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 the Company's 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

                               Nine months ended           Three months ended
                                 September 30,                September 30,
                               2009          2008          2009           2008
Revenues                         100.0  %     100.0  %       100.0   %     100.0 %
Cost of Revenues                  53.2  %      51.1  %        52.1   %      52.1 %
Non- recurring loss                0.8  %         -  %           -   %         - %
Gross Profit                      46.0  %      48.9  %        47.9   %      47.9 %
Operating Expenses:
Research and Development           0.1  %       0.1  %         0.1   %       0.1 %
Marketing and Selling             12.5  %      14.0  %        12.0   %      13.0 %
General and Administrative        29.2  %      27.4  %        30.5   %      27.3 %
Non-recurring loss                   -  %       0.3  %           -   %       0.7 %
Total Operating Expenses          41.8  %      41.8  %        42.6   %      41.1 %

Revenues. Revenues for the nine months ended September 30, 2009 decreased 5% to $64,228,176 from $67,608,521 for the same period in 2008. The decrease of $3,380,345 in the consolidated revenues is attributed to a $912,354 increase in our revenues in the United States which is offset by a $1,053,776 decrease in revenues in Israel and a $3,238,923 decrease in revenues in the United Kingdom ("UK"). In the first nine months of 2009, revenues in the United States as a percentage of total revenues increased to 72.5% from 67.5% for the same period in 2008, whereas revenues in the United Kingdom and Israel as a percentage of total revenues decreased to 17.9% and 9.6% from 21.8% and 10.7%, respectively.

Revenues in the United States for the nine months ended September 30, 2009 increased 2.0% to $46,548,959 from $45,636,605 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 $39.5 million for the nine months ended September 30, 2009, in comparison to the inclusion of NTS' revenues in the amount of approximately $37.5 million only from its acquisition date, on February 26, 2008 for the nine months ended September 30, 2008. The increase in revenues is also due to an increase of $1.5 million in revenues from business and residential customers using our fiber network. The increase in revenues was offset by a $2.4 million decrease in revenues from other carriers.

Revenues in the United Kingdom for the nine months ended September 30, 2009 decreased 22.0% to $11,508,526 from $14,747,449 for the same period in 2008. While our earned revenues in the UK were at substantially the same level during the nine months of 2009 and 2008, we experienced such decrease in our revenues due to the devaluation of the GBP against the U.S. dollar in the first nine months 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 nine months ended September 30, 2009 decreased 14.6% to $6,170,691 from $7,224,467 for the same period in 2008. While our revenues in Israel, stated in its local currency, decreased by approximately NIS 750,000, largely as a result of the termination of the marketing of certain calling cards. We experienced a decrease of $1,053,776 in reported revenues due to the revaluation of the U.S. dollar against the NIS during the first nine months 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 nine months ended September 30, 2009, excluding reported non-recurring loss, decreased 1.0% to $34,189,233 from $34,536,276 for the same period in 2008. Cost of revenues, excluding reported non-recurring loss, as a percentage of revenues in the nine months ended September 30, 2009 increased to 53.2% from 51.1% in the same period in 2008.

Cost of revenues as a percentage of revenues in the United States in the nine months ended September 30, 2009 decreased to 54.7% from 56.2% in the same period in 2008 as a result of an increase in revenues generated by customers using our fiber network and businesses using our non-fiber network and a decrease in sales of low-margin products mainly to residential customers and to other carriers.

Cost of revenues as a percentage of revenues in the UK for the nine months ended September 30, 2009 increased to 46.2% from 40.3% in the same period in 2008, as a result of an increase in the cost of traffic time and an increase in sales of products with lower margins.

Cost of revenues, excluding reported non-recurring loss, as a percentage of revenues in Israel for the nine months ended September 30, 2009 increased to 55.5% from 40.5% in the same period in 2008, as a result of an increase in the cost of traffic time and an increase in sales of products with lower margins.

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 nine months ended September 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 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 nine months ended September 30, 2009 decreased to $8,004,161 from $9,517,132 for the same period in 2008. Marketing and selling expenses as a percentage of revenues decreased to 12.5% for the nine months ended September 30, 2009 from 14.1% for the same period in 2008. The decrease is mainly attributed to a decrease in commission-based revenues in the UK, certain reductions in personnel towards the end of 2008 and the revaluation of the U.S. dollar against the GBP and the NIS.

Non- recurring Expense. On March 17, 2008, Xfone 018 Ltd. ("Xfone 018") entered into an Agreement of Principles with Tiv Taam Holdings 1 Ltd. ("Agreement of Principles") for the acquisition of control over Tadiran Telecom-Communication Services In Israel - Limited Partnership ("Tadiran Telecom LP"). During the third quarter of 2008, negotiations between Xfone 018, Tiv Taam and the management and employees of Tadiran Telecom LP ceased. As a result, we recoded one-time expenses of $189,610 consisting primarily of financial, legal and accounting fees.

Financing Expenses, net. Financing expenses, net, for the nine months ended September 30, 2009 decreased to $3,676,813 from $5,031,403 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' outstanding principle amount, the reduction in the Bonds' interest rate from 9% to 8% in November 2008 and the revaluation of the U.S. dollar against the GBP and the NIS.

Net Income (Loss). Net loss for the nine months ended September 30, 2009 was $(1,313,725) compared to a net loss of $(49,629) for the same period in 2008.

Earning (Loss) Per Share. Basic and diluted net loss per share of common stock for the nine months ended September 30, 2009 was $(0.067), compared to basic and diluted net loss per share of common stock of $(0.014) for the same period in 2008.

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

Revenues. Revenues for the quarter ended September 30, 2009 decreased 17.8% to $21,233,468 from $25,962,701 for the same period in 2008. This decrease in the consolidated revenues is attributed to a decrease of $2,722,450 in the United States, and $1,418,204 and $488,579 in the UK and in Israel, respectively. In the three months ended September 2009, revenues in the United States as a percentage of total revenues increased to 72.4% from 70.0% for the same period in 2008, whereas revenues in the United Kingdom and Israel as a percentage of total revenues decreased to 17.9% and 9.8% from 20.1% and 9.9%, respectively.

Revenues in the United States for the three months ended September 30, 2009 decreased 15.0% to $15,443,537 from $18,165,987 for the same period in 2008. The decrease in revenues is a result of a decrease of $1.7 million in revenues from other carriers and a decrease of $314,000 from residential customers. The decrease in revenues was offset by $116,000 in revenues from business and residential customers using our fiber network.

Revenues in the United Kingdom for the three months ended September 30, 2009 decreased 27.1% to $3,808,720 from $5,226,924 for the same period in 2008. When stated in its local currency, our revenues in the UK decreased 17.4% during the three months ended September 30, 2009 compared to the same period of last year as a result of a decline in sales of calling cards. In addition, we experienced such decrease in our revenues due to the devaluation of the GBP against the U.S. dollar in the third 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 September 30, 2009 decreased 19.0% to $2,081,211 from $2,569,790 for the same period in 2008. We experienced this decrease in reported revenues as a result of the termination of the marketing of certain calling cards in the Israeli market.

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 September 30, 2009, decreased 17.7% to $11,125,135 from $13,519,015 for the same period in 2008. Cost of revenues, as a percentage of revenues in the quarter ended September 30, 2009, was 52.1% similar to the same period in 2008.

Cost of revenues as a percentage of revenues in the United States in the three months ended September 30, 2009 decreased to 54.2% from 55.4% in the same period in 2008 as a result of an increase in sales of our services on our fiber network which generated high-margins and a decrease in sales of low-margin products mainly to residential customers and to other carriers.

Cost of revenues as a percentage of revenues in the UK in the three months ended September 30, 2009 decreased to 43.8% from 46.3% in the same period in 2008 as a result of a decrease in the cost of traffic time.

Cost of revenues, as a percentage of revenues in Israel in the three months ended September 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.

Research and Development. Research and development expenses for each of the quarters ended September 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 until the end of 2009.

Marketing and Selling Expenses. Marketing and selling expenses consists 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 September 30, 2009 decreased 24.2% to $2,562,071 from $3,378,328 for the same period in 2008. Marketing and selling expenses as a percentage of revenues decreased to 12.0% for the quarter ended September 30, 2009 from 13.0% for the same period in 2008. The decrease is mainly attributed to the decrease in commission-based revenues in the UK and Israel and certain reduction in personnel towards the end of 2008.

General and Administrative Expenses. General and administrative expenses consists primarily of compensation costs for administration, finance and general management personnel and consulting fees. General and administrative expenses for the quarter ended September 30, 2009 decreased 8.3% to $6,502,945 from $7,091,436 for the same period in 2008. The decrease is a result of certain reduction in personnel towards the end of 2008.

Financing Expenses, net. Financing expenses, net, for the quarter ended September 30, 2009 increased to $2,478,365 from $1,035,823 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 the 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 increase in financing expenses is a result of a devaluation of 4.1% in the U.S. dollar against the NIS during the third quarter of 2009 versus an evaluation of 2.1% in the U.S. Dollar against the NIS in the same period in 2008. The increase in financing expenses was offset against a decrease in the Bonds' outstanding principle amount and a reduction in the Bonds' interest rate from 9% to 8% in November 2008.

Net Income (Loss). Net loss for the quarter ended September 30, 2009 was $(1,649,747) compared to net profit of $653,540 for the same period in 2008.

Earning (Loss) Per Share. Diluted net loss per share of common stock for the quarter ended September 30, 2009 was $(0.092), compared to diluted net profit of $0.035 for the same period in 2008.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents as of September 30, 2009, amounted to $4,653,271 compared to $3,078,474 as of December 31, 2008, an increase of $1,574,797. Net cash provided by operating activities in the nine months ended September 30, 2009, was $5,154,834. Cash used for investing activities in the nine months ended September 30, 2009 was $5,506,584. Out of that amount, $1,855,301 is attributable to the build out of the project under the United States Department of Agriculture in Levelland, TX and $3,651,283 to the purchase of other equipment. Net cash provided in financing activities for the nine months ended September 30, 2009 was $1,932,570, and is primarily attributable to proceeds from a $2,859,493 non-recourse loan from the United States Department of Agriculture.

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

2009                                          $   89,653
2010                                             200,686
2011                                             184,545
2012                                              59,512

Total                                         $  534,396

 Total minimum lease payments                 $  469,050
Less: amount representing interest                65,346

 Present value of net minimum lease payment   $  534,396

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 originally 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 "Annual Monitoring Report") with the TASE. According to the Annual Monitoring Report, Midroog's rating committee decided on a negative outlook on the reaffirmed A3 rating assigned to the Bonds. On October 26, 2009, Midroog issued a monitoring report downgrading the rating of the Bonds from A3 to Baa1, and announcing that the negative outlook on the rating remains in effect.

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.

We have a credit facility from Bank Leumi (UK) plc ("Bank Leumi"), of up to £150,000 ($249,984), 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 September 30, 2009, we have drawn down the full £150,000 ($249,984) of this Credit Facility.

U.S. subsidiaries

Our U.S. subsidiary, NTS Communications, Inc. ("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 3.25% at September 30, 2009. At September 30, 2009, the total amount advanced was $3,653,396. 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 36 monthly installments. Each repayment includes principle and interest totaling $61,212 each. The first installment commenced on June 25, 2009 and the final principal payment is due on May 2012 and subject to renewal at the banks option.

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 September 30, 2009 and December 31, 2008 is $4,264,464 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 September 30, 2009, the aggregate amount guaranteed by us pursuant to the Leases is $431,778.

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 September 30, 2009 is $49,443.

Upon the assignment of the Interconnection Agreement between WS Telecom, Inc. . . .