 |   |  £ | 0.005 |   | $ | 0.006 |   |
|                                                                                                                 |   |   |   |   |   |   |   |   |   |   |
| The                accompanying notes are an integral part of these consolidated financial                statements |   |   |   |

----

| **Xfone,                Inc. and Subsidiaries**                              |
|------------------------------------------------------------------------------|
|                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **CONSOLIDATED                STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY** |   |
| **Year                Ended December 31, 2004 and 2005**                     |   |

|                                                     |   |   | **Number                  of Ordinary Shares** |   |         | **Share                  Capital ** | ** ** | ** **   | **Contributions                  in excess of Par Value ** | ** ** | ** **   | **Foreign                  currancy translation adjustments ** | ** ** | ** **   | **Treasury                  Stock ** | ** ** | ** **   | **Retained                  Earnings ** | ** ** | ** **   | **Total                  Shareholders' Equity ** |   |
|----------------------------------------------------------|--------|--------|------------------------------------------------|--------|--------------|------------------------------------------|------------|--------------|-----------------------------------------------------------------|------------|--------------|---------------------------------------------------------------------|------------|--------------|-------------------------------------------|------------|--------------|----------------------------------------------|------------|--------------|-------------------------------------------------------|--------|
| Balance                  at January 1, 2004              |   |   | 5,117,684                                      |   |  £ | 3,530                                    |       |         | £193,514                                                   |       | £       | -                                                                   |       | £       | -                                         |       | £       | 793,062                                      |       |  £ | 990,106                                               |   |
| Issuance                  of shares                      |   |   | 1,103,187                                      |   |         | 760                                      |       |         | 1,180,042                                                       |       |         | -                                                                   |       |         | -                                         |       |         | -                                            |       |         | 1,180,802                                             |   |
| Currency                  Translation                    |   |   | -                                              |   |         | -                                        |       |         | -                                                               |       |         | 1,210                                                               |       |         | -                                         |       |         | -                                            |       |         | 1,210                                                 |   |
| Net                  income                              |   |   | -                                              |   |         | -                                        |       |         | -                                                               |       |         | -                                                                   |       |         | -                                         |       |         | 39,874                                       |       |         | 39,874                                                |   |
|                                                     |   |   |                                           |   |         |                                     |       |         |                                                            |       |         |                                                                |       |         |                                      |       |         |                                         |       |         |                                                  |   |
| Balance                  at December 31, 2004            |   |   | 6,220,871                                      |   |         | 4,290                                    |       |         | 1,373,556                                                       |       |         | 1,210                                                               |       |         | -                                         |       |         | 832,936                                      |       |         | 2,211,992                                             |   |
|                                                     |   |   |                                           |   |         |                                     |       |         |                                                            |       |         |                                                                |       |         |                                      |       |         |                                         |       |         |                                                  |   |
| Purchase                  of treasury stock              |   |   | (100,000                                       | )      |         | -                                        |       |         | -                                                               |       |         | -                                                                   |       |         | (142,166                                  | )          |         | -                                            |       |         | (142,166                                              | )      |
| Stock                  issued during the                 |   |   |                                           |   |         |                                     |       |         |                                                            |       |         |                                                                |       |         |                                      |       |         |                                         |       |         |                                                  |   |
| period,                  net of issuance expenses:       |   |   |                                           |   |         |                                     |       |         |                                                            |       |         |                                                                |       |         |                                      |       |         |                                         |       |         |                                                  |   |
| For                  acquisition transaction             |   |   | 663,650                                        |   |         | 370                                      |       |         | 1,188,204                                                       |       |         | -                                                                   |       |         | -                                         |       |         | -                                            |       |         | 1,188,574                                             |   |
| For                  services                            |   |   | 3,150                                          |   |         | 2                                        |       |         | (2                                                              | )          |         | -                                                                   |       |         | -                                         |       |         | -                                            |       |         | -                                                     |   |
| For                  cash                                |   |   | 885,000                                        |   |         | 496                                      |       |         | 832,665                                                         |       |         | -                                                                   |       |         | -                                         |       |         | -                                            |       |         | 833,161                                               |   |
| Exercise                  of share options               |   |   | 500,000                                        |   |         | 290                                      |       |         | 115,129                                                         |       |         | -                                                                   |       |         | -                                         |       |         | -                                            |       |         | 115,419                                               |   |
| Warrants                  issued during the              |   |   |                                           |   |         |                                     |       |         |                                                            |       |         |                                                                |       |         |                                      |       |         |                                         |       |         |                                                  |   |
| period                                                   |   |   | -                                              |   |         | -                                        |       |         | 756,322                                                         |       |         | -                                                                   |       |         | -                                         |       |         | -                                            |       |         | 756,322                                               |   |
| Beneficial                  conversion feature           |   |   |                                           |   |         |                                     |       |         |                                                            |       |         |                                                                |       |         |                                      |       |         |                                         |       |         | 0                                                     |   |
| relating                  to convertible note            |   |   | -                                              |   |         | -                                        |       |         | 140,190                                                         |       |         | -                                                                   |       |         | -                                         |       |         | -                                            |       |         | 140,190                                               |   |
| Currency                  translation                    |   |   | -                                              |   |         | -                                        |       |         | -                                                               |       |         | (117,618                                                            | )          |         | -                                         |       |         | -                                            |       |         | (117,618                                              | )      |
| Net                  income                              |   |   |                                           |   |         |                                     |       |         |                                                            |       |         |                                                                |       |         |                                      |       |         | 26,078                                       |       |         | 26,078                                                |   |
|                                                     |   |   |                                           |   |         |                                     |       |         |                                                            |       |         |                                                                |       |         |                                      |       |         |                                         |       |         |                                                  |   |
| Balance                  at December 31, 2005            |   |   | 8,172,671                                      |   |  £ | 5,448                                    |       |  £ | 4,406,064                                                       |       |  £ | (116,408                                                            | )          |  £ | (142,166                                  | )          |  £ | 859,014                                      |       |  £ | 5,011,952                                             |   |
|                                                     |   |   |                                           |   |         |                                     |       |         |                                                            |       |         |                                                                |       |         |                                      |       |         |                                         |       |         |                                                  |   |
| **Convenience                  translation into U.S.$:** |   |   |                                           |   |         |                                     |       |         |                                                            |       |         |                                                                |       |         |                                      |       |         |                                         |       |         |                                                  |   |
| Balance                  at January 1, 2005              |   |   | 6,220,871                                      |   | $            | 7,400                                    |       | $            | 2,369,386                                                       |       | $            | 2,087                                                               |       | $            | -                                         |       | $            | 1,436,814                                    |       | $            | 3,815,687                                             |   |
|                                                     |   |   |                                           |   |         |                                     |       |         |                                                            |       |         |                                                                |       |         |                                      |       |         |                                         |       |         |                                                  |   |
| Purchase                  of treasury stock              |   |   | (100,000                                       | )      |         | -                                        |       |         | -                                                               |       |         | -                                                                   |       |         | (245,236                                  | )          |         | -                                            |       |         | (245,236                                              | )      |
| Stock                  issued during the                 |   |   |                                           |   |         |                                     |       |         |                                                            |       |         |                                                                |       |         |                                      |       |         |                                         |       |         |                                                  |   |
| period,                  net of issuance expenses:       |   |   |                                           |   |         |                                     |       |         |                                                            |       |         |                                                                |       |         |                                      |       |         |                                         |       |         |                                                  |   |
| For                  acquisition transaction             |   |   | 663,650                                        |   |         | 638                                      |       |         | 2,049,652                                                       |       |         | -                                                                   |       |         | -                                         |       |         | -                                            |       |         | 2,050,290                                             |   |
| For                  services                            |   |   | 3,150                                          |   |         | 3                                        |       |         | (3                                                              | )          |         | -                                                                   |       |         | -                                         |       |         | -                                            |       |         | -                                                     |   |
| For                  cash                                |   |   | 885,000                                        |   |         | 857                                      |       |         | 1,436,347                                                       |       |         | -                                                                   |       |         | -                                         |       |         | -                                            |       |         | 1,437,204                                             |   |
| Exercise                  of share options               |   |   | 500,000                                        |   |         | 500                                      |       |         | 198,598                                                         |       |         | -                                                                   |       |         | -                                         |       |         | -                                            |       |         | 199,098                                               |   |
| Warrants                  issued during the              |   |   |                                           |   |         |                                     |       |         |                                                            |       |         |                                                                |       |         |                                      |       |         |                                         |       |         |                                                  |   |
| period                                                   |   |   | -                                              |   |         | -                                        |       |         | 1,304,655                                                       |       |         | -                                                                   |       |         | -                                         |       |         | -                                            |       |         | 1,304,655                                             |   |
| Beneficial                  conversion feature           |   |   |                                           |   |         |                                     |       |         |                                                            |       |         |                                                                |       |         |                                      |       |         |                                         |       |         |                                                  |   |
| relating                  to convertible note            |   |   | -                                              |   |         | -                                        |       |         | 241,828                                                         |       |         | -                                                                   |       |         | -                                         |       |         | -                                            |       |         | 241,828                                               |   |
| Currency                  translation                    |   |   |                                           |   |         |                                     |       |         |                                                            |       |         | (202,891                                                            | )          |         |                                      |       |         |                                         |       |         | (202,891                                              | )      |
| Net                  income                              |   |   | -                                              |   |         | -                                        |       |         | -                                                               |       |         | -                                                                   |       |         | -                                         |       |         | 44,983                                       |       |         | 44,983                                                |   |
|                                                     |   |   |                                           |   |         |                                     |       |         |                                                            |       |         |                                                                |       |         |                                      |       |         |                                         |       |         |                                                  |   |
| Balance                  at December 31, 2005            |   |   | 8,172,671                                      |   | $            | 9,398                                    |       | $            | 7,600,463                                                       |       |         | ($200,804                                                           | )          |         | ($245,236                                 | )          | $            | 1,481,797                                    |       | $            | 8,645,618                                             |   |

----

| **Xfone,                Inc. and Subsidiaries**                             |   |
|-----------------------------------------------------------------------------|--------|
|                                                                        |   |    |   |   |   |    |   |
| **CONSOLIDATED                STATEMENTS OF CASH FLOWS**                    |   |
|                                                                        |   |  **Years                Ended** |   |  **Year                Ended** |   |
|                                                                        |   |  **December                31 ,** |   |  **December                31 ,** |   |
|                                                                        |   |  **2005** |   | **2004** |   |  **2005** |   |
|                                                                        |   |    |   |   |   |  **U.S.$** |   |
| **Cash                flow from operating activities**                      |   |   |   |   |   |   |   |   |   |   |
| Net                income                                                   |   |  £ | 26,078 |   |  £ | 39,874 |   | $ | 44,983 |   |
| Adjustments                required to reconcile net income                 |   |   |   |   |   |   |   |   |   |   |
| to                net cash provided by (used in)                            |   |   |   |   |   |   |   |   |   |   |
| operating                activities:                                        |   |   |   |   |   |   |   |   |   |   |
| Depreciation                and amortization                                |   |   | 246,443 |   |   | 124,200 |   |   | 425,114 |   |
| Stock                issued for professional services                       |   |   | 24,377 |   |   | - |   |   | 42,050 |   |
| Minority                Interest                                            |   |   | (113,960 | ) |   | - |   |   | (196,581 | ) |
| Currency                differences on convertible notes                    |   |   | 97,572 |   |   | - |   |   | 168,312 |   |
| Capital                (loss) from the sale of fix assets                   |   |   | (5,398 | ) |   | - |   |   | (9,312 | ) |
| (Increase)                in trade receivables                              |   |   | (1,013,747 | ) |   | (1,007,624 | ) |   | (1,748,713 | ) |
| Increase                in Severence pay                                    |   |   | (4,565 | ) |   | - |   |   | (7,875 | ) |
| Increase                in other receivables                                |   |   | (11,361 | ) |   | (352,580 | ) |   | (19,598 | ) |
| Decrease                in shareholder loans                                |   |   | 123,966 |   |   | 38,805 |   |   | 213,841 |   |
| Equity                in earnings of investments                            |   |   | (76,800 | ) |   | (20,885 | ) |   | (132,480 | ) |
| Increase                in trade payables                                   |   |   | 957,861 |   |   | 397,938 |   |   | 1,652,310 |   |
| Increase                (decrease) in other payables                        |   |   | 521,970 |   |   | (155,777 | ) |   | 900,398 |   |
| (Decrease)                increase in deferred taxes                        |   |   | 82,079 |   |   | (36,057 | ) |   | 141,586 |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |
| **Net                cash provided by (used in) operating activities**      |   |   | 854,515 |   |   | (972,106 | ) |   | 1,474,035 |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |
| **Cash                flow from investing activities**                      |   |   |   |   |   |   |   |   |   |   |
| Purchase                of other assets                                     |   |   | (117,348 | ) |   | (57,816 | ) |   | (202,425 | ) |
| Purchase                of equipment                                        |   |   | (388,580 | ) |   | (635,905 | ) |   | (670,301 | ) |
| change                in long-term receivables                              |   |   | (87,000 | ) |   | - |   |   | (150,075 | ) |
| Proceeds                from sale of fixed assets                           |   |   | 57,971 |   |   | - |   |   | 100,000 |   |
| Repayment                of capital lease obligation                        |   |   | (229,358 | ) |   | - |   |   | (395,643 | ) |
| Net                cash acquired through purchase of WS Telecom             |   |   | 76,594 |   |   | - |   |   | 132,125 |   |
| Acquisition                of WS Telecom                                    |   |   | (244,208 | ) |   | - |   |   | (421,258 | ) |
|                                                                        |   |   |   |   |   |   |   |   |   |   |
| **Net                cash (used in) investing activities**                  |   |   | (931,929 | ) |   | (693,721 | ) |   | (1,607,577 | ) |
|                                                                        |   |   |   |   |   |   |   |   |   |   |
| **Cash                flow from financing activities**                      |   |   |   |   |   |   |   |   |   |   |
| Proceed                (Repayment) of long term loans from banks and others |   |   | (72,773 | ) |   | 578,741 |   |   | (125,533 | ) |
| Repayment                of capital lease obligation                        |   |   | - |   |   | (187,357 | ) |   | - |   |
| Purchase                of Treasury stock                                   |   |   | (142,166 | ) |   | - |   |   | (245,236 | ) |
| Dividend                paid                                                |   |   | - |   |   | (86,270 | ) |   | - |   |
| Proceeds                from issuance of convertable notes, net             |   |   | 842,889 |   |   | - |   |   | 1,453,984 |   |
| Proceeds                from issuance of common stock                       |   |   | 1,147,289 |   |   | 1,180,802 |   |   | 1,979,074 |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |
| **Net                cash provided by financing activities**                |   |   | 1,775,239 |   |   | 1,485,916 |   |   | 3,062,289 |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |
| Net                Increase (Decrease) in cash                              |   |   | 1,697,826 |   |   | (179,911 | ) |   | 2,928,747 |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |
| Cash,                beginning of year                                      |   |   | 797,097 |   |   | 977,008 |   |   | 1,374,995 |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |
| Cash                at end of year                                          |   |  £ | 2,494,923 |   |  £ | 797,097 |   | $ | 4,303,742 |   |
|                                                                        |   |   |   |   |   |   |   |   |   |   |

| SUPPLEMENTAL                SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:                                  |   |                             |      |
|----------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|-----------|
| **For                the year ended December 31, 2005**                                                              |   |                             |      |   |   |    |   |
|                                                                                                                 |   |  **Year**                        |      |  **Year** |   |
|                                                                                                                 |   |  **December                31,** |      |  **December                31,** |   |
|                                                                                                                 |   |  **2005**                        |      | **2004** |   |  **2005** |   |
|                                                                                                                 |   |                             |      |   |   |  **U.S.$** |   |
| Acquiring                equipment under capital lease obligation                                                    |   |  £                          | -         |   | £ | 319,953 |   | $ | - |   |
| Acquisition                of WS Telecom                                                                             |   |                                  | 1,862,000 |   |   |   |   | $ | 3,211,950 |   |
| Acquisition                of communication license                                                                  |   |                                  | 61,256    |   |   | - |   |   | 105,667 |   |
|                                                                                                                 |   |                                  |      |   |   |   |   |   |   |   |
| Issuance                of shares of common stock for                                                                |   |                                  | -         |   |   | - |   |   | - |   |
| Compensation                for professional services                                                                |   |                                  | -         |   |   | 60,120 |   |   | - |   |
|                                                                                                                 |   |                                  |      |   |   |   |   |   |   |   |
| Interest                paid                                                                                         |   |  £                          | 92,023    |   |  £ | 30,347 |   | $ | 158,739 |   |
| Tax                paid                                                                                              |   |  £                          | 23,490    |   |  £ | 261,896 |   | $ | 40,520 |   |
| The                accompanying notes are an integral part of these consolidated financial                statements |   |                                  |      |   |   |

----

**Note        1 -** **Organizationand        Nature of Business**

|   | A. | Xfone,                Inc. ("Xfone") was incorporated in Nevada, U.S.A. in September, 2000                and                is a provider of voice and data telecommunications services, with                operations in the United Kingdom, the United States and                Israel. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | - | Xfone                USA, Inc. ("Xfone USA") located in Mississippi- wholly owned                subsidiary. |
|--------|---|--------------------------------------------------------------------------------------------------------------|

|   | - | Xfone                018 Ltd, an Israeli company ("Xfone 018") - in which Xfone holds                a 69%                ownership share. |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------------------|

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

|   | C. | The                financial statements have been translated into U.S. dollars using                the rate                of exchange of the U.S. dollar at December 31, 2005. The translation                was                made solely for the convenience of the readers. It should be noted                that                the £ figures do not necessarily represent the current cost amounts of                the                various elements presented and that the translated U.S. dollars figures                should not be construed as a representation that the £ currency amounts                actually represented, or could be converted into, U.S. dollars. The                representative rate of exchange of the £ at December 31, 2005 was £1 =                1.725 US$. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Note      2 -**
**Significant      Accounting Policies**

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

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

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

----

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

|                                   | Methods                      | Useful                Life |
|----------------------------------------|------------------------------|----------------------------|
| Switching                equipment     | straight                line | 10                years    |
| Machinery                and equipment | straight                line | 3-4                years   |
| Furniture                and fixtures  | straight                line | 4-14                years  |
| Motor                vehicles          | straight                line | 4                years     |

|   | E. | Other                intangible assets |
|--------|----|----------------------------------------|

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

----

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

|   | H. | Use                of Estimates |
|--------|----|---------------------------------|

|   | I. | Earnings                Per Share |
|--------|----|-----------------------------------|

|   | J. | Income                Taxes |
|--------|----|-----------------------------|

----

|   | K. | Stock-Based                Compensation |
|--------|----|-----------------------------------------|

|   | L. | Foreign                Currency Translation |
|--------|----|---------------------------------------------|

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

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

*1)      FAS 123(R)*

----

*2)      FAS 151 *

*3)      FAS 154 *

**Note      3 —**
** **
**Prepaid      Expenses, Other Receivables and Deposits**

|                                                              |   | **December                31,** |    | **December                31,** |   |
|-------------------------------------------------------------------|--------|---------------------------------|---------|---------------------------------|--------|
|                                                              |   | **2005**                        |    | **2005**                        |   |
|                                                              |   |                            |    | **US$**                         |   |
| Deferred                taxes                                     |   |  £                    | 20,590  |                            | $      | 35,518 |   |
| Prepaid                acquisition costs                          |   |                            | 27,930  |                            |   | 48,179 |   |
| Due                from Swiftglobal, Ltd. (non-affiliated entity) |   |                            | 10,846  |                            |   | 18,709 |   |
| Other                prepaid expenses                             |   |                            | 180,510 |                            |   | 311,380 |   |
| Due                from Story Ltd. (affiliated entity)            |   |                            | 15,960  |                            |   | 27,531 |   |
| Tax                authorities                                    |   |                            | 52,084  |                            |   | 89,845 |   |
| Income                receivable                                  |   |                            | 318,833 |                            |   | 549,987 |   |
| Other                receivables                                  |   |                            | 116,121 |                            |   | 200,309 |   |
|                                                              |   |                            |    |                            |   |  |   |
|                                                              |   |  £                    | 742,874 |                            | $      | 1,281,458 |   |

----

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

**Note      5 — Fixed Assets **

|                                              |   | **December                31,** |          | **December****31,** |   |
|---------------------------------------------------|--------|---------------------------------|---------------|---------------------|--------|
|                                              |   | **2005**                        |          | **2005**            |   |
|                                              |   |                            |          |  **US$**       |   |
| **Fixed                Assets**                   |   |                            |          |                |   |   |   |
|                                              |   |                            |          |                |   |   |   |
| **Cost**                                          |   |                            |          |                |   |   |   |
| Equipment                held under capital lease |   |  £                    | 529,950       |                | $      | 914,164 |   |
| Office                furniture and equipment     |   |                            | 197,317       |                |   | 340,372 |   |
| Development                costs                  |   |                            | 143,079       |                |   | 246,811 |   |
| Computer                equipment                 |   |                            | 1,665,643     |                |   | 2,873,234 |   |
|                                              |   |                            |          |                |   |  |   |
|                                              |   |  £                    | 2,535,989     |                | $      | 4,374,581 |   |
| **Accumulated                Depreciation**       |   |                            |          |                |   |   |   |
| Equipment                held under capital lease |   |                            | £135,131 |                | $      | 199,769 |   |
| Office                furniture and equipment     |   |                            | 40,911        |                |   | 70,571 |   |
| Development                costs                  |   |                            | 73,309        |                |   | 126,458 |   |
| Computer                equipment                 |   |                            | 235,323       |                |   | 439,265 |   |
|                                              |   |                            |          |                |   |   |   |
|                                              |   |  £                    | 484,674       |                | $      | 836,063 |   |

----

**Note      6 — Investments **

**Note      7 — Other Assets**

|                                           |   | **December                31,** |      | **December                31,** |   |
|------------------------------------------------|--------|---------------------------------|-----------|---------------------------------|--------|
|                                           |   | **2005**                        |      | **2005**                        |   |
|                                           |   |                            |      | **US$**                         |   |
| Goodwill                in connection with the |   |                            |      |                            |   |   |   |
| acquisition                of WS Telecom       |   |  £                    | 2,218,401 |                            | $      | 3,826,742 |   |
| License                                        |   |                            | 80,959    |                            |   | 139,654 |   |
| Other                                          |   |                            | 176,021   |                            |   | 303,636 |   |
| Accumulated                amortization        |   |                            | (10,048   | )                               |   | (17,333 | ) |
|                                           |   |  £                    | 2,465,333 |                            | $      | 4,252,699 |   |

**Note      8 — Other Liabilities and Accrued Expenses**

|                                                 |   | **December                31,** |      | **December                31,** |   |
|------------------------------------------------------|--------|---------------------------------|-----------|---------------------------------|--------|
|                                                 |   | **2005**                        |      | **2005**                        |   |
|                                                 |   |                            |      | **US$**                         |   |
| Companies                under management agreements |   |  £                    | 271,335   |                            | $      | 468,053 |   |
| Shareholders                                         |   |                            | 29,743    |                            |   | 51,307 |   |
| Corporate                taxes                       |   |                            | 33,124    |                            |   | 57,139 |   |
| Professional                fees                     |   |                            | 23,797    |                            |   | 41,050 |   |
| Government                authorities                |   |                            | 62,968    |                            |   | 108,620 |   |
| Payroll                and other taxes               |   |                            | 470,446   |                            |   | 811,519 |   |
| Other                accrued expense                 |   |                            | 234,959   |                            |   | 405,304 |   |
| Others                                               |   |                            | 161,713   |                            |   | 278,954 |   |
|                                                 |   |                            |      |                            |   |  |   |
|                                                 |   |  £                    | 1,288,085 |                            | $      | 2,221,946 |   |

----

**Note      9 — Notes Payable **

|                                                                                                |       |  **December                31,** | ** ** | **December                31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                          | ** ** | ** 2005**                        | ** ** | **2005**                        | ** ** |
| ** **                                                                                          | ** ** | **  **                      | ** ** | **US$**                         |       |
| Short                term bank credit, interest rate at prime or prime +1.0%                        |       |  £                          | 217,861    |                            | $          | 375,810 |   |
| Convertible                note                                                                     |       |                                  | 1,113,285  |                            |       | 1,920,417 |   |
| Note                payable to others, due on demand, interest rate                                 |       |                                  |       |                            |       |  |   |
| at                5 percent, monthly interest payments only                                         |       |                                  | 64,771     |                            |       | 111,730 |   |
|                                                                                                |       |                                  |       |                            |       |   |   |
| Note                payable to others, due December 2010, interest rate                             |       |                                  |       |                            |       |   |   |
| at                prime, 5.25 percent at December 31, 2005                                          |       |                                  | 73,812     |                            |       | 127,326 |   |
|                                                                                                |       |                                  |       |                            |       |   |   |
| Note                payable to others, due March 2010, interest rate at 7.0                percent, |       |                                  | 32,143     |                            |       | 55,447 |   |
| monthly                payments of $940, including interest                                         |       |                                  |       |                            |       |   |   |
|                                                                                                |       |                                  |       |                            |       |   |   |
| Note                payable to others, due March 2010, interest rate at 7.0                percent, |       |                                  | 10,690     |                            |       | 18,440 |   |
| monthly                payments of $315, including interest                                         |       |                                  |       |                            |       |   |   |
|                                                                                                |       |                                  |       |                            |       |   |   |
| Note                payable to bank, due January 2010, interest rate at 6.0                percent, |       |                                  | 10,297     |                            |       | 17,762 |   |
| monthly                payments of $302, including interest                                         |       |                                  |       |                            |       |   |   |
|                                                                                                |       |                                  |       |                            |       |   |   |
| Bank                Hapoalim -maturity ,October 2009                                                |       |                                  |       |                            |       |   |   |
| annual                interest of the bank's prime rate                                             |       |                                  |       |                            |       |   |   |
| plus                1%, payable in 58 equal payments of                                             |       |                                  |       |                            |       |   |   |
| Pound                7,654 including interest                                                       |       |                                  | 380,954    |                            |       | 657,146 |   |
|                                                                                                |       |                                  |       |                            |       |   |   |
| Shareholder(minority                interest holder)                                                |       |                                  |       |                            |       |   |   |
| due                and payable ,November 2008 annual                                                |       |                                  |       |                            |       |   |   |
| interest                at Israeli consumer price index plus 4%                                     |       |                                  | 235,783    |                            |       | 406,725 |   |
|                                                                                                |       |                                  | 2,139,596  |                            |       | 3,690,803 |   |
|                                                                                                |       |                                  |       |                            |       |   |   |
| less                current portion                                                                 |       |                                  | 769,356    |                            |       | 1,327,139 |   |
|                                                                                                |       |                                  |       |                            |       |   |   |
| Long                term portion                                                                    |       |  £                          | 1,370,240  |                            | $          | 2,363,664 |   |

----

** **

** **
** **
** **

|       |       | **December                31,** | ** ** | **Convenience**                           | ** ** |
|------------|------------|---------------------------------|------------|-------------------------------------------|------------|
| ** ** | ** ** | **2005**                        | ** ** | **translation                into U.S.$** |       |
| **Year**   |       |                            |       |                                      |       |   |   |
| 2006       |       |  £                    | 769,356    |                                      | $          | 1,327,139 |   |
| 2007       |       |                            | 653,202    |                                      |       | 1,126,774 |   |
| 2008       |       |                            | 599,879    |                                      |       | 1,034,792 |   |
| 2009       |       |                            | 100,214    |                                      |       | 172,869 |   |
| 2010       |       |                            | 16,945     |                                      |       | 29,229 |   |
|       |       |  £                    | 2,139,596  |                                      | $          | 3,690,803 |   |

**Note      10 — Capital Lease Obligations**

** **

|                                                      |   |    |    | **U.S.$** |   |
|-----------------------------------------------------------|--------|--------------|---------|-----------|--------|
|                                                      |   |    |    |      |   |
| Year                2006         |   |  £ | 100,432 |      | $      | 173,245 |   |
|                                                      |   |         |    |      |   |   |   |
|                                                      |   |         |    |      |   |   |   |
| Total                minimum lease payments               |   |         | 107,799 |      |   | 185,953 |   |
| Less:                amount representing interest         |   |         | (7,367  | )         |   | (12,708 | ) |
|                                                      |   |         |    |      |   |   |   |
| Present                value of net minimum lease payment |   |  £ | 100,432 |      | $      | 173,245 |   |

----

**Note      11 — Income Taxes **

|                                                     |   | **  December                31,                2005** |   |
|----------------------------------------------------------|--------|-----------------------------------------------------------------|--------|
|                                                     |   |                                                            |   | **U.S.$** |   |
| Deferred                Tax Liabilities:                 |   |                                                            |   |   |   |   |   |
| Accelerated                tax write off of fixed assets |   |  £                                                    | 82,131 |   | $ | 141,676 |   |
|                                                     |   |                                                            |   |   |   |   |   |
| Deferred                Tax Assets:                      |   |                                                            |   |   |   |   |   |
| Carry                forward losses                      |   |                                                            | 20,590 |   |   | 35,518 |   |
|                                                     |   |                                                            |   |   |   |   |   |
| Net                deferred taxes liabilities            |   |  £                                                    | 61,541 |   | $ | 106,158 |   |

|                                                         |   | **Years                Ended**  |    | **Year                Ended**   |         |
|--------------------------------------------------------------|--------|---------------------------------|---------|---------------------------------|--------------|
|                                                         |   | **December                31,** |    | **December                31,** |         |
|                                                         |   | **2005**                        |    | **2004**                        |         | **2005** |   |
|                                                         |   |                            |    |                            |         | **U.S.$** |   |
|                                                         |   |                            |    |                            |         |   |   |
| Income                tax computed at statutory rate         |   |  £                    | 22,428  |                            |  £ | 17,969 |   | $ | 38,689 |   |
| Effect                of tax authority adjustments           |   |                            |    |                            |         | 11,601 |   |   |   |   |
| Current                income (losses) for which no deferred |   |                            |    |                            |         |   |
| tax                expense (benefit) has been recorded       |   |                            | (94,451 | )                               |         |   |   |   | (162,928 | ) |
| Difference                between income reported for        |   |                            |    |                            |         |   |   |   |   |   |
| tax                purposes and income for financial         |   |                            |    |                            |         |   |   |   |   |   |
| reporting                purposes - net                      |   |                            | 134,564 |                            |         |   |   |   | 232,123 |   |
| Effect                of permanent differences (including    |   |                            |    |                            |         |   |   |   |   |   |
| effect                of non consolidated tax filings)       |   |                            |    |                            |         | 1,948 |   |   |   |   |
| Provision                for income taxes                    |   |  £                    | 62,541  |                            |  £ | 31,518 |   | $ | 107,884 |   |

----

**Note      12 — Commitments & Contingencies **

|   | A. | The                Company’s wholly-owned UK based subsidiary, Swiftnet Limited was served                with a claim on October 11, 2005 that was filed by MCI WorldCom Limited                (“MCI”) in an English court for the sum of £1,640,440 ($2,829,758) plus                interest accruing at a daily rate of £401 ($691) which at the date of                Claim had amounted to £92,317 ($159,247). MCI’s claim is for                telecommunication services MCI claims it provided to Swiftnet. Swiftnet                has been in dispute with MCI regarding amounts due to MCI for                telecommunications services provided by MCI to Swiftnet. Swiftnet                alleges                that the disputed charges were improperly billed by MCI to its                account for a long time and therefore MCI should credit Swiftnet for                a certain amount of the claim.  Swiftnet has defended the claim by                stating that in relation to the Invoices that MCI is claiming remain                unpaid, £307,094 ($529,737) is not justified according to the rates agreed                at various meetings and                equates to an over-billing by such amount,                although Swiftnet does not have written evidence for many of the                agreed                rates. Swiftnet                has also submitted a counterclaim stating that it is owed a further                £671,111 ($1,157,666) in credits in relation to amounts paid on account                and wrongly attributed by MCI to over-billed invoices. In addition,                MCI continues to send traffic to Swiftnet for termination via our                Israeli                subsidiary's network. Swiftnet is claiming that the amounts owed by                MCI to Swiftnet in this regard should be set off as against any amounts                being claimed by MCI in the dispute.  There                is a further counterclaim for additional accountancy costs and loss                of                management time incurred by Swiftnet due to the incorrect                billing.                The Company's financial statements have for some time carried the                full                amount due to MCI based on the invoices issued by MCI, as well as                an                appropriate provision for the credit the company is                claiming.  |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | B. | Opal                Telecom Limited claims that the Company’s wholly-owned UK based                subsidiary, Swiftnet Limited, owes them £119,000 ($205,275). However,                Swiftnet claims that Opal Telecom owes it damages for breach of an                agreement and further that the debt claimed should be reduced by£50,000                ($86,250) to take account of billing errors. Legal proceedings have                not been commenced and the parties are planning to meet to see if                a                settlement can be reached. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | C. | Xfone                entered into an agreement with an investor in Israel, whereby the                later                purchased 26% interest in Xfone 018 owned by another shareholder                through                providing a bank guarantee of 10,000,000 New Israeli Shekels                ("NIS") (£1,259,398) ($2,172,496) to the Ministry of Communications                of the State of Israel which replaced an existing bank guarantee                given by                the Company. As part of the agreement, the Company agreed to indemnify                the                investor for any damage caused to him due to the forfeiture of the                bank                guarantee with the Ministry of Communications on account of any act                and/or                omission of Xfone, provided that the said act or omission is performed                against the opinion of the investor or without his knowledge. Further,                the                Company agreed that if at the end of the first two years of Xfone                018                business activity, its revenues shall be less than $2,000,000                (£1,159,420), or if it shall cease business activity (at any time),                the                Company shall secure the return of the bank guarantee to the                investor. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | D. | Our                Israeli based subsidiary, Xfone 018 Ltd. has received credit facilities                from Bank Hapoalim B.M. in Israel to finance its start-up activities.                The                credit facility includes a revolving credit line of 500,000 New Israeli                Shekels ("NIS") ($108,625) and a short-term credit line of 2,250,000                NIS                ($488,812). In addition, the bank made available to Xfone 018 a long-term                facility of 3,150,000 NIS ($684,336) to procure equipment. The credit                facilities are secured with: (a) a floating charge on Xfone 018 assets;                (b) a fixed charge on its telecommunication equipment (including                switches); (c) subordination of a Term Note of $800,000 (in favor                of the                Company); (d) assignment of rights by way of pledge on the Partner                Communications Company Ltd. contract, the Cellcom Israel Ltd. contract,                the Pelephone Communications Ltd. contract, and the Credit companies                contracts with Xfone 018; (e) personal collateral by Abraham Keinan                and                Guy Nissenson, which includes a stock pledge. The                Company agreed to indemnify Abraham Keinan and/or Guy Nissenson on                account                of any damage and/or loss and/or expense (including legal expenses)                that                they may incur in connection with the stock pledge and/or any other                obligation made by them to Bank Hapoalim in connection with the                collateral;                (f) The Company and Swiftnet Limited issued a Letter of Guarantee,                unlimited in amount, in favor of the bank, guaranteeing all debt                and                indebtedness of Xfone 018 towards the bank. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Note      13 — Capital Structure, Stock Options**

**Shares      and Warrants**

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

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

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

|   | D. | The                offering agreement requires the Company to issue additional shares                for no                consideration to the participants of the offering under certain                conditions, as defined. Accordingly, on November 17, 2004, the Company                issued 109,716 shares according to this agreement. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | E. | In                February 2005, the Company granted 11,400 shares to employees, agents                and                subcontractors from its compensation                fund stock pool the shares value as of the granting day was: £                18,171. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | F. | In                March 2005 the Company granted 8,419 warrants for consulting services,                valued £ 4,505. Each Warrant is valid for 5 years and exercisable                into one share of                restricted common stock at an exercise price of $5.50 per                share. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | G. | In                connection with the acquisition of W.S. Telecom, the Company issued                663,650 restricted shares of                its common stock representing a market value of £1,170,400, and 561,216                warrants with a value £                691,600 (see also Note 19). Each Warrant is valid for 5 years and                exercisable into one share with a strike price                that is 10% above the closing price of the Company's common stock                at the                date of the acquisition. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | H. | During                July 2005, the Company granted 3,150 shares to a subcontractor. The                value                at the granting day was: £5,478. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | I. | In                connection with our September 28, 2005 financing transaction with                Laurus                Master Fund, Ltd. the Company issued 157,500 warrants with a value                of                £21,740 (see also Note 9). Each warrant is valid for 5 years and                exercisable into one share of common stock at $3.80 per                share. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | J. | On                September 28, 2005 a Securities Purchase Agreement was entered for                a                financial transaction by and among the Company, Crestview Capital                Master,                LLC, Burlingame Equity Investors, LP, Burlingame Equity Investors                II, LP,                Burlingame Equity Investors (Offshore), Ltd. and Mercantile Discount                -                Provident Funds. The proceeds of the financial transaction are expected                to                be used for general working capital and/or investment in equipment                and/or                for acquisitions and/or business development. Upon the closing of                the                financial transaction on October 31, 2005, the Company issued to                the                investors an aggregate of 885,000 shares of common stock at a purchase                price of $2.50 per share together with, 221,250 warrants at $3.00                per                share and 221,250 warrants at $3.25 per                share. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | K. | During                November 2005, the Company granted 320,370 warrants to service providers                and subcontractors valued £ 77,671                according to Black-Scholes option pricing model. Each Warrant is                valid for                5 years and exercisable                into one share of                restricted common stock at an exercise price of $3.15 to 6.80 per                share. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | L. | In                connection with a Stock Purchase Agreement, clarified on July 30,                2001,                Campbeltown Business Limited (“Campbeltown”), an entity owned by the                Nissenson family including the Company’s President and Chief 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 (£115,942).                This option was exercised on December 29, 2005. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | M. | On                December 29, 2005, the Board of Directors of the Company entered                into an                oral Stock Purchase Agreement with Mr. Keinan pursuant to which it                repurchased 100,000 restricted shares of its common stock at a price                of                $2.50 per share (market price at that day was $2.75 per share). The                100,000 shares were returned to the Company for cancellation. The                Agreement was approved by a majority of the non-interested members                of the                Board of Directors of the Company. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                               |   | **Number                of** |      | **Price**                    |         | **Share**   |   | **On                excess** |   | **Treasury** |         | **Total                issue** |   |
|----------------------------------------------------|--------|------------------------------|-----------|------------------------------|--------------|-------------|--------|------------------------------|--------|--------------|--------------|--------------------------------|--------|
| **Month                  Issued**                  |   | **Shares**                   |      | **Per                share** |         | **Capital** |   | **of                shares** |   | **Stock**    |         | **Price**                      |   |
| **2004**                                           |   |                         |      |                         |         |        |   |                         |   |         |         |                           |   |   |   |   |   |   |   |
| February                                           |   |                         | 986,737   |                         |  £ | 1.628       |   |  £                 | 680    |         |  £ | 1,605,728                      |   |   | - |   |  £ | £1,606,408 |   |
| cost                of February issuance           |   |                         | -         |                         |         | -           |   |                         | -      |         |         | (433,051                       | )      |   | - |   |   | (433,051 | ) |
| May                                                |   |                         | 3,000     |                         |         | 1.618       |   |                         | 2      |         |         | 4,852                          |   |   | - |   |   | 4,854 |   |
| July                                               |   |                         | 3,734     |                         |         | 0.694       |   |                         | 2      |         |         | 2,589                          |   |   | - |   |   | 2,591 |   |
| November                                           |   |                         | 109,716   |                         |         | -           |   |                         | 76     |         |         | (76                            | )      |   | - |   |   | - |   |
| **Total                2004**                      |   |                         | 1,103,187 |                         |         |        |   |  £                 | 760    |         |  £ | 1,180,042                      |   |   | - |   |  £ | 1,180,802 |   |
| **2005**                                           |   |                         |      |                         |         |        |   |                         |   |         |         |                           |   |   |   |   |   |   |   |
| February                (see section E)            |   |                         | -         |                         |         | -           |   |                         | 6      |         |         | (6                             | )      |   | - |   |   | - |   |
| March                                              |   |                         | 663,650   |                         |         | 1.791       |   |                         | 370    |         |         | 1,188,201                      |   |   | - |   |   | 1,188,571 |   |
| July                                               |   |                         | 3,150     |                         |         | -           |   |                         | 2      |         |         | (2                             | )      |   | - |   |   | - |   |
| October                                            |   |                         | 885,000   |                         |         | 1.450       |   |                         | 498    |         |         | 1,282,608                      |   |   | - |   |   | 1,283,107 |   |
| cost                of October issuance            |   |                         | -         |                         |         | -           |   |                         | -      |         |         | (449,943                       | )      |   | - |   |   | (449,943 | ) |
| December                Purchase of Treasury Stock |   |                         | (100,000  | )                            |         | 1.422       |   |                         | -      |         |         | -                              |   |   | (142,166 | ) |   | (142,166 | ) |
| December                                           |   |                         | 500,000   |                         |         | 0.23        |   |                         | 282    |         |         | 115,137                        |   |   | - |   |   | 115,419 |   |
| **Total                2005**                      |   |                         | 1,951,800 |                         |         |        |   |                         | 1,158  |         |         | 2,135,996                      |   |   | (142,166 | ) |   | 1,994,988 |   |
| **Total**                                          |   |                         | 3,054,987 |                         |         |        |   |  £                 | 1,918  |         |  £ | 3,316,038                      |   |  £ | (142,166 | ) |  £ | 3,175,790 |   |

----

**Stock      Option Plan**

|   | A. | In                November 2004, the Company’s board of directors approved the adoption of                the principal items forming the Company’s 2004 stock option plan (The                “Plan”) for the benefit of employees, officers, directors, consultants                and                subcontractors of the Company including its subsidiaries. This plan                was                approved by a special meeting of shareholders on March 13, 2006.                The                purpose of the Plan is to enable the Company to attract and retain                the                best available personnel for positions of substantial responsibility,                to                provide an incentive to such persons presently engaged with the Company                and to promote the success of the Company business. The Plan will                provide                for the grant of options an aggregate of 5,500,000 shares of the                Company’s                common stock. The Plan shall be administered by the board to determine                the                persons to whom options are granted, the number of options that are                granted, the number of shares to be covered by each option, the options                may be exercised and whether the options is an incentive or non-statutory                option. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | B. | At                November 24, 2004 3,200,000 options were granted under the plan described                above according to the following terms: Option exercise price - $3.50,                vesting date - 12 month from the date of grant, expiration date -                5 years                from the vesting date. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | C. | On                February 6, 2005, the Company’s board of directors approved a grant to                past/current employees of 730,000 options under and subject to the                2004                Stock Option Plan of the Company according to the following terms:                Option                exercise price of $3.50; Vesting Date **-**                the vesting of the options will be over a period of 4 years as follows:                25% of the options are vested after a year from the Date of Grant.                Thereafter, 1/16 of the options are vested every 3 months for the                following 3 years; Expiration Date**-**                5.5 years from the Grant Date. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | D. | On                November 13, 2005, our Board of Directors ratified the grant                of 600,000 options to Wade Spooner and 300,000 options to Ted                Parsons on March 10, 2005, under our 2004 Stock Option Plan, pursuant                to the terms described in their March 10, 2005 employment agreements.                The                stock options will provide for a five (5) year term from the vesting                date,                a strike price that is 10% above the closing price of the Registrant’s                common stock on the date of issue of the Options. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | E. | On                June 8, 2005, the Company’s board of directors approved a grant to the                Company's Chief Financial Officer, of 300,000 options under and subject                to                the 2004 Stock Option Plan of the Company according to the following                terms: Option exercise price of $3.50; Vesting Date**-**                the vesting of the options will be over a period of 4 years as follows:                25% of the options are vested after a year from the Date of Grant.                Thereafter, 1/16 of the options are vested every 3 months for the                following 3 years; Expiration Date**-**5.5                years from the grant date. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | F. | As                of December 31, 2005 the Company granted 5,130,000 options out of                this                plan, of which 1,930,000 options were granted in 2005. Transactions                related to the above Plan during the period ending December 31, 2005                were                as follows: |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                              |       | **Period                Ended****December                31** | ** ** | **Weighted                average** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                        | ** ** | ** 2005**                                                | ** ** | **Exercise                price**   |       |
| Options                outstanding at the beginning of the period |       |                                                          | 3,200,000  |                                | $          | 3.50 |   |
| Granted                                                           |       |                                                          | 1,930,000  |                                | $          | 4.02 |   |
| Forfeited                                                         |       |                                                          | -          |                                |       |   |   |
| Options                outstanding at the end of the period       |       |                                                          | 5,130,000  |                                | $          | 3.70 |   |
|                                                              |       |                                                          |       |                                |       |   |   |
|                                                              |       |                                                          |       |                                |       |   |   |
| weighted                average fair value of options granted     |       |                                                          |       |                                | $          | 0.362 |   |

----

|                           | **Options                Outstanding** |
|--------------------------------|----------------------------------------|
|                           | **Number**                             | **Average** | **Average** |
|                           | **outstanding**                        | **remaining** | **exercise** |
| **Range                price** | **12.31.2005**                         | **life(                years)** | **price** |
| 3.5                -4.62       | 5,130,000                              | 5 | $3.70 |

|                                                |   | **Period                Ended December 31,2005** |   | **Period                Ended December 31,2005** |         |
|-----------------------------------------------------|--------|--------------------------------------------------|--------|--------------------------------------------------|--------------|
|                                                |   | **Reported**                                     |   | **Proforma**                                     |         | **Reported** |   | **Proforma** |   |
|                                                |   |                                             |   |                                             |         | **US$** |   | **US$** |   |
| Cost                of compensation Net             |   |  £                                     | -      |                                             |  £ |  822,480 |   | $ | - |   |   | 1,418,778 |   |
|                                                |   |                                             |   |                                             |         |   |   |   |   |   |   |   |   |
| Net                Income(loss) for the period      |   |                                             | 26,078 |                                             |         | (796,402 | ) |   | 44,983 |   |   | (1,373,795 | ) |
|                                                |   |                                             |   |                                             |         |   |   |   |   |   |   |   |   |
| Basic                net Earning(loss) per share:   |   |                                             | 0.004  |                                             |         | (0.133 | ) |   | 0.007 |   |   | (0.229 | ) |
|                                                |   |                                             |   |                                             |         |   |   |   |   |   |   |   |   |
| Diluted                net earning(loss) per share: |   |                                             | 0.003  |                                             |         | (0.092 | ) |   | 0.006 |   |   | (0.159 | ) |

----

**Note      14 — Earnings Per Share**

|                                                   |   | ** Year                Ended December 31 , 2005** |   |
|--------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                   |   | ** Weighted                Average**              |   |
|                                                   |   | ** Income**                                       |   | **Shares** |   | **Per                Share** |   | **Per                Share** |   |
|                                                   |   | **  **                                       |   | **  ** |   | **Amounts** |   | **Amounts** |   |
|                                                   |   | **  **                                       |   | **  ** |   |   |   | **U.S.$** |   |
| Net                Income                              |   |  £                                           | 26,078 |   |   |   |   |   |   |   |   |   |   |
| **Basic                EPS:**                          |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |
| Income                available to common stockholders |   |  £                                           | 26,078 |   |   | 6,868,471 |   |  £ | 0.004 |   | $ | 0.007 |   |
| Effect                of dilutive securities:          |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |
| Options                and warrants                    |   |                                                   |   |   |   | 1,074,713 |   |   | (0.001 | ) |   | (0.001 | ) |
| **Diluted                EPS:**                        |   |                                                   |   |   |   |   |   |   |   |   |   |   |   |
| Income                available to common stockholders |   |  £                                           | 26,078 |   |   | 7,943,184 |   |  £ | 0.003 |   | $ | 0.006 |   |

|                                                   |   | **Year                Ended December 31 , 2004** |         |
|--------------------------------------------------------|--------|--------------------------------------------------|--------------|
|                                                   |   | **Weighted                Average**              |         |
|                                                   |   | **Income**                                       |         | **Shares** |   | **Per                Share** |   |
|                                                   |   | **(Numerator)**                                  |         |   |   | **Amounts** |   |
| Net                Income                              |   |  £                                     | 39,874       |   |   |   |   |   |   |   |
| **Basic                EPS:**                          |   |                                             |         |   |   |   |   |   |   |   |
| Income                available to common stockholders |   |  £                                     | 39,874       |   |   | 5,998,252 |   |  £ | 0.007 |   |
| Effect                of dilutive securities:          |   |                                             |         |   |   |   |   |   |   |   |
| Options                and warrants                    |   |                                             |         |   |   | 2,634,698 |   |   | (0.002 | ) |
| **Diluted                EPS:**                        |   |                                             |         |   |   |   |   |   |   |   |
| Income                available to common stockholders |   |  £                                     | £39,874 |   |   | 8,632,950 |   |   | £0.005 |   |

----

**Note      15 - Related Party Transactions**

|                                                                                                                   |       | **Years                ended**  | ** ** | **Years                ended**  | ** **   |
|------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|--------------|
| ** **                                                                                                             | ** ** | **December                31,** | ** ** | **December                31,** |         |
|                                                                                                                   |       | **2005**                        |       | **2004**                        |         | **2005** |   |
|                                                                                                                   |       |                            |       |                            |         | US$ |   |
| **Campbeltown                Business:**                                                                               |       |                            |       |                            |         |   |   |   |   |   |
|                                                                                                                   |       |                            |       |                            |         |   |   |   |   |   |
| Fees                                                                                                                   |       |  £                    | 83,400     |                            |  £ | 57,000 |   |  $ | 143,865 |   |
| Consultancy                                                                                                            |       |                            |       |                            |         | 44,643 |   |   |   |   |
| Due                to Campbeltown                                                                                      |       |                            |       |                            |         | 6,950 |   |   |   |   |
| Accrued                Expenses                                                                                        |       |                            | 6,950      |                            |         | 18,243 |   |   | 11,989 |   |
|                                                                                                                   |       |                            |       |                            |         |   |   |   |   |   |
| **Vision                Consultants Limited:**                                                                         |       |                            |       |                            |         |   |   |   |   |   |
|                                                                                                                   |       |                            |       |                            |         |   |   |   |   |   |
| Fees                                                                                                                   |       |                            | 83,400     |                            |         | 101,643 |   |   | 143,865 |   |
| Accrued                expenses                                                                                        |       |                            | 6,950      |                            |         | - |   |   | 11,989 |   |
|                                                                                                                   |       |                            |       |                            |         |   |   |   |   |   |
| **Story                Telecom Limited:**                                                                              |       |                            |       |                            |         |   |   |   |   |   |
|                                                                                                                   |       |                            |       |                            |         |   |   |   |   |   |
| Revenues                                                                                                               |       |                            | 3,203,663  |                            |         | 4,778,564 |   |   | 5,526,319 |   |
|                                                                                                                   |       |                            |       |                            |         |   |   |   |   |   |
| Commissions                                                                                                            |       |                            | 172,144    |                            |         | 296,339 |   |   | 296,948 |   |
| Due                from related Story Telecom (net)                                                                    |       |                            | 1,290,702  |                            |         | 1,137,863 |   |   | 2,226,461 |   |
|                                                                                                                   |       |                            |       |                            |         |   |   |   |   |   |
| **Auracall                Limited:**                                                                                   |       |                            |       |                            |         |   |   |   |   |   |
|                                                                                                                   |       |                            |       |                            |         |   |   |   |   |   |
| Related                revenues                                                                                        |       |                            | 211,099    |                            |         | 909,007 |   |   | 364,146 |   |
| Commissions                                                                                                            |       |                            | 143,364    |                            |         | 496,822 |   |   | 247,303 |   |
| Due                to Auracall (net)                                                                                   |       |                            | 120,395    |                            |         | 86,097 |   |   | 207,681 |   |
|                                                                                                                   |       |                            |       |                            |         |   |   |   |   |   |
|                                                                                                                   |       |                            |       |                            |         |   |   |   |   |   |
| **Dionysos                Limited:**                                                                                   |       |                            |       |                            |         |   |   |   |   |   |
| Fees                                                                                                                   |       |                            | 36,000     |                            |         | 16,274 |   |   | 62,100 |   |
| Accrued                Expenses                                                                                        |       |                            | 3,000      |                            |         | - |   |   | 5,175 |   |
|                                                                                                                   |       |                            |       |                            |         |   |   |   |   |   |
| **Shareholders:**                                                                                                      |       |                            |       |                            |         |   |   |   |   |   |
| Loan                to Abraham Keinan                                                                                  |       |                            | 123,965    |                            |         | 247,931 |   |   | 213,840 |   |
| Guy                Nissenson                |       |                            | (11,542    | )                               |         | - |   |   | (19,910 | ) |
| Abraham                Keinan                                                                                          |       |  £                    | (18,201    | )                               |  £ | - |   | $ | (31,397 | ) |

----

**Note      16 — Financial Commitments**

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

| **Year                  ended December 31,** |                          |
|----------------------------------------------|-------------------------------|
| 2006                                         | £                102,738 |
| 2007                                         | 91,636                        |
| 2008                                         | 52,721                        |
| 2009                                         | 53,883                        |
| 2010                                         | 38,200                        |
| 2011                                         | 38,200                        |
| 2012                                         | 38,200                        |

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

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

| **Target                Monthly Revenue**          |   |   | **Monthly                  Bonus** |        |  **US$** |   |       |   |
|----------------------------------------------------|--------|--------|------------------------------------|-------------|---------------|---|-------|--------|
| Up                to £125,000                 |   |   |  £                       | --          |          | $ | --    |   |
| From                £125,000 to £150,000 |   |   |  £                       | £1,250 |          | $ | 2,156 |   |
| From                £150,000 to £175,000 |   |   |  £                       | £2,500 |          | $ | 4,313 |   |
| Over                £175,000                  |   |   |  £                       | £2,750 |          | $ | 4,744 |   |

----

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

**Note      17 — Economic Dependency and Credit Risk**

|   | A. | Approximately,                23% and 19% of total 2005 revenues were derived, respectively, from                two                customers and approximately 42% and 22% of total 2004 revenues were                derived, respectively, from two                customers. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | B. | Approximately,                37% and 17% of the total accounts receivable at 2005 were due from                two                customers. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------|

|   | C. | Approximately,                21%, 16%, 15% and 14% of the Company’s purchases are from four suppliers                for the year ended December 31, 2005, and 20%, 20%, 20% and 12% are                from                four suppliers for the year ended December 31,                2004. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Note      18 — Segment Information **

|                                          |   | **Years                Ended**  |            | **Years                Ended**  |         |
|-----------------------------------------------|--------|---------------------------------|-----------------|---------------------------------|--------------|
| ** **                                    |   | **December                31,** |            | **December                31,** |         |
| ** **                                    |   | **2005**                        |            | **2004**                        |         | **2005** |   |
| ** **                                    |   | ** **                      |            | ** **                      |         | **US$** |   |
| Revenues                                      |   |                            |            |                            |         |   |   |   |   |   |
| England                                       |   |                            | £8,141,766 |                            |         | £9,722,528 |   | $ | 14,044,546 |   |
| United                states                  |   |                            | 4,516,472       |                            |         | 1,598,344 |   |   | 7,790,914 |   |
| Israel                                        |   |                            | 1,455,511       |                            |         | 9,244 |   |   | 2,510,755 |   |
|                                          |   |                            |            |                            |         |   |   |   |   |   |
| Total                revenues                 |   |                            | 14,113,748      |                            |         | 11,330,116 |   |   | 24,346,215 |   |
|                                          |   |                            |            |                            |         |   |   |   |   |   |
| Direct                operating expenses      |   |                            |            |                            |         |   |   |   |   |   |
| England                                       |   |  £                    | 6,104,497       |                            |  £ | 8,841,441 |   | $ | 10,530,257 |   |
| United                states                  |   |                            | 2,146,386       |                            |         | 882,908 |   |   | 3,702,516 |   |
| Israel                                        |   |                            | 1,003,715       |                            |         | 18,741 |   |   | 1,731,407 |   |
|                                          |   |                            |            |                            |         |   |   |   |   |   |
| Total                direct operating         |   |                            | 9,254,597       |                            |         | 9,743,090 |   |   | 15,964,180 |   |
|                                          |   |                            |            |                            |         |   |   |   |   |   |
| Direct                Operating Profit (Loss) |   |                            |            |                            |         |   |   |   |   |   |
| England                                       |   |                            | 2,037,269       |                            |         | 881,087 |   |   | 3,514,289 |   |
| United                states                  |   |                            | 2,370,086       |                            |         | 715,436 |   |   | 4,088,398 |   |
| Israel                                        |   |                            | 451,796         |                            |         | -9,497 |   |   | 779,348 |   |
|                                          |   |                            |            |                            |         |   |   |   |   |   |
|                                          |   |                            | 4,859,151       |                            |         | 1,587,026 |   |   | 8,382,035 |   |
|                                          |   |                            |            |                            |         |   |   |   |   |   |
| Corporate                and common operating |   |                            |            |                            |         |   |
| expenses                                      |   |                            |            |                            |         |   |   |   |   |   |
| England                                       |   |                            | 1,826,754       |                            |         | 805,285 |   |   | 3,151,151 |   |
| United                states                  |   |                            | 2,255,095       |                            |         | 584,186 |   |   | 3,890,039 |   |
| Israel                                        |   |                            | 823,048         |                            |         | 84,773 |   |   | 1,419,758 |   |
|                                          |   |                            |            |                            |         |   |   |   |   |   |
|                                          |   |                            | 4,904,897       |                            |         | 1,474,244 |   |   | 8,460,948 |   |
|                                          |   |                            |            |                            |         |   |   |   |   |   |
| Operating                Profit               |   |                            |            |                            |         |   |   |   |   |   |
| England                                       |   |                            | 210,515         |                            |         | 75,802 |   |   | 363,138 |   |
| United                states                  |   |                            | 114,991         |                            |         | 131,250 |   |   | 198,359 |   |
| Israel                                        |   |                            | (371,252        | )                               |         | (94,270 | ) |   | (640,410 | ) |
|                                          |   |                            |            |                            |         |   |   |   |   |   |
| Operating                Profit               |   |  £                    | (45,746         | )                               |  £ | £112,782 |   |  $ | (78,913 | ) |
|                                          |   |                            |            |                            |         |   |   |   |   |   |

----

**Note      19 - Management Agreement**

----

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

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

|   | - | Contracts                - Maintain all existing contracts necessary for the operation of                the                business and the authority to enter into or renew contract in the                companies’ name; |
|--------|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

**Note      20 — Subsequent Events**

|   | A. | Auracall |
|--------|----|----------|

----

|   | B. | EBI                Comm, Inc. ("EBI") |
|--------|----|---------------------------------------|

|   | C. | Canufly.net,                Inc. |
|--------|----|----------------------------------|

|   | D. | Equity                transaction |
|--------|----|-----------------------------------|

----

 AND FINANCIAL

ROLS 

ITEM      8B. OTHER 

----

      9. DIRECTORS

**Directors      and Executive Officers **

| **Name**                          | **Age** | **Director                / Officer Since** |
|-----------------------------------|---------|---------------------------------------------|
| Abraham                Keinan     |    |                                        | 56 |   |   | Chairman                of the Board of Directors, since our inception |
|                              |    |                                        |   |   |   |   |
| Guy                Nissenson      |    |                                        | 31 |   |   | Director,                since our inception |
|                              |    |                                        |   |   |   |   |
| Eyal                J. Harish     |    |                                        | 53 |   |   | Director,                since December 19, 2002 |
|                              |    |                                        |   |   |   |   |
| Shemer                S. Schwartz |    |                                        | 31 |   |   | Director,                since December 19, 2002, and is an independent director and a member                of                the Audit Committee |
|                              |    |                                        |   |   |   |   |
| Arie                Czertok       |    |                                        | 65 |   |   | Director,                since November 23, 2004, and is an independent director and Chairman                of                the Audit Committee |
|                              |    |                                        |   |   |   |   |
| Aviu                Ben-Horrin    |    |                                        | 57 |   |   | Director,                since November 23, 2004, and is an independent director and a member                of                the Audit Committee. |
|                              |    |                                        |   |   |   |   |
| Alon                Mualem        |    |                                        | 39 |   |   | Treasurer,                Chief Financial Officer and Principal Accounting Officer since June                8,                2005. |

----

----

**Significant      Employees **

----

**Family      Relationships **

**Involvement      in certain legal proceedings**

**Committee      of the Board of Directors**

**Audit      Committee financial expert**

**Section      16(a) Beneficial Ownership Reporting Compliance**

----

10.      EXECUTIVE 

**Executives      and Directors compensation **

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | **Annual                Compensation**                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                   | **Long                Term Compensation**                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Name                &****Position**                                                                                                                                                                                                                                                                                                                                                                                                                                                         | **Year**                                                                                                                                                                                     | **Salary                ($)**                                                                                                                                                                                                                                                                                                                                                                          | **Bonus($)**                                                                                                                                                                                                                                                                                  | **Other($)**                                                                                                                                                                                                                                                                                     | **Restricted****Stock                Awards**                                                                                                                                                                       | **Options($)** | **L/Tip($)** | **All****Other** |
| AbrahamKeinanChairman                                                                                 Guy                NissensonChiefExecutiveand                FinancialOfficer                (utill June 2005)                                       Alon                MualemTreasurer,                Chief Financial Officer & Principal Accounting Officer | 2005  2004                   2003                   2005   2004                  2003                   2005 | $94,175(54,594                pound) $116,510                (60,368                Pound)  $69,057(1)                (40,622                Pound)  $82,800(48,000                pound)  $116,510                (60,368                Pound) $74,820(4)                (43,500                Pound)   $59,920(34,736                pound) |    $9,650                (5,000                Pound)   $112,576                (63,245                Pound)   $220,000(125,121                pound)  ----                  $171,302(5)                (96,237                Pound) | $143,865(83,400                pound) $196,171                (7) (101,643                Pound)  $97,900(2)                (55,000                Pound)  $205,965(119,400                pound)  $196,171                (8) (101,643                Pound) |    1,500,000                (9)   400,000(3)      1,500,000                (9)  200,000(6)    300,000                (10) |             |               |               |

----

----

|                  **Name                and****Principle****Position**                                                           |                  **Number****Securities****Underlying****Options**                                                                                                                                                                                 |                  **%                of Total****Options****Granted                To****Employees****in                2003** |                  **%                of Total****Options****Granted                To****Employees****in                2004** |                  **%                of Total****Options****Granted                To****Employees****in                2005** |                  **Exercise****Price**                                         |                  **Expiration****Date**                                                                                                                                                                                                                                                                   |
|--------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Abraham                KeinanChairman                of                the Board                                 |  1) 400,000                common                stockshares (3)1,500,000                Common                stock shares                                        |   66.7%                                                                                         | 46.88%                                                                                                                        |                                                                                                                               |  $0.475                 $3.50                                             |  August                31, 2008                                                                                                                                                                                                                                                                 |
| Guy                NissensonPrincipal                Executive                          | (2)200,000                common                stockshares       (3)1,500,000                Common                stock shares               | 33.3%                                                                       |   46.88%                                                                                                       |                                                                                                                               | $0.475        $3.50     | 5                years from theVesting                Date which is 12 months from the date Of GrantAugust                31, 2008  5                years from theVesting                Date which is 12 months from the date Of Grant5.5                years from theVesting                Date |
| Eyal                J. Harish,Director                                                                                          |  (3)75,000                Common                stock shares                                                                                                                 |                                                                                                                               | 2.34%                                                                                                                         |                                                                                                                               |   $3.50                                                              | 5                years from theVesting                Date                                                                                                                                                                                                                                                |
| Shemer                S. Schwartz, Director                                                                                     | (3)                75,000 Common                stock shares                                                                                                                      |                                                                                                                               | 2.34%                                                                                                                              |                                                                                                                               |   $3.50                                                                   | 5                years from theVesting                Date                                                                                                                                                                                                                                                     |
|  Arie                Czertok,Director                                                                                      | (3)                25,000 Common                stock shares                                                                                                                      |                                                                                                                               | 0.78%                                                                                                                              |                                                                                                                               |   $3.50                                                                   | 5                years from theVesting                Date                                                                                                                                                                                                                                                     |
| Aviu                Ben-Horrin,                Director                                                                         | (3)                25,000 Common                stock shares                                                                                                                      |                                                                                                                               | 0.78%                                                                                                                              |                                                                                                                               |   $3.50                                                                   | 5                years from theVesting                Date                                                                                                                                                                                                                                                     |
|  Alon                MualemTreasurer,                Chief Financial Officer & Principal Accounting Officer                 | (4)                300,000 Common                stock shares                                                                                                                     |                                                                                                                               |                                                                                                                               | 100%                                                                                                                          | $3.50                                                                          | 5.5                years from theGrant                Date                                                                                                                                                                                                                                                     |
|                  TOTAL                                                                                                          |                                                                                                                                                                                                                                                    |  100%                                                                                                                         |  100%                                                                                                                         |  100%                                                                                                                         |                                                                                |                                                                                                                                                                                                                                                                                                           |

----

**      -**
**      -**

----

** **
** **

| **Name**                           | **Shares****Acquired                on****Exercise(#)** | **Value****Realized****($)**  | **Number                of Securities Underlying****Unexercised                Options/SARs at FY-End****(#)****Exercisable/Unexercisable** | **Value                of Unexercised In-the****Money                Options/SARs at FY-End****($)****Exercisable/Unexercisable** |
|------------------------------------|---------------------------------------------------------|-------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|
| Guy                Nissenson,      | Not                Applicable                           | Not                Applicable | 700,000                / 0 (1)                                                                                                              | $1,665,000                / $0 (2)                                                                                                |
| Chief                Executive     | Not                Applicable                           | Not                Applicable | 1,500,000/0                (5)                                                                                                              | Negative                Value / $0                                                                                                |
| Officer,                President  |                                                    |                          |                                                                                                                                        |                                                                                                                              |
|                               |                                                    |                          |                                                                                                                                        |                                                                                                                              |
| Abraham                Keinan,     | Not                Applicable                           | Not                Applicable | 400,000                / 0 (3)                                                                                                              | $930,000                / $0 (4)                                                                                                  |
| Chairman                of         | Not                Applicable                           | Not                Applicable | 1,500,000/0                (5)                                                                                                              | Negative                Value / $0                                                                                                |
| The                Board           |                                                    |                          |                                                                                                                                        |                                                                                                                              |
|                               |                                                    |                          |                                                                                                                                        |                                                                                                                              |
| Eyal                J. Harish,     | Not                Applicable                           | Not                Applicable | 75,000                / 0 (6)                                                                                                               | Negative                Value / $0                                                                                                |
| Director                           |                                                    |                          |                                                                                                                                        |                                                                                                                              |
|                               |                                                    |                          |                                                                                                                                        |                                                                                                                              |
| Shemer                S. Schwartz, | Not                Applicable                           | Not                Applicable | 75,000                / 0 (7)                                                                                                               | Negative                Value / $0                                                                                                |
| Director                           |                                                    |                          |                                                                                                                                        |                                                                                                                              |
|                               |                                                    |                          |                                                                                                                                        |                                                                                                                              |
| Arie                Czertok,       | Not                Applicable                           | Not                Applicable | 25,000                / 0 (8)                                                                                                               | Negative                Value / $0                                                                                                |
| Director                           |                                                    |                          |                                                                                                                                        |                                                                                                                              |
|                               |                                                    |                          |                                                                                                                                        |                                                                                                                              |
| Aviu                Ben-Horrin,    | Not                Applicable                           | Not                Applicable | 25,000                / 0 (9)                                                                                                               | Negative                Value / $0                                                                                                |
| Director                           |                                                    |                          |                                                                                                                                        |                                                                                                                              |

----

** **
** **

| **Name**                                                                           | **Shares****Acquired                on****Exercise(#)** | **Value****Realized****($)**  | **Number                of Securities Underlying****Unexercised                Options/SARs at FY-End****(#)****Exercisable/Unexercisable** | **Value                of Unexercised In-the****Money                Options/SARs at FY-End****($)****Exercisable/Unexercisable** |
|------------------------------------------------------------------------------------|---------------------------------------------------------|-------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|
| Guy                Nissenson,                                                      | 500,000                                                 | Not                Applicable | 200,000                / 0 (1)                                                                                                              | 457,000                / $0                                                                                                       |
| Chief                Executive                                                     | Not                Applicable                           | Not                Applicable | 1,500,000/0                (5)                                                                                                              | Negative                Value / $0                                                                                                |
| Officer,                President                                                  |                                                    |                          |                                                                                                                                        |                                                                                                                              |
|                                                                               |                                                    |                          |                                                                                                                                        |                                                                                                                              |
| Abraham                Keinan,                                                     | Not                Applicable                           | Not                Applicable | 400,000                / 0 (3)                                                                                                              | $914,000                / $0 (4)                                                                                                  |
| Chairman                of                                                         | Not                Applicable                           | Not                Applicable | 1,500,000/0                (5)                                                                                                              | Negative                Value / $0                                                                                                |
| The                Board                                                           |                                                    |                          |                                                                                                                                        |                                                                                                                              |
|                                                                               |                                                    |                          |                                                                                                                                        |                                                                                                                              |
| Eyal                J. Harish,                                                     | Not                Applicable                           | Not                Applicable | 75,000                / 0 (6)                                                                                                               | Negative                Value / $0                                                                                                |
| Director                                                                           |                                                    |                          |                                                                                                                                        |                                                                                                                              |
|                                                                               |                                                    |                          |                                                                                                                                        |                                                                                                                              |
| Shemer                S. Schwartz,                                                 | Not                Applicable                           | Not                Applicable | 75,000                / 0 (7)                                                                                                               | Negative                Value / $0                                                                                                |
| Director                                                                           |                                                    |                          |                                                                                                                                        |                                                                                                                              |
|                                                                               |                                                    |                          |                                                                                                                                        |                                                                                                                              |
| Arie                Czertok,                                                       | Not                Applicable                           | Not                Applicable | 25,000                / 0 (8)                                                                                                               | Negative                Value / $0                                                                                                |
| Director                                                                           |                                                    |                          |                                                                                                                                        |                                                                                                                              |
|                                                                               |                                                    |                          |                                                                                                                                        |                                                                                                                              |
| Aviu                Ben-Horrin,                                                    | Not                Applicable                           | Not                Applicable | 25,000                / 0 (9)                                                                                                               | Negative                Value / $0                                                                                                |
| Director                                                                           |                                                    |                          |                                                                                                                                        |                                                                                                                              |
|                                                                               |                                                    |                          |                                                                                                                                        |                                                                                                                              |
| Alon                Mualem,                                                        | Not                Applicable                           | Not                Applicable | 300,000                / 0 (10)                                                                                                             | Negative                Value / $0                                                                                                |
| Treasurer,                Chief Financial Officer and Principal Accounting Officer |                                                    |                          |                                                                                                                                        |                                                                                                                              |
|                                                                               |                                                    |                          |                                                                                                                                        |                                                                                                                              |

----

|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   | (1)    | Of                the 700,000 share options, 200,000 were issued to Guy Nissenson,                our Chief                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, owned options to purchase 500,000 shares of our                common                stock for $0.40 per share or an aggregate of $200,000. Said options                were                exercised on December 29, 2005. Guy Nissenson owns 20% of Campbeltown                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 closing price of $2.80 and $2.76 per share as of December                30, 2004                and December 30, 2005, respectively, and an exercise price $0.475                per                share for 200,000 share options, and $0.40 per share for 500,000                share                options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | (3)    | The                options to purchase 400,000 shares of our common stock were issued                to                Abraham Keinan, our Chairman of the Board, on August 21, 2003, and                on                March 1, 2004, all 400,000 share options were cancelled by our Board                of                Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | (4)    | Based                on the closing price of $2.80 and $2.76 per share as of December                30, 2004                and December 30, 2005, respectively, and an exercise price of $0.475                per                share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | (5)    | Based                on the closing price of $2.80 and $2.76 per share as of December                30, 2004                and December 30, 2005, respectively, and an exercise price of $3.50                per                share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | (6)    | Based                on the closing price of $2.80 and $2.76 per share as of December                30, 2004                and December 30, 2005, respectively, and an exercise price of $3.50                per                share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | (7)    | Based                on the closing price of $2.80 and $2.76 per share as of December                30, 2004                and December 30, 2005, respectively, and an exercise price of $3.50                per                share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | (8)    | Based                on the closing price of $2.80 and $2.76 per share as of December                30, 2004                and December 30, 2005, respectively, and an exercise price of $3.50                per                share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | (9)    | Based                on the closing price of $2.80 and $2.76 per share as of December                30, 2004                and December 30, 2005, respectively, and an exercise price of $3.50                per                share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | (10)   | Based                on the December 30, 2005 per share closing price of $2.76, and an                exercise                price of $3.50 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

----

----

URITY 

**Security      Ownership of Beneficial Owners and Management **

|  **Title                of Class** |  **Name                & Address of ** **Beneficial                Owner**                                 | **Amount                of Beneficial Ownership **  | **Nature                of Ownership **  | **Percent                of Class **  |   |
|-----------------------------------------|-------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------|----------------------------------------------------|-------------------------------------------------|--------|
|  Common                            | Abraham                Keinan                                                                                                 | 3,500,000                                                | Direct*/****                                       | 41.04                                           |   |
|                                    | Chairman                of the Board                                                                                          |                                                          |                                               |                                            |   |
|                                    | 4                Wycombe Gardens                                                                                              |                                                          |                                               |                                            |   |
|                                    | London                Nw11 8al                                                                                                |                                                          |                                               |                                            |   |
|                                    | United                Kingdom                                                                                                 |                                                          |                                               |                                            |   |
|                                    |                                                                                                                          |                                                          |                                               |                                            |   |
|  Common                            |  Crestview                Capital                                                                                        | 768,967                                                       | Direct                                        | 9.02**                                          |   |
|                                    |  Master                LLC**                                                                                             |                                                          |                                               |                                            |   |
|                                    |  95                Revere Drive, Suite F                                                                                 |                                                          |                                               |                                            |   |
|                                    |  Northbrook,                Illinois 60062                                                                               |                                                          |                                               |                                            |   |
|                                    |                                                                                                                          |                                                          |                                               |                                            |   |
| Common                                  | Guy                Nissenson                                                                                                  | 1,203,500                                                     | Indirect***/****                                   | 14.11                                           |   |
|                                    | Chief                Executive Officer                                                                                        |                                                          |                                               |                                            |
|                                    | President/Director                                                                                                            |                                                          |                                               |                                            |
|                                    | 3A                Finchley Park                                                                                               |                                                          |                                               |                                            |
|                                    | London                N12 9JS                                                                                                 |                                                          |                                               |                                            |
|                                    | United                Kingdom                                                                                                 |                                                          |                                               |                                            |
|                                    |                                                                                                                          |                                                          |                                               |                                            |
| Common                                  | Eyal                Harish*****Director3                Moshe Dayan Street, Raanana, Israel** **                         |  15,000                                                  | Direct                                             | 0.17                                  |   |
|                                    |                                                                                                                          |                                                          |                                               |                                            |   |
| Common                                  | Mercantile                Discount - Provident Funds******32                Yavne StreetTel-Aviv                65792, Israel | 480,000                                        | ** **Direct                                   | 5.63         |   |
| **Total**                               |                                                                                                                          | **5,967,467**                                                 |                                               | **69.97% **                                |   |
|                                    |                                                                                                                          |                                                          |                                               |                                                 |   |

----

----

**      %**
**%**
** **
**%**
**%**

. CERTAIN 

**Abraham      Keinan **

----

**Guy      Nissenson **

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

----

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

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

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

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

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

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

----

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

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

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

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

----

**Voting      Agreement **

**Indemnification**

**Dionysos      Investments (1999) ltd. financial services and business development consulting      agreement **

----

13.      EXHIBITS 

**(a) Exhibits      and Index of Exhibits**

|       |                                                                                                                                                 |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.    | Agreement                and plan or reorganization between Xfone, Inc. and Swiftnet Ltd.                dated                September 20, 2000 (1) |
| 3.1        | Articles                of Incorporation of Xfone, Inc. (1)                                                                                          |
| 3.2a       | Bylaws                of Xfone, Inc. (1)                                                                                                             |
| 3.2b       | Amended                Bylaws of Xfone, Inc. (4)                                                                                                     |
| 3.3        | Articles                of Incorporation of Swiftnet, Ltd. (1)                                                                                       |
| 3.4        | Bylaws                of Swiftnet, Ltd. (1)                                                                                                          |
| 3.5        | Amended                bylaws of Xfone, Inc. (3)                                                                                                     |
| 3.6        | By-Laws                of Xfone USA, Inc. (7)                                                                                                        |
| 3.7        | Office                of the Mississippi Secretary of State, Articles of Merger or Share                Exchange Profit Corporation (7)              |
| 3.8.  | Amended                and Restated Bylaws dated March 12, 2006                (22)                                                                  |

----

| 4.  | Specimen                Stock Certificate (1)                                                                                                                            |
|----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 5.  | Opinion                of Gersten Savage LLP.                                                                                                                            |
| 10.1     | Agreement                between Swiftnet Ltd. and Guy Nissenson dated May 11, 2000                (1)                                                                   |
| 10.2     | Employment                Agreement with Bosmat Houston dated January 1, 2000 (1)                                                                                        |
| 10.3     | Loan                Agreement with Swiftnet Ltd., Guy Nissenson, and Nissim Levy dated                August                5, 2000 (1)                                  |
| 10.4     | Promissory                Note executed between Xfone and Swiftnet Ltd. dated September 29,                2000                (1)                                       |
| 10.5     | Stock                Purchase Agreement between Swiftnet, Ltd, Abraham Keinan, and Campbeltown                Business, Ltd. dated                June 19, 2000 (1) |
| 10.6     | Consulting                Agreement between Swiftnet, Ltd. and Campbeltown Business, Ltd. dated                May                11, 2000 (1)                           |
| 10.7     | Agreement                with Campbeltown Business Ltd. dated July 30, 2001 (1)                                                                                          |
| 10.8     | Contract                with WorldCom International, Ltd. dated June 20, 1998                (1)                                                                         |
| 10.9     | Contract                with VoiceNet Inc. dated April 11, 2000 (1)                                                                                                      |
| 10.10    | Contract                with InTouchUK.com Ltd. dated April 25, 2000 (1)                                                                                                 |
| 10.11    | Letter                of Understanding from Campbeltown Business, Ltd. to Xfone, Inc. dated                July                30, 2001 (2)                              |
| 10.12    | Agreement                between Adar International, Inc./Mr. Sidney J. Golub and Swiftnet                dated                April 6, 2000 (2)                         |
| 10.13    | Lease                Agreement between Elmtree Investments, Ltd. and Swiftnet, Ltd. dated                December 4, 1991 (2)                                            |
| 10.14    | Lease                Agreement between Postwick Property Holdings Limited and Swiftnet,                Ltd.                dated October 8, 2001.(2)                     |
| 10.15    | Agreement                between Xfone, Inc., Swiftnet, Ltd., and Nir Davison dated September                30,                2002 (5)                                 |
| 10.16    | As                to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy,                Warrant                A, Warrant B                                  |
|     | and                Registration Rights Agreement of Selling Shareholders Platinum Partners                Value                                                          |
|     | Arbitrage                Fund LP, Countrywide Partners LLC and WEC Partners LLC. [3 investors]                (6)                                                        |
| 10.17    | As                to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy,                Warrant                A, Warrant B                                  |
|     | and                Registration Rights Agreement of Selling Shareholders Simon Langbart,                Robert Langbart,                                                 |
|     | Arik                Ecker, Zwi Ecker, Michael Derman, Errol Derman,Yuval Haim Sobel,                Zvi                Sobel, Tenram                                     |
|     | Investment                Ltd., Michael Zinn, Michael Weiss. [11 investors] (6)                                                                                          |
| 10.18    | As                to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy,                Warrant                A, Warrant B                                  |
|     | and                Registration Rights Agreement of Selling Shareholders Southridge                Partners                LP and                                        |
|     | Southshore                Capital Fund Ltd. [2 investors] (6)                                                                                                            |
| 10.19    | As                to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy,                Warrant                A, Warrant B                                  |
|     | and                Registration Rights Agreement of Selling Shareholders Crestview Capital                Master LLC. [1 investors] (6)                                  |

----

| 10.20   | As                to Form: Shares and Warrant Purchase Agreement, Irrevocable Proxy,                Warrant                A, Warrant B                        |
|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    | and                Registration Rights Agreement of Selling Shareholders Adam Breslawsky,                Oded Levy,                                            |
|    | Michael                Epstein, Steven Frank, Joshua Lobel, Joshua Kazan and The Oberon                Group                LLC. [7 investors] (6)             |
| 10.21   | Newco                (Auracall Limited) Formation Agreement. (6)                                                                                               |
| 10.22   | Agreement                with ITXC Corporation (6)                                                                                                             |
| 10.23   | Agreement                with Teleglobe International (6)                                                                                                      |
| 10.23.1 | Amendment                to Agreement with Teleglobe International (6)                                                                                         |
| 10.24   | Agreement                with British Telecommunications (6)                                                                                                   |
| 10.25   | Agreement                with Easyair Limited (OpenAir) (6)                                                                                                    |
| 10.26   | Agreement                with Worldnet (6)                                                                                                                     |
| 10.27   | Agreement                with Portfolio PR (6)                                                                                                                 |
| 10.28   | Agreement                with Stern and Company (6)                                                                                                            |
| 10.29   | December                31, 2003 letter to Xfone from A. Keinan (6)                                                                                            |
| 10.30   | Agreement                between Swiftnet, Ltd. and Dan Kirschner (8)                                                                                          |
| 10.31   | Agreement                and Plan of Acquisition (7)                                                                                                           |
| 10.32   | Escrow                Agreement (7)                                                                                                                            |
| 10.33   | Release                Agreement (7)                                                                                                                           |
| 10.34   | Employment                Agreement between WS Telecom, Inc. and Wade Spooner (7)                                                                              |
| 10.35   | Employment                Agreement between WS Telecom, Inc. and Ted Parsons (7)                                                                               |
| 10.36   | First                Amendment to Agreement and Plan of Merger (WS Telecom, Inc./Xfone,                Inc./Xfone USA, Inc.) (11)                              |
| 10.37   | Finders                Agreement with The Oberon Group, LLC (11)                                                                                               |
| 10.38   | Agreement                with The Oberon Group, LLC (11)                                                                                                       |
| 10.39   | Management                Agreement (WS Telecom, Inc. and Xfone USA, Inc.) (8)                                                                                 |
| 10.40   | Engagement                Letter to Tommy R. Ferguson, Confidentiality Agreement, and Executive                Inventions Agreement dated August 19, 2004 (11) |
| 10.41   | Voting                Agreement dated September 28, 2004 (11)                                                                                                  |
| 10.42   | Novation                Agreement executed September 27, 2004 (11)                                                                                             |
| 10.43   | Novation                Agreement executed September 28, 2004 (11)                                                                                             |
| 10.44   | Ilan                Shoshani Investment Agreement dated August 26, 2004                (12)                                                                    |
| 10.44.1 | Addendum                and Clarification to the Ilan Shoshani Investment Agreement dated                September 13, 2004 (12)                               |

----

| 10.45 | Elite                Financial Communications Group Agreement dated November 16,                2004 (13)                                                                                                                                                                                                              |
|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.46 | Dionysos                Investments (1999) Ltd. Financial Services and Business Development                Consulting Agreement dated November 18, 2004(13)                                                                                                                                                                 |
| 10.47 | Agreement                and Plan of Merger to acquire I-55 Internet Services, Inc. dated                August                18, 2005 (14)                                                                                                                                                                                |
| 10.48 | Agreement                and Plan of Merger to acquire I-55 Telecommunications, LLC dated                August                26, 2005 (15)                                                                                                                                                                                |
| 10.49 |                                                                                                                                                                                                                                                                                                                   | Securities                Purchase Agreement, dated September 27, 2005, by and between the                Registrant and Laurus Master Fund, Ltd. (16) |   |
| 10.50 |                                                                                                                                                                                                                                                                                                                        | Secured                Convertible Term Note, dated September 27, 2005, by the Registrant                in                favor of Laurus Master Fund, Ltd.; Adjustment Provision Waiver Agreement,                dated September 27, 2005, by and between the Registrant and Laurus                Fund,                Ltd. (16) |   |
| 10.51 |                                                                                                                                                                                                                                                                                                                        | Common                Stock Purchase Warrant, dated September 27, 2005, by the Registrant                in                favor of Laurus Master Fund, Ltd. (16) |   |
| 10.52 |                                                                                                                                                                                                                                                                                                                        | Registration                Rights Agreement, dated September 27, 2005, by and between the Registrant                and Laurus Master Fund, Ltd. (16) |   |
| 10.53 |                                                                                                                                                                                                                                                                                                                        | Master                Security Agreement, dated September 27, 2005, by and between the                Registrant, Xfone USA, Inc., eXpeTel Communications, Inc., Gulf Coast                Utilities, Inc., and Laurus Master Fund, Ltd. (16) |   |
| 10.54 |                                                                                                                                                                                                                                                                                                                        | Stock                Pledge Agreement, dated September 27, 2005, by and between the Registrant,                Xfone USA, Inc., and Laurus Master Fund, Ltd. (16) |   |
| 10.55 |                                                                                                                                                                                                                                                                                                                        | Subsidiary                Guarantee dated September 27, 2005, by Xfone USA, Inc., eXpeTel                Communications, Inc. and Gulf Coast Utilities, Inc. in favor of Laurus                Master Fund, Ltd. (16) |   |
| 10.56 |                                                                                                                                                                                                                                                                                                                        | Funds                Escrow Agreement, dated September 27, 2005, by and between the Registrant,                Laurus Master Fund, Ltd. and Loeb & Loeb LLP; Disbursement Letter,                dated September 27, 2005 (16) |   |
| 10.57 |                                                                                                                                                                                                                                                                                                                        | Incremental                Funding Side Letter, dated September 27, 2005, by and between the                Registrant and Laurus Master Fund, Ltd. (16) |   |
| 10.58 |                                                                                                                                                                                                                                                                                                                        | Securities                Purchase Agreement, dated September 28, 2005, by and between the                Registrant and Crestview (16) |   |
| 10.59 |                                                                                                                                                                                                                                                                                                                        | Registration                Rights Agreement, dated September 28, 2005, by and between the Registrant                and Crestview (16) |   |
| 10.60 |                                                                                                                                                                                                                                                                                                                        | Common                Stock Purchase Warrant, dated September 28, 2005, by the Registrant                in                favor of the Crestview (16) |   |
| 10.61 |                                                                                                                                                                                                                                                                                                                        | Escrow                Agreement, dated September 28, 2005, by and between the Registrant,                the                Purchasers and Feldman Weinstein LLP (16) |   |
| 10.62 |                                                                                                                                                                                                                                                                                                                        |  Management                Agreement dated October 11, 2005 (17) |   |
| 10.63 |                                                                                                                                                                                                                                                                                                                        |  First                Amendment to the Agreement and Plan of Merger to acquire I-55 Internet                Services, Inc., dated October 10, 2005 (17) |   |
| 10.64 | Letter                Agreement with MCG Capital Corporation dated October 10, 2005                (17)                                                                                                                                                                                                                |
| 10.65 | Securities                Purchase Agreement, dated November 23, 2005, between the Registrant                and                Mercantile Discount - Provident Funds, Hadar Insurance Company Ltd.,                The                Isreali Phoenix Assurance Company Ltd. and Gaon Gemel Ltd.                (18)       |
| 10.66 | Registration                Rights Agreement, dated November 23, 2005, between the Registrant                and                Mercantile Discount - Provident Funds, Hadar Insurance Company Ltd.,                The                Isreali Phoenix Assurance Company Ltd. and Gaon Gemel Ltd.                 (18) |

----

| 10.67 | Common                Stock Purchase Warrant, dated November 23, 2005, Registrant in favor                of                Mercantile Discount - Provident Funds, Hadar Insurance Company Ltd.,                The                Isreali Phoenix Assurance Company Ltd. and Gaon Gemel Ltd.                (18) |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.68 | Escrow                Agreement, dated November 23, 2005, between the Registrant and Mercantile                Discount - Provident Funds, Hadar Insurance Company Ltd., The Isreali                Phoenix Assurance Company Ltd. and Gaon Gemel Ltd. (18)                                                       |
| 10.69 | Management                Agreement with I-55 Telecommunications, LLC dated October 12, 2005                (19)                                                                                                                                                                                                  |
| 10.70 | Agreement                - General Terms and Conditions with EBI Comm, Inc., dated January                1, 2006.                (21)                                                                                                                                                                            |
| 10.71 | Asset                Purchase Agreement with Canufly.net, Inc., dated January 10,                2006.                (21)                                                                                                                                                                                        |
| 16.1  | Letter                dated January 31, 2006 from Chaifetz & Schreiber, P.C to the                SEC                (20)                                                                                                                                                                                     |
| 21.1  | List                of Subsidiaries (Amended) (8)                                                                                                                                                                                                                                                                 |

| 23.1  | Consent                of Chaifetz & Schreiber, P.C.                                                            |
|------------|---------------------------------------------------------------------------------------------------------------------|
| 31.1       | Certification              pursuant to section 302 of the Sarbanes - Oxley Act Of 2002.                             |
| 31.2       | Certification                pursuant to section 302 of the Sarbanes - Oxley Act Of 2002.                           |
| 32.1       | Certification                of Officer pursuant to section 906 of the Sarbanes - Oxley Act Of                2002. |
| 32.2       | Certification                of Officer pursuant to section 906 of the Sarbanes - Oxley Act Of                2002. |

----

|   | (1)  | Denotes                previously filed exhibits: filed on August 10, 2001 with Xfone, Inc.'s                SB-2 registration statement, file # 333-67232.                                                          |
|--------|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (2)  | Denotes                previously filed exhibits: filed on October 16, 2001 with Xfone,                Inc.'s                SB-2/Amendment 1 registration statement, file #                333-67232.               |
|   | (3)  | Denotes                previously filed exhibit: filed on November 28, 2001 with Xfone,                Inc.'s                SB-2/Amendment 2 registration statement, file #                333-67232.               |
|   | (4)  | Denotes                previously filed exhibit: filed on December 5, 2002 with Xfone, Inc.'s                Form 8-K.                                                                                               |
|   | (5)  | Denotes                previously filed exhibit: filed on March 3, 2003 with Xfone, Inc.'s                SB-2/Post Effective Amendment No. 2 registration statement, file                #                333-67232 |
|   | (6)  | Denotes                previously filed exhibit: filed on April 15, 2004 with Xfone's, Inc.SB-2                Amendment 1 Registration Statement, file # 333-113020.                                                |
|   | (7)  | Denotes                previously filed exhibit: filed on June 1, 2004 with Xfone, Inc.'s                Form                8-K                                                                                     |
|   | (8)  | Denotes                previously filed exhibit: filed on June 7, 2004 with Xfone, Inc.'s                SB-2/Amendment 2 Registration Statement, file #                333-113020.                                  |
|   | (9)  | Denotes                previously filed exhibit: filed on August 11, 2004 with Xfone's,                Inc.SB-2                Amendment 3 Registration Statement, file # 333-113020.                                |
|   | (10) | Denotes                previously filed exhibit: filed on September 13, 2004 with Xfone's,                Inc.SB-2 Amendment 4 Registration Statement, file #                333-113020.                             |
|   | (11) | Denotes                previously filed exhibits: filed on October 4, 2004 with Xfone, Inc.‘s                Form 8-K                                                                                          |
|   | (12) | Denotes                previously filed exhibits: filed on November 29, 2004 with Xfone,                Inc.‘s                Form 8-K.                                                                        |
|   | (13) | Denotes                previously filed exhibits; filed on March 31, 2005 with Xfone, Inc.‘s Form                10-KSB.                                                                                       |
|   | (14) | Denotes                previously filed exhibit: filed on August 22, 2005 with Xfone, Inc.‘s Form                8-K.                                                                                          |
|   | (15) | Denotes                previously filed exhibit: filed on August 31, 2005 with Xfone, Inc.‘s Form                8-K.                                                                                          |
|   | (16) | Denotes                previously filed exhibits: filed on October 3, 2005 with Xfone, Inc.‘s                Form 8-K.                                                                                         |
|   | (17) | Denotes                previously filed exhibits: filed on October 11, 2005 with Xfone,                Inc.‘s                Form 8-K/A #1.                                                                    |

|   | (18) | Denotes                previously filed exhibits: filed on November 29, 2005 with Xfone,                Inc.‘s                Form 8-K. |
|--------|------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|   | (19) | Denotes                previously filed exhibit: filed on January 23, 2006 with Xfone, Inc.‘s                Form 8-K/A #3.             |
|   | (20) | Denotes                previously filed exhibit: filed on January 31, 2006 with Xfone, Inc.‘s                Form 8-K/A #1.             |
|   | (21) | Denotes                previously filed exhibit: filed on January 31, 2006 with Xfone, Inc.‘s                Form 8-K.                  |
|   | (22) | Denotes                previously filed exhibit: filed on March 15, 2006 with Xfone, Inc.‘s Form                8-K.                    |

----

RICINP

**2005**

**Audit      Fees **

**Audit-Related      Fees **

**Tax      Fees **

**All      Other Fees **

----

**2004**

**Audit      Fees **

**Audit-Related      Fees **

**Tax      Fees **

**All      Other Fees **

----

**SIGNATURES**

|                                   |                                                        |                                |
|----------------------------------------|-------------------------------------------------------------|-------------------------------------|
|                                   | XFONE,              INC.                                    |
|                              |                                                   |                           |
| Date: March              30, 2006 | By:                                               | /s/ Guy              Nissenson |
|                                   | Guy              Nissenson                                  |
|                                   | President,Chief              Executive Officer and Director |

| **Signature**                          | **Title**                                                                                | **Date**                            |
|----------------------------------------|------------------------------------------------------------------------------------------|-------------------------------------|
|                                   |                                                                                     |                                |
| /s/Guy                Nissenson        | President,                Chief Executive Officer, and Director                          | March                30, 2006       |
| Guy                Nissenson           |                                                                                     |                                |
|                                   |                                                                                     |                                |
| /s/                Abraham Keinan      | Chairman                of the Board                                                     | March                30, 2006       |
| Abraham                Keinan          |                                                                                     |                                |
|  /s/Eyal                J. Harish |  Director                                                                           |  March                30, 2006 |
| Eyal                J. Harish          |                                                                                     |                                |
|                                   |                                                                                     |                                |
| /s/                Arie Czertok        | Director                                                                                 | March                30, 2006       |
| Arie                Czertok            |                                                                                     |                                |
|  /s/                Alon Mualem   |  Treasurer,                Chief Financial Officer and Principal Accounting Officer |  March                30, 2006 |
| Alon                Mualem             |                                                                                     |                                |

----