Second Quarter 2006 Letter to Shareholders by XFONE's CEO

The following is a letter to shareholders of XFONE, Inc. (AMEX: XFN) (TASE: XFN) 


JACKSON, Mississippi, August 31  /PRNewswire-FirstCall/ -- Dear Shareholders, Partners, and Friends:

I am once again pleased to report to you that XFONE remains on track and is delivering on its strategy to build a compelling, increasingly profitable multi-national communications company. Having just reported our 2006 second quarter results, we continue to demonstrate our commitment and ability to succeed in improving the Company's strong financial and operating performance on a quarter over quarter basis.

To recap, our total revenues continued to climb, growing by 45% in the second quarter to $8.4 million, and up 7% sequentially from $7.8 million last quarter. Net income more than doubled to $229,000, compared with both the $107,000 reported for the second quarter of last year, and $111,000 reported in the prior quarter.

As is evident, the steps we have taken to strengthen our long term growth platform are yielding favorable results, and are setting the stage for a very strong year.

Looking at our business operations by geography, XFONE 018, our Israel-based operation, remains a great source of pride and achievement for us. Since this start-up was launched in December 2004, we have concentrated on building our customer base through exceptional price and service positioning. Consequently, customer growth has been brisk and financial performance has been very good. Specifically, in the second quarter, Xfone 018 delivered revenues of $1.3 million, more than double the $600,000 posted for the second quarter of last year.

In addition, the recently granted ISP license provides Xfone 018 with a new platform to accomplish our strategy to offer all types of telecommunication services to our customers. Coupled with the recent permission to initiate experimental Voice over Broadband services, XFONE 018 is on the forefront, providing customers with the most advanced technology-driven solutions available. Although it may take some time before the Ministry of Communications determines whether or not it will advocate licensing for this initiative, their permission to proceed with the experiment is a very positive first step.

The United Kingdom remains a strong and stable business for us. Revenues from our UK-based business operations were $3.6 million in the second quarter of this year, at the same level as reported for the same period in 2005. We anticipate that our recent acquisition of Equitalk, completed in July, coupled with our purchase of a controlling interest in Story Telecom, have put into a motion a comprehensive plan of action to quick-start renewed growth of our UK operations. With the appointment of John Mark Burton to lead our newly consolidated operations in the UK, we are now well positioned to aggressively pursue a greater share of the UK market, and subsequently improve our financial performance in the coming quarters.

Looking to our American operations, XFONE USA has continued to perform admirably, driven largely by the success of our value-driven, synergy seeking, acquisition strategy in that market. In the second quarter of this year, XFONE USA delivered revenue growth of 119% reporting revenues of $3.5 million. This notable rise was attributed to revenue contributions made from our 2006 acquisitions of Canufly, EBI Comm, I-55 Internet Services and I-55 Telecommunications.

With these four acquisitions complete, XFONE USA remains very active in identifying and pursuing additional targets in the Southeastern region of the United states , which will enable XFONE USA to position itself as one of the largest, and most successful communications service providers of choice in its region.

Before I conclude this quarterly update to you, I would like to comment on our recent dual listing on the Tel Aviv Stock Exchange. Given our growing success in Israel, the listing is a logical extension to grow and diversify our multi-national shareholder base as well as providing additional support of our business plan.

With the first half of 2006 now behind us and the second half well underway, XFONE intends to remain highly vigilant on perpetuating its success through thoughtful execution of strategies designed to expand its growing industry leadership. We remain focused on growing our revenues and profitability, while increasing our emphasis on improving our earnings per share, as we realize the synergies of our recent acquisitions.

Thank you again for your continued support of XFONE. Your faith and confidence in our Company is greatly appreciated, and inspires all of us at XFONE worldwide to remain committed to our mission of delivering an enduring and highly successful enterprise. 

  Sincerely,
  Guy Nissenson
  President and Chief Executive Officer
  XFONE, Inc.


This letter contains forward-looking statements. The words or phrases "should," "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions are intended to identify "forward-looking statements." The Company's financial results reflected above should not be construed by any means as representative of the current or future value of its common stock. All information set forth in this letter, except historical and factual information, represents forward-looking statements. This includes all statements about the company's plans, beliefs, estimates and expectations. These statements are based on current estimates and projections, which involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These risks and uncertainties include issues related to rapidly changing technology and evolving standards in the industries in which the Company and its subsidiaries operate; the ability to obtain sufficient funding to continue operations, maintain adequate cash flow, profitably exploit new business, and license and sign new agreements; the unpredictable nature of consumer preferences; and other factors set forth in the Company's most recently filed annual report and registration statement. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risks and uncertainties described in other documents that the Company files from time to time with the Securities and Exchange Commission. 

DATASOURCE: XFONE Inc.



CONTACT:  Contact: Guy Nissenson, President and Chief Executive Officer,

XFONE, Inc., , [phone]

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