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 Consolidated 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

                               Six months ended          Three months ended
                                   June 30,                   June 30,
                               2009          2008        2009           2008
Revenues                           100  %      100 %         100  %        100 %
Cost of Revenues                  53.8  %     50.5 %        52.7  %       51.7 %
Non- recurring loss                1.2  %        - %         2.4  %          - %
Gross Profit                      45.0  %     49.5 %        44.9  %       48.3 %
Operating Expenses:
Research and Development           0.1  %      0.1 %         0.1  %        0.1 %
Marketing and Selling             12.7  %     14.7 %        12.7  %       13.4 %
General and Administrative        28.6  %     27.4 %        29.3  %       27.5 %
Total Operating Expenses          41.4  %     42.2 %        42.1  %       41.0 %
Income (loss) before Taxes         0.9  %     -2.3 %        -9.6  %       -4.6 %
Net Income (loss)                  1.1  %     -2.1 %        -8.7  %       -3.7 %

COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 2009 AND JUNE 30, 2008

Revenues. Revenues for the six months ended June 30, 2009 increased 3% to $42,894,708 from $41,645,820 for the same period in 2008. The increase of $1,248,888 in the consolidated revenues is attributed to $3,634,804 increase in our revenues in the United States which is partially offset by $565,197 decrease in revenues in Israel and $1,820,719 decrease in revenues in the United Kingdom. In the first six months of 2009, revenues in the United States as a percentage of total revenues increased to 72.5% from 66.0% for the same period in 2008, whereas revenues in the United Kingdom and Israel as a percentage of total revenues decreased to 18.0% and 9.5% from 22.9% and 11.2%, respectively.

Revenues in the United States for the six months ended June 30, 2009 increased 13.2% to $31,105,422 from $27,470,618 for the same period in 2008. The increase in revenues is a result of the inclusion of the revenues of NTS Communications, Inc., our wholly owed U.S. subsidiary ("NTS"), in the amount of approximately $26.3 million for the six months ended June 30, 2009, in comparison to the inclusion of NTS' revenues in the amount of approximately $22.2 million only from its acquisition date, on February 26, 2008 for the six months ended June 30, 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 six months ended June 30, 2009 decreased 19.1% to $7,699,806 from $9,520,525 for the same period in 2008. While our earned revenues in the UK were at substantially the same level during the first half of 2009, we experienced such decrease in our revenues due to the devaluation of the GBP against the U.S. dollar in the first half of 2009 versus the value of the GBP against the U.S. dollar in the same period of last year.

Revenues in Israel for the six months ended June 30, 2009 decreased 12.1% to $4,089,480 from $4,654,677 for the same period in 2008. While our revenues in Israel, stated in its local currency, increased 11% as a result of entering into the Internet and Local Telephony markets in Israel, we experienced this decrease in reported revenues due to the revaluation of the U.S. dollar against the NIS during the first 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 six months ended June 30, 2009, excluding reported non- recurring loss, increased 9.7% to $23,064,098 from $21,017,261 for the same period in 2008. Cost of revenues, excluding reported non- recurring loss, as a percentage of revenues in the six months ended June 30, 2009 increased to 53.8% from 50.5% in the same period in 2008.

Cost of revenues as a percentage of revenues in the United States in the six months ended June 30, 2009 decreased to 54.9% from 56.8% 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 for the six months ended June 30, 2009 increased to 47.4% from 37.0% 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.

Cost of revenues, excluding reported non- recurring loss, as a percentage of revenues in Israel for the six months ended June 30, 2009 increased to 57.4% from 40.8% 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.

Non-recurring loss. During the period covered by this Quarterly Report, certain pre-paid calling cards were sold through distribution channels in Israel and resulted in a loss of $506,176. As a result, we discontinued the distribution of such pre-paid calling cards.

Research and Development. Research and development expenses for each of the six months ended June 30, 2009 and 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 at or near the same level during the second half 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 six months ended June 30, 2009 decreased to $5,442,090 from $6,138,804 for the same period in 2008. Marketing and selling expenses as a percentage of revenues decreased to 12.7% for the six months ended June 30, 2009 from 14.7% for the same period in 2008. The decrease is mainly attributed to a 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.

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 six months ended June 30, 2009 increased 7.6% (or $865,660) to $12,281,048 from $11,415,388 for the same period in 2008. The increase in general and administrative expenses is a result of the inclusion of the general and administrative expenses of NTS Communications, Inc. ("NTS"), our wholly owed U.S. subsidiary, in the amount of approximately $7.9 million for the six months ended June 30, 2009, in comparison to the inclusion of its general and administrative expenses in the amount of approximately $5.7 million only from its acquisition date, on February 26, 2008 for the six months ended June 30, 2008. The increase in general and administrative expenses 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 expenses, net, for the six months ended June 30, 2009 decreased to $1,198,448 from $3,995,580 for the same period in 2008. Financing expenses consist of interest payable on our Bonds, the effect of fluctuation in the exchange rate of the NIS on our Bonds which are stated in NIS and linkage to the CPI expenses accumulated on the Bonds which are linked to the Israeli CPI. It also includes 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, which is of a temporary nature under the determination of SFAS 52. The decrease in financing expenses is a result of a decrease in the Bonds' interest rate from 9% to 8% and the revaluation of the U.S. dollar against the GBP and the NIS.

Net Income (Loss). Net income for the six months ended June 30, 2009 was $455,184 compared to net loss of $882,228 for the same period in 2008.

Earning Per Share. Basic and diluted net income per share of common stock for the six months ended June 30, 2009 was $0.025, compared to basic and diluted net loss per share of common stock of $0.052 for the same period in 2008.

COMPARISON OF THE THREE MONTH PERIODS ENDED JUNE 30, 2009 AND JUNE 30, 2008

Revenues. Revenues for the quarter ended June 30, 2009 decreased 17.1% to $21,420,273 from $25,852,722 for the same period in 2008. This decrease in the consolidated revenues is attributed to a decrease of $3,307,705 in the United States, and $663,835 and $460,909 in the UK and in Israel respectively. Revenues in the different segments as a percentage of total revenues remain consistent in relation to the same period in 2008 and are 72.0%, 19.0% and 9.0% in the United States, the UK and Israel, respectively.

Revenues in the United States for the three months ended June 30, 2009 decreased 17.6% to $15,455,409 from $18,763,114 for the same period in 2008. The decrease in revenues is a result of a decrease in revenues from other carriers and due to attrition of residential customers.

Revenues in the United Kingdom for the three months ended June 30, 2009 decreased 14.1% to $4,049,266 from $4,713,101 for the same period in 2008. When stated in its local currency, our revenues in the UK increased 10.4% during the three months ended June 30, 2009 compared to the same period of last year. However, we experienced such decrease in our revenues due to the devaluation of the GBP against the U.S. dollar in the second quarter of 2009 versus the value of the GBP against the US dollar in the same period of last year.

Revenues in Israel for the three months ended June 30, 2009 decreased 19.4% to $1,915,598 from $2,376,507 for the same period in 2008. While our revenues in Israel, when stated in its local currency, increased 7% as a result of entering into the Internet and Local Telephony markets in Israel, we experienced this decrease in reported revenues due to the revaluation of the U.S. dollar against the NIS during the second quarter of 2009.

Cost of Revenues. Cost of revenues consists primarily of traffic time purchased from telephone companies and other related charges. Cost of revenues for the quarter ended June 30, 2009, excluding reported non- recurring loss, decreased 15.5% to $11,285,641 from $13,360,988 for the same period in 2008. The decrease in the cost of revenues is primarily attributed to the decrease in revenues. Cost of revenues, excluding reported non- recurring loss as a percentage of revenues in the quarter ended June 30, 2009, increased to 52.7% from 51.7% in the same period in 2008.

Cost of revenues as a percentage of revenues in the United States in the three months ended June 30, 2009 decreased to 54.4% from 56.5% 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 in the three months ended June 30, 2009 increased to 44.1% from 38.8% 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.

Cost of revenues, excluding reported non- recurring loss, as a percentage of revenues in Israel in the three months ended June 30, 2009 increased to 56.9% from 39.3% 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.

Non-recurring loss. During the three months ended June 30, 2009, certain pre-paid calling cards were sold through distribution channels in Israel and resulted in a loss of $506,176. As a result, we discontinued the distribution of such pre-paid calling cards.

Research and Development. Research and development expenses for each of the quarters ended June 30, 2009 and 2008 were 0.1% of total revenues. We estimate that the research and development expenses will remain at or near the same level during the second half 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 quarter ended June 30, 2009 decreased 21.5% (or $745,695) to $2,727,480 from $3,473,175 for the same period in 2008. Marketing and selling expenses as a percentage of revenues decreased to 12.7% for the quarter ended June 30, 2009 from 13.4% for the same period in 2008. The decrease is mainly attributed to the 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.

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 quarter ended June 30, 2009 decreased 11.6% to $6,277,511 from $7,103,668 for the same period in 2008. The decrease is a result of 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 expenses, net, for the quarter ended June 30, 2009 decreased to $2,660,520 from $3,092,411 for the same period in 2008. Financing expenses consist of interest payable on our Bonds, the effect of fluctuation in the exchange rate of the NIS on our Bonds which are stated in NIS and linkage to the CPI expenses accumulated on the Bonds which are linked to the Israeli CPI. It also includes 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, which is of a temporary nature under the determination of SFAS 52. The decrease in financing expenses is a result of a decrease in the Bonds' interest rate from 9% to 8% and the revaluation of the U.S. dollar against the GBP and the NIS.

Net Income (Loss). Net loss for the quarter ended June 30, 2009 was $1,863,177 compared to net loss of $963,358 for the same period in 2008.

Earning (Loss) Per Share. Diluted net loss per share of common stock for the quarter ended June 30, 2009 was $0.101, compared to diluted net loss of $0.052 for the same period in 2008.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents as of June 30, 2009, amounted to $3,495,526 compared to $3,078,474 as of December 31, 2008, an increase of $417,052. Net cash provided by operating activities in the six months ended June 30, 2009, was $3,111,793. Cash used for investing activities in the six months ended June 30, 2009 was $4,190,473, and is attributable to the purchase of equipment. Net cash provided in financing activities for the six months ended June 30, 2009 was $1,483,079, and is primarily attributable to proceeds from long-term bank loans in an aggregate amount of $4,059,283, $2,662,585 of which was received as a non- recourse loan from the United States Department of Agriculture, increase of short-term bank credit of $719,695, repayment of third installment of interest on Bonds of $957,879 and the repayment of financial obligations of $2,338,020.

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 June 30, 2009, the minimum future lease payments are:

2009                                          $  112,788
2010                                             171,223
2011                                             135,308
2012                                              27,092

Total                                         $  446,409

 Total minimum lease payments                 $  413,257
Less: amount representing interest                33,152

 Present value of net minimum lease payment   $  446,409

We will continue to finance our operations and fund the current commitments for capital expenditures mainly from the cash provided from operating activities and the non- recourse debt facilities granted by the U.S. government, as expanded below. We believe that our current cash and cash equivalents, supported by our debt facilities, will be sufficient to meet our cash requirements for both the short and long term. As we deem necessary, we will seek additional debt or equity financing.

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 $102,249) (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. Through June 20, 2009 , 16,147 NIS (approximately $4,128) was paid as interest on the Loan.

We have a credit facility from Bank Leumi (UK) plc ("Bank Leumi"), of up to £150,000 ($251,258), which we obtained on November 26, 2008 for general working capital purposes (the "Credit Facility"). The Credit Facility initially had been available for six months, and was renewed for an additional six months on July 8, 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. As of June 30, 2009, we have drawn down the full £150,000 ($251,258) of this Credit Facility. Through June 30, 2009, 30,014 GBP (approximately $50,275) was paid as interest on the credit facility.

U.S. subsidiaries

Our U.S. subsidiary, NTS, has a $4,000,000 revolving line of credit and loan with a commercial bank. The facility is secured by an assignment of all NTS' trade accounts receivable. The line bears interest at a rate equivalent to Wall Street Journal Prime. At June 30, 2009, the total amount advanced was $3,808,455. The amounts and terms of the facility are:

NTS has a $4,000,000 revolving line of credit and loan with a commercial bank. The facility is secured by an assignment of all NTS' trade accounts receivable. The facility bears interest at a rate equivalent to Wall Street Journal Prime, but not less than 6% per annum. The Wall Street Journal Prime rate was 9.5% at June 30, 2009. At June 30, 2009, the total amount advanced was $3,808,455. The amounts and terms of the facility are:
1. Revolving credit line of $2,000,000 matures on April 27, 2010.

2. Loan of $2,000,000 repayable in equal monthly installments of $61,212 each. The first installment commenced on June 25, 2009 and the final principal payment is due on May 2010 and subject to renewal at the banks option.

In addition, NTS has $2,507,404 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 a 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 3.63%.

The total aggregate amount of these loans as of June 30, 2009 and December 31, 2008 is $4,067,556 and $1,404,971, respectively. The loans are repaid in monthly installments until 2024.

On July 14, 2009, NTS and Onset Financial, Inc. ("OFI") entered into a master lease agreement (the "Master Lease Agreement") and intend to enter into certain schedules which will incorporate the terms and conditions of the Master Lease Agreement and identify the specifics of particular leases for IT hardware including routers, NIDS, set top boxes, and their associated enclosures and other related property (the "Leases"). NTS' performance of payments under the Leases is secured with a payment guarantee issued by us, in favor of OFI, guaranteeing the full and punctual payment of any amount due to OFI pursuant to the Leases. As of August 12, 2009, the aggregate amount guaranteed by us pursuant to the Leases is $225,029.11.

Our U.S. subsidiary, Xfone USA, Inc., has certain loan facilities with certain . . .