FORWARD-LOOKING STATEMENTS

The information set forth in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, including, among others (i) expected changes in the Company's revenues and profitability,
(ii) prospective business opportunities and (iii) the Company's strategy for financing its business. Forward-looking statements are statements other than historical information or statements of current condition. Some forward-looking statements may be identified by use of terms such as "believes", "anticipates", "intends" or "expects". These forward-looking statements relate to the plans, objectives and expectations of the Company for future operations. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, in light of the risks and uncertainties inherent in all future projections, the inclusion of forward-looking statements in this Quarterly Report should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved.

You should read the following discussion and analysis in conjunction with the Condensed Financial Statements and Notes attached hereto, and the other financial data appearing elsewhere in this Quarterly Report.

The Company's revenues and results of operations could differ materially from those projected in the forward-looking statements as a result of numerous factors, including, but not limited to, the following: the risk of significant natural disaster, the inability of the Company to insure against certain risks, inflationary and deflationary conditions and cycles, currency exchange rates, changing government regulations domestically and internationally affecting our products and businesses.

OVERVIEW

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

The Company's principal executive offices are in Lubbock, Texas,

RESULTS OF OPERATIONS

Financial Information - Percentage of Revenues
                                             Three months ended
                                                  March 31,
                                               2009           2008
                Revenues                        100  %         100 %
                Cost of Revenues              -54.8  %       -48.5 %
                Gross Profit                   45.2  %        51.5 %
                Operating Expenses:
                Research and Development       -0.1  %        -0.1 %
                Marketing and Selling         -12.6  %       -16.9 %
                General and Administrative      -28  %       -27.5 %
                Total Operating Expenses      -40.7  %       -44.5 %
                Income before Taxes            11.2  %         0.8 %
                Net Income                     10.8  %         0.3 %

COMPARISON OF THE THREE MONTHS PERIOD ENDED MARCH 31, 2009 AND MARCH 31, 2008

Revenues. Revenues for the three months ended March 31, 2009 increased 36% to $21,474,435 from $15,793,098 for the same period in 2008. The increase of $5,681,337 in the consolidated revenues is attributed to $6,942,509 increase in our revenues in the United States which is partially offset by $104,288 decrease in revenues in Israel and $1,156,884 decrease in revenues in the United Kingdom. In the first three months of 2009, revenues in the United States as a percentage of total revenues increased to 72.9% from 55.1% for the same period in 2008, whereas revenues in the United Kingdom and Israel as a percentage of total revenues decreased to 17% and 10.1% from 30.4% and 14.4%, respectively.

Revenues in the United States for the three months ended March 31, 2009 increased 79.7% to $15,650,013 from $8,707,504 for the same period in 2008. The increase in revenues is a result of the inclusion of the revenues of NTS Communications, Inc. ("NTS"), our wholly owed U.S. subsidiary, in the amount of approximately $13.2 million for the three months ended March 31, 2009, in comparison to the inclusion of its revenues in the amount of approximately $6 million only from its acquisition date, on February 26, 2008 for the three months ended March 31, 2008. The increase in revenues was offset by a decrease in revenues from other carriers and due to attrition of residential customers.

Revenues in the United Kingdom for the three months ended March 31, 2009 decreased 24.1% to $3,650,540 from $4,807,424 for the same period in 2008. While our earned revenues in the UK were at substantially the same level during the first quarter of 2008 and 2009, we experienced this 24.1% decrease due to the devaluation of the GBP against the US dollar which occurred mainly during the second half of 2009.

Revenues in Israel for the three months ended March 31, 2009 decreased 4.6% to $2,173,882 from $2,278,170 for the same period in 2008. While our nominal revenues in Israel increased 11% as a result of new marketing channels, we experienced the slight decrease in reported revenues due to the revaluation of the U.S. dollar against the NIS during the second half of 2009.

Our primary geographic markets are the United States, the United Kingdom and Israel. However, we serve customers worldwide.

Cost of Revenues. Cost of revenues consists primarily of traffic time purchased from telephone companies and other related charges. Cost of revenues for the three months ended March 31, 2009 increased 53.8% to $11,778,457 from $7,656,273 for the same period in 2008. Cost of revenues as a percentage of revenues in the three months ended March 31, 2009 increased to 54.8% from 48.5% in the same period in 2008.

Cost of revenues as a percentage of revenues in the United States in the three months ended March 31, 2009 decreased to 55.3% from 57.3% in the same period in 2008 as a result of a decrease in sales of low-margin products mainly to residential and to other carriers.

Cost of revenues as a percentage of revenues in the UK and Israel for the three months ended March 31, 2009 increased to 51.1% and 57.8%, respectively, from 35.3% and 42.5%, respectively, in the same period in 2008, as a result of an increase in the cost of traffic time and increase in sales of products with lower margin.

Research and Development. Research and development expenses for the three months ended March 31, 2009 and for the same period in 2008 were 0.1% of total revenues. The research and development activities are located only in the U.K and represent the payroll of those who are engaged in development activities. We estimate that the research and development expenses will remain in the same level until the end of 2009.

Marketing and Selling Expenses. Marketing and selling expenses consist primarily of commissions to agents and resellers. Other marketing and selling expenses are related to compensation attributed to employees engaged in marketing and selling activities, promotion, advertising and related expenses. Marketing and selling expenses for the three months ended March 31, 2009 increased to $2,714,610 from $2,665,629 for the same period in 2008. Marketing and selling expenses as a percentage of revenues decreased to 12.6% for the three months ended March 31, 2009 from 16.9% for the same period in 2008. The decrease is mainly attributed to decrease in commission-based revenues in the UK, certain reduction in personnel towards the end of 2008 and the revaluation of the U.S. dollar against the GBP and the NIS. Such decrease was offset by the inclusion of the marketing and selling expenses of NTS in the amount of approximately $905,000 for the three months ended March 31, 2009, in comparison to the inclusion of its marketing and selling expenses in the amount of approximately $370,000 only from February 26, 2008 for the three months ended March 31, 2008.

General and Administrative Expenses. General and administrative expenses consist primarily of compensation costs for administration, finance and general management personnel and consulting fees. General and administrative expenses for the three months ended March 31, 2009 increased 39.2% to $6,003,537 from $4,311,720 for the same period in 2008. The increase resulted from the inclusion of the general and administration expenses of NTS in the amount of approximately $4.1 million for the three months ended March 31, 2009, in comparison to the inclusion of its general and administration expenses in the amount of approximately $1.5 million only from February 26, 2008 for the three months ended March 31, 2008. Such increase was offset by certain reduction in personnel towards the end of 2008 and the revaluation of the U.S. dollar against the GBP and the NIS.

Financing Expenses, net. Financing income, net, for the three months ended March 31, 2009 increased to financial profits of $1,462,072 from financial expenses of ($903,169) for the same period in 2008. Approximately $2,360,000 of the financial income is attributed to the effect of fluctuation in the exchange rate of the NIS on our Bonds which are stated in NIS and linked to the Israeli CPI which is offset by approximately $590,000 of interest payable on the Bonds. The remaining financial expenses of approximately $304,000 consists of interest expenses on our interest bearing obligations and the effect of currency exchange rate on intercompany balances with our subsidiaries which report in NIS and GBP as their functional currencies.

Net Income. Net income for the three months ended March 31, 2009 was $2,318,361 compared to net income of $81,130 for the same period in 2008.

Earning Per Share. Basic and diluted net profit per share of common stock for the three months ended March 31, 2009 was $0.126, compared to basic and diluted net loss per share of common stock of $0.005 for the same period in 2008.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents as of March 31, 2009, amounted to $3,193,809 compared to $3,078,474 as of December 31, 2008, an increase of $115,335. Net cash provided by operating activities in the three months ended March 31, 2009, was $1,235,690. Cash used for investing activities in the three months ended March 31, 2009 was $2,331,810, and is primarily attributable to the purchase of fixed assets. Net cash provided in financing activities for the three months ended March 31, 2009 was $1,227,565, and is primarily attributable to proceeds from long-term bank loans in an aggregate amount of $1,463,807, $1,272,939 of which was received as a non- recourse loan from the United States Department of Agriculture, increase of short-term bank credit of $46,271 and the repayment of financial obligations of $782,513.

Our capital investments are primarily for the build-out of our fiber network, the purchase of equipment and software for services that we provide or intend to provide.

Capital lease obligations: We are the lessee of switching and other telecom equipment and motor vehicles under capital leases expiring on various dates from 2009 through 2012.

As of March 31, 2009, the minimum future lease payments are:

2009                                          $  185,983
2010                                             157,175
2011                                             127,158
2012                                              21,702

Total                                         $  492,018

 Total minimum lease payments                 $  455,903
Less: amount representing interest                36,115

 Present value of net minimum lease payment   $  492,018

We will continue to finance our operations and fund the current commitments for capital expenditures mainly from the cash provided from operating activities and from private and/or public placements.

Xfone, Inc.

On December 13, 2007 (the "Date of Issuance"), we accepted offers, for the issuance of securities to Israeli institutional investors, for total gross proceeds of NIS 100,382,100 (approximately $25,562,032, based on the exchange rate as of December 13, 2007) par value non-convertible bonds (Series A) (the "Bonds"). The Bonds were issued for an amount equal to their par value.

The Bonds accrue annual interest that is paid semi-annually on the 1st of June and on the 1st of December of every year from 2008 until 2015 (inclusive). The principal of the Bonds is repaid in eight equal annual payments on the 1st of December of every year from 2008 until 2015 (inclusive). The principal and interest of the Bonds are linked to the Israeli Consumer Price Index.

On November 4, 2008, we filed a public prospectus (the "Prospectus") with the Israel Securities Authority and the Tel Aviv Stock Exchange ("TASE") for listing of the Bonds for trading on the TASE. On November 11, 2008 (the "Date of Listing"), the Bonds commenced trading on the TASE. From the Date of Issuance until the Date of Listing, the Bonds accrued annual interest at a rate of 9%. As of the Date of Listing, the interest rate for the unpaid balance of the Bonds was reduced by 1% to an annual interest rate of 8%.

The Bonds may only be traded in Israel. The Bonds were rated A3 by Midroog Limited, an Israeli rating company which is a subsidiary of Moody's Investor Services. On February 19, 2009, Midroog filed its annual monitoring report (the "Monitoring Report") with the TASE. According to the Monitoring Report, Midroog's rating committee reaffirmed the A3 rating assigned to the Bonds. However, the rating committee decided on a negative outlook on the rating of the Bonds, largely, but not exclusively, due to the increase of the risk level in the business environment in which we operate, resulting from the increasing recession in the United States and the threat it poses on our business, since our core activity is based in the U.S. While the Monitoring Report recognizes that we show relative stability in our financial results and adherence to our expected cash flow coverage ratios, it cites our currency exposure resulting from the New Israeli Shekel index-linked bonds in relation to the U.S. dollar, which is our major activity currency.

On December 1, 2008, we borrowed 400,000 NIS (approximately $97,347) (the "Loan") from an individual lender unrelated to us pursuant to a Loan Agreement entered into on the same date, for general working capital purposes and/or for our repurchase of the Bonds. The Loan is to be repaid no later than 12 months from the date of the Loan. The Loan bears interest at an annual rate of 8% and is (including any interest accrued thereon) linked to the Israeli Consumer Price Index. The interest is payable quarterly, at the end of each three-month period, commencing from the Loan date and continuing until the Loan is fully repaid. The first interest payment on the amount of 7,985 NIS (approximately $1,889) was made on March 20, 2009.

We have a credit facility from Bank Leumi (UK) plc ("Bank Leumi"), of up to £150,000 ($227,311), which we obtained on November 26, 2008 for general working capital purposes (the "Credit Facility"). The Credit Facility is available for six months, and will be reviewed by Bank Leumi in May 2009. The Credit Facility is secured by a bank guarantee given to Bank Leumi by FIBI London. The guarantee is based upon a £150,000 deposit by Iddo Keinan, son of Abraham Keinan, our Chairman of the Board, and employee of our wholly-owned UK based subsidiary, Swiftnet Limited, with FIBI London. The Credit Facility bears interest at a rate based on the London Interbank Offered Rate ("LIBOR"), plus one percent per annum, payable at the end of each three-month interest period. If we were to draw funds in excess of the agreed £150,000 amount without prior consent of Bank Leumi, we will be charged interest at the Base Rate, which is currently 5.5% plus 5% per annum for Sterling balances. During fiscal 2008, we have drawn down the full £150,000 ($227,311) of this Credit Facility. The first interest payment on the amount of 1,836 GBP (approximately $2,607) was made on February 27, 2009.

US subsidiaries

Our U.S. subsidiary, NTS Communications, Inc. ("NTS") has a $4,000,000 revolving line of credit with a commercial bank. The facility is secured by an assignment of all NTS's trade accounts receivable. The line bears interest at a rate equivalent to Wall Street Journal Prime. At March 31, 2009, the total amount advanced was $3,850,000. During April 2009, NTS agreed with the commercial bank to replace the previous amounts and terms which matured on March 10, 2009, with the following:
1. Revolving credit line of $2,000,000 bearing an annual interest of 6%. The revolving credit line matures on April 27, 2010.

2. Long-term loan of $2,000,000 bearing interest equal to the Wall Street Prime Daily. The principal will be repaid on a monthly basis starting June 25, 2009 with each payment of principal equal to $61,212. Final principal payment is expected to be made on May 2012.

In addition, NTS has $2,400,000 notes payable for the purchase of certain fixed assets. These notes payable are secured by fixed assets in the form of installment loan agreements.

Our U.S subsidiary, NTS Telephone Company, LLC, a wholly owned subsidiary of NTS has received approval from the Rural Utilities Service ("RUS"), a division of the United States Department of Agriculture, for an $11.8 million, 17-year debt facility to complete a telecommunications overbuild project in Levelland, Texas. The RUS loan is non-recourse to NTS and all other NTS subsidiaries and is cost-of-money loan, bearing interest at the average rate for 10-year U.S. Treasury obligations. Advances are requested as the construction progresses, and the interest rate is set based upon the prevailing rate at the time of each individual advance. The current average rate is approximately 3.17%.

The total aggregate amount of these loans as of March 31, 2009 and December 31, 2008 is $2,677,911 and $1,404,971 respectively.

Our U.S. subsidiary, Xfone USA, Inc., has certain loan facilities with certain liens on its fixed assets in the form of installment loan agreements. The total aggregate amount of these loans as of March 31, 2009 is $244,870.

Upon the assignment of the Interconnection Agreement between WS Telecom, Inc. and BellSouth Telecommunications, Inc. to Xfone USA, Inc., and consummation of the merger on March 10, 2005, Xfone, Inc. and its subsidiaries Swiftnet Limited and Xfone 018 Ltd., individually and/or jointly, agreed to guarantee all undisputed debts owed to BellSouth Telecommunications by Xfone USA in accordance with the assigned Interconnection Agreement. The guarantee was given on December 16, 2004, and became effective upon the consummation of the merger on March 10, 2005.

UK subsidiaries

On April 18, 2002 Bank Leumi (UK) plc issued company credit cards to two directors of Swiftnet Limited, and by way of securing the balances on these cards, took a First Party Charge over Swiftnet to the sum of £50,000 ($75,770).

As of April 10, 2003, Equitalk.co.uk Limited, our U.K. based subsidiary since July 2006, has received loan facilities from Barclays Bank plc in the form of a Government Small Firms Loan Guarantee Scheme Loan Agreement whereby Barclays would lend Equitalk £150,000 ($227,311). As part of the agreement a Debenture charge was raised on all the assets of Equitalk. As of December 31, 2008 the loan was fully repaid.

Israeli subsidiary

Our Israel based subsidiary, Xfone 018 Ltd. has received credit facilities from Bank Hapoalim B.M. in Israel in order to finance its activities. As of March 31, 2009, the credit facilities include a revolving credit line of 500,000 NIS ($121,684), a short-term credit line of 5,250,000 NIS ($1,277,683), and long-term credit line of 1,290,000 NIS ($313,945). In addition, the bank made available to Xfone 018 a long-term facility of 3,150,000 NIS ($766,610) to procure equipment. The credit facilities are secured with: (a) a floating charge on Xfone 018 assets; securities, banknotes, unissued capital stock, reputation, and any property and right including profits thereof Xfone 018 has or may have at any time and in any manner; (b) a fixed charge on its telecommunication equipment (including switches) and insurance rights thereof; (c) 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; (d) We and Swiftnet Limited issued a Letter of Guarantee, unlimited in amount, in favor of the bank, guaranteeing all debt and indebtedness of Xfone 018 towards the bank; (e) Xfone 018 undertook to comply, as of March 31, 2009, with certain covenants concerning its capital and the annual ratio between its total liabilities and EBITDA.

As of March 31, 2009, Xfone 018 has a balance due of 3,351,153 NIS ($800,179) under the credit facility.

According to an agreement between us, Xfone 018 Ltd. and the 26% minority interest partner in Xfone 018 (the "Minority Partner"), in 2004 the Minority Partner provided a bank guarantee of 10,000,000 NIS ($2,433,682) to the Ministry of Communications of the State of Israel which replaced an existing bank guarantee given by us in connection with Xfone 018's license to provide international telecom services in Israel. As part of the agreement, we agreed to indemnify the Minority Partner for any damage caused to him due to the forfeiture of the bank guarantee with the Ministry of Communications on account of any act and/or omission of Xfone 018, provided that the said act or omission is performed against the opinion of the Minority Partner or without his knowledge. On March 26, 2009, a payment of NIS 380,162 ($89,958) was made to the Minority Partner as consideration for interest loss imposed on the Minority Partner in connection with providing the bank guarantee.

According to the above-mentioned agreement with the Minority Partner, during the fourth quarter of 2004, the Minority Partner provided a shareholder loan of approximately $400,000 to Xfone 018 (the "Minority Partner Loan"). The Minority Partner Loan was established for four years, unless otherwise agreed between the parties, with annual interest of 4% and linkage to the Israeli consumer price index. On March 26, 2009, a repayment, by way of off set, of NIS 995,433 ($235,550) was made to the Minority Partner in connection with the Minority Partner Loan. As of March 31, 2009, the balance of the Minority Partner Loan is 960,680 NIS ($229,389).

According to the agreement with the Minority Partner and a Term Note of $800,000 which was executed in July 2004 by Xfone 018 in favor of the Company, as of March 31, 2009, we provided to Xfone 018 a shareholder loan in an aggregate amount of $536,818.

As of March 31, 2009, our Israeli subsidiary activities were financed by the shareholders loans and by using 3,351,153 NIS ($800,179) of the credit facility from Bank Hapoalim.

On November 5, 2007, Bank Hapoalim B.M. in Israel provided a bank guarantee of 322,500 NIS ($78,486) to the Ministry of Communications of the State of Israel in connection with a November 7, 2007 license to commence an experimental deployment of Local Telephone Services utilizing Voice over Broadband (VoB) technology, which was granted to Xfone 018. In connection with the bank guarantee, Xfone 018 executed an indemnification agreement in favor of Bank Hapoalim. The bank guarantee will expire on October 29, 2009.

During February 2008, Xfone 018 Ltd. received a capital lease facilities to purchase certain communication equipment amounting to $75,095 to be paid in 23 equal installments. The balance as of March 31, 2009 is $37,283.

On December 11, 2008, we signed a Letter of Guarantee (the "Guarantee"), pursuant to which we agreed to guarantee the obligations of Xfone 018 under a certain contract dated March 13, 2008 (the "Contract"), entered into by and between Xfone 018 and Tikshoov Digital Ltd. ("Tikshoov") and a certain Agreement dated December 11 2008, entered into by and between Xfone 018 and Tikshoov (the "Agreement"). Pursuant to the Contract, Xfone 018 provides telephone services to Tikshoov for participants in a television call-in game show. Xfone 018 collects the telephone service fees from the participants and delivers the fees to Tikshoov, after deducting applicable monthly fees and costs. Pursuant to the Guarantee, if for any reason Xfone 018 fails to comply with its obligations under the Contract and pursuant to the Agreement in whole or in part, we will pay to Tikshoov directly any amounts due and outstanding. We have agreed to make any payments pursuant to the Guarantee within three (3) business days upon Tikshoov's first demand, without deducting any amounts that we may claim from Tikshoov and free of any taxes or withholdings. The Guarantee terminates and becomes null and void upon the full satisfaction of Xfone 018's obligations.

On May 10, 2009, Bank Hapoalim B.M. in Israel provided a bank guarantee of 100,000 NIS ($24,337) to the Ministry of Treasury of the State of Israel in connection with Xfone 018's participation in a public tender to provide international telecom services to government offices. In connection with the bank guarantee, Xfone 018 agreed to decrease its short-term credit line from 5,250,000 NIS ($1,277,683) to 5,150,000 NIS ($1,253,346). The bank guarantee will expire on February 15, 2010.

On May 12, 2009, Bank Hapoalim B.M. in Israel provided a bank guarantee of 202,000 NIS ($49,160) to the Ministry of Communications of the State of Israel in connection with Xfone 018's application for a license to commence an experimental deployment of Local Telephone Services utilizing Voice over Cellular (VoC) technology. The bank guarantee will expire on November 14, 2010.

IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS

17% and 10.1% of our revenues in the first quarter of 2009 were derived from our U.K. and Israeli operations, respectively, compared to 30.4% and 14.4% in the same period, in 2008. In the first three months of 2009, approximately 39% of the direct traffic costs in Israel were in GBP and the rest were in NIS compared to approximately 30% in the same period in 2008. We believe that the U.S. and Israeli portions of our revenues will increase in the remaining quarters of 2009.

For continuing transactions made in currencies other then US dollar, we use a current conversion rate. For non-contingent past transactions made in currencies . . .