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 MARCH 31, 2010





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





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, May 21, 2010, there were 37,556,657 shares 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:
F-1Condensed Consolidated Balance Sheets as of March 31, 2010 (unaudited) and September 30, 2009
F-1Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Six and Three Months Ended  March 31, 2010 and 2009 (unaudited)
F-2Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2010

and 2009 (unaudited)
F-3Notes to Condensed Consolidated Financial Statements (unaudited)
F-4Item 2.
Management Discussion and Analysis of Financial Condition and Results of Operations
36Item 3
Quantitative and Qualitative Disclosures about Market Risk
58Item 4T.
Control and Procedures
58PART II – OTHER INFORMATION
59Item 1.
Legal Proceedings
59Item 1A
Risk Factors
60Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
61Item 3.
Defaults its Upon Senior Securities
61Item 4.
(Removed and Reserved)
61Item 5
Other Information
61Item 6.
Exhibits
61Signatures

62





3





TELIPHONE CORP.CONDENSED CONSOLIDATED BALANCE SHEETSMARCH 31, 2010 (UNAUDITED) AND SEPTEMBER 30, 2009ASSETSUS $MARCH 31,


SEPTEMBER 30,2010


2009(UNAUDITED)Current Assets:Cash and cash equivalents

$
-


$
-Accounts receivable, net


586,697



514,988Inventory


12,265



11,819Prepaid expenses and other current assets


194,293



88,240Total Current Assets


793,255



615,047Fixed assets, net of depreciation


20,629



15,250Goodwill


551,841



851,489TOTAL ASSETS

$
1,365,725


$
1,481,786LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)LIABILITIESCurrent Liabilities:Bank overdraft

$
236,146


$
93,714Deferred revenue


3,994



2,690Promissory note payable


9,844



26,152Current portion of related party convertible debentures


59,067



56,038Current portion of related party loans


20,000



42,500Accounts payable and accrued expenses


1,015,910



998,494Total Current Liabilities


1,344,961



1,219,588Long Term Liabilities:Related party loans, net of current portion


70,828



70,828TOTAL LIABILITIES


1,415,789



1,290,416STOCKHOLDERS' EQUITY (DEFICIT)Common stock, $.001 Par Value; 125,000,000 shares authorizedand 37,556,657 and 37,376,657 shares issued and outstanding, respectively


37,557



37,377Additional paid-in capital


1,870,191



1,847,871Accumulated deficit


(1,904,299
)


(1,650,709
)Accumulated other comprehensive income (loss)


(128,787
)


(119,562
)Total Teliphone Corp. Stockholders' Equity (Deficit)


(125,338
)


114,977Noncontrolling interest


75,274



76,393Total Stockholders' Equity (Deficit)


(50,064
)


191,370TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

$
1,365,725


$
1,481,786




F-1
 
  TELIPHONE CORP.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSFOR THE SIX AND THREE MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)US$


US$SIX MONTHS ENDED


THREE MONTHS ENDEDMARCH 31,


MARCH 31,2010


2009


2010


2009OPERATING REVENUESRevenues

$
2,506,643


$
644,395


$
1,112,108


$
323,961COST OF REVENUESInventory, beginning of period


11,819



8,964



11,204



6,593Purchases and cost of VoIP services


1,560,778



348,724



711,799



170,122Inventory, end of period


(12,265
)


(8,788
)


(12,265
)


(8,788
)Total Cost of Revenues


1,560,332



348,900



710,738



167,927GROSS PROFIT


946,311



295,495



401,370



156,034OPERATING EXPENSESSelling and promotion


13,847



3,428



4,714



128Administrative wages


468,832



90,183



252,034



49,743Professional and consulting fees


386,223



67,993



160,410



43,940Other general and administrative expenses


96,741



37,387



44,540



20,388Impairment


337,275



-



337,275



-Depreciation


6,168



3,572



3,379



1,762Total Operating Expenses


1,309,086



202,563



802,352



115,961NET INCOME (LOSS) BEFORE OTHERINCOME (EXPENSE)


(362,775
)


92,932



(400,982
)


40,073OTHER INCOME (EXPENSE)Forgiveness of debt


114,805



-



-



-Interest expense


(6,739
)


(37,024
)


(4,400
)


(4,917
)Total Other Income (Expense)


108,066



(37,024
)


(4,400
)


(4,917
)NET INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES


(254,709
)


55,908



(405,382
)


35,156Provision for income taxes


-



-



-



-NET INCOME (LOSS)


(254,709
)


55,908



(405,382
)


35,156Less: Net earnings attributable to noncontrolling interest


1,119



(14,164
)


7,985



(7,654
)NET INCOME (LOSS) APPLICABLE TO COMMON SHARES

$
(253,590
)

$
41,744


$
(397,397
)

$
27,502NET INCOME (LOSS) PER BASIC AND DILUTED SHARES

$
(0.01
)

$
0.00


$
(0.01
)

$
0.00WEIGHTED AVERAGE NUMBER OF COMMONSHARES OUTSTANDING


37,377,646



35,460,336



37,378,657



37,366,657COMPREHENSIVE INCOME (LOSS)Net income (loss)

$
(253,590
)

$
41,744


$
(397,397
)

$
27,502Other comprehensive income (loss)Currency translation adjustments


(9,195
)


53,597



(7,198
)


8,291Comprehensive income (loss)

$
(262,785
)

$
95,341


$
(404,595
)

$
35,793
  F-2
 
  TELIPHONE CORP.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)US$SIX MONTHS ENDEDMARCH 31,2010


2009CASH FLOWS FROM OPERATING ACTIVITIESNet income (loss)

$
(253,590
)

$
41,744Adjustments to reconcile net income (loss) to net cashprovided by (used in) operating activities:Depreciation


6,168



3,572Impairment


337,275



-Noncontrolling interest


(1,119
)


14,164Forgiveness of debt


(114,805
)


-Changes in assets and liabilities(Increase) in accounts receivable


(43,920
)


(105,278
)(Increase) decrease in inventory


192



(1,226
)(Increase) decrease in prepaid expenses and other current assets


(1,969
)


13,606Increase in deferred revenues


1,159



197Increase (decrease) in accounts payable andand accrued expenses


86,999



(58,009
)Total adjustments


269,980



(132,974
)Net cash provided by (used in) operating activities


16,390



(91,230
)CASH FLOWS FROM INVESTING ACTIVITIESAcquisitions of capital assets


(10,918
)


-Net cash (used in) investing activities


(10,918
)


-CASH FLOWS FROM FINANCING ACTIVITESIncrease in bank overdraft


137,198



98,838Repayment of promissory note


(17,719
)


-Proceeds from debenture payable


-



47,570Proceeds from loan payable - related parties, net


(100,563
)


(53,720
)Net cash provided by (used in) financing activities


18,916



92,688Effect of foreign currencies


(24,388
)


(1,458
)NET INCREASE (DECREASE) INCASH AND CASH EQUIVALENTS


-



-CASH AND CASH EQUIVALENTS -BEGINNING OF YEAR


-



-CASH AND CASH EQUIVALENTS - END OF PERIOD

$
-


$
-CASH PAID DURING THE YEAR FOR:Interest expense

$
6,739


$
22,745SUPPLEMENTAL NONCASH INFORMATION:Common stock issued for liability for stock to be issued

$
-


$
953,158Common stock issued for conversion of notes payable

$
22,500


$
-
  F-3
 TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (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.
  F-4
 
 TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (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 ($551,706) as of March 31, 2010, and has an accumulated deficit of ($1,904,299) through March 31, 2010. The Company has improved operations and streamlined their business, and expanded their services throughout Canada which 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 10.
 
 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.
  F-5
 
 TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (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 began to service the customers of Orion Communications Inc., an Ontario, Canada Company.  The transaction is further detailed in Note 11.
 
 While the Company had experienced a net profit for the year ended September 30, 2009, and three months ended December 31, 2009. The Company took a write-down of $337,275 as part of the events of February 2010 related to the cancelation of its agreement with 9191-4200 Quebec Inc. (see Note 11), and as a result had a net loss for this period. 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.
  F-6
 
 TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
 
 NOTE 1-
ORGANIZATION AND BASIS OF PRESENTATION(CONTINUED)
 
 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”).
 
 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 CDN$323,000 in line of credits from the bank. Therefore, the Company can exceed their cash in bank by this amount. The $323,000 CD$ in line of credits is comprised of personal guarantees to the bank from two shareholders.
  F-7
  TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
 
 NOTE 2-
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
 
 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 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.
 
 F-8
 
 TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (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.
  F-9
 
 TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (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.
  F-10
 
 TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (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.
  F-11
  TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (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 and the servicing of the clients of 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.
  F-12
 
 TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (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 $73,830 at March 31, 2010.
 
 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 March 31, 2010.
  F-13
 
 TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (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 six months ended March 31, 2010 and 2009 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.
  F-14
 TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (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:
 
 March 31,


March 31,2010


2009Net income (loss)

$
(253,590
)

$
41,744Weighted-average common sharesOutstanding (Basic)


37,377,646



35,460,336Weighted-average common stockEquivalentsStock options


-



-Warrants


-



-Weighted-average common sharesOutstanding (Diluted)


37,377,646



35,460,336
 
 F-15
 
 TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (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.
  F-16
  TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (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 six months ended March 31, 2009 to conform with the March 31, 2010 presentation. These reclassifications had no effect on the net income for the six months ended March 31, 2009.
 
 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 March 31, 2010, 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 six months ended March 31, 2010. For the six months ended March 31, 2010, net income attributable to noncontrolling interests of $1,119, 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.
  F-17
  TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (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.
  F-18
 
 TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (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.
 
 F-19
 
 TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (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 May 19, 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.
 
 F-20
  TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
 
 NOTE 3-
FIXED ASSETS
 
 Fixed assets as of March 31, 2010 (unaudited) and September 30, 2009 were as follows:
  Estimated Useful


(Unaudited)Lives (Years)


March 31,


September 30,2010


2009Furniture and fixtures


5


$
2,244


$
2,182Computer equipment


3



222,365,



205,825Vehicles


5



-



23,548224,609



231,555Less: accumulated depreciation






203,980



216,305Property and equipment, net





$
20,629


$
15,250
  There was $6,168 and $3,572 charged to operations for depreciation expense for the six months ended March 31, 2010 and 2009, 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.
  F-21
 
 TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (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 March 31, 2010, the Company has $42,500 including accrued interest outstanding with shareholders. Interest expense for the six months ended March 31, 2010 was $256. 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 March 31, 2010.  On March 31, 2010, an agreement of repayment and conversion was made with all shareholders as follows:
 
 $20,000 loan: Payment in cash for accrued interest to March 31, 2010 of $768, with no further interest payable from April 1, 2010 during the repayment period ending January 1, 2011.
 
 $12,500 loan: Conversion of the entire amount to Common Stock of the Company at a rate of $0.125 per share (100,000 shares) on March 31, 2010.  No interest has been paid or accrued on this loan.
 
 $10,000 loan: Payment in cash for accrued interest to March 31, 2010 of $768, with the principal being converted to Common stock of the Company at a rate of $0.125 per share (80,000 shares) on March 31, 2010.
 
 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.
 
 F-22
  TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
 
 NOTE 4-
RELATED PARTY LOANS (CONTINUED)
 
 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 was not interest bearing and was fully paid by September 30, 2009.
 
 The Company’s subsidiary, Teliphone Inc., entered into an Acquisition Line of Credit agreement with a related party to a shareholder of the Company.  The line of credit permits the company to draw up to $1,000,000 for the purposes of business acquisitions in the future.  The loan rate is 5%.  As of March 31, 2010, the Company has not drawn down on any amount of this line of credit.  As a result of the agreement, Teliphone Inc. entered into a General Security Agreement which provides the secured party with first ranked security on all of the assets of Teliphone Inc. for any obligations owed to the secured party in the event of default.
 
 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.
 
 F-23
  TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
 
 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 March 31, 2010, the amount outstanding was CDN$10,000 ($9,844).  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.  On February 6, 2010, the Debenture was renewed for an additional 12 months at 12% to mature on February 6, 2011.
 
 The Debentures can either be paid to the holders on February 6, 2011 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.
 
 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.  On February 17, 2010, the Debenture was renewed for an additional 12 months at 12% to mature on February 17, 2011.
 
 The Debentures can either be paid to the holders on February 17, 2011 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.
  F-24
  TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
 
 NOTE 6-
CONVERTIBLE DEBENTURES(CONTINUED)
 
 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 / LITIGATION
 
 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.
 
 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.
 
 F-25
  TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
 
 NOTE 7-
COMMITMENTS / LITIGATION(CONTINUED)
 
 Subsequently on April 30, 2010, BR Communications Inc. amended its statement of claim for a total of Cdn$286,000 for commissions owed to the end of the contract period, February 28, 2011, claiming a disagreement with the Company for the termination of the agreement.
 
 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 six months ended March 31, 2010 was $20,688.
 
 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 six months ended March 31, 2010 was $23,500.
 
 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 $22,000 for the year ending September 30, 2010 and $18,000 for the year ending September 30, 2011.
 
 On April 29, 2009, 9191-4200 Quebec Inc. (“9191”) entered into a purchase agreement with 3 individuals residing in the Province of Ontario, Canada for all of the issued and outstanding shares of Orion Communications Inc. (“Orion”).  On April 30, 2009, Orion, under management of 9191, had executed a services agreement with the Company’s subsidiary, Teliphone Inc. to provide telecommunications services to the customers of Orion.  On January 18, 2010, 9191 filed a Statement of Claim in Superior Court of Justice in the Province of Ontario, Canada for rescission due to overpayment and damages totaling CDN$1,000,000 claiming misrepresentation of financial statements made by the former owners.
  F-26
 
 TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
 
 NOTE 7-
COMMITMENTS / LITIGATION(CONTINUED)
 
 As a result of the claim for rescission, the Company’s subsidiary, Teliphone Inc.’s employment agreement with a former owner of Orion was likewise rescinded.
 
 On February 18, 2010, the Former owners of Orion filed their defense and counterclaim against 9191, naming the Company, its subsidiary Teliphone Inc., George Metrakos, the Company’s President and CEO and other individuals as third party claimants for a total of CDN$4,000,000.  The Former Owners of Orion claim that the Company, its subsidiary and President are third party claimants due to its agreements with 9191 to provide services to the clients of Orion.
 
 The Former owners of Orion are also pursuing the Company’s subsidiary Teliphone Inc. for $150,000 for the early termination of the employment agreement.
 
 The Company does not feel that, as a service provider, the agreements and disagreements between the new and former owners of Orion have anything to do with the Company and hence feel that the claim brought upon it has any merit.  As a result, it has not accrued a liability for the amounts of the claims made by the former owners of Orion, however will continue to evaluate this as more information becomes readily available. The Company has accrued for legal fees in association with this claim.
 
 On March 10, 2010, Bank of Montreal (“BMO”), a Canadian financial institution and creditor of Orion has filed a claim against the Company’s subsidiary Teliphone Inc. requesting payment of Orion’s outstanding debt of CDN$778,607.  BMO stands as a secured creditor of Orion based on its issuance of a credit line to Orion in 2007.  BMO claims that as a secured creditor holding a General Security Agreement, it has rights to the receivables of Orion and claims that these receivables are being collected by Teliphone Inc.  Management has attempted to explain to BMO that it is a service provider and hence has a right to collect fees for services provided and as such has began to prepare a defense demonstrating that Teliphone Inc. is providing a paid service to Orion’s clients.
 
 The Company has not accrued a liability for any amounts of the claims made by BMO on its balance sheet, however has accrued for legal fees in connection with this claim..
  NOTE 8-
STOCKHOLDERS’ DEFICIT
 
 Common Stock
 
 As of March 31, 2010, the Company has 125,000,000 shares of common stock authorized with a par value of $.001.
 
 The Company has 37,556,657 and 37,376,657 shares issued and outstanding as of March 31, 2010 and September 30, 2009, respectively.
 
 F-27
 
 TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
 
 NOTE 8-
STOCKHOLDERS’ DEFICIT (CONTINUED)
 
 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).
 
 The Company issued 180,000 shares of common stock to convert related party notes in the amount of $22,500 ($0.125 per share) on March 31, 2010 (see Note 4).
  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.
  F-28
  TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
 
 
 NOTE 9-
PROVISION FOR INCOME TAXES
 
 At March 31, 2010, deferred tax assets consist of the following:
  Net operating losses

$
715,446Valuation allowance


(715,446
)$
-
  At March 31, 2010, the Company had a net operating loss carryforward in the approximate amount of $2,104,252, available to offset future taxable income through 2030.  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 March 31, 2010 and 2009 is summarized as follows:
  2010


2009Federal statutory rate


(34.0
)%


(34.0
)%State income taxes, net of federal benefits


3.3



3.3Valuation allowance


30.7



30.70
%


0
%
 F-29
 
 TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (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 (Business Acquisition)

$
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.
  F-30
 
 TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
 
 NOTE 11-
SERVICING CONTRACT FOR THE CUSTOMERS OF ORION COMMUNICATIONS INC.
 
 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 had agreed to share 50% each of the gross benefits received from the customer base. The consideration would have taken effect upon the customer base achieving $767,840 in profits ($767,840 @ 50% = $393,920, which was the goodwill on the transaction). Upon achievement of this threshold, the Company would have paid 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 March 31, 2010, the Company had repaid 9191 the entire amount.  The amount was considered as a cash advance and was 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 March 31, 2010.
 
 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.
 
 F-31
 
 TELIPHONE CORP.
 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE SIX MONTHS ENDED MARCH 31, 2010 AND 2009 (UNAUDITED)
 
 NOTE 11-
SERVICING CONTRACT FOR THE CUSTOMERS OF ORION COMMUNICATIONS INC.(CONTINUED)
 
 As a result, the following demonstrates the details of the assets and liabilities acquired:
  AssetsGoodwill (Difference between Assets and Liabilities acquired)

$
327,901Accounts Receivable

$
46,686TOTAL ASSETS:

$
376,781LiabilitiesCurrent Supplier Payables

$
420,191TOTAL LIABILITIES:Net cash paid through September 30, 2009

$
45,604
 On February 23, 2010, the Company’s agreement of assignment with 9191 was cancelled due to a default of the assignor.  As a result of the default, immediate payment for all amounts owed by 9191 was requested, however 9191 did not comply.  The delivery of services to Orion clients was suspended, and the clients were permitted to request delivery of service directly from the Company.  As a result of the cancellation of the contract, the Company took a write-down (fully impaired) of $337,275 previously listed as Goodwill.
 F-32


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.





36





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.





37





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. This capacity was later transferred under the Teliphone Inc.-Rogers agreement in 2008. 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. applies $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.





38





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 April 30, 2009, the Company entered into a services agreement with the owners of Orion Communications Inc.  As a result, the Company acquired the rights to service 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.  Subsequently on February 23, 2010, the Company’s agreement of assignment with 9191 was cancelled due to a default of the assignor.  As a result of the cancelation of the agreement, the Company took a write-down (full impairment) of $337,275 previously listed as Goodwill on its Balance Sheet.





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.





39





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 since the interim period ended December 31, 2006, and a positive net income for the fiscal year ended September 30, 2009





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.





40





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. Since we entered into a dispute with BR Communications, Inc. (See "LEGAL PROCEEDINGS") in February 2009, this distribution channel provides limited revenue generation, as we have elected to work with only two resellers from the original BR Communications Inc. channel and likewise focus our efforts predominantly on the business market, of which is outside of this 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.





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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.





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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.





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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.




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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.




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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.





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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.





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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.





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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.





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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.





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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 $73,830 at March 31, 2010.





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.





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Advertising Costs





The Company expenses the costs associated with advertising as incurred.  Advertising expenses for the interim periods ended March 31, 2010 and 2009 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.





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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.





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 March 31, 2010, 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 periods ended March 31, 2010 and 2009.





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.





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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.





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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.





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 and Six Months Ended March 31, 2010 Compared to Three and Six Months Ended March 31, 2009





For the six month period ended March 31, 2010, the Company recorded sales of $2,506,643 of which $3,216 was hardware and $2,503,427 was services compared with $644,395, of which $50,602 was for hardware and $593,793 was for services for the same period in 2009.   This revenue was derived from the sale of $2,364,190 of VoIP hardware and services to Residential and Business Retail clients and $142,453 VoIP hardware and services to Wholesale customers.  For the same period in 2009, revenue was derived from the sale of $609,849 of VoIP hardware and services to Residential and Business Retail clients and $34,546 VoIP hardware and services to Wholesale customers.





The Company's cost of sales were $1,560,332 for the six month period ended March 31, 2010 compared to $348,900 for the same period ended March 31 2009, 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 ended March 31, 2010 of $946,311 compared to $295,495 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 the servicing of the clients of Orion Communications.





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For the three month period ended March 31, 2010, the Company recorded sales of $1,112,108 of which $1,781 was hardware and $1,110,327 was services compared with $323,961, of which $33,896 was for hardware and $290,065 was for services for the same period in 2009.   This revenue was derived from the sale of $1,032,399 of VoIP hardware and services to Residential and Business Retail clients and $79,709 VoIP hardware and services to Wholesale customers.  For the same period in 2009, revenue was derived from the sale of $315,422 of VoIP hardware and services to Residential and Business Retail clients and $8,539 VoIP hardware and services to Wholesale customers.





The Company's cost of sales were $710,738 for the three month period ended March 31, 2010 compared to $167,927 for the same period ended March 31 2009, 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 ended March 31, 2010 of $401,370 compared to $156,034 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 the servicing of the clients of Orion Communications.





The Company's aggregate operating expenses were $1,309,086 for the period ended March 31, 2010 compared to $202,563 for the period ended March 31, 2009. The Company took a one-time, non-cash impairment of $337,275 on February 23, 2010 related to its cancelled agreement for the assignment of clients with 9191-4200 Quebec Inc., and a one-time charge for legal fees that have been accrued as a result of recent litigation that is in the discovery stage at this point of $75,000.  Likewise,  there was an increase in Selling and Promotion expenses from $3,428 to $13,847 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 $90,183 to $468,832 as the Company opened a new office in May 2009 in Toronto and hence increased its salaried employee base. There was an increase in Professional and Consulting Fees from $67,993 to $311,223 as the company increased its accounting, internal audit and legal expenditures related to the servicing of the Orion communications customer base, and likewise increased legal expenses due to the required defense pending new statement of claims issued against the company and its officers.   There was an increase in General and Administrative Expenses from $37,387 to $96,741 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 $3,572 to $6,168 since the company acquired 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 (loss) of ($253,590) for the six month period ended March 31, 2010 (when considering a minority interest of $1,119) compared to a net income (loss) of $41,744 for the prior period (when considering a minority interest of ($14,164)). The Company has achieved a net income from operations of $158,685, however when considering the non-cash impairment of $337,275, and the one-time charge for legal fees of $75,000 the company is reporting a loss per share of ($0.005).





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 period ended March 31, 2010:





On The Company's balance sheet as of March 31, 2010, the Company had assets consisting of accounts receivable in the amount of $586,697, inventory of $12,265, prepaid expenses of $194,293 and no cash. The Company has expended its cash in furtherance of its business plan.  Consequently, the Company's balance sheet as of March 31, 2010 reflects a deficit accumulated of ($1,904,299) and total stockholder’s deficit of $50,064.





The Company was provided $16,390 of cash from operating activities in 2010 compared to using $91,230 in 2009. This change was attributable in large part to the fact that of the total net (loss) of ($253,590), $337,275 was attributed to impairment.





The Company used cash in investing activities of $10,918 compared to $0 in 2009. This change was attributable to the Company's acquisition of telecommunications equipment.





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The Company had net cash provided by financing activities of $18,916 in 2010 compared to being provided $92,688 in 2009.  The majority of this provision comes from the company’s expansion of its current debt through disbursements made on its operating credit line and repayment of its promissory note with a supplier





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 March 31, 2010 of $20,000 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, the interim three month period ended December 31, 2009 and positive income from operations (not counting a non-cash impairment) for the six month period ended March 31, 2010.  The Company continues to have a working capital deficit of $551,706. 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.





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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 $46,686 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 4T. CONTROL AND PROCEDURES.





Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures





Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934.  Based on this evaluation as of March 31, 2010, the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level to ensure that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, including this Quarterly Report, were recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and was accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.  Our conclusion is based primarily on our inadvertent failure to file management's assessment of internal controls over financial reporting in connection with the filing of our Annual Report on Form 10-K for the period ending September 30, 2009, which failure stems, we believe, primarily from the fact that we have limited personnel on our accounting and financial staff.  We are in the process of considering changes in our disclosure controls and procedures in order to address the aforementioned failure to timely file the assessment.





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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 six months ended March 31, 2010. 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, 2009.




PART II - OTHER INFORMATION


ITEM 1 - LEGAL PROCEEDINGS




BR Communications Inc.
  The Company received notice on February 11, 2009 from 9164-4898 Quebec Inc d/b/a BR Communications Inc. (“BR”). The notice, filed at the Province of Quebec Superior Court, District of Montreal, claims that the Company owes BR unpaid commissions totalling CDN$ 158,275.25 ($129,944 US$) based on the Company’s increase in sales due to its Dialek acquisition.
  Subsequently on April 30, 2010, BR Communications Inc. amended its statement of claim for a total of Cdn$286,000 for commissions owed to the end of the contract period, February 28, 2011, claiming a disagreement with the Company for the termination of the agreement.
  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 ($390,358 US$)
  Former Owners of Orion Communications Inc.
  On April 29, 2009, 9191-4200 Quebec Inc. (“9191”) entered into a purchase agreement (the “Purchase Agreement”) with 3 individuals (the “Former Owners”) residing in the Province of Ontario, Canada for all of the issued and outstanding shares of Orion Communications Inc. (“Orion”).  On April 30, 2009, Orion, under management of 9191, had executed a services agreement with the Company’s subsidiary, Teliphone Inc. to provide telecommunications services to the customers of Orion.  On January 18, 2010, 9191 filed a Statement of Claim in Superior Court of Justice in the Province of Ontario, Canada, district of Toronto, for rescission of the Purchase Agreement due to overpayment and damages totalling CDN$1,000,000 claiming misrepresentation of financial statements made by the Former Owners.
  As a result of the claim for rescission, the Company’s subsidiary, Teliphone Inc.. terminated its employment agreement with one of the Former Owners.
  On February 18, 2010, the Former Owners of Orion filed their defence and counterclaim against 9191, naming the Company, its subsidiary Teliphone Inc., George Metrakos, the Company’s President and CEO and other individuals as third party claimants for a total of CDN$4,000,000.  The Former Owners claim that the Company, its subsidiary and President are third party claimants due to its agreements with 9191 to provide services to the clients of Orion.
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  The Former Owners are also pursuing the Company’s subsidiary Teliphone Inc. for $150,000 for the early termination of the employment agreement.
  The Company does not feel that, as a service provider, the agreements and disagreements between the 9191 and the Former Owners have anything to do with the Company and hence feel that the claims brought upon it do not have any merit.  As a result, it has not accrued a liability for the amounts of the claims made by the Former Owners, however will continue to evaluate this as more information becomes readily available. The Company has accrued legal fees in connection with the claim.
  Bank of Montreal, related to Former Owners of Orion Communications Inc.
  On March 10, 2010, Bank of Montreal (“BMO”), a Canadian financial institution and creditor of Orion has filed a claim in Superior Court of Justice in the Province of Ontario, Canada, district of Brampton, against the Company’s subsidiary Teliphone Inc. requesting payment of Orion’s outstanding debt of CDN$778,607.  BMO stands as a secured creditor of Orion based on its issuance of a credit line to Orion in 2007.  BMO claims that as a secured creditor holding a General Security Agreement, it has rights to the receivables of Orion and claims that these receivables are being collected by Teliphone Inc.  Management has attempted to explain to BMO that it is a service provider and hence has a right to collect fees for services provided and as such has began to prepare a defence demonstrating that Teliphone Inc. is providing a paid service to Orion’s clients.
  The Company has not accrued a liability for any amounts of the claims made by BMO on its balance sheet. The Company has accrued legal fees in connection with the claim.
  Other than the disputes 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





Not Applicable.





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





The Company issued 180,000 restricted shares for the repayment of loans from Shareholders on March 31, 2010.  The repayments totalled $22,500 and the stock was priced at $0.125 per share.  These securities were issued in a private transaction and issued in reliance of the exemption provided by Section 4(2) of the Securities Act and Regulation S promulgated thereunder in the case of non-U.S. persons  The Company did not engage in any general solicitation or advertising in relation to the issuance of these securities.  The stock certificate were issued with the appropriate legends affixed.





ITEM 3 - DEFAULTS UPON SENIOR SECURITIES





There have been no material defaults.





ITEM 4 - (REMOVED AND RESERVED)





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.





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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: May 21, 2010


TELIPHONE CORP./s/ George MetrakosGeorge Metrakos

Chief Executive Officer and President





TELIPHONE CORP./s/ George MetrakosGeorge Metrakos

Principal Financial Officer





TELIPHONE CORP./s/ George MetrakosGeorge Metrakos

Principal Accounting Officer











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