UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-Q




(Mark
One)


x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





FOR
THE QUARTERLY PERIOD ENDED DECEMBER 31, 2009





OR





 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





Commission
file number: 000-28793





TELIPHONE
CORP.


(Exact
name of Registrant as specified in its charter)





Nevada
            
            3661
            
            84-1491673(State
      or jurisdiction of
              Incorporation
      or organization)
            
            (Primary
      Std. Industrial
              Classification
      Code Number)
            
            (IRS
      Employer
              ID
      Number)





194 St-Paul St. west, Suite
303, Montreal, Quebec CANADA H2Y 1Z8


(Address
of principal executive offices) (Zip Code)





Registrant’s
telephone number, including area code: 514-313-6010





Copies of
communications to:


JOSEPH
I. EMAS


1224
WASHINGTON AVENUE


MIAMI
BEACH, FLORIDA 33139


TELEPHONE
NO.: (305) 531-1174


FACSIMILE
NO.: (305) 531-1274








Securities
registered under Section 12(b) of the Exchange Act:





None





Securities
registered under Section 12(g) of the Exchange Act:





Common
Stock, $0.001 par value per share





(Title of
Class)




Indicate
by check mark whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. xYes oNo





1


Indicate
by check mark whether the registrant is a large accelerated file, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer
            o
            
            Accelerated
      filer
            oNon-accelerated
      filer
            o
            (Do
      not check if a smaller reporting company)
            Smaller
      reporting company
            x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). oYes xNo





APPLICABLE ONLY TO CORPORATE
ISSUERS





State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practical date. As of February 15, 2010, there were
37,376,657shares of the issuer's $.001 par value common stock issued and
outstanding.










2


TABLE OF
CONTENTS





PagePART
      I - FINANCIAL INFORMATIONItem 1.
            Condensed
      Consolidated Financial Statements:
            4Condensed
      Consolidated Balance Sheets as of December 31, 2009 (unaudited) and
      September 30, 2009
            4Condensed
      Consolidated Statements of Operations and Comprehensive Income (Loss) for
      the Three
              Months
      Ended  December 31, 2009 and 2008 (unaudited)
            5Condensed
      Consolidated Statements of Cash Flows for the Three Months Ended December
      31, 2009
              and
      2008 (unaudited)
            6Notes
      to Condensed Consolidated Financial Statements (unaudited)
            7Item 2.
            Management
      Discussion and Analysis of Financial Condition and Results of
      Operations
            34Item
      3
            Quantitative
      and Qualitative Disclosures about Market Risk
            56Item 4.
            Control
      and Procedures
            56PART
      II – OTHER INFORMATION
            57Item 1.
            Legal
      Proceedings
            57Item 1A
            Risk
      Factors
            57Item 2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            58Item 3.
            Defaults
      its Upon Senior Securities
            58Item 4.
            Submission
      of Matters to a Vote of Security Holders
            58Item 5
            Other
      Information
            58Item 6.
            Exhibits
            58Signatures
            
            59






3


TELIPHONE
      CORP.CONDENSED
      CONSOLIDATED BALANCE SHEETSDECEMBER
      31, 2009 (UNAUDITED) AND SEPTEMBER 30,
2009  ASSETSUS
      $DECEMBER
      31,
                  
                  
                  SEPTEMBER
      30,2009
                  
                  
                  2009(unaudited)Current
      Assets:Cash
      and cash equivalents
                  
                  $
                  -
                  
                  
                  $
                  -Accounts
      receivable, net
                  
                  
                  566,112
                  
                  
                  
                  514,988Inventory
                  
                  
                  11,204
                  
                  
                  
                  11,819Prepaid
      expenses and other current assets
                  
                  
                  191,117
                  
                  
                  
                  88,240Total
      Current Assets
                  
                  
                  768,433
                  
                  
                  
                  615,047Fixed
      assets, net of depreciation
                  
                  
                  16,543
                  
                  
                  
                  15,250Goodwill
                  
                  
                  867,443
                  
                  
                  
                  851,489TOTAL
      ASSETS
                  
                  $
                  1,652,419
                  
                  
                  $
                  1,481,786LIABILITIES AND STOCKHOLDERS' EQUITY
      (DEFICIT)LIABILITIESCurrent
      Liabilities:Bank
      overdraft
                  
                  $
                  361,579
                  
                  
                  $
                  93,714Deferred
      revenue
                  
                  
                  4,329
                  
                  
                  
                  2,690Promissory
      note payable
                  
                  
                  18,079
                  
                  
                  
                  26,152Current
      portion of related party convertible debentures
                  
                  
                  57,088
                  
                  
                  
                  56,038Current
      portion of related party loans
                  
                  
                  42,500
                  
                  
                  
                  42,500Accounts
      payable and accrued expenses
                  
                  
                  758,000
                  
                  
                  
                  998,494Total
      Current Liabilities
                  
                  
                  1,241,575
                  
                  
                  
                  1,219,588Long
      Term Liabilities:Related
      party convertible debentures, net of current portion
                  
                  
                  -
                  
                  
                  
                  -Related
      party loans, net of current portion
                  
                  
                  70,828
                  
                  
                  
                  70,828TOTAL
      LIABILITIES
                  
                  
                  1,312,403
                  
                  
                  
                  1,290,416STOCKHOLDERS'
      EQUITY (DEFICIT)Common
      stock, $.001 Par Value; 125,000,000 shares authorizedand
      37,376,657 and 37,376,657 shares issued and outstanding,
      respectively
                  
                  
                  37,377
                  
                  
                  
                  37,377Additional
      paid-in capital
                  
                  
                  1,847,871
                  
                  
                  
                  1,847,871Accumulated
      deficit
                  
                  
                  (1,506,902
                  )
                  
                  
                  (1,650,709
                  )Accumulated
      other comprehensive income (loss)
                  
                  
                  (121,589
                  )
                  
                  
                  (119,562
                  )Total
      Teliphone Corp. Stockholders' Equity (Deficit)
                  
                  
                  256,757
                  
                  
                  
                  114,977Noncontrolling
      interest
                  
                  
                  83,259
                  
                  
                  
                  76,393Total
      Stockholders' Equity (Deficit)
                  
                  
                  340,016
                  
                  
                  
                  191,370TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                  
                  $
                  1,652,419
                  
                  
                  $
                  1,481,786
 
 The
accompanying notes are an integral part of the  condensed consolidated
financial statements.
 4
 
 TELIPHONE
      CORP.CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONSFOR
      THE THREE MONTHS ENDED DECEMBER 31, 2009 AND
  2008  US$THREE
      MONTHS ENDEDDECEMBER
      31,2009
                    
                    
                    2008OPERATING
      REVENUESRevenues
                    
                    $
                    1,394,535
                    
                    
                    $
                    319,690COST
      OF REVENUESInventory,
      beginning of period
                    
                    
                    11,819
                    
                    
                    
                    8,964Purchases
      and cost of VoIP services
                    
                    
                    848,979
                    
                    
                    
                    178,603Inventory,
      end of period
                    
                    
                    (11,204
                    )
                    
                    
                    (6,593
                    )Total
      Cost of Revenues
                    
                    
                    849,594
                    
                    
                    
                    180,974GROSS
      PROFIT
                    
                    
                    544,941
                    
                    
                    
                    138,716OPERATING
      EXPENSESSelling
      and promotion
                    
                    
                    9,133
                    
                    
                    
                    3,300Administrative
      wages
                    
                    
                    216,798
                    
                    
                    
                    40,440Professional
      and consulting fees
                    
                    
                    225,813
                    
                    
                    
                    24,054Other
      general and administrative expenses
                    
                    
                    52,201
                    
                    
                    
                    16,997Depreciation
                    
                    
                    2,789
                    
                    
                    
                    1,810Total
      Operating Expenses
                    
                    
                    506,734
                    
                    
                    
                    86,601NET
      INCOME BEFORE OTHERINCOME
      (EXPENSE)
                    
                    
                    38,207
                    
                    
                    
                    52,115OTHER
      INCOME (EXPENSE)Forgiveness
      of debt
                    
                    
                    114,805
                    
                    
                    
                    -Interest
      expense
                    
                    
                    (2,339
                    )
                    
                    
                    (31,363
                    )Total
      Other Income (Expense)
                    
                    
                    112,466
                    
                    
                    
                    (31,363
                    )NET
      INCOME BEFORE PROVISION FORINCOME
      TAXES
                    
                    
                    150,673
                    
                    
                    
                    20,752Provision
      for Income Taxes
                    
                    
                    -
                    
                    
                    
                    -NET
      INCOME
                    
                    
                    150,673
                    
                    
                    
                    20,752Less:
      Net earnings attributable to noncontrolling interest
                    
                    
                    (6,866
                    )
                    
                    
                    (6,510
                    )NET
      INCOME APPLICABLE TO COMMON SHARES
                    
                    $
                    143,807
                    
                    
                    $
                    14,242NET
      INCOME PER BASIC AND DILUTED SHARES
                    
                    $
                    0.00
                    
                    
                    $
                    0.00WEIGHTED
      AVERAGE NUMBER OF COMMONSHARES
      OUTSTANDING
                    
                    
                    37,376,657
                    
                    
                    
                    33,554,024COMPREHENSIVE
      INCOMENet
      Income
                    
                    $
                    143,807
                    
                    
                    $
                    14,242Other
      comprehensive income (loss)Currency
      translation adjustments
                    
                    
                    (2,027
                    )
                    
                    
                    45,306Comprehensive
      income
                    
                    $
                    141,780
                    
                    
                    $
                    59,548
  The
accompanying notes are an integral part of the  condensed consolidated
financial statements.
 5
 
 TELIPHONE
      CORP.CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWSFOR
      THE THREE MONTHS ENDED DECEMBER 31, 2009 AND
  2008  US$THREE
      MONTHS ENDEDDECEMBER
      31,2009
                      
                      
                      2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                      
                      $
                      143,807
                      
                      
                      $
                      14,242Adjustments
      to reconcile net income to net cashused
      in operating activities:Depreciation
                      
                      
                      2,789
                      
                      
                      
                      1,810Noncontrolling
      interest
                      
                      
                      6,866
                      
                      
                      
                      6,510Forgiveness
      of debt
                      
                      
                      (114,809
                      )
                      
                      
                      -Changes
      in assets and liabilities(Increase)
      in accounts receivable
                      
                      
                      (41,475
                      )
                      
                      
                      (25,972
                      )Decrease
      in inventory
                      
                      
                      836
                      
                      
                      
                      1,239(Increase)
      decrease in prepaid expenses and other current assets
                      
                      
                      (101,655
                      )
                      
                      
                      4,459Increase
      in deferred revenues
                      
                      
                      1,589
                      
                      
                      
                      2,477(Decrease)
      in accounts payable andand
      accrued expenses
                      
                      
                      (142,185
                      )
                      
                      
                      (497
                      )Total
      adjustments
                      
                      
                      (388,044
                      )
                      
                      
                      (9,974
                      )Net
      cash provided by (used in) operating activities
                      
                      
                      (244,237
                      )
                      
                      
                      4,268CASH
      FLOWS FROM INVESTING ACTIVITIESAcquisitions
      of capital assets
                      
                      
                      (3,810
                      )
                      
                      
                      -Net
      cash (used in) investing activities
                      
                      
                      (3,810
                      )
                      
                      
                      -CASH
      FLOWS FROM FINANCING ACTIVITESIncrease
      in bank overdraft
                      
                      
                      266,106
                      
                      
                      
                      55,340Repayment
      of promissory note
                      
                      
                      (8,563
                      )
                      
                      
                      -Proceeds
      from loan payable - related parties, net
                      
                      
                      -
                      
                      
                      
                      (70,493
                      )Net
      cash provided by (used in) financing activities
                      
                      
                      257,543
                      
                      
                      
                      (15,153
                      )Effect
      of foreign currencies
                      
                      
                      (9,496
                      )
                      
                      
                      10,885NET
      INCREASE (DECREASE) INCASH
      AND CASH EQUIVALENTS
                      
                      
                      -
                      
                      
                      
                      -CASH
      AND CASH EQUIVALENTS -BEGINNING
      OF PERIOD
                      
                      
                      -
                      
                      
                      
                      -CASH
      AND CASH EQUIVALENTS - END OF PERIOD
                      
                      $
                      -
                      
                      
                      $
                      -CASH
      PAID DURING THE PERIOD FOR:Interest
      expense
                      
                      $
                      2,339
                      
                      
                      $
                      32,107SUPPLEMENTAL
      NONCASH INFORMATION:Common
      stock issued for liability for stock to be issued
                      
                      $
                      -
                      
                      
                      $
                      953,159
  The
accompanying notes are an integral part of the  condensed consolidated
financial statements.
 6
 
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      1-
              ORGANIZATION AND BASIS
      OF PRESENTATION
 
 The
unaudited condensed consolidated financial statements included herein have been
prepared, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”).  The condensed consolidated financial
statements and notes are presented as permitted on Form 10-Q and do not contain
information included in the Company’s annual consolidated statements and
notes.  Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading.  It is suggested that these condensed consolidated
financial statements be read in conjunction with the September 30, 2009 audited
financial statements and the accompanying notes thereto.  While
management believes the procedures followed in preparing these condensed
consolidated financial statements are reasonable, the accuracy of the amounts
are in some respects dependent upon the facts that will exist, and procedures
that will be accomplished by the Company later in the year.
 
 These
condensed consolidated unaudited financial statements reflect all adjustments,
including normal recurring adjustments which, in the opinion of management, are
necessary to present fairly the consolidated operations and cash flows for the
periods presented.
 
 Teilphone
Corp. (formerly OSK Capital II Corporation) (the “Company”) was incorporated in
the State of Nevada on March 2, 1999 to serve as a vehicle to effect a merger,
exchange of capital stock, asset acquisition or other business combination with
a domestic or foreign private business. Effective April 28, 2005, the Company
achieved its objectives with the reverse merger and reorganization with
Teliphone Inc., a Canadian company.
 
 Teliphone,
Inc. was founded by its original parent company, United American Corporation, a
publicly traded Florida Corporation, in order to develop a
Voice-over-Internet-Protocol (VoIP) network which enables users to connect an
electronic device to their internet connection at the home or office which
permits them to make telephone calls to any destination phone number anywhere in
the world. VoIP is currently growing in scale significantly in North America.
This innovative new approach to telecommunications has the benefit of
drastically reducing the cost of making these calls as the distances are covered
over the Internet instead of over dedicated lines such as traditional
telephony.
 
 Prior to
its acquisition by the Company, Teliphone Inc. had grown primarily in the
Province of Quebec, Canada through the sale of its product offering in retail
stores and over the internet.  For this distribution channel, the
Company typically pays a 25% commission to the distributor who shares this with
the re-seller.
 
 7
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 
 NOTE
      1-
              ORGANIZATION AND BASIS
      OF PRESENTATION(CONTINUED)
 
 In
addition to the retail services provided, Teliphone Inc. also sells to
wholesalers. Wholesalers typically receive approximately a 35% commission on
such sales, however, the wholesaler re-bills these services to their customers
and provide the necessary customer support to their customers
directly.
 
 In
addition to retail and wholesale services provided, Teliphone Inc. also re-sells
traditional telecommunications services across Canada through a direct sales
channel.
 
 On August
21, 2006, OSK Capital II Corporation formerly changed its name to Teliphone
Corp.
 
 Going
Concern
  As shown
in the accompanying consolidated financial statements the Company has a working
capital deficiency of ($473,142) as of December 31, 2009, and has an accumulated
deficit of ($1,506,902) through December 31, 2009. The Company has improved
operations and streamlined their business, expanded their services through the
acquisitions of Dialek and Orion customer bases, and has generated net profits
for the past year. The Company has utilized their line of credit limits from the
bank and their profits have gone to pay down the payables that exist. While the
Company demonstrates that it has recently become profitable, the existence of
the working capital deficiency continues to raise substantial doubt about the
Company’s ability to continue as a going concern.
 
 The
Company also successfully reduced approximately $400,000 of related party debt
in August 2006 as this was converted into additional shares of the Company’s
stock.
 
 In August
of 2006, the Company sold approximately 25% of its subsidiary Teliphone Inc. to
the parent company of Intelco Communications which will bring further
opportunity and working capital to the Company. Since this period, Teliphone
Inc. has required further cash investments from the Company.  These
amounts, totaling approximately $600,000 have been converted into Common Stock
the subsidiary Teliphone Inc. on September 30, 2008 hence, the resulting
ownership of Teliphone Inc. by the parent company of Intelco Communications to
be presently 12.9%.
 
 The
Company’s subsidiary, Teliphone Inc. finalized an agreement with 9151-4877
Quebec Inc (known as Dialek Telecom), which was effective on February 15, 2008,
to acquire certain assets and liabilities from this entity. This transaction as
described in Note 11.
 
 The
Company further reduced approximately $950,000 of related party debt in February
2009 as this was converted into additional shares of the Company’s
stock.
 
 8
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      1-
              ORGANIZATION AND BASIS
      OF PRESENTATION(CONTINUED)
 
 Going Concern
(Continued)
 On May 1,
2009, the company entered into a customer assignment contract with 9191-4200
Quebec Inc. where it acquired the customer contracts of Orion Communications
Inc., an Ontario, Canada Company.  The transaction is further detailed
in Note 11.
 
 While the
Company has experienced a net profit for the year ended September 30, 2009, and
three months ended December 31, 2009, there is still no guarantee that the
Company will be able to raise additional capital or generate the increase in
revenues to sustain its operations.  The Company hired a market maker
and has secured a listing on the Over the Counter Bulletin Board, and the
Company’s Common Stock became tradeable over-the-counter in June
2008.
 
 Management
believes that the Company’s capital requirements will depend on many factors.
These factors include the increase in sales through existing channels as well as
the Company’s subsidiary Teliphone Inc.’s ability to continue to expand its
distribution points and leveraging its technology into the commercial small
business segments. The Company’s subsidiary Teliphone Inc.’s strategic
relationships with telecommunications interconnection companies, internet
service providers and retail sales outlets has permitted the Company to achieve
consistent monthly growth in acquisition of new customers.
 
 The
Company’s ability to continue as a going concern for a reasonable period is
dependent upon management’s ability to raise additional interim
capital.  There can be no assurance that management will be able to
raise sufficient capital, under terms satisfactory to the Company, if at
all.
 
 The
consolidated financial statements do not include any adjustments relating to the
carrying amounts of recorded assets or the carrying amounts and classification
of recorded liabilities that may be required should the Company be unable to
continue as a going concern.
 
 Effective
July 1, 2009, the Company adopted the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted
Accounting Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB
Accounting Standards Codification (the “Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with U.S. GAAP. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative U.S. GAAP
for SEC registrants. All guidance contained in the Codification carries an equal
level of authority. The Codification superseded all existing non-SEC accounting
and reporting standards. All other non-grandfathered, non-SEC accounting
literature not included in the Codification is non-authoritative. The FASB will
not issue new standards in the form of Statements, FASB Positions or Emerging
Issue Task Force Abstracts. Instead, it will issue Accounting Standards Updates
(“ASUs”).
 9
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      1-
              ORGANIZATION AND BASIS
      OF PRESENTATION(CONTINUED)
 
 The FASB
will not consider ASUs as authoritative in their own right. ASUs will serve only
to update the Codification, provide background information about the guidance
and provide the bases for conclusions on the change(s) in the Codification.
References made to FASB guidance throughout this document have been updated for
the Codification.
 
 NOTE 2-
              SUMMARY
      OF SIGNIFICANT ACCOUNTING
POLICIES
 
 Principles of
Consolidation
 
 The
condensed consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. All minority interests have
been reflected herein.
 
 Use of
Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  On an on-going basis, the Company
evaluates its estimates, including, but not limited to, those related to
investment tax credits, bad debts, income taxes and contingencies. The Company
bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results
could differ from those estimates.
 
 Cash and Cash
Equivalents
 
 The
Company considers all highly liquid debt instruments and other short-term
investments with an initial maturity of three months or less to be cash
equivalents.
 
 The
Company has available approximately $384,000 CDN$ in line of credits from the
bank. Therefore, the Company can exceed their cash in bank by this amount. The
$384,000 CD$ in line of credits is comprised of personal guarantees to the bank
from two shareholder.
 
 Comprehensive
Income
 
 The
Company adopted ASC 220-10, “Reporting Comprehensive Income,” (formerly SFAS No.
130). ASC 220-10 requires the reporting of comprehensive income in addition to
net income from operations.
 
 10
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE 2-
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
 
 Comprehensive Income
(Continued)
 
 Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of information that historically has not been recognized in the
calculation of net income.
 
 Inventory
 
 Inventory
is valued at the lower of cost or market determined on a first-in-first-out
basis.  Inventory consisted only of finished goods.
 
 Fair Value of Financial
Instruments
 
 The
      carrying amounts reported in the condensed consolidated balance sheets for
      cash and cash equivalents, accounts receivable and accounts payable
      approximate fair value because of the immediate or short-term maturity of
      these financial instruments.  For the notes payable, the
      carrying amount reported is based upon the incremental borrowing rates
      otherwise available to the Company for similar
  borrowings.
 
 Currency
Translation
  For
subsidiaries outside the United States that prepare financial statements in
currencies other than the U.S. dollar, the Company translates income and expense
amounts at average exchange rates for the year, translates assets and
liabilities at year-end exchange rates and equity at historical rates. The
Company’s functional currency is the Canadian dollar, while the Company reports
its currency in the US dollar. The Company records these translation adjustments
as accumulated other comprehensive income (loss). Gains and losses from foreign
currency transactions are included in other income (expense) in the results of
operations.
 
 Research and
Development
 
 The
Company occasionally incurs costs on activities that relate to research and
development of new products. Research and development costs are expensed as
incurred. Certain of these costs are reduced by government grants and investment
tax credits where applicable.
 
 
 11
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      2-
              SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES(CONTINUED)
 
 Revenue
Recognition
 
 Operating
revenues consists of telephony services revenue and customer equipment (which
enables the Company's telephony services) and shipping revenue. The point in
time at which revenue is recognized is determined in accordance with Revenue
Recognition under ASC 605-50, Accounting for Consideration Given by a Vendor to
a Customer (Including a Reseller of the Vendor's Products) ("ASC 605-50"), and
ASC 605-25, "Revenue Arrangements with Multiple Deliverables" (“ASC 605-25”).
When the Company emerged from the development stage with the acquisition of
Teliphone Inc. they began to recognize revenue from their VoIP Telephony
services when the services were rendered and customer equipment purchased as
follows:
 
 VoIP Telephony Services
Revenue
 
 The
Company realizes VoIP telephony services revenue through sales by two distinct
channels; the Retail Channel (Customer purchases their hardware from a Retail
Distributor and the Company invoices the customer direct) and the Wholesale
Channel (Customer purchases their hardware from the Wholesaler and the Company
invoices the Wholesaler for usage by the Wholesaler’s customers
collectively).
 
 Substantially
all of the Company's operating revenues are telephony services revenue, which is
derived primarily from monthly subscription fees that customers are charged
under the Company's service plans. The Company also derives telephony services
revenue from per minute fees for international calls and for any calling minutes
in excess of a customer's monthly plan limits.
 
 Retail
Channel
 
 Monthly
subscription fees are automatically charged to customers' credit cards in
advance and are recognized over the following month when services are
provided.
 
 Revenue
generated from international calls and from customers exceeding allocated call
minutes under limited minute plans is charged to the customer’s credit cards in
advanced in small increments and are recognized over the following month when
the services are provided.
 
 The
Company generates revenues from shipping equipment direct to customers and our
re-seller partners.  This revenue is considered part of the VoIP
service revenues.
 
 12
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      2-
              SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES(CONTINUED)
 
 Revenue Recognition(Continued)
 
 The
Company does not charge initial activation fees associated with the service
contracts in the Retail Channel.  The Company generates revenues from
disconnect fees associated with early termination of service contracts with
Retail Customers. These fees are included in service revenue as they are
considered part of the service component when the service is delivered or
performed.
 
 Prior to
March 31, 2007 the Company generally charged a disconnect fee to Retail
customers who did not return their customer equipment to the Company upon
disconnection of service if the disconnection occurred within the term of the
service contract. On April 1, 2007, the Company changed its disconnect policy.
Upon cancellation of the service, no disconnection fee is charged and there is
no refund issued to the customer for any portion of the unused services as
before.  The customer’s service termination date becomes the next
anniversary date of its billing cycle.
  This
accounting is consistent with the rules set forth in the revenue recognition
guidelines in ASC Topic 605 since there are no rights of returns or refunds that
exist for the customer other than a standard 30-day money-back
guarantee.  In the event of a return within the 30 day guarantee
period, the hardware is refunded in its entirety.  This accounting is
also consistent with ASC 605-15 on “Revenue Recognition When Right of Return
Exists” which allows for equipment revenue to be recognized at the time of sale
since there no longer exists a right of return after the 30 day
period.
 
 Wholesale
Channel
 
 Monthly
subscription fees are invoiced to Wholesale customers at the end of the month
for the entirety of the services delivered during the month.  Revenue
for this period is therefore recognized at the time the Wholesaler is
billed.
  The
Company recognizes this revenue utilizing the guidance set forth in ASC 605-25,
"Revenue Arrangements with Multiple Deliverables".  For the Wholesale
channel, the activation fee is recognized as deferred revenue, and amortized
over the length of the service agreement. If the service is terminated within
the term of the service agreement, the deferred revenue is fully
amortized.  This accounting is consistent because the up-front fee is
not in exchange for products delivered or services performed that represent the
culmination of a separate earnings process, and hence the deferral of revenue is
appropriate.
  There is
no disconnection fee associated with a wholesale customer.
  The
Company generates revenues from shipping equipment direct to wholesale
customers.  This revenue is considered part of the VoIP service
revenues.
 13
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      2-
              SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES(CONTINUED)
 
 Revenue Recognition(Continued)
 
 Customer
Equipment
 
 Retail
Channel
 
 For
retail sales, the equipment is sold to re-sellers at a subsidized price below
that of cost and below that of the retail sales price. The customer purchases
the equipment at the retail price from the retailer.  The Company
recognizes this revenue utilizing the guidance set forth in ASC 605-25, “Revenue
Arrangements with Multiple Deliverables” and ASC 605-50, “Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor’s Products)”.
 
 Under a
retail agreement, the cost of the equipment is recognized as deferred revenue,
and amortized over the length of the service agreement. Upon refund, the
deferred revenue is fully amortized.
 
 Customer
equipment expense is recorded to direct cost of goods sold when the hardware is
initially purchased from our suppliers.
 
 The
Company also provides rebates to retail customers who purchase their customer
equipment from retailers and satisfy minimum service period
requirements.   This minimum service period (e.g. three months)
differs from the length of the service agreement (e.g. twelve
months).  These rebates are recorded as a reduction of service revenue
over the minimum service period based upon the actual rebate coupons received
from customers and whose accounts are in good standing.  The Company
records a contingent liability to represent the amount of the refund obligation
through earnings on a systematic basis.
 
 Wholesale
Channel
 
 For
wholesale customers, the equipment is sold to wholesalers at the Company’s cost
price plus mark-up.  There are no rebates for equipment sold to
wholesale customers and the Company does not subsidize their equipment
sales.  The Company recognizes revenue from sales of equipment to
wholesale customers as billed.
 14
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      2-
              SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES(CONTINUED)
 
 Revenue Recognition(Continued)
 
 Commissions Paid to Retail
Distributors
  Commissions
paid to Retail Distributors are based on the recurring revenues recorded by the
company and incurred in the period where the revenue is recognized and paid by
the company to the retail Distributor in the following month.  These
commissions are recorded as cost of sales as they are directly related to the
revenue acquired and are not considered a sales and marketing
expense.  These commissions are payable based on the Distributor’s
servicing of the customer on an on-going basis.
 
 Commissions Paid to
Wholesalers
 
 The
Company recognizes this revenue utilizing the guidance set forth in ASC 605-50
“Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor’s Products)”.  The Company is receiving
identifiable benefits from the Wholesaler (billing and customer support) in
return for the allowance.  These benefits are sufficiently separable
from the Wholesaler’s purchase of the Company’s hardware and
services.  The fair value of those benefits can be reasonably
estimated and therefore the excess consideration is characterized as a reduction
of revenue on the Company’s Statement of Operations.
 
 Resale of Traditional
Telecommunications Services (due to Acquisition of customer base of Dialek
Telecom (see Note 10) and Orion Communications Inc. (see Note 11)- represents a
majority of the Company’s revenue
 
 The
Company earns revenue by reselling telecommunications services purchased from
wholesale providers such as Rogers Communications and Videotron
Telecom.  These revenues include monthly network access fees for local
calling and internet access services billed one month in advance and recognized
when earned.  Long Distance and Toll free calling service revenues are
recognized when the service is rendered and included and billed the following
month.
 
 15
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      2-
              SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES(CONTINUED)
 
 Accounts
Receivable
 
 The
Company conducts business and extends credit based on an evaluation of the
customers’ financial condition, generally without requiring
collateral.
 
 Exposure
to losses on receivables is expected to vary by customer due to the financial
condition of each customer. The Company monitors exposure to credit losses and
maintains allowances for anticipated losses considered necessary under the
circumstances. The Company has an allowance for doubtful accounts of $76,701 at
December 31, 2009.
 
 Accounts
receivable are generally due within 30 days and collateral is not required.
Unbilled accounts receivable represents amounts due from customers for which
billing statements have not been generated and sent to the
customers.
 
 Income
Taxes
 
 The
Company accounts for income taxes utilizing the liability method of
accounting.  Under the liability method, deferred taxes are determined
based on differences between financial statement and tax bases of assets and
liabilities at enacted tax rates in effect in years in which differences are
expected to reverse.  Valuation allowances are established, when
necessary, to reduce deferred tax assets to amounts that are expected to be
realized.
 
 Investment Tax
Credits
 
 The
Company claims investment tax credits as a result of incurring scientific
research and experimental development expenditures. Investment tax credits are
recognized when the related expenditures are incurred, and there is reasonable
assurance of their realization. Management has made a number of estimates and
assumptions in determining their expenditures eligible for the investment tax
credit claim. It is possible that the allowed amount of the investment tax
credit claim could be materially different from the recorded amount upon
assessment by Revenue Canada and Revenue Quebec. The Company has not estimated
any amounts for incoming tax credits for December 31, 2009.
 
 16
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      2-
              SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES(CONTINUED)
 
 Convertible
Instruments
 
 The
Company reviews the terms of convertible debt and equity securities for
indications requiring bifurcation, and separate accounting, for the embedded
conversion feature. Generally, embedded conversion features where the ability to
physical or net-share settle the conversion option is not within the control of
the Company are bifurcated and accounted for as a derivative financial
instrument. (See Derivative Financial Instruments below). Bifurcation of the
embedded derivative instrument requires allocation of the proceeds first to the
fair value of the embedded derivative instrument with the residual allocated to
the debt instrument. The resulting discount to the face value of the debt
instrument is amortized through periodic charges to interest expense using the
Effective Interest Method.
 
 Derivative Financial
Instruments
 
 The
Company generally does not use derivative financial instruments to hedge
exposures to cash-flow or market risks. However, certain other financial
instruments, such as warrants or options to acquire common stock and the
embedded conversion features of debt and preferred instruments that are indexed
to the Company’s common stock, are classified as liabilities when either (a) the
holder possesses rights to net-cash settlement or (b) physical or net share
settlement is not within the control of the Company. In such instances, net-cash
settlement is assumed for financial accounting and reporting, even when the
terms of the underlying contracts do not provide for net-cash settlement. Such
financial instruments are initially recorded at fair value and subsequently
adjusted to fair value at the close of each reporting period.
 
 Advertising
Costs
 
 The
      Company expenses the costs associated with advertising as
      incurred.  Advertising expenses for the three months ended
      December 31, 2009 and 2008 are included in selling and promotion expenses
      in the condensed consolidated statements of
  operations.
 
 Fixed
Assets
 
 Fixed
      assets are stated at cost.  Depreciation is computed using the
      straight-line method over the estimated useful lives of the assets;
      automobiles – 3 years, computer equipment – 3 years, and furniture and
      fixtures – 5 years.
 
 When
      assets are retired or otherwise disposed of, the costs and related
      accumulated depreciation are removed from the accounts, and any resulting
      gain or loss is recognized in income for the period.  The cost
      of maintenance and repairs is charged to income as incurred; significant
      renewals and betterments are capitalized.  Deduction is made for
      retirements resulting from renewals or
  betterments.
  17
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      2-
              SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES(CONTINUED)
 
 Impairment of Long-Lived
Assets
 
 Long-lived
assets, primarily fixed assets, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets might
not be recoverable. The Company does perform a periodic assessment of assets for
impairment in the absence of such information or indicators. Conditions that
would necessitate an impairment assessment include a significant decline in the
observable market value of an asset, a significant change in the extent or
manner in which an asset is used, or a significant adverse change that would
indicate that the carrying amount of an asset or group of assets is not
recoverable. For long-lived assets to be held and used, the Company recognizes
an impairment loss only if its carrying amount is not recoverable through its
undiscounted cash flows and measures the impairment loss based on the difference
between the carrying amount and estimated fair value.
 
 Earnings (Loss) Per Share of
Common Stock
 
 Basic net
income (loss) per common share is computed using the weighted average number of
common shares outstanding.  Diluted earnings per share (EPS) includes
additional dilution from common stock equivalents, such as stock issuable
pursuant to the exercise of stock options and warrants.  Common stock
equivalents were not included in the computation of diluted earnings per share
when the Company reported a loss because to do so would be antidilutive for
periods presented.
 
 The
following is a reconciliation of the computation for basic and diluted
EPS:
  December
      31,
                
                
                December
      31,2009
                
                
                2008Net
      income (loss)
                
                $
                143,807
                
                
                $
                14,242Weighted-average
      common sharesOutstanding
      (Basic)
                
                
                37,376,657
                
                
                
                33,554,024Weighted-average
      common stockEquivalentsStock
      options
                
                
                -
                
                
                
                -Warrants
                
                
                -
                
                
                
                -Weighted-average
      common sharesOutstanding
      (Diluted)
                
                
                37,376,657
                
                
                
                33,554,024
 
 18
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      2-
              SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES(CONTINUED)
 
 Earnings (Loss) Per Share of
Common Stock (Continued)
 
 The
Company has not issued options or warrants to purchase stock in these periods.
If there were options or warrants outstanding they would not be included in the
computation of diluted EPS when the Company reported a loss because inclusion
would have been antidilutive.
 
 Stock-Based
Compensation
 
 In 2006,
the Company adopted the provisions of ASC 718-10 “Share Based Payments” for
its year ended September 30, 2008. The adoption of this principle had no effect
on the Company’s operations.
 
 The
Company has elected to use the modified–prospective approach method. Under that
transition method, the calculated expense in 2006 is equivalent to compensation
expense for all awards granted prior to, but not yet vested as of January 1,
2006, based on the grant-date fair values. Stock-based compensation expense for
all awards granted after January 1, 2006 is based on the grant-date fair values.
The Company recognizes these compensation costs, net of an estimated forfeiture
rate, on a pro rata basis over the requisite service period of each vesting
tranche of each award. The Company considers voluntary termination behavior as
well as trends of actual option forfeitures when estimating the forfeiture
rate.
 
 The
Company measures compensation expense for its non-employee stock-based
compensation under ASC 505-50, “Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services”.  The fair value of the option
issued is used to measure the transaction, as this is more reliable than the
fair value of the services received.  The fair value is measured at
the value of the Company’s common stock on the date that the commitment for
performance by the counterparty has been reached or the counterparty’s
performance is complete. The fair value of the equity instrument is charged
directly to compensation expense and additional paid-in capital.
 
 Segment
Information
 
 The
Company follows the provisions of ASC 280-10, “Disclosures about Segments of an
Enterprise and Related Information”. This standard requires that
companies disclose operating segments based on the manner in which management
disaggregates the Company in making internal operating decisions. Despite the
Company’s subsidiary, Teliphone, Inc. incurring sales of hardware components for
the VoIP service as well as the service itself, the Company treats these items
as one component, therefore has not segregated their business.
 19
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      2-
              SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES(CONTINUED)
 
 Reclassifications
 
 The
Company has reclassified certain amounts in their condensed consolidated
statement of operations for the three months ended December 31, 2008 to conform
with the December 31, 2009 presentation. These reclassifications had no effect
on the net income for the three months ended December 31, 2008.
 
 Uncertainty in Income
Taxes
 
 The
Company follows ASC 740-10, “Accounting for Uncertainty in Income Taxes” (“ASC
740-10”). This interpretation requires recognition and measurement of uncertain
income tax positions using a “more-likely-than-not” approach. ASC 740-10 is
effective for fiscal years beginning after December 15, 2006. Management has
adopted ASC 740-10 for 2009, and they evaluate their tax positions on an annual
basis, and has determined that as of December 31, 2009, no additional accrual
for income taxes other than the federal and state provisions and related
interest and estimated penalty accruals is not considered
necessary.
 
 Noncontrolling
Interests
 
 In
accordance with ASC 810-10-45, Noncontrolling Interests in
Consolidated Financial Statements,the Company classifies controlling
interests as a component of equity within the consolidated balance sheets. The
Company has retroactively applied the provisions in ASC 810-10-45 to the
financial information for the three months ended December 31, 2008. For the
three months ended December 31, 2008, net income attributable to noncontrolling
interests of $6,510, is included in the Company’s net income.
 
 Recent Accounting
Pronouncements
 
 In
September 2006, ASC issued 820, Fair Value Measurements. ASC
820 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosure about fair
value measurements. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. Early adoption is
encouraged. The adoption of ASC 820 is not expected to have a material impact on
the financial statements.
  
 20
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      2-
              SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES(CONTINUED)
 
 Recent Accounting
Pronouncements (Continued)
 
 In
February 2007, ASC issued 825-10, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of ASC 320-10,
(“ASC 825-10”) which permits entities to choose to measure many financial
instruments and certain other items at fair value at specified election dates. A
business entity is required to report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. This statement is expected to expand the use of fair value
measurement. ASC 825-10 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years.
  In
December 2007, the Company adopted ASC 805,Business Combinations (“ASC
805”). ASC 805 retains the fundamental requirements that the acquisition method
of accounting be used for all business combinations and for an acquirer to be
identified for each business combination. ASC 805 defines the acquirer as the
entity that obtains control of one or more businesses in the business
combination and establishes the acquisition date as the date that the acquirer
achieves control.  ASC 805 will require an entity to record separately
from the business combination the direct costs, where previously these costs
were included in the total allocated cost of the acquisition.  ASC 805
will require an entity to recognize the assets acquired, liabilities assumed,
and any non-controlling interest in the acquired at the acquisition date, at
their fair values as of that date.
 
 ASC 805
will require an entity to recognize as an asset or liability at fair value for
certain contingencies, either contractual or non-contractual, if certain
criteria are met.  Finally, ASC 805 will require an entity to
recognize contingent consideration at the date of acquisition, based on the fair
value at that date.  This will be effective for business combinations
completed on or after the first annual reporting period beginning on or after
December 15, 2008.  Early adoption is not permitted and the ASC is to
be applied prospectively only.  Upon adoption of this ASC, there would
be no impact to the Company’s results of operations and financial condition for
acquisitions previously completed.  The adoption of ASC 805 is not
expected to have a material effect on the Company’s financial position, results
of operations or cash flows.
 
 In March
2008, ASC issued ASC 815, Disclosures about Derivative
Instruments and Hedging Activities”, (“ASC 815”). ASC 815 requires
enhanced disclosures about an entity’s derivative and hedging activities. These
enhanced disclosures will discuss: how and why an entity uses derivative
instruments; how derivative instruments and related hedged items are accounted
for and its related interpretations; and how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. ASC 815 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. The Company does
not believe that ASC 815 will have an impact on their results of operations or
financial position.
 21
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      2-
              SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES(CONTINUED)
 
 Recent Accounting
Pronouncements (Continued)
 
 In April
2008, ASC 350-30 was issued, “Determination of the Useful Life of Intangible
Assets”. The Company was required to adopt ASC 350-30 on October 1, 2008. The
guidance in ASC 350-30 for determining the useful life of a recognized
intangible asset shall be applied prospectively to intangible assets acquired
after adoption, and the disclosure requirements shall be applied prospectively
to all intangible assets recognized as of, and subsequent to, adoption. The
Company does not believe ASC 350-30 will materially impact their financial
position, results of operations or cash flows.
 
 In May
2008, ASC 470-20 was issued, “Accounting for Convertible Debt Instruments That
May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”
(“ASC 470-20”). ASC 470-20 requires the issuer of certain convertible debt
instruments that may be settled in cash (or other assets) on conversion to
separately account for the liability (debt) and equity (conversion option)
components of the instrument in a manner that reflects the issuer’s
non-convertible debt borrowing rate. ASC 470-20 is effective for fiscal years
beginning after December 15, 2008 on a retroactive basis. The Company does not
believe that the adoption of ASC 470-20 will have a material effect on its
financial position, results of operations or cash flows.
 
 In June
2008, ASC 815-40 was issued, “Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity’s Own Stock” (“ASC 815-40”), which supersedes
the definition in ASC 605-50 for periods beginning after December 15, 2008. The
objective of ASC 815-40 is to provide guidance for determining whether an
equity-linked financial instrument (or embedded feature) is indexed to an
entity’s own stock and it applies to any freestanding financial instrument or
embedded feature that has all the characteristics of a derivative in accordance
with ASC 815-20.
 
 ASC
815-40 also applies to any freestanding financial instrument that is potentially
settled in an entity’s own stock. The Company believes that ASC 815-40, will not
have a material impact on their financial position, results of operations and
cash flows.
 
 In June
2008, ASC 470-20-65 was issued, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios
(“ASC 470-20-65”). ASC 470-20-65 is effective for years ending after December
15, 2008. The overall objective of ASC 470-20-65 is to provide for consistency
in application of all the standards issued for convertible securities. The
Company has computed and recorded a beneficial conversion feature in connection
with certain of their prior financing arrangements and does not believe that ASC
470-20-65 will have a material effect on that accounting.
 
 
 22
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      2-
              SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES(CONTINUED)
 
 Recent Accounting
Pronouncements (Continued)
 
 Effective
April 1, 2009, the Company adopted ASC 855, Subsequent Events (“ASC
855”). ASC 855 establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date – that is, whether that date represents the date the financial statements
were issued or were available to be issued. This disclosure should alert all
users of financial statements that an entity has not evaluated subsequent events
after that date in the set of financial statements being presented. Adoption of
ASC 855 did not have a material impact on the Company’s results of operations or
financial condition. The Company has evaluated subsequent events through
February 8, 2010, the date the financial statements were issued.
 
 Effective
July 1, 2009, the Company adopted FASB ASU No. 2009-05, Fair Value Measurement and
Disclosures (Topic 820) (“ASU 2009-05”). ASU 2009-05 provided amendments
to ASC 820-10, Fair Value
Measurements and Disclosures – Overall, for the fair value measurement of
liabilities. ASU 2009-05 provides clarification that in circumstances in which a
quoted market price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using certain
techniques. ASU 2009-05 also clarifies that when estimating the fair value of a
liability, a reporting entity is not required to include a separate input or
adjustment to other inputs relating to the existence of a restriction that
prevents the transfer of a liability. ASU 2009-05 also clarifies that both a
quoted price in an active market for the identical liability at the measurement
date and the quoted price for the identical liability when traded as an asset in
an active market when no adjustments to the quoted price of the asset are
required for Level 1 fair value measurements. Adoption of ASU 2009-05 did not
have a material impact on the Company’s results of operations or financial
condition.
 
 Other
ASU’s that have been issued or proposed by the FASB ASC that do not require
adoption until a future date and are not expected to have a material impact on
the financial statements upon adoption.
 
 
 23
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 
 NOTE
      3-
              FIXED
      ASSETS
 
 Fixed
assets as of December 31, 2009 and September 30, 2009 were as
follows:
 
 Estimated
      Useful
              
              
              (Unaudited)Lives (Years)
              
              
              December
      31,
              
              
              September
      30,2009
              
              
              2009Furniture
      and fixtures
              
              
              5
              
              
              
              $2,223
              
              
              
              $2,182Computer
      equipment
              
              
              3
              
              
              
              213,492
              
              
              
              205,825Vehicles
              
              
              5
              
              
              
              -
              
              
              
              23,548215,715
              
              
              
              231,555Less:
      accumulated depreciation
              
              
              
              
              
              
              199,172
              
              
              
              216,305Property
      and equipment, net
              
              
              
              
              
              
              $16,543
              
              
              
              $15,250
  There was
$2,789 and $1,810 charged to operations for depreciation expense for the three
months ended December 31, 2009 and 2008, respectively. In November 2009, the
vehicle was disposed of for $0. It was fully depreciated, and therefore no gain
or loss was recognized.
 
 NOTE
      4-
              RELATED PARTY
      LOANS
 
 On August
1, 2006, the Company converted $421,080 of the $721,080 of its loans with United
American Corporation, a related party through common ownership, and majority
shareholder of the Company prior to United American Corporation’s stock dividend
that took place effective October 30, 2006 into 1,699,323 shares of the
Company’s common stock.
 
 In
December 2006, the Company issued a resolution to issue the remaining 171
fractional shares related to United American Corporation’s spin-off of the
corporation and pro-rata distribution of United American Corporation’s holding
of the Company’s common stock to its shareholders. Those shares were issued
prior to December 31, 2006 and distributed to shareholders.
 
 The
$300,000 remaining on the loan was interest bearing at 12% per Annum until it
was converted to common stock of the Company through the issuance of 1,200,000
shares ($0.25 per share) on December 31, 2008.
 
 In
addition, there was approximately $145,081 of non-interest bearing advances that
were incurred from August 2006 from United American Corporation. These advances
were provided for cash flow purposes for the Company to sustain its
operations.  On December 31, 2008, the Company converted this
liability into 580,324 shares ($0.25 per share) of the common stock of the
Company.
 
 
 24
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      4-
              RELATED PARTY
      LOANS (CONTINUED)
 
 The
Company had also over the past few years been advanced various amounts from
related parties whom are officers, shareholders or entities under control by an
officer or shareholder. These amounts bore interest at interest rates ranging
between 5% and 7% per annum.  On December 31, 2008, the Company
converted the remaining balances of $120,448 into 481,791 shares of the common
stock of the Company ($0.25 per share).
 
 As of
December 31, 2009, the Company has $42,500 including accrued interest
outstanding with shareholders. Interest expense for the three months ended
December 31, 2009 was $384. These notes accrue interest at 5% per annum. These
related party loans are due on demand and classified as current liabilities on
the condensed consolidated balance sheet at December 31, 2009.
 
 The
Company agreed to pay the shareholders of 9151-4877 Quebec Inc. a total of CDN
$383,464 for the acquisition of certain assets and liabilities of 9151-4877
Quebec Inc. (d/b/a “Dialek Telecom”). The Company held the option to pay the
entire amount of the balance due at anytime.  Up thorough November 30,
2008, the Company was making a minimum monthly payment of CDN $9,992.01, which
equates to the payment of the $360,331 (US$) (CDN $383,464) over 52 months at
15% annual interest.
 
 On
December 1, 2008, the Company and 9151-4877 Quebec Inc. entered into an
agreement which permits the Company to pay 50% of the monthly payment in cash
and the balance in shares of the common stock.
 
 On
December 31, 2008, the Company and Dialek Telecom agreed to convert the entire
remaining principal of $264,476 into 1,057,905 shares ($.25 per share) of the
common stock of the Company.
 
 In
addition, the shareholders of 9151-4877 Quebec Inc. have provided a revolving
line of credit facility of CDN $150,000 18% per annum rate of
interest.  As of December 31, 2008, the Company had drawn down
$123,153 (CDN$150,000) of this line of credit   On December 31,
2008, the Company and the shareholders of Dialek Telecom agreed to convert the
entire amount into 492,612 shares ($.25 per share) of the common stock of the
Company.
 
 The
Company entered into a cash advance agreement as part of its assignment
agreement with 9191-4200 Quebec Inc. (see Note 11) for $5,472.  The
amount is not interest bearing.
 25
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      4-
              RELATED PARTY
      LOANS (CONTINUED)
 
 On
November 15, 2007, a shareholder of the Company provided a fixed term deposit of
$45,000 (US$) with the Company’s bank in order to guarantee an equivalent value
operating line of credit for use by the Company.  Until December 31,
2008, the Company provided the shareholder an annual interest rate of 20%
payable in common stock of the Company.
 
 On
January 29, 2008, a shareholder of the Company provided a fixed term deposit of
$30,000 (US$) with the Company’s bank in order to guarantee an equivalent value
operating line of credit for use by the Company.
 
 Until
December 31, 2008, the Company provided the shareholder an annual interest rate
of 20% payable in common stock of the Company.
 .
 On
December 31, 2008, the Company and the shareholder combined these two figures
into a $70,828 loan payable and agreed that the payable would be converted to a
long term loan, maturing on December 31, 2013 with interest only payable monthly
at an annual rate of 12%.  The Company reserves the right to pay the
principal in its entirety at any time without penalty
 
 The
Company has accrued $4,250 in accrued interest on this payable.
 
 NOTE
      5-
              PROMISSORY NOTE
      PAYABLE
 
 The
Company entered into a Promissory Note agreement (“Promissory Note”) with Primus
Telecommunications Canada Inc. (“Primus”) on April 15, 2009 for a total amount
of CDN$40,000, representing the conversion of Primus’ trade payable amount owing
into the Promissory Note.  The Company agreed to pay, by way of monthly payments of theprincipal amount outstanding of $3,000 per month commencing on June 1,
2009 and each month thereafter with the final principal balance of $4,000 being
paid on June 1, 2010.  As of December 31, 2009, the amount outstanding
was CDN$19,000 ($18,079).  Interest costs have been established at the
Bank Prime rate + 2.5%, for a total of 4.25%.
 
 NOTE
      6-
              CONVERTIBLE
      DEBENTURES
 
 On
February 6, 2009, the Company entered into a 12% Convertible Debenture (the
“Debenture”) with an individual. The Debenture had a maturity date of February
6, 2010, and incurred interest at a rate of 12% per annum.
 
 The
Debentures can either be paid to the holders on February 6, 2010 or converted at
the holders’ option any time up to maturity at a conversion price equal to
eighty percent (80%) of the average closing price of the common stock as listed
on a Principal Market for the five (5) trading days immediately preceding the
conversion date. If the common stock is not traded on a Principal Market, the
conversion price shall mean the closing bid price as furnished by the National
Association of Securities Dealers, Inc.
  26
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      6-
              CONVERTIBLE DEBENTURES(CONTINUED)
 
 On
February 17, 2009, the Company entered into a 12% Convertible Debenture (the
“Debenture”) with an individual. The Debenture had a maturity date of February
17, 2010, and incurred interest at a rate of 12% per annum.
 
 The
Debentures can either be paid to the holders on February 17, 2010 or converted
at the holders’ option any time up to maturity at a conversion price equal to
eighty percent (80%) of the average closing price of the common stock as listed
on a Principal Market for the five (5) trading days immediately preceding the
conversion date. If the common stock is not traded on a Principal Market, the
conversion price shall mean the closing bid price as furnished by the National
Association of Securities Dealers, Inc.
 
 The total
amount of the Debentures was $56,038.
 
 The
convertible debentures met the definition of hybrid instruments, as defined in
ASC 815-10, Accounting for
Derivative Instruments and Hedging Activities (ASC 815-10). The hybrid
instruments are comprised of a i) a debt instrument, as the host contract and
ii) an option to convert the debentures into common stock of the Company, as an
embedded derivative. The embedded derivative derives its value based on the
underlying fair value of the Company’s common stock. The Embedded Derivative is
not clearly and closely related to the underlying host debt instrument since the
economic characteristics and risk associated with this derivative are based on
the common stock fair value.
 
 The
embedded derivative did not qualify as a fair value or cash flow hedge under ASC
815-10.
 
 NOTE
      7-
              COMMITMENTS
 
 The
Company’s subsidiary Teliphone Inc. had entered into a distribution agreement
with one of its distributors in March 2006 for a period of five-years. The
distribution agreement stipulated that the Company must pay up to 25%
commissions on all new business generated by the distributor. This distributor
controlled the areas of Quebec and Ontario in Canada. The agreement was
terminated due to a default by the distributor on its terms and
conditions.
 
 The
default is now in dispute, as the Company received notice on February 11, 2009
from 9164-4898 Quebec Inc (known as BR Communications Inc.”). The notice claims
that the Company owes BR Communications Inc. unpaid commissions totaling CDN$
158,275.25 ($129,944 US$) based on the Company’s increase in sales due to its
Dialek acquisition.
 
 27
 
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      7-
              COMMITMENTS
 
 In the
executed agreement with BR Communications Inc, it is specifically stated that
sales from Dialek are excluded from the commission calculation due to BR
Communications Inc.
 
 The
Company evaluated this dispute and filed counterclaims against BR Communications
Inc. for lost sales due to BR’s default of their distribution agreement with the
Company. BR Communications, Inc. filed a lawsuit against the Company in December
of 2009, claiming damages of Cdn$410,255.
 
 The
Company does not believe that the dispute brought on by BR Communications Inc.
has any merit, and has not accrued a liability for the amounts BR Communications
Inc., claims are due them.
 
 The
Company’s subsidiary Teliphone Inc. has entered into a lease agreement for its
Montreal, Canada offices, which is set to expire on May 31, 2011. In May 2009,
Teliphone Inc. added additional offices to this lease without extending the
lease any further, only increasing the monthly rental. The Company anticipates
to pay approximately $50,000 (CDN$) for the year ending September 30, 2010, and
$30,000 (CND$) for the eight months ending May 31, 2011 for an aggregate total
of $80,000. Rent expense for this lease for the three months ended December 31,
2009 was $10,344.
 
 The
Company’s subsidiary Teliphone Inc. has entered into a lease agreement for its
Toronto, Canada offices, which is set to expire on August 31, 2014. The Company
pays approximately $45,000 (CDN$) for the year ending September 30, 2010, and
$47,000 (CND$) for the year ending September 30, 2011 and 2012 and $49,000 for
the year ending September 30, 2013 and 2014 for an aggregate total of $190,000.
Rent expense for this lease for the three months ended December 31, 2009 was
$11,750.
 
 The
Company’s subsidiary Teliphone Inc. has entered into various lease agreements
for computer equipment with Dell Financial Services Canada
Limited.  The Company pays approximately $3,700 (CDN$) per
month.   The Company will pay an aggregate amount of $44,000 for
the year ending September 30, 2010 and $18,000 for the year ending September 30,
2011.
 
 
 28
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      8-
              STOCKHOLDERS’
      DEFICIT
 
 Common
Stock
 
 As of
December 31, 2009, the Company has 125,000,000 shares of common stock authorized
with a par value of $.001.
 
 The
Company has 37,376,657 and 37,376,657 shares issued and outstanding as of
December 31, 2009 and September 30, 2009, respectively.
 
 On
September 30, 2004, the Company had 3,216,000 shares issued and outstanding. On
April 28, 2005, the Company entered into a reverse merger upon the acquisition
of Teliphone, Inc. and issued 27,010,000 shares of common stock to the
shareholders of Teliphone, Inc. in exchange for all of the outstanding shares of
stock of Teliphone, Inc. Thus the Company had 30,426,000 shares issued and
outstanding.
 
 On August
31, 2005, the Company issued 663,520 shares of common stock in conversion of the
Company’s convertible debentures in the amount of $331,760.
 
 On August
22, 2006, the Company issued 1,699,323 shares of common stock to United American
Corporation in conversion of related party debt in the amount of $421,080 (see
Note 4). An additional 171 fractional shares were issued in December
2006.
 
 On August
22, 2006, the Company issued 105,000 shares of common stock for consulting
services. These services have been valued at $0.25 per share, the price at which
the Company’s offering will be. The value of $26,250 was reflected in the
consolidated statement of operation for the year ended September 30,
2006.
 
 In
December 2006, the Company issued 660,000 shares of common stock representing a
value in the amount of $165,000, for consulting services that occurred during
the year ended September 30, 2006. The Company recognized the expense in the
year ended September 30, 2006 as the services were provided in this time frame.
The Company used the $0.25 price for valuation purposes.
 
 The
Company issued 3,812,633 shares of common stock of the Company in February 2009
as part of the debt conversion agreement with related parties on December 31,
2008. The Company also issued 10,000 shares of stock for services rendered at a
value of $.038 per share ($380).
 
 29
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 
 NOTE
      9-
              PROVISION FOR INCOME
      TAXES
 
 Deferred
income taxes are determined using the liability method for the temporary
differences between the financial reporting basis and income tax basis of the
Company’s assets and liabilities.  Deferred income taxes are measured
based on the tax rates expected to be in effect when the temporary differences
are included in the Company’s tax return.  Deferred tax assets and
liabilities are recognized based on anticipated future tax consequences
attributable to differences between financial statement carrying amounts of
assets and liabilities and their respective tax bases.
 
 At
December 31, 2009, deferred tax assets consist of the
following:
  Net
      operating losses
                
                $
                575,507Valuation
      allowance
                
                
                (575,507
                )$
                -
 At
December 31, 2009, the Company had a net operating loss carryforward in the
approximate amount of $1,692,666, available to offset future taxable income
through 2029.  The Company established valuation allowances equal to
the full amount of the deferred tax assets due to the uncertainty of the
utilization of the operating losses in future periods.
 
 A
reconciliation of the Company’s effective tax rate as a percentage of income
before taxes and federal statutory rate for the periods ended December 31, 2009
and 2008 is summarized as follows:
 
 2009
              
              2008Federal
      statutory rate
              (34.0)%
              
              (34.0)%State
      income taxes, net of federal benefits
              3.3
              
              3.3Valuation
      allowance
              30.7
              
              30.70%
              
              0%
 
 
 30
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      10-
              ACQUISITION OF CERTAIN
      ASSETS AND LIABILITIES (DIALEK
TELECOM)
 
 On
February 14, 2008, the Company entered into a Letter of Intent for the
acquisition of certain assets and liabilities of 9151-4877 Quebec Inc.
(Operating as “Dialek Telecom”). The Company later entered into a definitive
agreement for acquisition on June 30, 2008.  While the acquisition
remained effective from the date of February 15, 2008, the Company updated the
valuation after having negotiated the true values of the assets and
liabilities.  As a result, the following demonstrates the details of
the assets and liabilities acquired:
 
 Value
      adjusted and disclosed in 06-30-2008 Definitive Agreement
      (US$)AssetsGoodwill
      (customer contracts)
              
              
              $549,767Accounts
      Receivable
              
              
              $74,533Cash
      in Bank
              
              
              $9,807TOTAL
      ASSETS:
              
              
              $634,107LiabilitiesCurrent
      Supplier Payables
              
              
              $258,044TOTAL
      LIABILITIES:Note
      Payable (see Note 4):
              
              
              $376,063
 
 There was
a reduction of the valuation due to the difference between the verified assets
and liabilities that resulted in a decrease of the acquisition price from
$411,894 (CDN$420,000) to $376,063 (CDN$383,464).  This value
fluctuates based on the exchange rate of the US and CDN dollars.  On
December 31, 2008, the Company converted the entire amount owing of $264,476
into 1,057,905 shares ($.25 per share) of the common stock of the
Company.
 
 LINE OF CREDIT
FACILITY
 
 The
shareholders of 9151-4877 Quebec Inc. have provided a revolving line of credit
facility of CDN $150,000 18% per annum rate of interest.  As of
December 31, 2008, the Company had drawn down $123,153 (CDN$150,000)) of this
line of credit.  On December 31, 2008, the Company and the
shareholders of Dialek Telecom converted the entire amounts owing into 492,612
shares ($.25 per share) of the common stock of the Company.
 
 31
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      11-
              ACQUISITION OF CERTAIN
      ASSETS AND LIABILITIES (ORION
  COMMUNICATIONS)
 
 On May 7,
2009, the Company entered into an assignment agreement with 9191-4200 Quebec
Inc. (“9191”) in order to have the customer contracts of Orion Communications
Inc., (“Orion”) an Ontario, Canada Company assigned to the Company for its
management.  No consideration was paid however the Company and 9191
have agreed to share 50% each of the gross benefits received from the customer
base. The consideration will take effect upon the customer base achieving
$767,840 in profits ($767,840 @ 50% = $393.920, which is the goodwill on the
transaction). Upon achievement of this threshold, the Company will pay 9191 a
monthly commission that approximates 50% of the net profit generated by this
customer base.
 
 9191 had
provided to the Company a cash deposit of CDN$260,000 in order to have the
Company facilitate an extension to its line of credit in order to assist with
the management of the newly assigned customers.  As of December 31,
2009, the Company had repaid 9191 a total of CDN$241,972 and as a result, the
amount outstanding is CDN$5,859 ($5,472) as of December 31, 2009.  The
amount was considered as a cash advance and is not interest
bearing.
 
 As part
of the agreement, the Company was able to utilize the bank accounts of Orion for
its daily transactions until the Company can establish its own banking
facilities in Ontario.  The following highlights the summary of the
amounts from May 1, 2009 to September 30, 2009:
  Opening
      Balance on May 1, 2009:
                CDN$
      628,462Adjustment
      for payment on 9191 services:
                CDN$   19,248Closing
      Balance on September 30, 2009:
                CDN($696,537)Balance:
                CDN($  48,827)
 The
$48,827 CD$ represents the net cash paid by the Company in the acquisition of
the customer base through December 31, 2009.
 
 As part
of the agreement, the Company acquired certain supplier contracts in order to
continue delivery of services to the assigned clients.  These
suppliers had trade payables totaling CDN$487,046 as of May 1, 2009 and hence
these became trade payables of the Company.
 
 As part
of the agreement, the Company acquired certain receivables from the customers
assigned, totaling CDN$54,299 as of May 1, 2009 and hence these became trade
receivables of the Company.
 
 
 32
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008 (UNAUDITED)
 
 NOTE
      11-
              ACQUISITION OF CERTAIN
      ASSETS AND LIABILITIES (ORION COMMUNICATIONS)
      (CONTINUED)
 
 As a
result, the following demonstrates the details of the assets and liabilities
acquired:
 
 AssetsGoodwill
      (customer contracts)
              
              
              $327,901Accounts
      Receivable
              
              
              $46,686TOTAL
      ASSETS:
              
              
              $376,781LiabilitiesCurrent
      Supplier Payables
              
              
              $420,191TOTAL
      LIABILITIES:Net
      cash paid through September 30, 2009
              
              
              $45,604
 
 NOTE
      12-
              REDUCTION OF TRADE
      PAYABLES
 
 On
October 28, 2009, the Company settled a $242,538 (CD$) payable with a
non-related vendor for a lump sum payment of $121,269 (CD$) (50 cents on the
dollar). The forgiveness of debt of $121,269 is reflected in the December 31,
2009 condensed consolidated financial statements.




33









ITEM 2. MANAGEMENT DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





PRELIMINARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS





You
should read the following discussion of our financial condition and operations
in conjunction with the consolidated financial statements and the related notes
included elsewhere in this quarterly report. This quarterly report contains
forward–looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These include statements about our expectations,
beliefs, intentions or strategies for the future, which we indicate by words or
phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,”
“our company believes,” “management believes” and similar language. The
forward–looking statements are based on our current expectations and are subject
to certain risks, uncertainties and assumptions, including our ability to
(1) obtain sufficient capital or a strategic business arrangement to fund
our expansion plans; (2) build the management and human resources
infrastructure necessary to support the growth of our business;
(3) competitive factors and developments beyond our control; and
(4) those other risk factors, uncertainties and assumptions that are set
forth in the discussion under the headings captioned “Business,” “Risk Factors,”
and “Management’s Discussion and Analysis”. Our actual results may differ
materially from results anticipated in these forward–looking statements. We base
the forward–looking statements on information currently available to us, and we
assume no obligation to update or revise them, whether as a result of new
information, future events or otherwise. In addition, our historical financial
performance is not necessarily indicative of the results that may be expected in
the future and we believe that such comparisons cannot be relied upon as
indicators of future performance.





The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes thereto and other
financial information contained elsewhere in this Form 10–Q.





GENERAL
OVERVIEW





BACKGROUND





Company
Overview





As used
in this annual report, "we", "us", "our", “Teliphone”, the "Group", "Company" or
"our company" refers to Teliphone Corp., a Nevada corporation, together with our
majority-owned subsidiary Teliphone Inc., a Canadian corporation.





Teliphone
Corp was incorporated in the State of Nevada on March 2, 1999 under the name
"OSK Capital II Corp." to serve as a vehicle to effect a merger, exchange of
capital stock, asset acquisition or other business combination with a domestic
or foreign private business. Effective April 28, 2005, the Company achieved its
objectives with the reverse merger and reorganization with Teliphone Inc., a
Canadian company. On August 21, 2006, we changed our name from OSK Capital II
Corp. to Teliphone Corp.





As a
result of the merger and re-organization, Teliphone Inc. became our wholly owned
subsidiary and we became a majority owned subsidiary of Teliphone Inc.'s parent
company, United American Corporation, a Florida Corporation trading on the NASD
OTCBB under the symbol UAMA.  The merger and re-organization of April
28, 2005 was a business combination between Teliphone Inc. and OSK Capital II
Corp. As a result, Teliphone Inc. became a wholly-owned subsidiary of OSK
Capital II Corp.





34


The
Principal terms of the combination were that a recapitalization occurred as a
result of the reverse merger. The shareholder's equity of OSK Capital II Corp.
became that of Teliphone Inc. Original shareholders of OSK Capital II Corp.
maintained their shareholdings of OSK Capital II Corp. and new treasury shares
of OSK Capital II Corp. were issued to shareholders of Teliphone
Inc.





On July
14th, 2006 the Company entered into a Letter of Intent with 3901823 Canada Inc.
("3901823") whereby Teliphone Inc. will issue 3901823 new shares from its
treasury such that 3901823 became a 25% owner of our subsidiary Teliphone Inc.
effective August 1, 2006 in return for additional investment in the
company.  Subsequently on September 30, 2008, the Company’s subsidiary
Teliphone Inc. issued additional stock to the Company representing the
conversion of cash advances from August 1, 2006 to September 30,
2008.  The resultant ownership of its subsidiary by the Company as of
September 30, 2008 is 87.1%.  The Company does not have any other
subsidiaries.





On
October 30, 2006, United American Corporation spun off their share position in
our Company through the pro rata distribution of their 25,737,956 shares to
their shareholders. Although there were no contractual obligations on the part
of the company or United American Corporation, this spin off was part of a long
term strategy of United American Corporation.





History
of Key Agreements





At the
time of the merger and re-organization, the Company, through its subsidiary
Teliphone Inc., was able to offer its services to customers in Canada only. This
was achieved through the signing of a retail distribution agreement on March 1,
2005, with BR Communications Inc. ("BR") for the purpose accessing the retail
consumer portion of our target market through retail and Internet-based sales.
Under the terms of this agreement, BR was granted the exclusive right to
distribute Teliphone Inc.’s VoIP services via Internet-based sales or direct
sales to retail establishments in the territory consisting of the Province of
Quebec in Canada exclusive of Sherbrooke, Quebec for a 5 year term. The
agreement included a commitment by the company to pay BR and its resellers 25%
of the recurring revenues derived from clients in the territory. This agreement
was later expanded on July 6, 2005 to include the city of Ottawa within the
Province of Ontario and to remove the restriction of Sherbrooke,
Quebec.  Subsequently on September 1, 2008, the agreement was amended
by replacing the monthly % of recurring revenue commitment by a fixed monthly
payment of $2,500 for a term of 24 months, removing all exclusivity
restrictions, permitting the Company to sell its products and services in the
Territory through other sales channels without paying BR any % of recurring
revenues.





On April
22, 2005, the Company, through its subsidiary Teliphone Inc., entered into a
Wholesale distribution agreement with 9151-4877 Quebec Inc., also known as
"Dialek Telecom". Teliphone Inc. supplies Dialek Telecom with VoIP services to
Dialek's Canadian and US customers, permitting Dialek Telecom to brand the
service "Dialek VoIP" instead of "Teliphone VoIP". The agreement also permits
Dialek Telecom to invoice and support its clients directly. The term of the
agreement is for one year renewable to successive one year terms upon 30 days
written notice.





On June
1, 2005, the Company, through its subsidiary Teliphone Inc., signed an Agreement
with Northern Communication Services Inc. ("Northern") such that Northern would
supply the company with Emergency 9-1-1 caller address verification and call
transfer services to the necessary Municipal Emergency Services Department
associated with the caller's location. This service is required for Teliphone
Inc.'s customers located in North America. The term of the agreement is for 3
years, renewable automatically for an additional 3 years with a termination
clause of 90 days written notice.





35


On
December 2, 2005, the Company, through its subsidiary Teliphone Inc. signed a
Co-Location and Bandwidth Services Agreement with Peer 1. The agreement
stipulates that the Company houses its telecommunications and computer server
hardware within the Peer 1 Montreal Data center, located at 1080 Beaver Hall,
suite 1512, Montreal, Quebec, Canada. Likewise, Teliphone Inc. agrees to
purchase Peer 1 bandwidth services and internet access across its worldwide
network. The term of the contract was for 12 months, renewable for successive 30
day terms.





The
Company sought to expand its product offering in order to offer its broadband
phone services to US customers as well. The Company signed an agreement with RNK
Telecom Inc, a New Jersey company, in December of 2005 which permitted the
company to interconnect with RNK's network of US cities. This agreement has a
term of one year renewable month to month at the end of the term.





On April
6, 2006, the Company, through its subsidiary Teliphone Inc. signed a Master
Services Agreement with Rogers Business Solutions ("Rogers"). This agreement
permits Teliphone Inc. to purchase voice channel capacity for its Canadian
Network. The majority of its current voice channel capacity already exists with
Rogers, however, the current agreements are still between Rogers and the
Company's former parent company, United American Corporation. It is anticipate
that all of the capacity will transfer under the Teliphone Inc.-Rogers agreement
by June 30, 2007. The term of the agreement is for 2 years, with no specific
renewal conditions.  The contract was not renewed as the Company
migrated its Canadian network towards Intelco, as outlined in the next
paragraph.





Teliphone
Inc., a majority-owned subsidiary of the Company, 3901823 Canada Inc., the
holding company of Intelco Communications ("3901823"), and Intelco
Communications ("Intelco") entered into an agreement on July 14, 2006. Pursuant
to the terms of the Agreement, Teliphone Inc. agreed to issue 35 class A voting
shares of its common stock representing 25.2% of Teliphone Inc.'s issued shares
to 3901823 in exchange for office rent, use of Intelco's data center for
Teliphone Inc.'s equipment, and use of Intelco's broadband telephony network
valued at approximating $144,000 (CDN$) for the period August 1, 2006 through
July 31, 2007, a line of credit of $75,000 (CDN$), of which $25,000 (CDN$) was
already drawn upon in July 2006 and paid back in December 2006.





Teliphone
Inc. also agreed to make available to the customers of Intelco certain
proprietary software for broadband telephony use. In lieu of receiving cash for
the licensing of this software, Teliphone Inc. will apply $1 per customer per
month at a minimum of $5,000 per month.





On
February 15, 2008, the Company entered into an agreement with 9191-4200 Quebec
Inc., owners of Dialek Telecom for the acquisition of certain assets and
liabilities of Dialek Telecom.  As a result, the Company acquired an
additional 2,000 customers for telecommunications services in Canada, along with
other assets valued at CDN$86,000 and liabilities valued at CDN$227,000 and
access to an operating line of credit of CDN$150,000 at an annualized interest
rate of 18%.





On  September
30, 2008, the Company re-evaluated its pre-paid services asset from Intelco
(originally $144,000 CDN$ and valued at $119,819 CDN as of September 30, 2008)
to 0$ since the Company had vacated the premises of Intelco and could not
execute on the use of any of the pre-paid services originally earmarked for
consumption.





36


As of
September 30, 2008, the Company’s ownership in its subsidiary Teliphone Inc.
increased from 74.8% to 87.1% due to the issuance of stock to the Company in
exchange for funds invested from July 14th,
2008 to September 30, 2008.





On May
7th, 2009, the Company entered into a customer assignment agreement with the
owners of Orion Communications Inc.  As a result, the Company acquired
an additional 580 Business Customers for telecommunications services in Canada,
along with other assets valued at CDN$376,781 and liabilities valued at
CDN$418,762.  The Company and the owner of Orion Communications,
9191-4200 Quebec Inc. agreed to a gross benefit sharing arrangement of 50%-50%
for any potential future benefits derived from the customer base.





Description
of Business





Trends
in Our Industry and Business





A number
of trends in our industry and business have a significant effect on our results
of operations and are important to an understanding of our financial statements.
These trends include:





Broadband adoption. The
number of households with broadband Internet access in our core markets of
Canada and India has grown significantly. We expect this trend to continue. We
benefit from this trend because our service requires a broadband Internet
connection and our potential addressable market increases as broadband adoption
increases.





Changing competitive
landscape. We are facing increasing competition from other
companies that offer multiple services such as cable television, voice and
broadband Internet service. Several of these competitors are offering VoIP or
other voice services as part of a bundle, in which they offer voice services at
a lower price than we do to new subscribers. In addition, several of these
competitors are working to develop new integrated offerings that we cannot
provide and that could make their services more attractive to customers. We also
compete against established alternative voice communication providers and
independent VoIP service providers. Some of these service providers may choose
to sacrifice revenue in order to gain market share and have offered their
services at lower prices or for free. These offerings could negatively affect
our ability to acquire new customers or retain our existing
customers.





Consumer adoption of new VoIP
technology.  The development of our Teliphone VoIP service permits
us to sell telecommunications services to consumers who have a broadband
internet connection. Our technology permits customers to continue to use their
traditional phone devices to make and receive calls at a lower cost than
traditional phone services. One of the key challenges in the adoption of this
new technology is the customer’s acceptance of potential loss of service when
their internet connection goes down or they lose electrical power in their home
or office. The Company has mitigated this risk for their customers by providing
telephone call fail-over methods in case of loss of service. Management believes
that even though this adoption risk exists, the reduction of cost for the
services will negate the impact of occasional service loss much like how
consumers accepted at times lower call quality in their worldwide adoption of
mobile phones due to increased convenience.





The
development of our callona.com website seeks to attract consumers on the
internet who will look to utilize our web-based communications services, which
will permit us to generate advertising and promotional revenues from other
companies looking to advertise and promote their products to our callona.com
users. We have not as yet realized any revenue from our callona.com
prototype.





37


We
generate revenues from the sale of VoIP services to our customers, along with
the hardware required for our customers to utilize these services. Our cost of
sales includes all of the necessary purchases required for us to deliver these
services. This includes the use of broadband internet access required for our
servers to be in communication with our customers’ VoIP devices at the
customer’s location, our rental of voice channels connected to the
Public-Switched-Telephone-Network, that is the traditional phone network which
currently links all phone numbers worldwide. Our cost of sales also includes our
commissions paid to our re-sellers as we are distributing a portion of recurring
revenues to the re-seller after the sale has been consummated. Our cost of sales
also includes any variable costs of service delivery that we may have, including
our per-minute costs for terminating our customers’ calls on another carrier’s
network.





We have
incurred gross losses during our first three years of operation because the
minimum purchases necessary in order to sustain our operations are enough to
deliver services to more customers than we currently have. As a result, we
estimate that we will continue to increase our gross profit over time. An
indication of this is our positive gross profit from the interim period ending
December 31, 2006.





We will
continue to cover our cash shortfalls through debt financing with affiliated
parties. In the event that we do not have a significant increase in revenues and
we do not raise sufficient capital in the offering herein, management
estimates we can only sustain our cash requirements for three
months.  After three months, management will need to consider
alternate sources of financing, including but not limited to additional debt
financing, in order to sustain operations for the next twelve
months.  No agreements or arrangements have been made as of this date
for such financing.





Principal
products or services and their markets





With the
merger and re-organization we became a telecommunications company providing
broadband telephone services utilizing our innovative Voice over Internet
Protocol, or VoIP, technology platform, to offer feature-rich, low-cost
communications services to our customers, thus providing them an experience
similar to traditional telephone services at a reduced cost. VoIP means that the
technology used to send data over the Internet (example, an e-mail or web site
page display) is used to transmit voice as well. The technology is known as
packet switching. Instead of establishing a dedicated connection between two
devices (computers, telephones, etc.) and sending the message "in one piece,"
this technology divides the message into smaller fragments, called 'packets'.
These packets are transmitted separately over the internet and when they reach
the final destination, they are reassembled into the original
message.





Our
Company has invested in the research and development of our VoIP
telecommunications technology which permits the control, forwarding, storing and
billing of phone calls made or received by our customers. Our technology
consists of proprietary software programming and specific hardware
configurations, however, we have no specific legal entitlement that does not
permit someone else from utilizing the same base software languages and same
hardware in order to produce similar telephony service offerings.





Base
software languages are the language building blocks used by programmers to
translate the desired logic sequences into a message that the computer can
understand and execute.  An example of a logic sequence is “if the
user dials “011” before the number, the software should then treat this as an
international call and invoice the client accordingly”.  The
combination and use of these building blocks is known as ‘software code”, and
hence this combination, created by the Company’s programmers, along with
“off-the-shelf” computer and telecommunications hardware (ie. Equipment that is
readily available by computer, networking and telecommunications companies) is
collectively referred to as “our technology and trade secrets”.





Examples
of “off-the-shelf” hardware utilized include the desktop phones and handsets,
computer servers used to store such things as account information and voice
mail, and telecommunications hardware that permit the routing of telephone voice
calls between various points across the internet and the world’s Public Switched
Telephone Network (PSTN), the global wired and wireless connections between
every land and mobile phone.





38


We
therefore cannot be certain that others will not gain access to our technology.
In order to protect this proprietary technology, we hold non-disclosure and
confidentiality agreements and understandings with our employees, consultants,
re-sellers, distributors, wholesalers and technology partners. We cannot
guarantee that our technology and trade secrets will not be stolen, challenged,
invalidated or circumvented. If any of these were to occur, we would suffer from
a decreased competitive advantage, resulting in lower profitability due to
decreased sales.





The
Company offers the following products and services to customers utilizing its
VoIP technology platform:





·
            Residential
      phone service. Customers purchase a VoIP adaptor from a re-seller and
      install it in their home. This allows all of their traditional phones in
      their home to have their inbound and outbound calls redirected to
      Teliphone. As a result, the residential customer purchases their choice of
      unlimited local or long distance calling services, with pay-per-minute
      long distance calling services.





·
            Business
      phone service. Customers purchase multiple VoIP adaptors from re-sellers
      and install them in their business. Similar to Residential phone service,
      customers purchase various local and long distance calling services from
      the Company.





For
Residential and Business phone services, the Company, through its subsidiary
Teliphone Inc., invoices and collects funds directly from the end-user customer
and pays a commission to their re-sellers and distributors upon receipt of the
funds. The customer can also purchase the VoIP adaptors and calling services
directly with Teliphone Inc. via its website www.teliphone.us for
US customers, www.teliphone.ca for
Canadian customers and www.teliphone.in for
India customers.





·
            The
      Company also sells VoIP calling services to Wholesalers who re-sell these
      services to their customers. In this case, the Company’s subsidiary
      Teliphone Inc. provides the services to the end-user customers, however
      invoices and collects funds from the Wholesaler, who invoices their
      customers and provides technical support to their customers
      directly.





The VoIP
adaptors are manufactured by Linksys-Cisco and purchased by the Company directly
from the manufacturer and re-sold to the re-sellers and wholesalers. The
Company’s subsidiary Teliphone Inc. is a Linksys-Cisco Internet Telephony
Services approved supplier based on their agreement signed in October
2005.





Distribution
methods of the products or services





Retail
Sales.





We
distribute our products and services through our retail partners' stores. Our
retail partners have existing public retail outlets where they typically sell
telecommunications or computer related products and services such as other
telecommunications services (cellular phones) or computer hardware and
software.





The
Company does not own or rent any retail space for the purpose of distribution,
rather, it relies on its re-seller partners to display and promote the Company's
products and services within their existing retail stores. Our agreement with BR
Communications Inc. has permitted us to establish our retail sales
channel.





Our
relationship to the retail outlets is one of a supplier. We supply the hardware
to the retail outlet owners, who have a re-seller agreement with our
distributor, BR Communications Inc. We ship these products direct to the stores
based on their requirements. All shipments are Cash On Delivery payment
terms.





For a
retail sale to occur, our re-sellers purchase hardware from us and hold
inventory of our hardware at their store. In some cases, we may sell the
hardware to our re-sellers below cost in order to subsidize the customer's
purchase of the hardware from the re-seller. Upon the sale of hardware to the
customer, the retail partner activates the service on our website while in-store
with the customer.





39


Internet
Sales.





We
likewise distribute our products through the sale of hardware on our website,
www.teliphone.us. The customer purchases the necessary hardware from our on-line
catalog. Upon receipt of the hardware from us, the customer returns to the
company's website to activate their services.





Wholesale
Sales.





We
likewise distribute our products and services through Wholesalers. A Wholesaler
is a business partner who purchases our products and services "unbranded", that
is, with no reference to our Company on the hardware or within the service, and
re-bills the services to their end-user customers. In the case of a sale to our
Wholesalers, we do not sell the hardware below cost.





Direct Sales.





We
likewise distribute our products and services directly to customers via our own
sales force.  We currently employ 2 people in this capacity, providing
sales solutions directly to larger business clients throughout
Canada.





The
agreements between our wholesalers and our customers are similar to those that
the Company has with our Retail customers. The wholesalers provide monthly
calling services to their customers and invoice them on a monthly basis on their
usage. Our form of general conditions for use of the Company's
telecommunications products and services found in exhibit 10.2 of this
prospectus presents the general and underlying agreement that we hold with our
Wholesalers. While product and professional liability cannot be entirely
eliminated, the conditions set forth in the agreement serve to forewarn
Wholesalers that should a stoppage of service occur we cannot be held
liable.  Since we do not currently hold product and professional
liability insurance coverage, this does not protect us from potential
litigation. The risk of this is outlined in the Risk Factor section within our
Annual Report on form 10-K.





Status
of any publicly announced new product or service





TeliPhone
VoIP services were officially launched to the public in the Province of Quebec
in December of 2004.





teliPhone
Residential VoIP service





The
Company currently offers a residential VoIP phone service to customers in the
provinces of Ontario and Quebec.. Average revenues per customer are $30.00 per
month. The customer can also purchase virtual numbers from other cities in North
America and internationally, permitting the customer to provide a local phone
number to their calling party who is in another area or country that normally
would represent a long distance call. These services cost from 5$ to 30$ per
month depending on the country.





teliPhone
Small business VoIP services





The
Company targets Small and Medium sized business clients with an expanded version
of its offering. Average revenues per customer in this segment are $400. The
Company markets these services primarily through its telecom interconnection
resellers, who have existing customer relationships in this
segment.





Teliphone
has also developed and integrated new software permitting the replacement of
traditional auto-attendant and office telephony systems. The Company has
finalized its beta trials and has introduced this to the market through its
interconnection re-seller base.





40


teliPhone
Enterprise VoIP and Resale services





Since May
of 2009 as part of its acquisition of the clients of Orion Communications Inc.,
the Company has been selling services over its own network, along with those of
Tier 1 and Tier 2 telecommunications carriers across Canada to Enterprise
business clients.  Enterprise clients are larger, multi-national
organizations with multiple office locations throughout the
country.  Average revenue per customer in this segment is $1,000 per
month.  The Company markets its services primarily through its direct
sales force of qualified telecommunications services
representatives.





Competitive
Business Conditions





Today,
VoIP technology is used in the backbone of many traditional telephone networks,
and VoIP services are offered to residential and business users by a wide array
of service providers, including established telephone service providers. These
VoIP providers include traditional local and long distance phone companies,
established cable companies, Internet service providers and alternative voice
communications providers such as Teliphone.





While all
of these companies provide residential VoIP communications services, each group
provides those services over a different type of network, resulting in important
differences in the characteristics and features of the VoIP communications
services that they offer. Traditional wireline telephone companies offering VoIP
services to consumers do so using their existing broadband DSL networks.
Similarly, cable companies offering VoIP communications services use their
existing cable broadband networks. Because these companies own and control the
broadband network over which the VoIP traffic is carried between the customer
and public switched telephone network, they have the advantage of controlling a
substantial portion of the call path and therefore being better able to control
call quality. In addition, many of these providers are able to offer their
customers additional bandwidth dedicated solely to the customer's VoIP service,
further enhancing call quality and preserving the customer's existing bandwidth
for other uses. However, these companies typically have high capital
expenditures and operating costs in connection with their networks. In addition,
depending on the structure of their VoIP networks, the VoIP services provided by
some of these companies can only be used from the location at which the
broadband line they provide is connected.





Like
traditional telephone companies and cable companies offering VoIP services, the
Company also connects its VoIP traffic to the public switched telephone network
so that their customers can make and receive calls to and from non-VoIP users.
Unlike traditional telephone companies and cable companies, however, alternative
voice communications providers such as Teliphone do not own or operate a private
broadband network. Instead, the VoIP services offered by these providers use the
customer's existing broadband connection to carry call traffic from the customer
to their VoIP networks. These companies do not control the "last mile" of the
broadband connection, and, as a result, they have less control over call quality
than traditional telephone or cable companies do. However, these companies have
the operating advantage of low capital expenditure requirements and operating
costs.


Internet
service providers generally offer or have announced intentions to offer VoIP
services principally on a PC-to-PC basis. These providers generally carry their
VoIP traffic for the most part over the public Internet, with the result that
VoIP services are often offered for free, but can only be used with other users
of that provider's services. Many of these providers offer a premium service
that allows customers to dial directly into a public switched telephone network.
In addition, while no special adapters or gateways are required, often customers
must use special handsets, headsets or embedded microphones through their
computers, rather than traditional telephone handsets.





Competition





The
telecommunications industry is highly competitive, rapidly evolving and subject
to constant technological change and to intense marketing by different providers
of functionally similar services. Since there are few, if any, substantial
barriers to entry, except in those markets that have not been subject to
governmental deregulation, we expect that new competitors are likely to enter
our markets. Most, if not all, of our competitors are significantly larger and
have substantially greater market presence and longer operating history as well
as greater financial, technical, operational, marketing, personnel and other
resources than we do.





41


Our use
of VoIP technology and our proprietary systems and products enables us to
provide customers with competitive pricing for telecommunications services.
Nonetheless, there can be no assurance that we will be able to successfully
compete with major carriers in present and prospective markets. While there can
be no assurances, we believe that by offering competitive pricing we will be
able to compete in our present and prospective markets.





We rely
on specialized telecommunications and computer technology to meet the needs of
our consumers. We will need to continue to select, invest in and develop new and
enhanced technology to remain competitive. Our future success will also depend
on our operational and financial ability to develop information technology
solutions that keep pace with evolving industry standards and changing client
demands. Our business is highly dependent on our computer and telephone
equipment and software systems, the temporary or permanent loss of which could
materially and adversely affect our business.





We are
not dependent on a few major customers. Our largest Wholesale customer,
Horizon-Link, currently produces less than 10% of our monthly
revenues.





We do not
currently hold any patents, trademarks, licenses, franchises, concessions or
royalty agreements.





Existing
and Probable Governmental Regulation





Overview
of Regulatory Environment





Traditional
telephone service has historically been subject to extensive federal and state
regulation, while Internet services generally have been subject to less
regulation. Because some elements of VoIP resemble the services provided by
traditional telephone companies, and others resemble the services provided by
Internet service providers, the VoIP industry has not fit easily within the
existing framework of telecommunications law and until recently, has developed
in an environment largely free from regulation.





The
Federal Communications Commission, or FCC, the U.S. Congress and various
regulatory bodies in the states and in foreign countries have begun to assert
regulatory authority over VoIP providers and are continuing to evaluate how VoIP
will be regulated in the future. In addition, while some of the existing
regulation concerning VoIP is applicable to the entire industry, many rulings
are limited to individual companies or categories of service. As a result, both
the application of existing rules to us and our competitors and the effects of
future regulatory developments are uncertain.





Regulatory
Classification of VoIP Services





On
February 12, 2004, the FCC initiated a rulemaking proceeding concerning the
provision of VoIP and other services, and applications utilizing Internet
Protocol technology. As part of this proceeding, the FCC is considering whether
VoIP services like ours should be classified as information services, or
telecommunications services. We believe our service should be classified as
information services. If the FCC decides to classify VoIP services like ours as
telecommunications services, we could become subject to rules and regulations
that apply to providers of traditional telephony services. This could require us
to restructure our service offering or raise the price of our service, or could
otherwise significantly harm our business.





42


While the
FCC has not reached a decision on the classification of VoIP services like ours,
it has ruled on the classification of specific VoIP services offered by other
VoIP providers. The FCC has drawn distinctions among different types of VoIP
services, and has concluded that some VoIP services are telecommunications
services while others are information services. The FCC's conclusions in those
proceedings do not determine the classification of our service, but they likely
will inform the FCC's decision regarding VoIP services like ours.





In
Canada, the Canadian Radio-Television Commission (CRTC) is the regulating body
who has set guidelines that our subsidiary, Teliphone, must meet. These
guidelines center around 9-1-1 calling services and other services that are
normally available to subscribers of traditional telephony services. Teliphone
has met these requirements in its product offering.





An
additional element of Canadian regulation is that the incumbent providers, Bell
Canada (Central and Eastern Canada) and Telus (Western Canada), who in 2004
controlled over 75% of the Business and Residential phone lines, are not able to
reduce their prices to meet the newly offered reduced price options of
independent VoIP and Cable phone companies. This regulation permitted
independents such as Teliphone to provide their VoIP phone service without fear
of anti-competitive activity by the incumbents. The CRTC has recently ruled that
incumbent phone providers are permitted to reduce pricing now that a 25% market
share has been attained by the upstart phone service
providers.  Teliphone views its long term strategy outside of just
residential phone service, through the availability of international phone
numbers to global clients, thereby creating an international product offering, a
strategy that is very different from the geographically limited incumbent
carriers.





Customer
Access to Broadband Services





Our
customers must have broadband access to the Internet in order to use our
service. In the case of the Canadian market, our principal market, the Canadian
Radio-Television Telecommunications Commission (CRTC) has ordered that Internet
Service Providers and Incumbent Exchange Carriers have a legal obligation as per
Order 2000-789 to provide their services without interference to other service
providers in conjunction with to section 27(2) of the Telecommunications
Act.





However,
anti-competitive behavior in our market can still occur. For example, a Canadian
cable provider recently began offering an optional Cdn$10 per month "quality of
service premium" to customers who use third-party VoIP services over its
facilities. However, customers who purchase VoIP services directly from this
cable provider are not required to pay this additional fee. Based on this
example, some providers of broadband access may take measures that affect their
customers' ability to use our service, such as degrading the quality of the data
packets we transmit over their lines, giving those packets low priority, giving
other packets higher priority than ours, blocking our packets entirely, or
attempting to charge their customers more for also using our
services.





VoIP
E-911 Matters





On June
3, 2005, the FCC released an order and notice of proposed rulemaking concerning
VoIP emergency services. The order set forth two primary requirements for
providers of "interconnected VoIP services" such as ours, meaning VoIP services
that can be used to send or receive calls to or from users on the public
switched telephone network.





First,
the order requires us to notify our customers of the differences between the
emergency services available through us and those available through traditional
telephony providers. We also must receive affirmative acknowledgment from all of
our customers that they understand the nature of the emergency services
available through our service. Second, the order requires us to provide enhanced
emergency dialing capabilities, or E-911, to all of our customers by November
28, 2005. Under the terms of the order, we are required to use the dedicated
wireline E-911 network to transmit customers' 911 calls, callback number and
customer-provided location information to the emergency authority serving the
customer's specified location.





43


In July
of 2005, the CRTC required us to offer enhanced emergency calling services, or
E-911. The FCC followed suit with a deadline of November 28, 2005. The
requirement meant that we had to offer enhanced emergency calling services, or
E-911, to all of our customers located in areas where E-911 service is available
from their traditional wireline telephone company. E-911 service allows
emergency calls from our customers to be routed directly to an emergency
dispatcher in a customer's registered location and gives the dispatcher
automatic access to the customer's telephone number and registered location
information. We complied with both these requirements through our agreement with
Northern Communications Inc., which calls for Northern Communications to provide
and operate a 9-1-1 dispatch center for caller address verification and call
transfer to the emergency services department closest to the customer's location
on behalf of the Company.





Effective
the filing of this report, we have complied with all of these FCC
requirements.





International
Regulation





The
regulation of VoIP services is evolving throughout the world. The introduction
and proliferation of VoIP services have prompted many countries to reexamine
their regulatory policies. Some countries do not regulate VoIP services, others
have taken a light-handed approach to regulation, and still others regulate VoIP
services the same as traditional telephony. In some countries, VoIP services are
prohibited. Several countries have recently completed or are actively holding
consultations on how to regulate VoIP providers and services. We primarily
provide VoIP services internationally in Canada.





Canadian
Regulation





Classification
and Regulation of VoIP Services.





The
Telecommunications Act governs the regulation of providers of telecommunications
services in Canada. We are considered a telecommunications service provider
rather than a telecommunications common carrier. Telecommunications service
providers are subject to less regulation than telecommunications common
carriers, but do have to comply with various regulatory requirements depending
on the nature of their business.





On May
12, 2005, the Canadian regulator, the CRTC, stated that VoIP services permitting
users to make local calls over the public switched telephone networks will be
regulated by the same rules that apply to traditional local telephone services.
Because we are not a telecommunications common carrier, we will not be subject
to such regulation. Under the CRTC's decision, however, we are required to
register as a local VoIP reseller in order to obtain access to certain services
from other telecommunications providers.





The
CRTC's May 12, 2005 decision provided that VoIP providers who are registered as
local VoIP resellers will be able to obtain numbers and portability from
Canadian local exchange carriers, but will not be able to obtain numbers
directly from the Canadian Numbering Administrator or to have direct access to
the local number portability database. The CRTC's decision also identified other
obligations of VoIP providers, such as contributing to a national service fund,
complying with consumer protection, data and privacy requirements, and providing
access for the disabled. The details of these requirements have been referred to
industry groups for further study. Certain aspects of the decision are the
subject of pending appeals by other Canadian VoIP providers. We do not know what
requirements will ultimately be imposed nor the potential cost that compliance
may entail. The CRTC found that it is technically feasible for VoIP providers to
support special services for hearing-impaired customers.





Effective
the filing of this report, we have complied with all CRTC
requirements.





44


Provision
of 911 Services.





On April
4, 2005, the CRTC released a ruling requiring certain providers of VoIP
services, like us, to provide interim access to emergency services at a level
comparable to traditional basic 911 services by July 3, 2005 or such later date
as the CRTC may approve on application by a service provider. Under the interim
solution adopted by the regulator for the provision of VoIP 911 services,
customers of local VoIP services who dial 911 will generally be routed to a call
center, where agents answer the call, verbally determine the location of the
caller, and transfer the call to the appropriate emergency services agency. VoIP
service providers are also required to notify their customers about any
limitations on their ability to provide 911 services in a manner to be
determined.





Since
July 2005, Teliphone has complied with these regulations by partnering with a
PSAP (Primary Service Access Point) which serves to verify the customer location
and forward the call to the respective Municipal 9-1-1 center for assistance.
This service therefore permits Teliphone's customers to have access to 9-1-1
services irrespective of their physical location, anywhere in the Continental US
& Canada.. This service is of significance as VoIP permits customers to
utilize their phone anywhere a high-speed internet connection exists and can
therefore be located outside of their local city when requiring 9-1-1
services.





Other
Foreign Jurisdictions





Our
operations in foreign countries must comply with applicable local laws in each
country we serve. The communications carriers with which we associate in each
country is licensed to handle international call traffic, and takes
responsibility for all local law compliance. For that reason we do not believe
that compliance with the laws of foreign jurisdictions will affect our
operations or require us to incur any significant expense.





Research
and Development





The
Company spent $120,531 in Research and Development activities during 2006 and
$116,896 during 2005.  The Company did not spend any additional funds
directly in Research and Development since 2007, however, has advanced its
products and services through the continuous evolving needs of its
customers.





Compliance
with Environmental Laws





We did
not incur any costs in connection with the compliance with any federal, state,
or local environmental laws.





Employees





We
currently have 15 employees. We utilize the services of various consultants who
provide, among other things, accounting services, technological development
services and sales services to the Company.





CRITICAL ACCOUNTING POLICIES
AND ESTIMATES





Principles of
Consolidation





The
consolidated financial statements include the accounts of the Company and its
majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. All minority interests have
been reflected herein.





45


Use of
Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period.  On an on-going basis, the Company
evaluates its estimates, including, but not limited to, those related to
investment tax credits, bad debts, income taxes and contingencies. The Company
bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results
could differ from those estimates.





Cash and Cash
Equivalents





The
Company considers all highly liquid debt instruments and other short-term
investments with an initial maturity of three months or less to be cash
equivalents.





Comprehensive
Income





The
Company adopted ASC 220-10, “Reporting Comprehensive Income,” (formerly SFAS No.
130). ASC 220-10 requires the reporting of comprehensive income in addition to
net income from operations.





Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of information that historically has not been recognized in the
calculation of net income.





Inventory





Inventory
is valued at the lower of cost or market determined on a first-in-first-out
basis.  Inventory consisted only of finished goods.





Fair Value of Financial
Instruments





The
carrying amounts reported in the consolidated balance sheets for cash and cash
equivalents, accounts receivable and accounts payable approximate fair value
because of the immediate or short-term maturity of these financial
instruments.  For the notes payable, the carrying amount reported is
based upon the incremental borrowing rates otherwise available to the Company
for similar borrowings.





Currency
Translation





For
subsidiaries outside the United States that prepare financial statements in
currencies other than the U.S. dollar, the Company translates income and expense
amounts at average exchange rates for the year, translates assets and
liabilities at year-end exchange rates and equity at historical rates. The
Company’s functional currency is the Canadian dollar, while the Company reports
its currency in the US dollar. The Company records these translation adjustments
as accumulated other comprehensive income (loss). Gains and losses from foreign
currency transactions are included in other income (expense) in the results of
operations.





Research and
Development





The
Company occasionally incurs costs on activities that relate to research and
development of new products. Research and development costs are expensed as
incurred. Certain of these costs are reduced by government grants and investment
tax credits where applicable.





46


Revenue
Recognition





Operating
revenues consists of telephony services revenue and customer equipment (which
enables the Company's telephony services) and shipping revenue. The point in
time at which revenue is recognized is determined in accordance with Revenue
Recognition under ASC 605-50, Accounting for Consideration Given by a Vendor to
a Customer (Including a Reseller of the Vendor's Products) ("ASC 605-50"), and
ASC 605-25, "Revenue Arrangements with Multiple Deliverables" (“ASC 605-25”).
When the Company emerged from the development stage with the acquisition of
Teliphone Inc. they began to recognize revenue from their VoIP Telephony
services when the services were rendered and customer equipment purchased as
follows:





VoIP Telephony Services
Revenue





The
Company realizes VoIP telephony services revenue through sales by two distinct
channels; the Retail Channel (Customer purchases their hardware from a Retail
Distributor and the Company invoices the customer direct) and the Wholesale
Channel (Customer purchases their hardware from the Wholesaler and the Company
invoices the Wholesaler for usage by the Wholesaler’s customers
collectively).





Substantially
all of the Company's operating revenues are telephony services revenue, which is
derived primarily from monthly subscription fees that customers are charged
under the Company's service plans. The Company also derives telephony services
revenue from per minute fees for international calls and for any calling minutes
in excess of a customer's monthly plan limits.





Retail
Channel





Monthly
subscription fees are automatically charged to customers' credit cards in
advance and are recognized over the following month when services are
provided.





Revenue
generated from international calls and from customers exceeding allocated call
minutes under limited minute plans is charged to the customer’s credit cards in
advanced in small increments and are recognized over the following month when
the services are provided.





The
Company generates revenues from shipping equipment direct to customers and our
re-seller partners.  This revenue is considered part of the VoIP
service revenues.





The
Company does not charge initial activation fees associated with the service
contracts in the Retail Channel.  The Company generates revenues from
disconnect fees associated with early termination of service contracts with
Retail Customers. These fees are included in service revenue as they are
considered part of the service component when the service is delivered or
performed.





Prior to
March 31, 2007 the Company generally charged a disconnect fee to Retail
customers who did not return their customer equipment to the Company upon
disconnection of service if the disconnection occurred within the term of the
service contract. On April 1, 2007, the Company changed its disconnect policy.
Upon cancellation of the service, no disconnection fee is charged and there is
no refund issued to the customer for any portion of the unused services as
before.  The customer’s service termination date becomes the next
anniversary date of its billing cycle.





This
accounting is consistent with the rules set forth in the revenue recognition
guidelines in ASC Topic 605 since there are no rights of returns or refunds that
exist for the customer other than a standard 30-day money-back
guarantee.  In the event of a return within the 30 day guarantee
period, the hardware is refunded in its entirety.  This accounting is
also consistent with ASC 605-15 on “Revenue Recognition When Right of Return
Exists” which allows for equipment revenue to be recognized at the time of sale
since there no longer exists a right of return after the 30 day
period.





Wholesale
Channel





Monthly
subscription fees are invoiced to Wholesale customers at the end of the month
for the entirety of the services delivered during the month.  Revenue
for this period is therefore recognized at the time the Wholesaler is
billed.





47


The
Company recognizes this revenue utilizing the guidance set forth in ASC 605-25,
"Revenue Arrangements with Multiple Deliverables".  For the Wholesale
channel, the activation fee is recognized as deferred revenue, and amortized
over the length of the service agreement. If the service is terminated within
the term of the service agreement, the deferred revenue is fully
amortized.  This accounting is consistent because the up-front fee is
not in exchange for products delivered or services performed that represent the
culmination of a separate earnings process, and hence the deferral of revenue is
appropriate.





There is
no disconnection fee associated with a wholesale customer.





The
Company generates revenues from shipping equipment direct to wholesale
customers.  This revenue is considered part of the VoIP service
revenues.





Customer
Equipment





Retail
Channel





For
retail sales, the equipment is sold to re-sellers at a subsidized price below
that of cost and below that of the retail sales price. The customer purchases
the equipment at the retail price from the retailer.  The Company
recognizes this revenue utilizing the guidance set forth in ASC 605-25, “Revenue
Arrangements with Multiple Deliverables” and ASC 605-50, “Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor’s Products)”.





Under a
retail agreement, the cost of the equipment is recognized as deferred revenue,
and amortized over the length of the service agreement. Upon refund, the
deferred revenue is fully amortized.





Customer
equipment expense is recorded to direct cost of goods sold when the hardware is
initially purchased from our suppliers.





The
Company also provides rebates to retail customers who purchase their customer
equipment from retailers and satisfy minimum service period
requirements.   This minimum service period (e.g. three months)
differs from the length of the service agreement (e.g. twelve
months).  These rebates are recorded as a reduction of service revenue
over the minimum service period based upon the actual rebate coupons received
from customers and whose accounts are in good standing.  The Company
records a contingent liability to represent the amount of the refund obligation
through earnings on a systematic basis.





Wholesale
Channel





For
wholesale customers, the equipment is sold to wholesalers at the Company’s cost
price plus mark-up.  There are no rebates for equipment sold to
wholesale customers and the Company does not subsidize their equipment
sales.  The Company recognizes revenue from sales of equipment to
wholesale customers as billed.





Commissions Paid to Retail
Distributors





Commissions
paid to Retail Distributors are based on the recurring revenues recorded by the
company and incurred in the period where the revenue is recognized and paid by
the company to the retail Distributor in the following month.  These
commissions are recorded as cost of sales as they are directly related to the
revenue acquired and are not considered a sales and marketing
expense.  These commissions are payable based on the Distributor’s
servicing of the customer on an on-going basis.





Commissions Paid to
Wholesalers





The
Company recognizes this revenue utilizing the guidance set forth in ASC 605-50
“Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor’s Products)”.  The Company is receiving
identifiable benefits from the Wholesaler (billing and customer support) in
return for the allowance.  These benefits are sufficiently separable
from the Wholesaler’s purchase of the Company’s hardware and
services.  The fair value of those benefits can be reasonably
estimated and therefore the excess consideration is characterized as a reduction
of revenue on the Company’s Statement of Operations.





48


Resale of Traditional
Telecommunications Services (due to Acquisition of customer base of Dialek
Telecom and Orion Communications Inc. - represents a majority of the Company’s
revenue





The
Company earns revenue by reselling telecommunications services purchased from
wholesale providers such as Rogers Communications and Videotron
Telecom.  These revenues include monthly network access fees for local
calling and internet access services billed one month in advance and recognized
when earned.  Long Distance and Toll free calling service revenues are
recognized when the service is rendered and included and billed the following
month.





Accounts
Receivable





The
Company conducts business and extends credit based on an evaluation of the
customers’ financial condition, generally without requiring
collateral.





Exposure
to losses on receivables is expected to vary by customer due to the financial
condition of each customer. The Company monitors exposure to credit losses and
maintains allowances for anticipated losses considered necessary under the
circumstances. The Company has an allowance for doubtful accounts of $76,701 at
December 31, 2009.





Accounts
receivable are generally due within 30 days and collateral is not required.
Unbilled accounts receivable represents amounts due from customers for which
billing statements have not been generated and sent to the
customers.





Income
Taxes





The
Company accounts for income taxes utilizing the liability method of
accounting.  Under the liability method, deferred taxes are determined
based on differences between financial statement and tax bases of assets and
liabilities at enacted tax rates in effect in years in which differences are
expected to reverse.  Valuation allowances are established, when
necessary, to reduce deferred tax assets to amounts that are expected to be
realized.





Investment Tax
Credits





The
Company claims investment tax credits as a result of incurring scientific
research and experimental development expenditures. Investment tax credits are
recognized when the related expenditures are incurred, and there is reasonable
assurance of their realization. Management has made a number of estimates and
assumptions in determining their expenditures eligible for the investment tax
credit claim. It is possible that the allowed amount of the investment tax
credit claim could be materially different from the recorded amount upon
assessment by Revenue Canada and Revenue Quebec. The Company has not estimated
any amounts for incoming tax credits for December 31, 2009.





Convertible
Instruments





The
Company reviews the terms of convertible debt and equity securities for
indications requiring bifurcation, and separate accounting, for the embedded
conversion feature. Generally, embedded conversion features where the ability to
physical or net-share settle the conversion option is not within the control of
the Company are bifurcated and accounted for as a derivative financial
instrument. (See Derivative Financial Instruments below). Bifurcation of the
embedded derivative instrument requires allocation of the proceeds first to the
fair value of the embedded derivative instrument with the residual allocated to
the debt instrument. The resulting discount to the face value of the debt
instrument is amortized through periodic charges to interest expense using the
Effective Interest Method.





Derivative Financial
Instruments





The
Company generally does not use derivative financial instruments to hedge
exposures to cash-flow or market risks. However, certain other financial
instruments, such as warrants or options to acquire common stock and the
embedded conversion features of debt and preferred instruments that are indexed
to the Company’s common stock, are classified as liabilities when either (a) the
holder possesses rights to net-cash settlement or (b) physical or net share
settlement is not within the control of the Company. In such instances, net-cash
settlement is assumed for financial accounting and reporting, even when the
terms of the underlying contracts do not provide for net-cash settlement. Such
financial instruments are initially recorded at fair value and subsequently
adjusted to fair value at the close of each reporting period.





49


Advertising
Costs





The
Company expenses the costs associated with advertising as
incurred.  Advertising expenses for the interim period ending December
31, 2009 and 2008 are included in selling and promotion expenses in the
consolidated statements of operations.





Fixed
Assets





Fixed
assets are stated at cost.  Depreciation is computed using the
straight-line method over the estimated useful lives of the assets; automobiles
– 3 years, computer equipment – 3 years, and furniture and fixtures – 5
years.





When
assets are retired or otherwise disposed of, the costs and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
recognized in income for the period.  The cost of maintenance and
repairs is charged to income as incurred; significant renewals and betterments
are capitalized.  Deduction is made for retirements resulting from
renewals or betterments.





Impairment of Long-Lived
Assets





Long-lived
assets, primarily fixed assets, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets might
not be recoverable. The Company does perform a periodic assessment of assets for
impairment in the absence of such information or indicators. Conditions that
would necessitate an impairment assessment include a significant decline in the
observable market value of an asset, a significant change in the extent or
manner in which an asset is used, or a significant adverse change that would
indicate that the carrying amount of an asset or group of assets is not
recoverable. For long-lived assets to be held and used, the Company recognizes
an impairment loss only if its carrying amount is not recoverable through its
undiscounted cash flows and measures the impairment loss based on the difference
between the carrying amount and estimated fair value.





Earnings (Loss) Per Share of
Common Stock





Basic net
income (loss) per common share is computed using the weighted average number of
common shares outstanding.  Diluted earnings per share (EPS) includes
additional dilution from common stock equivalents, such as stock issuable
pursuant to the exercise of stock options and warrants.  Common stock
equivalents were not included in the computation of diluted earnings per share
when the Company reported a loss because to do so would be antidilutive for
periods presented.





The
Company has not issued options or warrants to purchase stock in these periods.
If there were options or warrants outstanding they would not be included in the
computation of diluted EPS when the Company reported a loss because inclusion
would have been antidilutive.





Stock-Based
Compensation





In 2006,
the Company adopted the provisions of ASC 718-10 “Share Based
Payments” for its year ended December 31, 2008. The adoption of this
principle had no effect on the Company’s operations.





The
Company has elected to use the modified–prospective approach method. Under that
transition method, the calculated expense in 2006 is equivalent to compensation
expense for all awards granted prior to, but not yet vested as of January 1,
2006, based on the grant-date fair values. Stock-based compensation expense for
all awards granted after January 1, 2006 is based on the grant-date fair values.
The Company recognizes these compensation costs, net of an estimated forfeiture
rate, on a pro rata basis over the requisite service period of each vesting
tranche of each award. The Company considers voluntary termination behavior as
well as trends of actual option forfeitures when estimating the forfeiture
rate.





50


The
Company measures compensation expense for its non-employee stock-based
compensation under ASC 505-50, “Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services”.  The fair value of the option
issued is used to measure the transaction, as this is more reliable than the
fair value of the services received.  The fair value is measured at
the value of the Company’s common stock on the date that the commitment for
performance by the counterparty has been reached or the counterparty’s
performance is complete. The fair value of the equity instrument is charged
directly to compensation expense and additional paid-in capital.





Segment
Information





The
Company follows the provisions of ASC 280-10, “Disclosures about Segments of an
Enterprise and Related Information”. This standard requires that
companies disclose operating segments based on the manner in which management
disaggregates the Company in making internal operating decisions. Despite the
Company’s subsidiary, Teliphone, Inc. incurring sales of hardware components for
the VoIP service as well as the service itself, the Company treats these items
as one component, therefore has not segregated their business.





Reclassifications





The
Company has reclassified certain amounts in their consolidated statement of
operations for the period ending December 31, 2008 to conform with the December
31, 2009 presentation. These reclassifications had no effect on the net income
for the period ending December 31, 2008.





Uncertainty in Income
Taxes





The
Company follows ASC 740-10, “Accounting for Uncertainty in Income Taxes” (“ASC
740-10”). This interpretation requires recognition and measurement of uncertain
income tax positions using a “more-likely-than-not” approach. ASC 740-10 is
effective for fiscal years beginning after December 15, 2006. Management has
adopted ASC 740-10 for 2009, and they evaluate their tax positions on an annual
basis, and has determined that as of December 31, 2009, no additional accrual
for income taxes other than the federal and state provisions and related
interest and estimated penalty accruals is not considered
necessary.





Noncontrolling
Interests





In
accordance with ASC 810-10-45, Noncontrolling Interests in
Consolidated Financial Statements,the Company classifies
controlling interests as a component of equity within the consolidated balance
sheets. The Company has retroactively applied the provisions in ASC 810-10-45 to
the financial information for the period ending December 31, 2009 and
2008.





Recent Accounting
Pronouncements





In
September 2006, ASC issued 820, Fair Value Measurements. ASC
820 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosure about fair
value measurements. This statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007. Early adoption is
encouraged. The adoption of ASC 820 is not expected to have a material impact on
the financial statements.





In
February 2007, ASC issued 825-10, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of ASC 320-10,
(“ASC 825-10”) which permits entities to choose to measure many financial
instruments and certain other items at fair value at specified election dates. A
business entity is required to report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. This statement is expected to expand the use of fair value
measurement. ASC 825-10 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years.





51


In
December 2007, the Company adopted ASC 805,Business
Combinations (“ASC 805”). ASC 805 retains the fundamental
requirements that the acquisition method of accounting be used for all business
combinations and for an acquirer to be identified for each business combination.
ASC 805 defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as
the date that the acquirer achieves control.  ASC 805 will require an
entity to record separately from the business combination the direct costs,
where previously these costs were included in the total allocated cost of the
acquisition.  ASC 805 will require an entity to recognize the assets
acquired, liabilities assumed, and any non-controlling interest in the acquired
at the acquisition date, at their fair values as of that
date.





ASC 805
will require an entity to recognize as an asset or liability at fair value for
certain contingencies, either contractual or non-contractual, if certain
criteria are met.  Finally, ASC 805 will require an entity to
recognize contingent consideration at the date of acquisition, based on the fair
value at that date.  This will be effective for business combinations
completed on or after the first annual reporting period beginning on or after
December 15, 2008.  Early adoption is not permitted and the ASC is to
be applied prospectively only.  Upon adoption of this ASC, there would
be no impact to the Company’s results of operations and financial condition for
acquisitions previously completed.  The adoption of ASC 805 is not
expected to have a material effect on the Company’s financial position, results
of operations or cash flows.





In March
2008, ASC issued ASC 815, Disclosures about Derivative
Instruments and Hedging Activities”, (“ASC 815”). ASC 815 requires
enhanced disclosures about an entity’s derivative and hedging activities. These
enhanced disclosures will discuss: how and why an entity uses derivative
instruments; how derivative instruments and related hedged items are accounted
for and its related interpretations; and how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. ASC 815 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. The Company does
not believe that ASC 815 will have an impact on their results of operations or
financial position.





In April
2008, ASC 350-30 was issued, “Determination of the Useful Life of Intangible
Assets”. The Company was required to adopt ASC 350-30 on October 1, 2008. The
guidance in ASC 350-30 for determining the useful life of a recognized
intangible asset shall be applied prospectively to intangible assets acquired
after adoption, and the disclosure requirements shall be applied prospectively
to all intangible assets recognized as of, and subsequent to, adoption. The
Company does not believe ASC 350-30 will materially impact their financial
position, results of operations or cash flows.





In May
2008, ASC 470-20 was issued, “Accounting for Convertible Debt Instruments That
May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”
(“ASC 470-20”). ASC 470-20 requires the issuer of certain convertible debt
instruments that may be settled in cash (or other assets) on conversion to
separately account for the liability (debt) and equity (conversion option)
components of the instrument in a manner that reflects the issuer’s
non-convertible debt borrowing rate. ASC 470-20 is effective for fiscal years
beginning after December 15, 2008 on a retroactive basis. The Company does not
believe that the adoption of ASC 470-20 will have a material effect on its
financial position, results of operations or cash flows.





In June
2008, ASC 815-40 was issued, “Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity’s Own Stock” (“ASC 815-40”), which supersedes
the definition in ASC 605-50 for periods beginning after December 15, 2008. The
objective of ASC 815-40 is to provide guidance for determining whether an
equity-linked financial instrument (or embedded feature) is indexed to an
entity’s own stock and it applies to any freestanding financial instrument or
embedded feature that has all the characteristics of a derivative in accordance
with ASC 815-20.





52


ASC
815-40 also applies to any freestanding financial instrument that is potentially
settled in an entity’s own stock. The Company believes that ASC 815-40, will not
have a material impact on their financial position, results of operations and
cash flows.





In June
2008, ASC 470-20-65 was issued, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios
(“ASC 470-20-65”). ASC 470-20-65 is effective for years ending after December
15, 2008. The overall objective of ASC 470-20-65 is to provide for consistency
in application of all the standards issued for convertible securities. The
Company has computed and recorded a beneficial conversion feature in connection
with certain of their prior financing arrangements and does not believe that ASC
470-20-65 will have a material effect on that accounting.





Effective
April 1, 2009, the Company adopted ASC 855, Subsequent Events (“ASC
855”). ASC 855 establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date – that is, whether that date represents the date the financial statements
were issued or were available to be issued. This disclosure should alert all
users of financial statements that an entity has not evaluated subsequent events
after that date in the set of financial statements being presented. Adoption of
ASC 855 did not have a material impact on the Company’s results of operations or
financial condition. The Company has evaluated subsequent events
through December 23, 2009, the date the financial statements were
issued.





Effective
July 1, 2009, the Company adopted FASB ASU No. 2009-05, Fair Value Measurement and
Disclosures (Topic 820) (“ASU 2009-05”). ASU 2009-05 provided
amendments to ASC 820-10, Fair Value Measurements and
Disclosures – Overall, for the fair value measurement of liabilities. ASU
2009-05 provides clarification that in circumstances in which a quoted market
price in an active market for the identical liability is not available, a
reporting entity is required to measure fair value using certain techniques. ASU
2009-05 also clarifies that when estimating the fair value of a liability, a
reporting entity is not required to include a separate input or adjustment to
other inputs relating to the existence of a restriction that prevents the
transfer of a liability. ASU 2009-05 also clarifies that both a quoted price in
an active market for the identical liability at the measurement date and the
quoted price for the identical liability when traded as an asset in an active
market when no adjustments to the quoted price of the asset are required for
Level 1 fair value measurements. Adoption of ASU 2009-05 did not have a material
impact on the Company’s results of operations or financial
condition.





Other
ASU’s that have been issued or proposed by the FASB ASC that do not require
adoption until a future date and are not expected to have a material impact on
the financial statements upon adoption.





Results of Operations -
Three Months Ending December 31, 2009 Compared to Three Months Ending
December 31, 2008





The
Company recorded sales of $1,394,535 of which $1,435 was hardware and $1,393,100
was services, for the period ending December 31, 2009 as compared to $319,690 of
which $5,916 was hardware and $313,774 was services, for the period ending
December 31, 2008.  This revenue was derived from the sale of
$1,331,791 of VoIP hardware and services to Residential and Business Retail
clients and $62,744 VoIP hardware and services to Wholesale
customers.  For the period ending December 31, 2008, revenue was
derived from the sale of $295,063 of VoIP hardware and services to Residential
and Business Retail clients and $24,627 VoIP hardware and services to Wholesale
customers.





The
Company's cost of sales were $849,594 for the period ending December 31, 2009
compared to $180,974 for the period ending December 30, 2008, primarily as a
consequence of an increase in sales and related costs, specifically the cost of
managing higher levels of traffic over our telecommunications network. The net
result was a gross margin for the period ending December 31, 2009 of $544,941
compared to $138,716 for the prior period. This increase in gross margin is
primarily due to the decrease in the Company’s cost of operating its VoIP
network in Canada as well as being derived from the gross profit attained
through the resale of certain telecommunications services due to the acquisition
of the customer base of Dialek Telecom and Orion Communications.





53


The
Company's aggregate operating expenses were $506,734 for the period ending
December 31, 2009 compared to $86,601 for the period ending December 31, 2008.
In particular, there was an increase in Selling and Promotion expenses from
$3,300 to $9,133 as the company increased sales travel as it concentrated it is
seeking to expand its sales outside of  its local market of Montreal,
Canada and into Toronto, Canada. There was an increase in Administrative wages
from $40,440 to $216,798 as the Company opened a new office in May 2009 in
Toronto and hence increased its salaried employee base. There was an increasein
Professional and Consulting Fees from $24,054 to $225,813 as the company
increased its accounting, internal audit and legal expenditures related to the
assignment of the Orion communications customer base.   There was
an increase in General and Administrative Expenses from $16,997 to $52,201 due
to an increase in costs related to opening a new sales and client services
office in Toronto.  There was an increase in Depreciation Expenses
from $1,810 to $2,789 since the company acquired some new computer equipment
during the period and the original equipment received in 2004 during the
formation of the Company’s subsidiary Teliphone Inc. from its former parent
company United American Corporation had completely depreciated.





As a
result, the Company had a net income of $143,807 for the period ending December
31, 2009 (when considering a minority interest of $6,866) compared to a net
income of $14,242 for the prior period (when considering a minority interest of
$6,510). The Company has achieved a net income from operations of $38,207 and an
additional increase to net income of $114,805 due to a negotiated settlement
with a large supplier resulting in a forgiveness of debt. This forgiveness of
debt is a one-time, non-cash gain that is not anticipated to be repeated in the
future.





Plan of Operations and Need
for Additional Financing





The
Company's plan of operations for most of 2010 and 2011 is to build a subscriber
base of retail customers who purchase telecommunications services on a monthly
basis, as well as wholesale technology and telecommunications solutions to Tier
1 & Tier 2 telecommunications companies.





Liquidity
and Capital Resources





For
the three month period ending December 31, 2009:





On The
Company's balance sheet as of December 31, 2009, the Company had assets
consisting of accounts receivable in the amount of $566,112, inventory of
$11,204, prepaid expenses of $191,117 and no cash. The Company has expended its
cash in furtherance of its business plan.  Consequently, the Company's
balance sheet as of December 31, 2009 reflects a deficit accumulated of
($1,506,902) and total stockholder’s equity of $256,757.





The
Company used $244,237 of cash from operating activities in 2009 compared to
being provided $4,268 in 2008. This change was attributable in large part to the
fact that of the total net income of $143,807, $114,805 was attributed to the
forgiveness of debt and hence non-cash related.  Likewise, $101,655 of
payments were made towards pre-payments to suppliers, including amounts paid to
9191-4200 Quebec Inc. towards future commissions owed against its assignment
deal for the clients of Orion Communications.





The
Company used cash in investing activities of $3,810 compared to $0 in 2008. This
change was attributable to the Company's acquisition of telecommunications
equipment,





54


The
Company had net cash provided by financing activities of $257,543 in 2009
compared to a use of $15,153 in 2008.  The majority of this provision
comes from the company’s expansion of its current debt through disbursements
made on its operating credit line.





In
pursuing its business strategy, the Company will require additional cash for
growing its operating and investing activities, since the Company’s current
level of gross margin is capable of covering its operating expenses. Company
will continue to borrow money through its operating line of credit at its
subsidiary’s bank when such cash for growth purposes is required.  In
order to increase this operating line, the Company relies on collateral
guarantees from shareholders and related parties.  The Company
continues to search for ways to reduce costs and increase revenues of its VoIP
and telecommunications resell services.





On
November 2nd, 2007, the Company cleared a registration of shares on form SB-2
for the sale of up to 20,000,000 of its shares of common stock at $0.25 per
share. The Company anticipated proceeds of this offering to be approximately
$450,568 should the minimum be raised to as high as $4,950,568 should the
maximum be raised, after the payment of closing costs of approximately
$49,432.  However, the company withdrew its offering on May 1, 2008
due to its inability to receive approval from the Over-The-Counter Bulletin
Board exchange regulator (FINRA, the Financial Industry Regulatory Authority)
for trading of its common stock over the counter with an open, pending offer to
sell registered securities.  The Company intends to re-submit its
preliminary prospectus for approval on form S-1 in the future should its capital
raising strategies require it.





The
Company anticipates raising funds in order to increase its base of retail
customers through the acquisition of telecommunications
resellers.  Likewise, the Company continues to pursue and carry out
its business plan, which includes marketing programs aimed at the promotion of
the Company's services, hiring additional staff to distribute and find
additional distribution channels, enhance the current services the Company is
providing and maintain its compliance with Sarbanes - Oxley Section
404."





Other
than current requirements from our suppliers, and the maintenance of our current
level of operating expenses, the company does not have any commitments for
capital expenditures or other known or reasonably likely cash
requirements.





The
company has classified its related party loans on its Balance sheet as of
December 31, 2009 of $42,500 as a current liability. These loans were issued as
advances to the company to be repaid when the company can raise adequate funds
through the sale of equity.  The Company has classified an additional
$70,828 of related party loans as a long term liability due to the requirement
of repayment of interest only over the next 5 years.





The
accompanying financial statements have been prepared assuming the Company will
continue as a going concern. The Company has suffered recurring losses from
operations from its inception in 2004 to its fiscal year ending September 30,
2008.  However, the Company has emerged from the recurring losses and has
posted a net income for the year ended September 30, 2009 and the interim three
month period ending December 31, 2009.  The Company continues to have a
working capital deficit of $473,142. The financial statements do not include any
adjustments that might result from the outcome of any uncertainty that may arise
due to this working capital deficit. The Company has been searching for new
distribution channels to wholesale their services to provide additional revenues
to support their operations.  There is no guarantee that the Company will
be able to raise additional capital or generate the increase in revenues to
sustain its operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern for a reasonable
period.





On August
1, 2006, the Company converted $421,080 of the $721,080 of its loans with United
American Corporation, a related party through common ownership, and majority
shareholder of the Company prior to United American Corporation's stock dividend
that took place effective October 30, 2006 into 1,699,323 shares of the
Company's common stock. In December 2006, the Company issued a resolution to
issue the remaining 171 fractional shares related to United American
Corporation's spin-off of the corporation and pro-rata distribution of United
American Corporation's holding of the Company's common stock to its
shareholders. Those shares were issued prior to December 31, 2006 and
distributed to shareholders. The $300,000 remaining on the loan has
become interest bearing at 12% per annum on August 1, 2006, payable monthly
with a maturity date of August 1, 2009.  However on December 31, 2008, the
Company converted the entire debt through the issuance of capital stock at $0.25
per share.





55


In
addition, the Company acquired certain assets and liabilities of Dialek Telecom
on February 15, 2008 for a total price of CDN$383,464.  After 10
months of operations, the Company has evaluated, taking into account the
interest payments required to finance the acquisition, the gross margin received
and increase in operating expenses required to support the new customer base,
that the assets and liabilities acquired were re-evaluated at
CDN$401,812.  The positive gross margin from its operations related to
the acquisition of certain assets and liabilities of Dialek have therefore
contributed to the Company’s increase in cash flow contributed from
operations.  On December 31, 2008, the Company converted the entire amount
due on the purchase price through the issuance of capital stock at $0.25 per
share.





The
Company also holds the possibility of a contingent liability and SEC violation
surrounding the distribution of a portion of its shares performed by its former
parent company United American Corporation (“UAC”) to its
shareholders.  The board of directors of UAC determined to spin off
its stock holdings in us. To accomplish the spin off, UAC declared a stock
dividend effective in at the end of business on October 30, 2006 for its equity
interests in our company, consisting of 1,699,323 shares of our common stock, to
UAC’s stockholders on a pro rata basis (with an additional 171 fractional shares
distributed in December). The Company has filed a registration statement on Form
SB-2 with the intent of complying with safe harbor provisions of Staff Legal
Bulletin No. 4. Although the Company and UAC intended to follow steps necessary
for reliance on the safe harbor, we failed to follow the appropriate steps. This
activity represented a violation of federal securities laws. There is a
possibility that the recipients could attempt to rescind their receipt of
securities and the Securities and Exchange Commission could find that UAC made a
distribution of securities in violation of Section 5. While the rescission of
the receipt of securities would not be likely to have an impact on our financial
condition as the shares would be returned to UAC, the action could have an
adverse impact on the liquidity and prospective market for our shares of common
stock.





In
addition, the Company acquired certain assets and liabilities of Orion
Communications Inc. on May 7, 2009, and assumed a total of $418,762 of
liabilities and $376,7891 of assets. The Company has realizes approximately
$35,000 per month of additional Gross Margin, and hence this has contributed to
an increase in cash flow from operations.





ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





We do not
hold any derivative instruments and do not engage in any hedging activities.
Because most of our purchases and sales are made in Canadian Dollars, any
exchange rate change affecting the value of the Canadian Dollar relative to the
U.S. dollar could have an effect on our financial results as reported in U.S.
dollars. If the Canadian Dollar were to depreciate against the U.S. dollar,
amounts reported in U.S. dollars would be correspondingly reduced. If the
Canadian Dollar were to appreciate against the U.S. dollar, amounts reported in
U.S. dollars would be correspondingly increased.





ITEM 4.
CONTROL AND PROCEDURES.





As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness
of our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period
covered by this report. Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls and
procedures as of the date of this filing were effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms.  Management, however, has
identified certain limitations in specific critical controls in their
accounting system which are increasingly resulting in lengthier time lapses
required in order for the company to accurately disclose its financial
statements.  In particular, these lengthier time lapses occur for the
following reasons:





56


·
            Lack
      of dedicated resources to track and keep records of supplier invoices on a
      daily basis·
            Lack
      of dedicated resources to track and keep records of daily disbursements
      against these invoices·
            Surplus
      accounting entries required to track intercompany expenses, post spin-off
      of the Company from its former parent company·
            Lack
      of a dedicated resource person to oversee daily record
      keeping





Management
will look to dedicate resources to these tasks in the coming months in order to
accelerate the reporting of our financial statements.  This resource
dedication will result in the Company incurring additional costs which will
affect the Company’s profitability going forward.  The Company's
management anticipates that these costs will be up to $50,000 per year in order
to maintain compliance with timely financial reporting
requirements.





Changes
in Internal Controls





There
have been no changes in our internal controls over financial reporting or in
other factors that could materially affect, or are reasonably likely to affect,
our internal controls over financial reporting during the three months ended
December 31, 2008. There have not been any significant changes in the Company’s
critical accounting policies identified since the Company filed its Form 10-K as
of September 30, 2008.








PART
II - OTHER INFORMATION





ITEM 1
- LEGAL PROCEEDINGS





The
Company received notice on February 11, 2009 from 9164-4898 Quebec Inc d/b/a BR
Communications Inc. (“BR”). The notice claims that the Company owes BR unpaid
commissions totaling CDN$ 158,275.25 ($129,944 US$) based on the Company’s
increase in sales due to its Dialek acquisition.





In the
executed agreement with BR it is specifically stated that sales from Dialek are
excluded from the commission calculation due to BR  The Company does
not believe that the dispute brought on by BR Communications Inc. has any merit,
and has not accrued a liability for the amounts BR Communications Inc., claims
are due them.





The
Company has issued counterclaims against BR Communications Inc. for lost sales
and other defaults caused by BR’s inability to meet its obligations as part of
its agreement with the Company.  The Company has filed a counter claim
of CDN$410,255 ($390,358 US$)





Other
than the dispute mentioned above, we are currently not involved in any
litigation that we believe could have a materially adverse effect on our
financial condition or results of operations. There is no action, suit,
proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the executive officers of our company or any of our subsidiaries,
threatened against or affecting our company, our common stock, any of our
subsidiaries or of our company’s or our company’s subsidiaries’ officers or
directors in their capacities as such, in which an adverse decision could have a
material adverse effect.





ITEM 1A
- RISK FACTORS





We have
updated the risk factors previously disclosed in Part I, Item 1A of our
Annual Report on Form 10–K for the year ended September 30, 2009, which
was  filed with the Securities and Exchange Commission on December 23, 2009
(the “Fiscal 2009 10–K”). We believe there are no changes that constitute
material changes from the risk factors previously disclosed in the Fiscal 2009
10–K.





57


ITEM
2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





There
were no changes in securities and small business issuer purchase of equity
securities during the period ended December 31, 2009.  The Company
recorded a liability for stock to be issued of $953,159 due to conversion of
debt at December 31, 2008.





ITEM 3 - DEFAULTS
UPON SENIOR SECURITES





There
have been no material defaults.





ITEM 4
- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





No
matters have been submitted to a vote of security holders during the period
covered by this report.





ITEM 5
- OTHER INFORMATION





None.





ITEM 6
- EXHIBITS





31.1
            
            Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act.31.2
            
            Certification
      of Principal Financial and Accounting Officer Pursuant to Section 302 of
      the Sarbanes-Oxley Act.32.1
            
            Certification
      of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act.32.2
            
            Certification
      of Principal Financial and Accounting Officer Pursuant to Section 906 of
      the Sarbanes-Oxley Act.





58


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(b) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Montreal, Quebec,
Canada.





Dated:
February 15, 2010





TELIPHONE
      CORP./s/
      George MetrakosGeorge
      Metrakos
              Chief
      Executive Officer and President





TELIPHONE
      CORP./s/
      George MetrakosGeorge
      Metrakos
              Principal
      Financial and Accounting Officer










59