<PAGE>

                                  United States
                       Securities and Exchange Commission
                             Washington, D.C. 20549

                                   FORM 10-QSB

              |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended December 31, 2006

             |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                                  EXCHANGE ACT

        For the transition period from ______________ to ________________

                         Commission File Number: 0-24857

                                TELECONNECT INC.
        (Exact name of small business issuer as specified in its charter)

                 Florida                             52-2137517
     (State or other jurisdiction of   (I.R.S. Employer Identification No.)
      incorporation or organization)

                   Centro Comercial Camojan Corner, 1(a) plta
                      Camino de Camojan, Urb. Sierra Blanca
                             29603 Marbella - Spain
                    (Address of principal executive offices)

Issuer's telephone number, including area code:

                               011-34-95-202-9400

(Former name, former address and former fiscal year, if changed since last
report) N/A

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes |_| No |_|

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the last practicable date: 190,360,383 shares at February 12,
2007.

Transitional Small Business Disclosure Format (check one): Yes |_| No |X|

<PAGE>

                                TELECONNECT INC.

                                      INDEX

PART  I. FINANCIAL INFORMATION

Item  1. Financial Statements:

  Condensed Consolidated Balance Sheet as of December 31, 2006
    (Unaudited)                                                          3

  Condensed Consolidated Statements of Operations for
    the three months ended December 31, 2006 and
    2005(Unaudited)                                                      4

  Condensed Consolidated Statements of Cash Flows for
  the three months ended December 31, 2006 and 2005
  (Unaudited)                                                            5

  Notes to Condensed Consolidated Financial Statements                   6

Item  2. Management's Discussion and Analysis or Plan of Operation      11

Item  3. Controls and Procedures                                        14

PART  II. OTHER INFORMATION

Item  1. Legal Proceedings                                              15

Item  2. Unregistered Sales of Equity Securities  and Use of Proceeds   15

Item  3. Defaults upon Senior Securities                                15

Item  4. Submission of Matters to a Vote of Security Holders            15

Item  5. Other Information                                              15

Item  6. Exhibits                                                       15

Signatures                                                              16


                                        2

<PAGE>

                          PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                                TELECONNECT INC.
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2006
                                   (Unaudited)

                                     ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                    $    175,000
  Accounts receivable - trade, net of allowance
    for doubtful accounts of $746,000                               561,000
  Accounts receivable - other                                        79,000
  Inventory                                                          48,000
  Prepaid Expenses                                                    2,000
                                                               ------------
    Total current assets                                            865,000
                                                               ------------

  PROPERTY AND EQUIPMENT, NET                                       281,000
                                                               ------------
  OTHER ASSETS:
    Vendor deposits                                                 316,000
    Other assets                                                     46,000
                                                               ------------
                                                               $  1,508,000

                                                               ============

                     LIABILITIES AND STOCKHOLDERS' (DEFICIT)

CURRENT LIABILITIES:

  Accounts payable - trade                                     $  2,655,000
  Accrued liabilities                                               682,000
  Notes payable to potential investor                               158,000
  Loans from related parties                                      2,595,000
  Deferred income                                                 1,875,000
                                                               ------------
    Total current liabilities                                     7,965,000
                                                               ------------
  STOCKHOLDERS' (DEFICIT):
  Preferred stock; par value of $0.001,
    5,000,000 shares authorized, no shares outstanding                   --
  Common stock; par value of $0.001,
    500,000,000 shares authorized, 181,360,383
    shares outstanding                                              182,000
  Additional paid-in capital                                     20,668,000
  Accumulated (deficit)                                         (24,879,000)
  Effect of cumulative translation adjustment                    (2,428,000)
                                                               ------------
    Total stockholders' (deficit)                                (6,457,000)
                                                               ------------
                                                               $  1,508,000

                                                               ============

   See accompanying summary of accounting policies and notes to the financial
                                   statements.


                                        3

<PAGE>

                                TELECONNECT INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005
                                   (Unaudited)

                                                     Three  Months  Ended
                                                         December 31,
                                                 ---------------------------
                                                     2006           2005
                                                 ------------   ------------
SALES                                            $    974,000   $  1,307,000

COST OF GOODS SOLD (exclusive of
  depreciation shown separately below)                666,000       897,000
                                                 ------------   ------------

GROSS PROFIT                                          308,000        410,000
                                                 ------------   ------------
OPERATING EXPENSES:
  Selling, general and administrative expenses        902,000        396,000
  Depreciation                                         67,000         75,000
                                                 ------------   ------------
    Total operating expenses                          969,000        471,000
                                                 ------------   ------------

(LOSS) FROM OPERATIONS                               (661,000)       (61,000)
                                                 ------------   ------------
OTHER INCOME (EXPENSES):
  Other Expenses                                           --        (35,000)
  Interest expense                                    (26,000)      (368,000)
                                                 ------------   ------------
(LOSS) BEFORE INCOME TAXES                           (687,000)      (464,000)

PROVISION FOR INCOME TAXES                                 --             --
                                                 ------------   ------------
NET (LOSS)                                       $   (687,000)  $   (464,000)
                                                 ============   ============

BASIC AND DILUTED EARNINGS (LOSS) PER SHARE      $      (0.00)  $      (0.00)
                                                 ============   ============
BASIC AND DIULTED AVERAGE COMMON AND COMMON
  EQUIVALENT SHARES OUTSTANDING                   181,360,383    109,505,819
                                                 ============   ============

THE COMPONENTS OF COMPREHENSIVE LOSS:
  Net (loss)                                     $   (687,000)  $   (464,000)
  Foreign currency translation adjustment             (51,000)        79,000
                                                 ------------   ------------

COMPREHENSIVE (LOSS)                             $   (738,000)  $   (385,000)
                                                 ============   ============

   See accompanying summary of accounting policies and notes to the financial
                                   statements.


                                        4

<PAGE>

                                TELECONNECT INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005
                                   (Unaudited)

                                                  Three months ended
                                                     December 31,
                                                ---------------------
                                                   2006        2005
                                                ---------   ----------
CASH  FLOWS  FROM  OPERATING ACTIVITIES:

  Net  (loss)                                   $(687,000)  $(464,000)
  Adjustments to reconcile net (loss) to
    net cash used in operating activities:
    Depreciation                                   67,000      75,000
    Non cash expenditures paid with stock          83,000     375,000
  Decrease (increase) in operating assets:
    Accounts receivable - trade                   (11,000)    138,000
    Accounts  receivable - other                  (71,000)    (31,000)
    Inventory                                     (29,000)     30,000
    Prepaid Expense                                36,000          --
    Vendor and other deposits                     (13,000)      5,000
Increase (decrease) in operating liabilities:
    Accounts payable and accrued liabilities     (330,000)    (49,000)
    Deferred income and deposits                  190,000    (418,000)
                                                ---------   ---------
      Net cash provided by (used in)
        operating  activities                    (765,000)   (339,000)
                                                ---------   ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of other assets                         (7,000)         --
  Purchase of property and equipment              (83,000)    (57,000)
                                                ---------   ---------
      Net cash (used in) investing
        activities                                (90,000)    (57,000)
                                                ---------   ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Loan proceeds from related parties              973,000     292,000
  Loan proceeds from bank                           6,000     142,000
  Payment on tax agency obligation                (96,000)    (15,000)
  Payment on loan from bank                            --    (120,000)
                                                ---------   --------
      Net cash provided by financing
        activities                                883,000     299,000
                                                ---------   ---------
EFFECT OF EXCHANGE RATE                           (51,000)     79,000
                                                ---------   ---------
NET INCREASE (DECREASE)IN CASH AND
  CASH EQUIVALENTS                                (23,000)    (18,000)

CASH AND CASH EQUIVALENTS,
  BEGINNING OF YEAR                               198,000      70,000
                                                ---------   ---------
CASH AND CASH EQUIVALENTS,
  END OF YEAR                                   $ 175,000   $  52,000
                                                =========   =========

   See accompanying summary of accounting policies and notes to the financial
                                   statements.


                                        5

<PAGE>

                               ITS NETWORKS, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                     Three Months Ended December 31,
                                                     -------------------------------
                                                        2006               2005
                                                     ---------           -------
<S>                                                  <C>                 <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid during the year for:
  Interest                                           $     --            $    566
                                                      ========           ========
SUPPLEMENTAL  DISCLOSURE  OF  NONCASH
  TRANSACTIONS:

Common stock issued for loan fees charged to
  interest on notes payable                          $     --            $299,000
Common stock issued for services received            $ 83,000            $ 25,000
</TABLE>

     See accompanying summary of accounting policies and notes to financial
                                   statements.


                                        6

<PAGE>

                                TELECONNECT, INC.

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                December 31, 2006

1. THE COMPANY

Teleconnect Inc. (the "Company", "Teleconnect", we, us or our) was incorporated
under the laws of the State of Florida on November 23, 1998. The Company is
engaged in the telecommunication industry in Spain and offers telecommunications
services for home and business use. The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with
accounting standards generally accepted in the United States ("GAAP") and rules
and regulations of the Securities and Exchange Commission for interim financial
information. The financial statements do not include all information and notes
required by GAAP for complete financial statements. In our opinion, all
adjustments considered necessary for a fair presentation have been included.
Results of the interim periods presented are not necessarily indicative of
results which might be expected for the entire fiscal year.

The Company has developed a new rechargeable prepaid telephone calling card.
Other marketing actions are being planned to bring up sales levels to help reach
a monthly breakeven as quickly as possible.

In February 2005, the Board of Directors and Shareholders approved changing the
name of ITS Networks Inc to Teleconnect Inc. in order to emphasize the nature or
the strategic business plan which is to have the company be a holding company
with international subsidiaries and affiliates in different countries with
similar names, thus taking advantage of the brand recognition and customer
loyalty. The Company will establish Teleconnect Spain as a subsidiary and will
establish other Teleconnect subsidiaries in other European countries.

The consolidated financial statements include the accounts of ITS Europe,
Teleconnect, Teleconnect Telecom, and the Company. The Company is a provider of
various telecommunication services and products within Spain. Significant
inter-company balances and transactions have been eliminated in consolidation.

2. GOING CONCERN

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.

As shown in the accompanying financial statement, the Company incurred losses of
($687,000) and ($464,000) for the three months ended December 31, 2006 and 2005,
respectively. In addition, the Company has incurred substantial losses since its
inception. As of December 31, 2006, the Company had a working capital deficit of
$(7,100,000) and a stockholders' deficit of $(6,457,000). These factors raise
substantial doubt about the Company's ability to continue as a going concern.

The financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event that the
Company cannot continue as a going concern.

Management anticipates that it will be able to convert certain outstanding debt
into equity and that it will be able to raise additional working capital through
the issuance of stock and through additional loans from investors.

The ability of the Company to continue as a going concern is dependent upon the
Company's ability to attain a satisfactory level of profitability and obtain
suitable and adequate financing. There can be no assurance that management's
plan will be successful.

3. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Accounts Receivable -

The Company uses the allowance method to account for uncollectible accounts
receivable. Accounts receivable are presented net of doubtful accounts of
$746,000 at December 31, 2006.

Advertising Costs -

Advertising and sales promotion costs are expensed as incurred. Advertising
expenses totaled (euro)12,676 and (euro)7,527 for respectively for the three
months ended December 31, 2006 and 2005.

Cash Equivalents -

The Company considers deposits that can be redeemed on demand and investments
that have original maturities of less than three months, when purchased, to be
cash equivalents. Substantially all cash on had at December 31, 2006 was held in
Spanish financial institutions and is not protected by FDIC insurance.


                                        7

<PAGE>

Comprehensive Income -

Comprehensive income consisted entirely of foreign currency translation gains
and losses during the two years ended September 30, 2006.

Consolidation Policy -

The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, after elimination of all material
intercompany accounts, transactions, and profits.

Deferred Revenues -

The Company recognizes revenue when earned. The proceeds from the sales of
prepaid calling cards are recorded in the deferred income until such time as the
time is utilized on the cards. In from each card is recognized on a prorated
basis as a time is utilized on that card.

Earnings per Share -

Basic net income (loss ) per common share is computed by dividing net earnings
(loss) applicable to common shareholders by the weighted average number of
common shares outstanding during the period. Diluted net earnings (loss) per
common share is determined using the weighted average number of common shares
outstanding during the period, adjusted for the dilutive affect of common stock
equivalents, consisting of shares that might be issued upon exercise of common
stock options. In periods where losses are reported, the weighted average number
of common shares outstanding excludes common stock equivalents, because their
exclusion would be anti-diluting

Estimates -

Preparing that Company's financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and disclosure of contention assets and liabilities at
the date of the financial statements and reporting periods of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

Foreign Currency Adjustments -

The financial position and results of substantially all foreign operations are
consolidated using the local currencies in which the Company operates as a
functional currency. Local currency assets and liabilities are translated at the
rates and exchange on the balance sheet date, and local currency revenues and
expenses are translated at the average rates and exchange during the period. The
resulting translation adjustments are recorded directly into a separate
component of shareholders equity.

Income Taxes -

The deferred tax assets and liabilities are recorded for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets, including tax losses and credit carryforwards, and
liabilities are measured using enacted tax rates expected to apply to taxable
income and in the years in which these temporary differences are expected to be
recovered or settled. The effect of deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment change. Deferred income tax expense represents the change during the
period in the deterred tax assets and deferred tax liabilities. The components
of the deferred tax assets and liabilities are individually classified as
current and non-current based on their characteristics. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.

Inventories -

Inventories are stated at the lower of cost or market with cost determined on
the first in, first out basis.

4. CONCENTRATION OF CREDIT

The Company extends credit to retailers on the sale of prepaid calling cards.
Substantially all sales are made in Spain. The Company has incurred substantial
losses in the past from the extension of credit but believes that as of December
31, 2006 its allowance for credit related losses is adequate to cover any
uncollectible receivables.

The Company does not require collateral or other security to support financial
instruments that are subject to credit risk.

As of December 31, 2006, three customers accounted for 30.19%, 12.22% and 10.38%
of net accounts receivables.

5. PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Expenditures for major additions
and improvements are capitalized, and minor replacements, maintenance, and
repairs are charged to expenses as incurred. When property and equipment are
retired or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts and any resulting gains or losses included in the
results of operation for the respective period.


                                        8

<PAGE>

The Company reviews the carrying value of property and equipment for the
impairment on an annual basis. In cases where undiscounted expected future cash
flows are less than the carrying value, an impairment loss is recognized equal
to an amount by which the carrying value exceeds the fair market value of the
assets. The Company recognizes no impairment losses related to the realization
of property and equipment during the years ended December 31, 2006 and 2005.

Property and equipment, substantially all of which are located in Spain, at
December 31, 2006 was comprised as follows:

Computers and switching systems   $ 2,571,000
Furniture and fixtures                138,000
Transportation equipment                6,000
                                  -----------
Total at cost                       2,715,000
                                  -----------
Less: Accumulated depreciation
  and amortization                 (2,434,000)
                                  -----------
Net Property and Equipment        $   281,000
                                  ===========

The useful lives of property and equipment for purposes of computing
depreciation are as follows:

Computers and switching systems   5-7 years
Furniture and fixtures              7 years
Transportation equipment            4 years

All depreciation is computed on a straight line bases over their useful lives.

6. LOANS FROM RELATED PARTIES

As of December 31, 2006, the Company had short term loans totaling $2,595,000
from shareholders. Of these, loans totaling $1,352,118 (1,213,000 EURO) bear no
interest. The remaining loan from shareholders bear interest at 8% per annum.
All shareholder loans are unsecured, and are due upon demand. Interest expense
of $25,000 was incurred on these notes during the three months ended December
31, 2006.

7. NOTE PAYABLE

As of December 31, 2006, the Company has a short-term bridge loan of $158,000
from a potential investor. This note is interest bearing at 4% per 60 days and
due now on demand.

8. OPERATING LEASES

The Company leases various office space and equipment under operating leases
expiring in various years through 2011. Rent expense incurred in operating
leases for the three months ended December 31, 2006 and 2005 are $25,000 and
$34,000 respectively.

Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one year as of December 31, 2006 for each of the
next five years and in the aggregate are:

Year ended September 30,                Amount
------------------------------------   --------

2007                                   $ 41,000
2008                                     68,000
2009                                     68,000
2010                                     68,000
2011                                     51,000
                                       --------
Total minimum future rental payments   $296,000
                                       ========


                                        9

<PAGE>

9. LITIGATION AND CONTINGENT LIABILITIES

A shareholder filed a suit against the Company claiming the right to an
additional 623,100 shares of the Company's common stock and 246,624 euros in
damage due to the failure to issue these shares on a timely basis. In August
2005, an agreement was reached whereby the Company will pay 29,000 euros and
issue 1,000,000 two-year restricted shares once the shareholder had collaborated
with some internal issues. As of September 30, 2006 the Company has paid 14,500
euros and accrued 96,000 euros for this settlement The associated 1,000,000
shares were issued in September 2006.

In the normal course of its operations, the Company may, from time to time, be
named in legal actions seeking monetary damages. While the outcome of these
matters cannot be estimated with certainty, management does not expect, based
upon consultation with legal counsel, that they will have a material effect on
the Company's business or financial condition or results of operations. As of
December 31, 2006, the Company has accrued $138,000 to cover the anticipated
cost of settling several litigation matters.

10. PREFERRED STOCK

The Company has 5,000,000 shares of authorized and unissued Preferred Stock with
par value of $0.001, which is noncumulative and nonparticipating. No shares of
preferred stock were issued and outstanding as of December 31, 2006.

12. COMMON STOCK TRANSACTIONS

On October 11, 2006 the Company issued 180,000 shares of common stock with a
fair market value of $12,600 for services.

On October 17, 2006 the Company issued 500,000 shares of common stock with a
fair market value of $70,000 for services.

11. EARNINGS (LOSS) PER SHARE

Basic earnings per share amounts are computed based on the weighted average
number of shares outstanding on that date during the applicable periods.

Diluted earnings per share was not disclosed as of December 31, 2006 and 2005
since the options and warrants outstanding at those dates were antidilutive.
Warrants and options total 4,315,000 and 4,755,790 shares were outstanding at
December 31, 2006 and 2005, respectively


                                       10

<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATION

IN ADDITION TO HISTORICAL INFORMATION, MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION MAY INCLUDE CERTAIN FORWARD-LOOKING STATEMENTS, INCLUDING, BUT
NOT LIMITED TO, THOSE RELATED TO THE GROWTH AND STRATEGIES, FUTURE OPERATING
RESULTS AND FINANCIAL POSITION AS WELL AS ECONOMIC AND MARKET EVENTS AND TRENDS
OF THE COMPANY. ALL FORWARD-LOOKING STATEMENTS MADE BY THE COMPANY, INCLUDING
SUCH STATEMENTS HEREIN, INCLUDE MATERIAL RISKS AND UNCERTAINTIES AND ARE SUBJECT
TO CHANGE BASED ON FACTORS BEYOND THE CONTROL OF THE COMPANY. ACCORDINGLY, THE
COMPANY'S ACTUAL RESULTS AND FINANCIAL POSITION COULD DIFFER MATERIALLY FROM
THOSE EXPRESSED OR IMPLIED IN ANY FORWARD-LOOKING STATEMENT AS A RESULT OF
VARIOUS FACTORS, INCLUDING WITHOUT LIMITATION FACTORS DESCRIBED IN THE COMPANY'S
PREVIOUS FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION REGARDING RISKS
AFFECTING THE COMPANY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion of the Company's consolidated financial condition and
results of operations should be read in connection with the Company's condensed
consolidated financial statements and notes thereto appearing elsewhere herein.
Factors that could cause or contribute to differences from the condensed
consolidated financial statements include, but are not limited to, risks and
uncertainties related to the need for additional funds, the growth of its
operations and the ability of the Company to operate profitably.

Significant Accounting Estimates and Policies

CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investments
with maturities of three months or less when purchased to be cash equivalents.
There are no cash equivalents at December 31, 2006.

CONSOLIDATION POLICIES - The accompanying condensed consolidated financial
statements include the accounts of the Company and all of its wholly owned and
majority owned subsidiaries. Intercompany transactions and balances have been
eliminated in consolidation.

REVENUE RECOGNITION - Revenues from the sale of prepaid calling cards are
recognized at the time the cards are used. Unused time is reflected in deferred
revenue until the time is utilized or the card reaches its expiration date. The
Company had deferred revenues of $1,875,000 as of December 31, 2006.

INVENTORY - Inventory consists primarily of unused calling cards. Inventories
are stated at the lower of cost determined on the first in first out method, or
cost, whichever is less.

PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation
is provided primarily by the straight-line method over the estimated useful
lives of the assets. Maintenance and repairs are charged to operations when
incurred.

IMPAIRMENT OF LONG-LIVED ASSETS - The Company evaluates its long-lived assets to
determine whether later events and circumstances warrant revised estimates of
useful lives or a reduction in carrying value due to impairment.

INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", which requires an asset and liability approach to determine deferred tax
assets and liabilities. Deferred tax assets and liabilities are determined based
upon the differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are assumed to reverse.

LOSS PER SHARE - Loss per common and common equivalent share is computed based
on the weighted average number of common shares outstanding.

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. Actual results could differ
from those estimates.

FOREIGN CURRENCY TRANSLATION/TRANSACTIONS - The assets and liabilities of ITS
Europe and Teleconnect whose functional currency is the Euro, are generally
translated into US dollars at the December 31, 2006 exchange rate for assets and
liabilities and at the historical exchange rate on stockholders' equity. The
revenues and expenses are translated at average exchange rates for the periods.
Resulting translation adjustments are accumulated and reflected as a separate
component of stockholders' equity.


                                       11

<PAGE>

New Accounting Pronouncements -

      In February 2006, the FASB issued Statement No. 155, "Accounting for
Certain Hybrid Financial Instruments" ("SFAS No. 155"), which amends FASB
Statements No. 133 and 140. This Statement permits fair value remeasurement for
any hybrid financial instrument containing an embedded derivative that would
otherwise require bifurcation, and broadens a Qualified Special Purpose Entity's
("QSPE") permitted holdings to include passive derivative financial instruments
that pertain to other derivative financial instruments. This Statement is
effective for all financial instruments acquired, issued or subject to a
remeasurement event occurring after the beginning of an entity's first fiscal
year beginning after September 15, 2006. This Statement has no current
applicability to the Company's financial statements. Management plans to adopt
this Statement on October 1, 2006 and it is anticipated that the initial
adoption of this Statement will not have a material impact on the Company's
financial position, results of operations, or cash flows.

      In March 2006, the FASB issued Statement No. 156, "Accounting for
Servicing of Financial Assets - an amendment of FASB Statement No. 140" ("SFAS
No. 156"). This Statement is effective for fiscal years beginning after
September 15, 2006. This Statement requires that all separately recognized
servicing assets and servicing liabilities be initially measured at fair value,
if practicable. This Statement has no current applicability to the Company's
financial statements. Management plans to adopt this Statement on October 1,
2006 and it is anticipated that the initial adoption of this Statement will not
have a material impact on the Company's financial position, results of
operations, or cash flows.

      In June 2006, the FASB issued Interpretation 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"), an interpretation of FASB Statement No.
109, "Accounting for Income Taxes." FIN 48 clarifies the accounting and
reporting for income taxes where interpretation of the law is uncertain. FIN 48
prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of income tax uncertainties with
respect to positions taken or expected to be taken in income tax returns. FIN 48
is effective for fiscal years beginning after December 15, 2006. This Statement
has no current applicability to the Company's financial statements. Management
plans to adopt this Statement on October 1, 2006 and it is anticipated that the
initial adoption of FIN 48 will not have a material impact on the Company's
financial position, results of operations, or cash flows.

      In September 2006, the FASB issued Statement No. 157, "Fair Value

      Measurements" ("SFAS No. 157"). SFAS No. 157 addresses how companies
should measure fair value when they are required to use a fair value measure for
recognition or disclosure purposes under GAAP. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007, with earlier adoption permitted. Management is
assessing the impact of the adoption of this Statement.

      In September 2006, the FASB issued Statement No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans" ("SFAS
No. 158"), an amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS No.
158 requires (a) recognition of the funded status (measured as the difference
between the fair value of the plan assets and the benefit obligation) of a
benefit plan as an asset or liability in the employer's statement of financial
position, (b) measurement of the funded status as of the employer's fiscal
year-end with limited exceptions, and (c) recognition of changes in the funded
status in the year in which the changes occur through comprehensive income. The
requirement to recognize the funded status of a benefit plan and the disclosure
requirements are effective as of the end of the fiscal year ending after
December 15, 2006. The requirement to measure the plan assets and benefit
obligations as of the date of the employer's fiscal year-end statement of
financial position is effective for fiscal years ending after December 15, 2008.
This Statement has no current applicability to the Company's financial
statements. Management plans to adopt this Statement on October 1, 2006 and it
is anticipated the adoption of SFAS No. 158 will not have a material impact to
the Company's financial position, results of operations, or cash flows.

      In September 2006, the Securities Exchange Commission issued Staff
Accounting Bulletin No. 108 ("SAB No. 108"). SAB No. 108 addresses how the
effects of prior year uncorrected misstatements should be considered when
quantifying misstatements in current year financial statements. SAB No. 108
requires companies to quantify misstatements using a balance sheet and income
statement approach and to evaluate whether either approach results in
quantifying an error that is material in light of relevant quantitative and
qualitative factors. When the effect of initial adoption is material, companies
will record the effect as a cumulative effect adjustment to beginning of year
retained earnings and disclose the nature and amount of each individual error
being corrected in the cumulative adjustment. SAB No. 108 will be effective
beginning October 1, 2006 and it is anticipated that the initial adoption of SAB
No. 108 will not have a material impact on the Company's financial position,
results of operations, or cash flows.


                                       12

<PAGE>

COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2006 AND 2005

We incurred a $(687,000) net loss for the three months ended December 31, 2006
as compared to a net loss of $(464,000) during the comparable period in 2005. A
comparison of revenues and expenses for the two periods is as follows:

REVENUES

Sales for the three months ended December 31, 2006, decreased 25.5% to $974,000
from $1,307,000 for the quarter ended December 31, 2005. The decrease in sales
is attributed to the fact that the market is extremely competitive and we have
had to reduce our rates to the end users. It is important to note that the
number of minutes switched, however, during the three months ended December 31,
2006 increased by 0.08% to 19,330,813 minutes from 19,315,080 minutes switched
during the same three-month period in 2005 thus reflecting the fact that the
volume of business is virtually the same. Hence, the Company is selling
approximately the same level of minutes as during the same quarter in 2005 but
the market price has been reduced by about 25%.

COST OF GOODS SOLD

Cost of goods sold decreased 25.8 % to $ 666,000 during the three months ended
December 31, 2006 from $897,000 during the same period in 2005. This decrease
was due primarily to the reduction in the rates the Company pays its suppliers
of access and termination traffic. The reduction in Cost of Goods sold is
proportional to the reduction in the market price of services. As such, the
gross profit margin is virtually the same during the quarter ended December 31,
2006 and 2005 these being 31.6% and 31.4% respectively.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses increase by 127.8 % to $ 902,000
during the three months ended December 31, 2006 as compared to $396,000 for the
comparable period in 2005. This increase in selling, general and administrative
expenses reflect management's efforts during the quarter to develop and launch
new services and also to produce new acquisition opportunities which required
additional internal and external efforts.

DEPRECIATION

Depreciation expense decreased 10.7 % to $ 67,000 during the three months ended
December 31, 2006 as compared to $75,000 for the comparable period in 2006.

INTEREST EXPENSE

Interest expense decreased 92.9 % to $ 26,000 during the quarter ended December
31, 2006, as compared to $368,000 during the comparable period in 2005. This is
due primarily to the fact that shareholder loans totaling $1,352,118 at December
31, 2006 were interest free while during the quarter ended December 31, 2005,
$350,000 was paid as common stock issued for loan fees charged to interest on
notes payable.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2006, the Company had negative working capital of approximately
$(7,100,000), compared to negative working capital of $(6,669,000) at December
31, 2005.

The ability of the Company to satisfy its obligations will depend in part upon
its ability to raise funds through the sale of additional shares of its Common
Stock, increase borrowings, and in part upon its ability to reach a profitable
level of operations of which there can be no assurances.

The Company's capital resources have been provided primarily by capital
contributions from stockholders, stockholder loans, the exchange of outstanding
debt into Common Stock of the Company, and services rendered in exchange for
Common Stock.

The Company intends to sell its Common Stock and/or borrow additional funds from
investors to pay debts and for working capital. However, there is no assurance
that such capital will be raised, and the Company may seek bank financing and
other sources of financing to complete the payment of additional debt.


                                       13

<PAGE>

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following table is a recap of the Company's contractual obligations as of
December 31, 2006.

                                           Payments Due by Period
                                           ----------------------
                                           Less Than      One to      Three to
Contractual Obligations         Total      One Year    Three Years   Five Years
------------------------     ----------   ----------   -----------   --------
  Long-term  Debt            $  158,000   $  158,000
  Operating  Leases          $  296,000       41,000      136,000      119,000
Loans to Related Parties      2,595,000    2,595,000           --           --
  Total Contractual Cash
    Obligations              $3,049,000   $2,794,000     $136,000     $119,000
                             ==========   ==========     ========     ========

ITEM 3. CONTROLS AND PROCEDURES

The Company's Chief Executive Officer and Chief Financial Officer/Principal
Accounting Officer (collectively, the Certifying Officers) are responsible for
establishing and maintaining disclosure controls and procedures for the Company.
Such officers have concluded (based upon their evaluation of these controls and
procedures as of a date within 90 days of the filing of this report) that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in this report is
accumulated and communicated to the Company's management, including its
principal executive officers as appropriate, to allow timely decisions regarding
required disclosure.

The Certifying Officers also have indicated that there were no significant
changes in the Company's internal controls or other factors that could
significantly affect such controls subsequent to the date of their evaluation,
and there were no corrective actions with regard to significant deficiencies and
material weaknesses.


                                       14

<PAGE>

                                     PART II

                                OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the normal course of its operations, the Company has, from time to time, been
named in legal actions seeking monetary damages. While the outcome of these
matters cannot be estimated with certainty, management does not expect, based
upon consultation with legal counsel, that they will have a material effect on
the Company's business or financial condition or results of operations, except
that as of December 31, 2006, the Company has accrued $138,000 for the
settlement of pending litigation.

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

      None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

      None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

      None

ITEM 5. OTHER INFORMATION

      None

ITEM 6. EXHIBITS

31.1 Certification of Gustavo Gomez

31.2 Certification of Alfonso de Borbon

32.1 Certification of Gustavo Gomez and Alfonso de Borbon


                                       15

<PAGE>

                                   SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

February 13, 2007

                                        TELECONNECT INC.


By: /s/ Gustavo Gomez                   By: /s/ Alfonso de Borbon
    ---------------------------------       ------------------------------------
    Gustavo Gomez, Director,                Alfonso de Borbon,
    Chief Executive Officer,                Director, Chief Accounting
    President, and Treasurer                and Financial Officer,
                                            Executive Vice President and
                                            Chief Operating Officer


                                       16

<PAGE>

                                INDEX TO EXHIBITS

Exhibit

      No.    Description

      31.1   Certification of Gustavo Gomez

      31.2   Certification of Alfonso de Borbon

      32.1   Certification of Gustavo Gomez and Alfonso de Borbon


                                       17