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, 2009
 
 OR
   ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 Commission
file number: 000-51151
  TELIPHONE
CORP.
 (Exact
name of Registrant as specified in its charter)
  Nevada
              
              3661
              
              84-1491673(State
      or jurisdiction of
                Incorporation
      or organization)
              
              (Primary
      Std. Industrial
                Classification
      Code Number)
              
              (IRS
      Employer
                ID
      Number)
  194 St-Paul St. west, Suite
303, Montreal, Quebec CANADA H2Y 1Z8
 (Address
of principal executive offices) (Zip Code)
 
 Registrant’s
telephone number, including area code: 514-313-6010
  Copies of
communications to:
 JOSEPH
I. EMAS
 1224
WASHINGTON AVENUE
 MIAMI
BEACH, FLORIDA 33139
 TELEPHONE
NO.: (305) 531-1174
 FACSIMILE
NO.: (305) 531-1274
   Securities
registered under Section 12(b) of the Exchange Act:
  None
  Securities
registered under Section 12(g) of the Exchange Act:
  Common
Stock, $0.001 par value per share
  (Title of
Class)
 
  
  Indicate
by check mark whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. xYes oNo
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405
of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [_] No
[_]
 Indicate by check markwhether 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 May15,
2009,there were 37,366,657 shares of the issuer's $.001
par value common stock issued and outstanding.
  
  TABLE OF
CONTENTS
  PagePART
      I - FINANCIAL INFORMATIONItem 1.
              Condensed
      Consolidated Financial Statements:
              1Condensed
      Consolidated Balance Sheets as of March 31, 2009 (unaudited) and September
      30, 2008
              1Condensed
      Consolidated Statements of Operations and Comprehensive Income (Loss) for
      the Six and Three Months Ended  March 31, 2009 and 2008
      (unaudited)
              2Condensed
      Consolidated Statements of Cash Flows for the Six Months Ended March 31,
      2009 and 2008 (unaudited)
              3Notes
      to Condensed Consolidated Financial Statements (unaudited)
              4Item 2.
              Management
      Discussion and Analysis of Financial Condition and Results of
      Operations
              33Item
      3
              Quantitative
      and Qualitative Disclosures about Market Risk
              55Item 4.
              Control
      and Procedures
              55PART
      II - OTHER INFORMATION
              56Item 1.
              Legal
      Proceedings
              56Item 1A
              Risk
      Factors
              56Item 2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              56Item 3.
              Defaults
      its Upon Senior Securities
              56Item 4.
              Submission
      of Matters to a Vote of Security Holders
              56Item 5
              Other
      Information
              57Item 6.
              Exhibits
              57Signatures
              
              58
  
  PART
I - FINANCIAL INFORMATION
   Item 1.
Condensed Consolidated Financial Statements
   TELIPHONE
CORP. CONDENSED
CONSOLIDATED BALANCE SHEETS MARCH
31, 2009 (UNAUDITED) AND SEPTEMBER 30, 2008
 ASSETSUS
      $MARCH
      31,
                  
                  
                  SEPTEMBER
      30,2009
                  
                  
                  2008(UNAUDITED)Current
      Assets:Cash
      and cash equivalents
                  
                  $
                  -
                  
                  
                  $
                  -Accounts
      receivable, net
                  
                  
                  234,222
                  
                  
                  
                  152,836Inventory
                  
                  
                  8,788
                  
                  
                  
                  8,964Prepaid
      expenses and other current assets
                  
                  
                  38,404
                  
                  
                  
                  45,714Total
      Current Assets
                  
                  
                  281,414
                  
                  
                  
                  207,514Fixed
      assets, net of depreciation
                  
                  
                  8,807
                  
                  
                  
                  14,563Goodwill
                  
                  
                  444,433
                  
                  
                  
                  526,783TOTAL
      ASSETS
                  
                  $
                  734,654
                  
                  
                  $
                  748,860LIABILITIES AND STOCKHOLDERS' EQUITY
      (DEFICIT)LIABILITIESCurrent
      Liabilities:Bank
      overdraft
                  
                  $
                  115,328
                  
                  
                  $
                  19,545Deferred
      revenue
                  
                  
                  3,933
                  
                  
                  
                  4,428Current
      portion of related party convertible debentures
                  
                  
                  -
                  
                  
                  
                  -Current
      portion of related party loans
                  
                  
                  42,500
                  
                  
                  
                  628,424Line
      of credit - Dialek
                  
                  
                  -
                  
                  
                  
                  140,951Current
      portion of note payable, Dialek Telecom
                  
                  
                  -
                  
                  
                  
                  69,390Accounts
      payable and accrued expenses
                  
                  
                  291,042
                  
                  
                  
                  535,215Total
      Current Liabilities
                  
                  
                  452,803
                  
                  
                  
                  1,397,953Long
      Term Liabilities:Related
      party convertible debentures, net of current portion
                  
                  
                  47,570
                  
                  
                  
                  250,116Related
      party loans, net of current portion
                  
                  
                  70,828
                  
                  
                  
                  250,116TOTAL
      LIABILITIES
                  
                  
                  571,201
                  
                  
                  
                  1,898,185Minority
      interest
                  
                  
                  74,024
                  
                  
                  
                  59,860STOCKHOLDERS'
      EQUITY (DEFICIT)Common stock, $.001 Par Value; 125,000,000 shares
    authorizedand
      37,366,657 and 33,554,024 shares issued and outstanding,
      respectively
                  
                  
                  37,367
                  
                  
                  
                  33,554Additional
      paid-in capital
                  
                  
                  1,847,501
                  
                  
                  
                  898,156Accumulated
      deficit
                  
                  
                  (1,711,316
                  )
                  
                  
                  (1,753,060
                  )Accumulated
      other comprehensive income (loss)
                  
                  
                  (84,122
                  )
                  
                  
                  (137,719
                  )Total
      Stockholders' Equity (Deficit)
                  
                  
                  89,430
                  
                  
                  
                  (959,069
                  )TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                  
                  $
                  734,654
                  
                  
                  $
                  998,976
   The accompanying notes are
an integral part of the condensed consolidated financial
statements.
 
 1
  TELIPHONE
CORP. CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS FOR
THE SIX AND THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 (UNAUDITED)
   US$
                  
                  
                  US$SIX
      MONTHS ENDED
                  
                  
                  THREE
      MONTHS ENDEDMARCH
      31,
                  
                  
                  MARCH
      31,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008OPERATING
      REVENUESRevenues
                  
                  $
                  644,395
                  
                  
                  $
                  481,863
                  
                  
                  $
                  323,961
                  
                  
                  $
                  291,895COST
      OF REVENUESInventory,
      beginning of period
                  
                  
                  8,964
                  
                  
                  
                  6,100
                  
                  
                  
                  6,593
                  
                  
                  
                  10,705Purchases
      and cost of VoIP services
                  
                  
                  348,724
                  
                  
                  
                  293,486
                  
                  
                  
                  170,122
                  
                  
                  
                  177,530Inventory,
      end of period
                  
                  
                  (8,788
                  )
                  
                  
                  (10,014
                  )
                  
                  
                  (8,788
                  )
                  
                  
                  (10,014
                  )Total
      Cost of Revenues
                  
                  
                  348,900
                  
                  
                  
                  289,572
                  
                  
                  
                  167,927
                  
                  
                  
                  178,221GROSS
      PROFIT
                  
                  
                  295,495
                  
                  
                  
                  192,291
                  
                  
                  
                  156,034
                  
                  
                  
                  113,674OPERATING
      EXPENSESSelling
      and promotion
                  
                  
                  3,428
                  
                  
                  
                  2,742
                  
                  
                  
                  128
                  
                  
                  
                  1,135Administrative
      wages
                  
                  
                  90,183
                  
                  
                  
                  11,467
                  
                  
                  
                  49,743
                  
                  
                  
                  11,467Professional
      and consulting fees
                  
                  
                  67,993
                  
                  
                  
                  157,583
                  
                  
                  
                  43,940
                  
                  
                  
                  75,579Other
      general and administrative expenses
                  
                  
                  37,387
                  
                  
                  
                  22,417
                  
                  
                  
                  20,388
                  
                  
                  
                  11,115Depreciation
                  
                  
                  3,572
                  
                  
                  
                  40,423
                  
                  
                  
                  1,762
                  
                  
                  
                  20,149Total
      Operating Expenses
                  
                  
                  202,563
                  
                  
                  
                  234,632
                  
                  
                  
                  115,961
                  
                  
                  
                  119,445NET
      INCOME (LOSS) BEFORE OTHERINCOME
      (EXPENSE)
                  
                  
                  92,932
                  
                  
                  
                  (42,341
                  )
                  
                  
                  40,073
                  
                  
                  
                  (5,771
                  )OTHER
      INCOME (EXPENSE)Interest
      expense
                  
                  
                  (37,024
                  )
                  
                  
                  (40,955
                  )
                  
                  
                  (4,917
                  )
                  
                  
                  (24,333
                  )Total
      Other Income (Expense)
                  
                  
                  (37,024
                  )
                  
                  
                  (40,955
                  )
                  
                  
                  (4,917
                  )
                  
                  
                  (24,333
                  )NET
      INCOME (LOSS) BEFORE MINORITY INTEREST ANDPROVISION
      FOR INCOME TAXES
                  
                  
                  55,908
                  
                  
                  
                  (83,296
                  )
                  
                  
                  35,156
                  
                  
                  
                  (30,104
                  )Minority
      interest
                  
                  
                  (14,164
                  )
                  
                  
                  10,050
                  
                  
                  
                  (7,654
                  )
                  
                  
                  5,396NET
      INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
                  
                  
                  41,744
                  
                  
                  
                  (73,246
                  )
                  
                  
                  27,502
                  
                  
                  
                  (24,708
                  )Provision
      for Income Taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -NET
      INCOME (LOSS) APPLICABLE TO COMMON SHARES
                  
                  $
                  41,744
                  
                  
                  $
                  (73,246
                  )
                  
                  $
                  27,502
                  
                  
                  $
                  (24,708
                  )NET
      INCOME (LOSS) PER BASIC AND DILUTED SHARES
                  
                  $
                  0.00
                  
                  
                  $
                  (0.00
                  )
                  
                  $
                  0.00
                  
                  
                  $
                  (0.00
                  )WEIGHTED
      AVERAGE NUMBER OF COMMONSHARES
      OUTSTANDING
                  
                  
                  35,460,336
                  
                  
                  
                  33,554,014
                  
                  
                  
                  37,366,657
                  
                  
                  
                  33,554,014COMPREHENSIVE
      INCOME (LOSS)Net
      income (loss)
                  
                  $
                  41,744
                  
                  
                  $
                  (73,246
                  )
                  
                  $
                  27,502
                  
                  
                  $
                  (24,708
                  )Other
      comprehensive income (loss)Currency
      translation adjustments
                  
                  
                  53,597
                  
                  
                  
                  2,399
                  
                  
                  
                  8,291
                  
                  
                  
                  4,154Comprehensive
      income (loss)
                  
                  $
                  95,341
                  
                  
                  $
                  (70,847
                  )
                  
                  $
                  35,793
                  
                  
                  $
                  (20,554
                  )
 
  The accompanying notes are
an integral part of the condensed consolidated financial
statements.
  2
 
  TELIPHONE
CORP. CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008
 (UNAUDITED)
   US$SIX
      MONTHS ENDEDMARCH
      31,2009
                    
                    
                    2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income (loss)
                    
                    $
                    41,744
                    
                    
                    $
                    (73,246
                    )Adjustments
      to reconcile net income (loss) to net cashused
      in operating activities:Depreciation
                    
                    
                    3,572
                    
                    
                    
                    40,423Minority
      interest
                    
                    
                    14,164
                    
                    
                    
                    (10,050
                    )Changes
      in assets and liabilities(Increase)
      in accounts receivable
                    
                    
                    (105,278
                    )
                    
                    
                    (93,471
                    )Decrease
      in investment tax credit receivable
                    
                    
                    -
                    
                    
                    
                    11,282(Increase)
      in inventory
                    
                    
                    (1,226
                    )
                    
                    
                    (4,145
                    )Decrease
      in prepaid expenses and other current assets
                    
                    
                    13,606
                    
                    
                    
                    2,129Increase
      (decrease) in deferred revenues
                    
                    
                    197
                    
                    
                    
                    (13,011
                    )Increase
      in accounts payable andand
      accrued expenses
                    
                    
                    (58,009
                    )
                    
                    
                    (7,583
                    )Total
      adjustments
                    
                    
                    (132,974
                    )
                    
                    
                    (74,426
                    )Net
      cash (used in) operating activities
                    
                    
                    (91,230
                    )
                    
                    
                    (147,672
                    )CASH
      FLOWS FROM INVESTING ACTIVITIESCash
      received in acquisition of net assets of Dialek Telecom
                    
                    
                    -
                    
                    
                    
                    74,039Net
      cash provided by investing activities
                    
                    
                    -
                    
                    
                    
                    74,039CASH
      FLOWS FROM FINANCING ACTIVITESIncrease
      in bank overdraft
                    
                    
                    98,838
                    
                    
                    
                    -Proceeds
      from debenture payable
                    
                    
                    47,570Proceeds
      from loan payable - related parties, net
                    
                    
                    (53,720
                    )
                    
                    
                    99,471Net
      cash provided by financing activities
                    
                    
                    92,688
                    
                    
                    
                    99,471Effect
      of foreign currencies
                    
                    
                    (1,458
                    )
                    
                    
                    (2,555
                    )NET
      INCREASE INCASH
      AND CASH EQUIVALENTS
                    
                    
                    -
                    
                    
                    
                    23,283CASH
      AND CASH EQUIVALENTS -BEGINNING
      OF YEAR
                    
                    
                    -
                    
                    
                    
                    11,981CASH
      AND CASH EQUIVALENTS - END OF PERIOD
                    
                    $
                    -
                    
                    
                    $
                    35,264CASH
      PAID DURING THE YEAR FOR:Interest
      expense
                    
                    $
                    22,745
                    
                    
                    $
                    40,955SUPPLEMENTAL
      NONCASH INFORMATION:Common
      stock issued for liability for stock to be issued
                    
                    $
                    953,158
                    
                    
                    $
                    -Acquisition
      of Dialek Customers:Accounts
      receivable
                    
                    $
                    -
                    
                    
                    $
                    9,742Goodwill
                    
                    
                    -
                    
                    
                    
                    546,123Accounts
      payable
                    
                    
                    -
                    
                    
                    
                    (220,740
                    )Note
      payable
                    
                    
                    -
                    
                    
                    
                    (409,164
                    )Cash
      received in acquisition
                    
                    $
                    -
                    
                    
                    $
                    (74,039
                    )
   The accompanying notes are
an integral part of the condensed consolidated financial
statements.
  3
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
1-                ORGANIZATION AND BASIS OF
PRESENTATION
 
 The
unaudited condensed consolidated financial statements included herein have been
prepared, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”).  The condensed consolidated financial
statements and notes are presented as permitted on Form 10-Q and do not contain
information included in the Company’s annual consolidated statements and
notes.  Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading.  It is suggested that these condensed consolidated
financial statements be read in conjunction with the September 30, 2008 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.
  4
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
 
 
 NOTE
1-                ORGANIZATION AND BASIS OF
PRESENTATION(CONTINUED)
 
 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.
 
 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.
 
 On August
21, 2006, OSK Capital II Corporation formerly changed its name to Teliphone
Corp.
 
 Going
Concern
  As shown
in the accompanying condensed consolidated financial statements the Company has
incurred net income (loss) of $41,744 and ($73,246) for the six months ended
March 31, 2009 and 2008, and has a working capital deficiency of $171,389 as of
March 31, 2009.  The Company has been searching for new distribution
channels to wholesale their services to provide additional revenues to support
their operations.
 
 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 will assist the Company in achieving profitability in the
future.
 5
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
 
 
 NOTE
1-                      ORGANIZATION AND BASIS OF
PRESENTATION(CONTINUED)
 
 Going Concern
(Continued)
 
 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.
 
 Subsequently
on May 1, 2009, the company entered into a customer assignment contract with
9191-4200 Quebec Inc. where it acquired the customer contracts of Orion
Communications Inc., an Ontario, Canada Company.  The transaction is
further detailed in Note 11- SUBSEQUENT EVENTS.
 
 While the
Company has experienced interim six month period net profit for the period
ending March 31, 2009, there is still no guarantee that the Company will be able
to raise additional capital or generate the increase in revenues to sustain its
operations.  The Company has 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. The Company’s management has
made strides in the past year; however the accumulated losses and working
capital deficiency continue to raise substantial doubt about the Company’s
ability to continue as a going concern for a reasonable period.
 
 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 will continue to search for acquisition opportunities as well as look to
expand its distribution channels in other markets in furtherance of its business
plan.
 
 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 and,
ultimately, achieve profitable operations.  There can be no assurance
that management will be able to raise sufficient capital, under terms
satisfactory to the Company, if at all.
 
 The
condensed 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.
  6
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
 
 
 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.
  7
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
2-                SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES(CONTINUED)
 
 Comprehensive
Income
 
 The
Company adopted Statement of Financial Accounting Standards No, 130, “Reporting
Comprehensive Income,” (SFAS No. 130). SFAS No. 130 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. For the six months ended March 31, 2009 and 2008, the Company
recorded approximately $53,597 and $2,399 in transaction gains as a result of
currency translation.
   8
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
2-                SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES(CONTINUED)
 
 Research and
Development
 
 The
Company annually 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.
 
 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 Staff
Accounting Bulletin No. 104, Revenue Recognition, and Emerging Issues Task Force
Consensus No. 01-9, Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products) ("EITF No. 01-9"), EITF Issue
00-21, "Revenue Arrangements with Multiple Deliverables", and EITF Issue No.
00-14, “Accounting for Certain Sales Incentives”. 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.
  9
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
2-                SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES(CONTINUED)
 
 Revenue Recognition(Continued)
 
 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 SAB 104 Section A(4)(a)
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 FASB Statement 48
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.
  10
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
2-                SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES(CONTINUED)
 
 Revenue Recognition(Continued)
  The
Company recognizes this revenue utilizing the guidance set forth in EITF Issue
00-21, "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 with Question 1 of Section
A(3)(f) of SAB 104 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 EITF 00-21, “Revenue
Arrangements with Multiple Deliverables” and EITF Issue 01-9, “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.
  11
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
2-                SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES(CONTINUED)
 
 Revenue Recognition(Continued)
 
 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.  This accounting is
consistent with EITF Issue No. 00-14, “Accounting for Certain Sales
Incentives.”
 
 Commissions Paid to
Wholesalers
 
 The
Company recognizes this revenue utilizing the guidance set forth in EITF Issue
01-9 “Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor’s Products)”.  The Company is receiving
identifiable benefits from the Wholesaler (billing and customer support) in
return for the allowance.  These benefits are sufficiently separable
from the Wholesaler’s purchase of the Company’s hardware and
services.  The fair value of those benefits can be reasonably
estimated and therefore the excess consideration is characterized as a reduction
of revenue on the Company’s Statement of Operations.
 
 Resale of Traditional
Telecommunications Services (due to Acquisition of customer base of Dialek
Telecom (see Note 10))
 
 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.   The revenue recognition policies used for these sales
are in accordance with the Securities and Exchange Commission's Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements."
  12
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
2-                SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES(CONTINUED)
 
 Accounts
Receivable
 
 The
Company conducts business and extends credit based on an evaluation of the
customers’ financial condition, generally without requiring
collateral.
 
 Exposure
to losses on receivables is expected to vary by customer due to the financial
condition of each customer. The Company monitors exposure to credit losses and
maintains allowances for anticipated losses considered necessary under the
circumstances. The Company has an allowance for doubtful accounts of $0 at March
31, 2009.
 
 Accounts
receivable are generally due within 30 days and collateral is not required.
Unbilled accounts receivable represents amounts due from customers for which
billing statements have not been generated and sent to the
customers.
 
 Income
Taxes
 
 The
Company accounts for income taxes utilizing the liability method of
accounting.  Under the liability method, deferred taxes are determined
based on differences between financial statement and tax bases of assets and
liabilities at enacted tax rates in effect in years in which differences are
expected to reverse.  Valuation allowances are established, when
necessary, to reduce deferred tax assets to amounts that are expected to be
realized.
 
 Investment Tax
Credits
 
 The
Company claims investment tax credits as a result of incurring scientific
research and experimental development expenditures. Investment tax credits are
recognized when the related expenditures are incurred, and there is reasonable
assurance of their realization. Management has made a number of estimates and
assumptions in determining their expenditures eligible for the investment tax
credit claim. It is possible that the allowed amount of the investment tax
credit claim could be materially different from the recorded amount upon
assessment by Revenue Canada and Revenue Quebec. The Company has not estimated
any amounts for incoming tax credits for March 31, 2009.
  13
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
2-                SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES(CONTINUED)
 
 Convertible
Instruments
 
 The
Company reviews the terms of convertible debt and equity securities for
indications requiring bifurcation, and separate accounting, for the embedded
conversion feature. Generally, embedded conversion features where the ability to
physical or net-share settle the conversion option is not within the control of
the Company are bifurcated and accounted for as a derivative financial
instrument. (See Derivative Financial Instruments below). Bifurcation of the
embedded derivative instrument requires allocation of the proceeds first to the
fair value of the embedded derivative instrument with the residual allocated to
the debt instrument. The resulting discount to the face value of the debt
instrument is amortized through periodic charges to interest expense using the
Effective Interest Method.
 
 Derivative Financial
Instruments
 
 The
Company generally does not use derivative financial instruments to hedge
exposures to cash-flow or market risks. However, certain other financial
instruments, such as warrants or options to acquire common stock and the
embedded conversion features of debt and preferred instruments that are indexed
to the Company’s common stock, are classified as liabilities when either (a) the
holder possesses rights to net-cash settlement or (b) physical or net share
settlement is not within the control of the Company. In such instances, net-cash
settlement is assumed for financial accounting and reporting, even when the
terms of the underlying contracts do not provide for net-cash settlement. Such
financial instruments are initially recorded at fair value and subsequently
adjusted to fair value at the close of each reporting period.
 
 Advertising
Costs
  The
Company expenses the costs associated with advertising as
incurred.  Advertising expenses for the six months ended March 31,
2009 and 2008 are included in selling and promotion expenses in the condensed
consolidated statements of operations.
 
 Fixed
Assets
  Fixed
assets are stated at cost.  Depreciation is computed using the
straight-line method over the estimated useful lives of the assets; automobiles
– 3 years, computer equipment – 3 years, and furniture and fixtures – 5
years.
  When
assets are retired or otherwise disposed of, the costs and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
recognized in income for the period.  The cost of maintenance and
repairs is charged to income as incurred; significant renewals and betterments
are capitalized.  Deduction is made for retirements resulting from
renewals or betterments.
  14
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
2-                SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES(CONTINUED)
 
 Impairment of Long-Lived
Assets
 
 Long-lived
assets, primarily fixed assets, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets might
not be recoverable. The Company does perform a periodic assessment of assets for
impairment in the absence of such information or indicators. Conditions that
would necessitate an impairment assessment include a significant decline in the
observable market value of an asset, a significant change in the extent or
manner in which an asset is used, or a significant adverse change that would
indicate that the carrying amount of an asset or group of assets is not
recoverable. For long-lived assets to be held and used, the Company recognizes
an impairment loss only if its carrying amount is not recoverable through its
undiscounted cash flows and measures the impairment loss based on the difference
between the carrying amount and estimated fair value.
 
 Earnings (Loss) Per Share of
Common Stock
 
 Basic net
income (loss) per common share is computed using the weighted average number of
common shares outstanding.  Diluted earnings per share (EPS) includes
additional dilution from common stock equivalents, such as stock issuable
pursuant to the exercise of stock options and warrants.  Common stock
equivalents were not included in the computation of diluted earnings per share
when the Company reported a loss because to do so would be antidilutive for
periods presented.
  15
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
2-               
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES(CONTINUED)
 
 Earnings (Loss) Per Share of
Common Stock (Continued)
 
 The
following is a reconciliation of the computation for basic and diluted
EPS:
 
 March
      31,
                  
                  
                  March31,2009
                  
                  
                  2008Net
      income (loss)
                  
                  $
                  41,744
                  
                  
                  $
                  (73,246
                  )Weighted-average
      common sharesOutstanding
      (Basic)
                  
                  
                  35,460,336
                  
                  
                  
                  33,554,024Weighted-average
      common stockEquivalentsStock
      options
                  
                  
                  -
                  
                  
                  
                  -Warrants
                  
                  
                  -
                  
                  
                  
                  -Weighted-average
      common sharesOutstanding
      (Diluted)
                  
                  
                  35,460,336
                  
                  
                  
                  33,554,024
 
 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
 
 On
December 16, 2004, the Financial Accounting Standards Board (“FASB”) published
Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (“SFAS
123R”).  SFAS 123R requires that compensation cost related to
share-based payment transactions be recognized in the financial statements.
Share-based payment transactions within the scope of SFAS 123R include stock
options, restricted stock plans, performance-based awards, stock appreciation
rights, and employee share purchase plans.  The provisions of SFAS
123R, as amended, are effective for small business issuers beginning as of the
next fiscal year after December 15, 2005.  The Company has adopted the
provisions of SFAS 123R as of its fiscal year ended September 30, 2006. The
adoption of this principle had no effect on the Company’s
operations.
  16
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
2-                SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES(CONTINUED)
 
 Stock-Based
Compensation (Continued)
 
 On
January 1, 2006, the Company adopted the provisions of FAS No. 123R “Share-Based
Payment” (“FAS 123R”) which requires recognition of stock-based compensation
expense for all share-based payments based on fair value. Prior to January 1,
2006, the Company measured compensation expense for all of its share-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”) and related interpretations. The Company has provided pro
forma disclosure amounts in accordance with FAS No. 148, “Accounting for
Stock-Based Compensation – Transition and Disclosure – an amendment of FASB
Statement No. 123” (“FAS 148”), as if the fair value method defined by FAS No.
123, “Accounting for Stock Based Compensation” (“FAS 123”) had been applied to
its stock-based compensation.
 
 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 estimated in accordance with the
original provisions of FAS 123. Stock-based compensation expense for all awards
granted after January 1, 2006 is based on the grant-date fair values estimated
in accordance with the provisions of FAS 123R. 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 the Financial Accounting Standards Board (FASB) Emerging
Issues Task Force (EITF) Issue No. 96-18, “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.
 17
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
      2-
                SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES(CONTINUED)
 
 Segment
Information
 
 The
Company follows the provisions of SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information”. This standard requires that
companies disclose operating segments based on the manner in which management
disaggregates the Company in making internal operating decisions. Despite the
Company’s subsidiary, Teliphone, Inc. incurring sales of hardware components for
the VoIP service as well as the service itself, the Company treats these items
as one component, therefore has not segregated their business.
 
 Reclassifications
 
 The
Company has reclassified certain amounts in their condensed consolidated
statement of operations for the six months ended March 31, 2008 to conform with
the March 31, 2009 presentation. These reclassifications had no effect on the
net loss for the six months ended March 31, 2008.
 
 Uncertainty in Income
Taxes
 
 In July
2006, the FASB issued Interpretation No. 48 (FIN No. 48), “Accounting for
Uncertainty in Income Taxes.” This interpretation requires recognition and
measurement of uncertain income tax positions using a “more-likely-than-not”
approach. FIN No. 48 is effective for fiscal years beginning after December 15,
2006. Management has adopted FIN 48 for 2008, and they evaluate their tax
positions on an annual basis, and has determined that as of March 31, 2009, no
additional accrual for income taxes other than the federal and state provisions
and related interest and estimated penalty accruals is not considered
necessary.
 
 Recent Accounting
Pronouncements
 
 In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” This
standard 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 SFAS 157 is not expected to have a material impact
on the financial statements.
  18
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
      2-
                SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES(CONTINUED)
 
 Recent Accounting
Pronouncements (Continued)
 
 In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115”, (“FAS 159”) 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. FAS 159 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 FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
No 51” (SFAS 160). SFAS 160 establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent,
changes in a parent’s ownership of a noncontrolling interest, calculation and
disclosure of the consolidated net income attributable to the parent and the
noncontrolling interest, changes in a parent’s ownership interest while the
parent retains its controlling financial interest and fair value measurement of
any retained noncontrolling equity investment. SFAS 160 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years. Early adoption is prohibited. The
adoption of SFAS No. 160 is not expected to have a material effect on the
Company’s financial position, results of operations or cash flows.
 
 In
December 2007, the FASB issued SFAS 141R,Business Combinations (“SFAS
141R”), which replaces FASB SFAS 141,Business
Combinations.  This Statement retains the fundamental
requirements in SFAS 141 that the acquisition method of accounting be used for
all business combinations and for an acquirer to be identified for each business
combination. SFAS 141R 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.  SFAS
141R 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.  SFAS 141R 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.  This compares to the cost allocation method previously
required by SFAS No. 141.  SFAS 141R 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, SFAS 141R will require an entity to recognize
contingent consideration at the date of acquisition, based on the fair value at
that date.  This Statement will be effective for business combinations
completed on or after the first annual reporting period beginning on or after
December 15, 2008.  Early adoption of this standard is not permitted
and the standards are to be applied prospectively
only.
  19
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
      2-
                SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES(CONTINUED)
 
 Recent Accounting
Pronouncements (Continued)
 
 Upon
adoption of this standard, there would be no impact to the Company’s results of
operations and financial condition for acquisitions previously
completed.  The adoption of SFAS No. 141R is not expected to have a
material effect on the Company’s financial position, results of operations or
cash flows.
 
 In
December 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 110, “Use of a
Simplified Method in Developing Expected Term of Share Options” (“SAB
110”). SAB 110 expenses the current view of the staff that it will accept a
company’s election to use the simplified method discussed in Staff Accounting
Bulletin No. 107, “Share Based
Payment”, (“SAB 107”), for estimating the expected term of “plain
vanilla” share options regardless of whether the company has sufficient
information to make more refined estimates. SAB 110 became effective for the
Company on January 1, 2008. The adoption of SAB 110 did not have a material
impact on the Company’s financial position.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS 161”).
SFAS 161 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 under SFAS 133 and its related interpretations; and how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008. The Company does not believe that SFAS 161 will have an impact on
their results of operations or financial position.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (SFAS 162). SFAS 162 makes the hierarchy of generally
accepted accounting principles explicitly and directly applicable to preparers
of financial statements, a step that recognizes preparers’ responsibilities for
selecting the accounting principles for their financial statements. The
effective date for SFAS 162 is 60 days following the U.S. Securities and
Exchange Commission’s approval of the Public Company Accounting Oversight
Board’s related amendments to remove the GAAP hierarchy from auditing standards,
where it has resided for some time. The adoption of SFAS 162 will not have an
impact on the Company’s results of operations or financial
position.
 20
 TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
      2-
                SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES(CONTINUED)
 
 Recent Accounting
Pronouncements (Continued)
 
 In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts – an interpretation of SFAS No. 60” (SFAS 163). SFAS 163
prescribes accounting for insures of financial obligations, bringing consistency
to recognizing and recording premiums and to loss recognition. SFAS 163 also
requires expanded disclosures about financial guarantee insurance contracts.
Except for some disclosures, SFAS 163 is effective for financial statements
issued for fiscal years beginning after December 15, 2008. The adoption of SFAS
163 will not have an impact on the Company’s results of operations or financial
position.
 
 In April
2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of
Intangible Assets”. This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible
Assets”. The Company was required to adopt FSP 142-3 on October 1, 2008. The
guidance in FSP 142-3 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 FSP 142-3 will materially impact their financial position,
results of operations or cash flows.
 
 In May
2008, the FASB issued FSP Accounting Principles Board 14-1, “Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 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. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008 on a retroactive
basis. The Company does not believe that the adoption of FSP APB 14-1 will have
a material effect on its financial position, results of operations or cash
flows.
 
 In June
2008, the Emerging Issues Task Force issued EITF No. 07-05, “Determining Whether
an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF
07-05”), which supersedes the definition in EITF 06-01 for periods beginning
after December 15, 2008. The objective of EITF 07-05 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 FSAB 133, for purposes of determining whether that instrument or embedded
feature qualifies for the first part of the scope exception in paragraph 11(a)
of SFAS 133 (“the Paragraph 11(a) Exception”). EITF 07-05 also applies to any
freestanding financial instrument that is potentially settled in an entity’s own
stock, regardless of whether the instrument is within the scope of EITF 00-19.
The Company is determining what impact, if any, EITF 07-05 will have on its
financial position, results of operations and cash flows.
  21
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
      2-
                SUMMARY OF SIGNIFICANT
      ACCOUNTING POLICIES(CONTINUED)
 
 Recent Accounting
Pronouncements (Continued)
 
 In June
2008, the Emerging Issues Task Force issued EITF 08-04, “Transition Guidance for
Conforming Changes to EITF 98-5, Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios”
(“EITF 08-04”). EITF 08-04 is effective for years ending after December 15,
2008. The overall objective of EITF 08-04 is to conform the requirements of EITF
00-27 and FASB 150 with EITF 98-5 to provide for consistency in application of
the standard. The Company has computed and recorded a beneficial conversion
feature in connection with certain of their prior financing arrangements and
does not believe that EITF 08-04 will have a material effect on that
accounting.
 
 Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date and
are not expected to have a material impact on the financial statements upon
adoption.
 
 NOTE
3-                FIXED
ASSETS
 
 Fixed
assets as of March 31, 2009 and September 30, 2008 were as follows:
  Estimated
                
                
                (unaudited)Useful
                
                
                March
      31,
                
                
                September
      30,Lives
      (Years)
                
                
                2009
                
                
                2008Furniture
      and fixtures
                
                
                5
                
                
                $
                1,059
                
                
                $
                1,255Computer
      equipment
                
                
                3
                
                
                
                166,945
                
                
                
                197,879Vehicles
                
                
                5
                
                
                
                19,988
                
                
                
                23,692187,992
                
                
                
                222,826Less:
      accumulated depreciation
                
                
                
                
                
                
                179,185
                
                
                
                208,263Property
      and equipment, net
                
                
                
                
                
                $
                8,807
                
                
                $
                14,563
 
 There was
$3,572 and $40,423 charged to operations for depreciation expense for the six
months ended March 31, 2009 and 2008, respectively.
 
 The
Company had acquired assets of a now related entity in April 2005, United
American Corporation (UAC).  UAC was the founder of Teliphone Inc.,
the Company’s majority-owned subsidiary.  This equipment was part of
the initial investment made by UAC in Teliphone Inc.  These assets,
included in fixed assets amounted to $104,500.
  22
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
 
 
 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 were 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.
 
 The
Company had also over the past few years been advanced various amounts from
related parties whom are either 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, 2009, the Company has $42,500 including accrued interest outstanding
with shareholders. Interest expense for the six months ended March 31, 2009 was
$2,210. These notes accrue interest at 5% per annum, and at March 31, 2009, all
interest has been paid to date. These related party loans are due on demand and
classified as current liabilities on the condensed consolidated balance sheet at
March 31, 2009.
  23
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
      4-
                RELATED PARTY
      LOANS (CONTINUED)
 
 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”) (See Note 9). The Company holds the option
to pay the entire amount of the balance due at anytime.  Up thorough
November 30, 2008, the Company was making a minimum monthly payment of CDN
$9,992.01, which equates to the payment of the $360,331 (US$) (CDN $383,464)
over 52 months at 15% annual interest.
 
 On
December 1, 2008, the Company and 9151-4877 Quebec Inc. entered into an
agreement which permits the Company to pay 50% of the monthly payment in cash
and the balance in shares of the common stock.
 
 On
December 31, 2008, the Company and Dialek Telecom agreed to convert the entire
remaining principal of $264,476 into 1,057,905 shares ($.25 per share) of the
common stock of the Company.
 
 In
addition, the shareholders of 9151-4877 Quebec Inc. have provided a revolving
line of credit facility of CDN $150,000 18% per annum rate of
interest.  As of December 31, 2008, the Company had drawn down
$123,153 (CDN$150,000) of this line of credit   On December 31,
2008, the Company and the shareholders of Dialek Telecom agreed to convert the
entire amount into 492,612 shares ($.25 per share) of the common stock of the
Company.
  24
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
      4-
                RELATED PARTY
      LOANS (CONTINUED)
 
 On
November 15, 2007, a shareholder of the Company provided a fixed term deposit of
$45,000 (US$) with the Company’s bank in order to guarantee an equivalent value
operating line of credit for use by the Company.  Until December 31,
2008, the Company provided the shareholder an annual interest rate of 20%
payable in common stock of The Company.
 
 On
January 29, 2008, a shareholder of the Company provided a fixed term deposit of
$30,000 (US$) with the Company’s bank in order to guarantee an equivalent value
operating line of credit for use by the Company. The Company is providing 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 payables 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 $2,125 in accrued interest on this payable.
 
 NOTE
      5-
                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.
  25
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
      5-
                CONVERTIBLE
      DEBENTURES(CONTINUED)
 
 The
Debentures can either be paid to the holders on February 6, 2010 or converted at
the holders’ option any time up to maturity at a conversion price equal to
eighty percent (80%) of the average closing price of the common stock as listed
on a Principal Market for the five (5) trading days immediately preceding the
conversion date. If the common stock is not traded on a Principal Market, the
conversion price shall mean the closing bid price as furnished by the National
Association of Securities Dealers, Inc.
 
 On
February 17, 2009, the Company entered into a 12% Convertible Debenture (the
“Debenture”) with an individual. The Debenture had a maturity date of February
17, 2010, and incurred interest at a rate of 12% per annum.
 
 The
Debentures can either be paid to the holders on February 6, 2010 or converted at
the holders’ option any time up to maturity at a conversion price equal to
eighty percent (80%) of the average closing price of the common stock as listed
on a Principal Market for the five (5) trading days immediately preceding the
conversion date. If the common stock is not traded on a Principal Market, the
conversion price shall mean the closing bid price as furnished by the National
Association of Securities Dealers, Inc.
 
 The total
amount of the Debentures entered into in February 2009 was $47,570.
 
 The
convertible debentures met the definition of hybrid instruments, as defined in
SFAS 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS No. 133). 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. There was no derivative liability recognized due to
the conversion of the debenture into shares of common stock at he time the
debenture agreement was entered into.
 
 The
embedded derivative did not qualify as a fair value or cash flow hedge under
SFAS No. 133.
  26
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
6-                COMMITMENTS
 
 The
Company’s subsidiary Teliphone Inc. had entered into a distribution agreement
with one of its distributors in March 2006 for a period of five-years. The
distribution agreement stipulated that the Company must pay up to 25%
commissions on all new business generated by the distributor. This distributor
controlled the areas of Quebec and Ontario in Canada. The agreement was
terminated due to a default by the distributor on its terms and
conditions.
 
 The
default is now in dispute, as The Company received notice on February 11, 2009
from 9164-4898 Quebec Inc (known as BR Communications Inc.”). The notice claims
that the Company owes BR Communications Inc. unpaid commissions totaling CDN$
158,275.25 ($129,944 US$) based on the Company’s increase in sales due to its
Dialek acquisition.
 
 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 is in the process of evaluating this dispute and is also considering
counterclaims against BR Communications Inc. for lost sales due to BR’s default
of their distribution agreement with the Company.
 
 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.
 
 On August
23, 2005, The Company’s subsidiary Teliphone, Inc. entered into a marketing and
distribution rights with Podar Infotech Ltd. The five year renewable agreement
grants Podar the exclusive marketing and distribution rights for the Company’s
products and services for India, China, Sri Lanka, Russia and UAE for which the
Company will receive contractually agreed payments.  This agreement
was terminated during 2008.
 
 The
Company’s subsidiary Teliphone, Inc. had entered into a lease agreement for its
offices, which is set to expire on March 31, 2011. The Company pays
approximately $28,000 (CND$) per year for the years ending September 30, 2009
and 2010, and $16,000 (CND$) for the six months ending March 31, 2011 for an
aggregate total of $72,000. Rent expense for the six months ended March 31, 2009
was $11,540.
 27
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
 
 
 NOTE
7-                AGREEMENT – INTELCO
COMMUNICATIONS
 
 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 (the
“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 repaid in December 2006.
 
 On
September 30, 2008, 133 class A voting shares of the common stock of Teliphone
Inc. were issued to the Company for a conversion of cash advances and loans by
the Company into its subsidiary.  As a result, 3901823 decreased its
holding of Teliphone Inc. from 25.2% to 12.9%.
 
 Teliphone
Inc. recognized a prepaid expense for the fair value of the shares issued to
Intelco. The value of the prepaid expense was determined based on the estimated
cost of the services that Teliphone Inc. is to receive under the Joint Venture
Agreement entered into for a one-year period of time. The cost was estimated at
$12,000 (CDN$) per month. Teliphone Inc. up through September 30, 2007 has not
used the $12,000 (CDN$) per month. As of September, 2008, the balance remaining
in the prepaid expense for Intelco was $112,594 (US$).
 
 On
September 30, 2008, the Company re-evaluated the $112,594 pre-paid asset and
considering that the Company has moved from the premises of Intelco, and will
not benefit from any future use of equipment, data center or network, the
Company reduced the value of this pre-paid asset to $0, with a corresponding
reduction in Additional Paid-In Capital of the same amount.
  28
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
8-                STOCKHOLDERS’
DEFICIT
 
 Common
Stock
 
 As of
March 31, 2009, the Company has 125,000,000 shares of common stock authorized
with a par value of $.001.
 
 The
Company has 37,366,657 and 33,554,024 shares issued and outstanding as of March
31, 2009 and September 30, 2008.
 
 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.
 29
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
9-                PROVISION FOR INCOME
TAXES
 
 Deferred
income taxes are determined using the liability method for the temporary
differences between the financial reporting basis and income tax basis of the
Company’s assets and liabilities.  Deferred income taxes are measured
based on the tax rates expected to be in effect when the temporary differences
are included in the Company’s tax return.  Deferred tax assets and
liabilities are recognized based on anticipated future tax consequences
attributable to differences between financial statement carrying amounts of
assets and liabilities and their respective tax bases.
 
 At March
31, 2009, deferred tax assets consist of the
following:
 
 Net
      operating losses
                  
                  $
                  581,847Valuation
      allowance
                  
                  
                  (581,847
                  )$
                  -
 
 At March
31, 2009, the Company had a net operating loss carryforward in the approximate
amount of $1,711,316, available to offset future taxable income through
2029.  The Company established valuation allowances equal to the full
amount of the deferred tax assets due to the uncertainty of the utilization of
the operating losses in future periods.
 
 A
reconciliation of the Company’s effective tax rate as a percentage of income
before taxes and federal statutory rate for the periods ended March 31, 2009 and
2008 is summarized as follows:
 
 2009
                
                
                2008Federal
      statutory rate
                
                
                (34.0
                )%
                
                
                (34.0
                )%State
      income taxes, net of federal benefits
                
                
                3.3
                
                
                
                3.3Valuation
      allowance
                
                
                30.7
                
                
                
                30.70
                %
                
                
                0
                %
 30
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
10-              ACQUISITION OF CERTAIN
ASSETS AND LIABILITIES
 
 On
February 14, 2008, the Company entered into a Letter of Intent for the
acquisition of certain assets and liabilities of 9151-4877 Quebec Inc.
(Operating as “Dialek Telecom”). The Company later entered into a definitive
agreement for acquisition on June 30, 2008.  While the acquisition
remained effective from the date of February 15, 2008, the Company updated the
valuation after having negotiated the true values of the assets and
liabilities.  As a result, the following demonstrates the details of
the assets and liabilities acquired:
 
 Value
      adjusted and
                  disclosed
      in 06-30-2008 Definitive Agreement (US$)AssetsGoodwill
      (customer contracts)
                
                $
                549,767Accounts
      Receivable
                
                $
                74,533Cash
      in Bank
                
                $
                9,807TOTAL
      ASSETS:
                
                $
                634,107LiabilitiesCurrent
      Supplier Payables
                
                $
                258,044TOTAL
      LIABILITIES:Note
      Payable (see Note 4):
                
                $
                376,063
 
 There was
a reduction of the valuation due to the difference between the verified assets
and liabilities that resulted in a decrease of the acquisition price from
$411,894 (CDN$420,000) to $376,063 (CDN$383,464).  This value
fluctuates based on the exchange rate of the US and CDN dollars.  On
December 31, 2008, the Company converted the entire amount owing of $264,476
into 1,057,905 shares ($.25 per share) of the common stock of the
Company.
 
 LINE OF CREDIT
FACILITY
 
 The
shareholders of 9151-4877 Quebec Inc. have provided a revolving line of credit
facility of CDN $150,000 18% per annum rate of interest.  As of
December 31, 2008, the Company had drawn down $123,153 (CDN$150,000)) of this
line of credit.  On December 31, 2008, the Company and the
shareholders of Dialek Telecom converted the entire amounts owing into 492,612
shares ($.25 per share) of the common stock of the Company.
 31
  TELIPHONE
CORP.
 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE SIX MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
   NOTE
11-             
SUBSEQUENT
EVENTS
 
 On May 7,
2009, the Company entered into an assignment agreement with 9191-4200 Quebec
Inc. in order to have the customer contracts of Orion Communications Inc., an
Ontario, Canada Company assigned to the Company for its
management.  No consideration was paid, however the Company and
9191-4200 Quebec Inc. have agreed to share 50% each of the gross benefits
received from the customer base effective May 1, 2009.
 
 9191-4200
Quebec Inc. likewise provided to the Company a cash deposit of CDN$240,000 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.
  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.
  33
 
 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.
  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.
 
 In June
of 2008, the Company commenced trading of its common stock over the counter
under the ticker symbol TLPH.
 
 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.  The contract was terminated in February 2009.
  34
  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.
  On
December 2, 2005, the Company, through its subsidiary Teliphone Inc. signed a
Co-Location and Bandwidth Services Agreement with Peer 1. The agreement
stipulates that the Company houses its telecommunications and computer server
hardware within the Peer 1 Montreal Data center, located at 1080 Beaver Hall,
suite 1512, Montreal, Quebec, Canada. Likewise, Teliphone Inc. agrees to
purchase Peer 1 bandwidth services and internet access across its worldwide
network. The term of the contract was for 12 months, renewable for successive 30
day terms.
  The
Company sought to expand its product offering in order to offer its broadband
phone services to US customers as well. The Company signed an agreement with RNK
Telecom Inc, a New Jersey company, in December of 2005 which permitted the
company to interconnect with RNK's network of US cities. This agreement has a
term of one year renewable month to month at the end of the term.
 
 On April
6, 2006, the Company, through its subsidiary Teliphone Inc. signed a Master
Services Agreement with Rogers Business Solutions ("Rogers"). This agreement
permits Teliphone Inc. to purchase voice channel capacity for its Canadian
Network. The majority of its current voice channel capacity already exists with
Rogers, however, the current agreements are still between Rogers and the
Company's former parent company, United American Corporation. It is anticipate
that all of the capacity will transfer under the Teliphone Inc.-Rogers agreement
by June 30, 2007. The term of the agreement is for 2 years, with no specific
renewal conditions.  The contract was not renewed as the Company
migrated its Canadian network towards Intelco, as outlined in the next
paragraph.
  Teliphone
Inc., a majority-owned subsidiary of the Company, 3901823 Canada Inc., the
holding company of Intelco Communications ("3901823"), and Intelco
Communications ("Intelco") entered into an agreement on July 14, 2006. Pursuant
to the terms of the Agreement, Teliphone Inc. agreed to issue 35 class A voting
shares of its common stock representing 25.2% of Teliphone Inc.'s issued shares
to 3901823 in exchange for office rent, use of Intelco's data center for
Teliphone Inc.'s equipment, and use of Intelco's broadband telephony network
valued at approximating $144,000 (CDN$) for the period August 1, 2006 through
July 31, 2007, a line of credit of $75,000 (CDN$), of which $25,000 (CDN$) was
already drawn upon in July 2006 and paid back in December
2006.  Teliphone Inc. also agreed to make available to the customers
of Intelco certain proprietary software for broadband telephony use. In lieu of
receiving cash for the licensing of this software, Teliphone Inc. will apply $1
per customer per month at a minimum of $5,000 per
month.  On  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.
 
 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%.
  35
 
 
 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.
 
 Subsequently
on May 7th, 2009,
the Company entered into a customer assignment agreement with the owners of
Orion Communications Inc.  The Company and the owner of Orion
Communications, 9191-4200 Quebec Inc. agreed to a gross benefit sharing
arrangement of 50%-50% for any potential future benefits derived from the
customer base.
  Description
of Business
 
 Trends
in Our Industry and Business
  A number
of trends in our industry and business have a significant effect on our results
of operations and are important to an understanding of our financial statements.
These trends include:
  Broadband adoption. The
number of households with broadband Internet access in our core markets of
Canada and India has grown significantly. We expect this trend to continue. We
benefit from this trend because our service requires a broadband Internet
connection and our potential addressable market increases as broadband adoption
increases.
  Changing competitive
landscape. We are facing increasing competition from other
companies that offer multiple services such as cable television, voice and
broadband Internet service. Several of these competitors are offering VoIP or
other voice services as part of a bundle, in which they offer voice services at
a lower price than we do to new subscribers. In addition, several of these
competitors are working to develop new integrated offerings that we cannot
provide and that could make their services more attractive to customers. We also
compete against established alternative voice communication providers and
independent VoIP service providers. Some of these service providers may choose
to sacrifice revenue in order to gain market share and have offered their
services at lower prices or for free. These offerings could negatively affect
our ability to acquire new customers or retain our existing
customers.
  Consumer adoption of new VoIP
technology.  The development of our Teliphone VoIP service permits
us to sell telecommunications services to consumers who have a broadband
internet connection. Our technology permits customers to continue to use their
traditional phone devices to make and receive calls at a lower cost than
traditional phone services. One of the key challenges in the adoption of this
new technology is the customer’s acceptance of potential loss of service when
their internet connection goes down or they lose electrical power in their home
or office. The Company has mitigated this risk for their customers by providing
telephone call fail-over methods in case of loss of service. Management believes
that even though this adoption risk exists, the reduction of cost for the
services will negate the impact of occasional service loss much like how
consumers accepted at times lower call quality in their worldwide adoption of
mobile phones due to increased convenience.
  The
development of our callona.com website seeks to attract consumers on the
internet who will look to utilize our web-based communications services, which
will permit us to generate advertising and promotional revenues from other
companies looking to advertise and promote their products to our callona.com
users. We have not as yet realized any revenue from our callona.com
prototype.
  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.
  36
  We have
incurred gross losses during our first three years of operation because the
minimum purchases necessary in order to sustain our operations are enough to
deliver services to more customers than we currently have. As a result, we
estimate that we will continue to increase our gross profit over time. An
indication of this is our positive gross profit from the interim period ending
December 31, 2006.
 
 We will
continue to cover our cash shortfalls through debt financing with affiliated
parties. In the event that we do not have a significant increase in revenues and
we do not raise sufficient capital in the offering herein, management
estimates we can only sustain our cash requirements for three
months.  After three months, management will need to consider
alternate sources of financing, including but not limited to additional debt
financing, in order to sustain operations for the next twelve
months.  No agreements or arrangements have been made as of this date
for such financing.
  Principal
products or services and their markets
  With the
merger and re-organization we became a telecommunications company providing
broadband telephone services utilizing our innovative Voice over Internet
Protocol, or VoIP, technology platform, to offer feature-rich, low-cost
communications services to our customers, thus providing them an experience
similar to traditional telephone services at a reduced cost. VoIP means that the
technology used to send data over the Internet (example, an e-mail or web site
page display) is used to transmit voice as well. The technology is known as
packet switching. Instead of establishing a dedicated connection between two
devices (computers, telephones, etc.) and sending the message "in one piece,"
this technology divides the message into smaller fragments, called 'packets'.
These packets are transmitted separately over the internet and when they reach
the final destination, they are reassembled into the original
message.
  Our
Company has invested in the research and development of our VoIP
telecommunications technology which permits the control, forwarding, storing and
billing of phone calls made or received by our customers. Our technology
consists of proprietary software programming and specific hardware
configurations, however, we have no specific legal entitlement that does not
permit someone else from utilizing the same base software languages and same
hardware in order to produce similar telephony service offerings.
 
 Base
software languages are the language building blocks used by programmers to
translate the desired logic sequences into a message that the computer can
understand and execute.  An example of a logic sequence is “if the
user dials “011” before the number, the software should then treat this as an
international call and invoice the client accordingly”.  The
combination and use of these building blocks is known as ‘software code”, and
hence this combination, created by the Company’s programmers, along with
“off-the-shelf” computer and telecommunications hardware (ie. Equipment that is
readily available by computer, networking and telecommunications companies) is
collectively referred to as “our technology and trade secrets”.
 
 Examples
of “off-the-shelf” hardware utilized include the desktop phones and handsets,
computer servers used to store such things as account information and voice
mail, and telecommunications hardware that permit the routing of telephone voice
calls between various points across the internet and the world’s Public Switched
Telephone Network (PSTN), the global wired and wireless connections between
every land and mobile phone.
  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.
  37
  The
Company offers the following products and services to customers utilizing its
VoIP technology platform:
  ·
              Residential
      phone service. Customers purchase a VoIP adaptor from a re-seller and
      install it in their home. This allows all of their traditional phones in
      their home to have their inbound and outbound calls redirected to
      Teliphone. As a result, the residential customer purchases their choice of
      unlimited local or long distance calling services, with pay-per-minute
      long distance calling services.
  ·
              Business
      phone service. Customers purchase multiple VoIP adaptors from re-sellers
      and install them in their business. Similar to Residential phone service,
      customers purchase various local and long distance calling services from
      the Company.
  For
Residential and Business phone services, the Company, through its subsidiary
Teliphone Inc., invoices and collects funds directly from the end-user customer
and pays a commission to their re-sellers and distributors upon receipt of the
funds. The customer can also purchase the VoIP adaptors and calling services
directly with Teliphone Inc. via its website www.teliphone.us for
US customers, www.teliphone.ca for
Canadian customers and www.teliphone.in for
India customers.
  ·
              The
      Company also sells VoIP calling services to Wholesalers who re-sell these
      services to their customers. In this case, the Company’s subsidiary
      Teliphone Inc. provides the services to the end-user customers, however
      invoices and collects funds from the Wholesaler, who invoices their
      customers and provides technical support to their customers
      directly.
  The VoIP
adaptors are manufactured by Linksys-Cisco and purchased by the Company directly
from the manufacturer and re-sold to the re-sellers and wholesalers. The
Company’s subsidiary Teliphone Inc. is a Linksys-Cisco Internet Telephony
Services approved supplier based on their agreement signed in October
2005.
  Distribution
methods of the products or services
  Retail
Sales.
  We
distribute our products and services through our retail partners' stores. Our
retail partners have existing public retail outlets where they typically sell
telecommunications or computer related products and services such as other
telecommunications services (cellular phones) or computer hardware and
software.
  The
Company does not own or rent any retail space for the purpose of distribution,
rather, it relies on its re-seller partners to display and promote the Company's
products and services within their existing retail stores. Our agreement with BR
Communications Inc. has permitted us to establish our retail sales
channel.
  Our
relationship to the retail outlets is on 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.
  38
  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.
  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 risk factor C.6. in this
prospectus.
  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.
  CallOnA.com
  We are
currently testing our CallOnA.com service, which permits users to execute free
calls to certain international destinations by initiating a call from our
website. This service has not been fully tested as of yet and we anticipate
launching the service in a preliminary form within 2009.
  39
  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.
  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.
  40
  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.
  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.
  41
  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.
  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.
  42
  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.
  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.
  43
  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.
  Compliance
with Environmental Laws
  We did
not incur any costs in connection with the compliance with any federal, state,
or local environmental laws.
  The
company has seven full time employees and two additional part time
employees.
 
 CRITICAL ACCOUNTING POLICIES
AND ESTIMATES
  Management's
Discussion and Analysis of Financial Conditions and Results of Operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
When preparing our financial statements, we make estimates and judgments that
affect the reported amounts on our balance sheets and income statements, and our
related disclosure about contingent assets and liabilities. We continually
evaluate our estimates, including those related to revenue, allowance for
doubtful accounts, reserves for income taxes, and litigation. We base our
estimates on historical experience and on various other assumptions, which we
believe to be reasonable in order to form the basis for making judgments about
the carrying values of assets and liabilities that are not readily ascertained
from other sources. Actual results may deviate from these estimates if
alternative assumptions or condition are used.
  In
December 2004, the FASB issued Statement of Financial Accounting Standards No.
123 R (As amended) Accounting for Stock-Based Compensation. This statement is a
revision of FASB Statement No 123 and supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees, and its related implementation guidance. This
statement establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods and services. It also
addresses transactions in which an entity incurs liabilities in exchange for
goods and services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity instruments.
This Statement focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. For public
entities that are not small business issuers, the implementation of this
Statement is required as of the beginning of the first interim or annual
reporting period after June 15, 2005. For public entities that are small
business issuers, the implementation of this Statement, is required as of the
beginning of the first interim or annual reporting period after December 18,
2005. Management is required to implement this Statements beginning in fiscal
year beginning on January 1, 2006 and they are currently evaluating the impact
of implementation of this Statement on the Company.
  44
  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.
 
 Inventories
  Inventories
are stated at the lower of cost to purchase and/or manufacture the inventory or
the current estimated market value of the inventory. We regularly review our
inventory quantities on hand and record a provision for excess and obsolete
inventory based primarily on our estimated forecast of product demand and/or our
ability to sell the products and production requirements. Demand for the our
products can fluctuate significantly. Factors which could affect demand for our
products include unanticipated changes in consumer preferences, general market
conditions or other factors, which may result in cancellations of advance orders
or a reduction in the rate of reorders placed by customers and/or continued
weakening of economic conditions. Additionally, our estimates of future product
demand may be inaccurate, which could result in an understated or overstated
provision required for excess and obsolete inventory. Our estimates are based
upon our understanding of historical relationships which can change at
anytime.
  Fair Value of Financial
Instruments (other than Derivative Financial Instruments)
  The
carrying amounts reported in the condensed consolidated balance sheet 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. For the convertible debentures, fair values were calculated at net
present value using the Company's weighted average borrowing rate for debt
instruments without conversion features applied to total future cash flows of
the instruments.
  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, whiles 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.
  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 Staff
Accounting Bulletin No. 104, Revenue Recognition, and Emerging Issues Task Force
Consensus No. 01-9, Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products) ("EITF No. 01-9"), EITF Issue
00-21, "Revenue Arrangements with Multiple Deliverables", and EITF Issue No.
00-14, “Accounting for Certain Sales Incentives”.. 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:
  45
  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 SAB 104 Section A(4)(a)
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 FASB Statement 48 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.
  46
  The
Company recognizes this revenue utilizing the guidance set forth in EITF Issue
00-21, "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 with SAB 104 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 EITF 00-21, “Revenue Arrangements
with Multiple Deliverables” and EITF Issue 01-9, “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.
  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. This accounting is consistent with EITF Issue No. 00-14, “Accounting for
Certain Sales Incentives.”
  47
  Commissions
Paid to Wholesalers
 
 The
Company recognizes this revenue utilizing the guidance set forth in EITF Issue
01-9 “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)
 
 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.   The revenue recognition policies used for these sales
are in accordance with the Securities and Exchange Commission's Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements."
 
 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.
  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 for 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.
  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.
  48
 
 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 period ending March 31, 2009 and 2008, are included
in selling and promotion expenses in the consolidated statements of
operations.
  Fixed
Assets
  Fixed
assets are stated at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets; automobiles
  - 3
years, computer equipment - 3 years, and furniture and fixtures - 5
years.
  When
assets are retired or otherwise disposed of, the costs and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
recognized in income for the period. The cost of maintenance and repairs is
charged to income as incurred; significant renewals and betterments are
capitalized. Deduction is made for retirements resulting from renewals or
betterments.
  Impairment of Long-Lived
Assets
  Long-lived
assets, primarily fixed assets, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets might
not be recoverable. The Company does perform a periodic assessment of assets for
impairment in the absence of such information or indicators. Conditions that
would necessitate an impairment assessment include a significant decline in the
observable market value of an asset, a significant change in the extent or
manner in which an asset is used, or a significant adverse change that would
indicate that the carrying amount of an asset or group of assets is not
recoverable. For long-lived assets to be held and used, the Company recognizes
an impairment loss only if its carrying amount is not recoverable through its
undiscounted cash flows and measures the impairment loss based on the difference
between the carrying amount and estimated fair value.
  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 because inclusion would have been
antidilutive.
  Stock-Based
Compensation
  On
December 16, 2004, the Financial Accounting Standards Board ("FASB") published
Statement of Financial Accounting Standards No. 123 (Revised 2004), "Share-Based
Payment" ("SFAS 123R"). SFAS 123R requires that compensation cost related to
share-based payment transactions be recognized in the financial statements.
Share-based payment transactions within the scope of SFAS 123R include stock
options, restricted stock plans, performance-based awards, stock appreciation
rights, and employee share purchase plans. The provisions of SFAS 123R, as
amended, are effective for small business issuers beginning as of the next
fiscal year after December 15, 2005. The Company has adopted the provisions of
SFAS 123R for its fiscal year ended September 30, 2006. The adoption of this
principle had no effect on the Company's operations.
  49
  On
January 1, 2006, the Company adopted the provisions of FAS No. 123R "Share-Based
Payment" ("FAS 123R") which requires recognition of stock-based compensation
expense for all share-based payments based on fair value. Prior to January 1,
2006, the Company measured compensation expense for all of its share-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations. The Company has provided pro
forma disclosure amounts in accordance with FAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123" ("FAS 148"), as if the fair value method defined by FAS No.
123, "Accounting for Stock Based Compensation" ("FAS 123") had been applied to
its stock-based compensation.
  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 estimated in accordance with the
original provisions of FAS 123. Stock-based compensation expense for all awards
granted after January 1, 2006 is based on the grant-date fair values estimated
in accordance with the provisions of FAS 123R. 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 the Financial Accounting Standards Board (FASB) Emerging
Issues Task Force (EITF) Issue No. 96-18, "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 SFAS No. 131, "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.
  Recent Accounting
Pronouncements
  In
February 2006, the FASB issued Statement of Financial Accounting Standard No.
155, "Accounting for Certain Hybrid Instruments" ("SFAS 155"). FASB 155 allows
financial instruments that have embedded derivatives to be accounted for as a
whole (eliminating the need to bifurcate the derivative from its host) if the
holder elects to account for the whole instrument on a fair value basis. This
statement is effective for all financial instruments acquired or issued after
the beginning of an entity's first fiscal year that begins after September 15,
2006.
  In May
2005, the FASB issued Statement of Financial Accounting Standard No. 154,
"Accounting Changes and Error Corrections" ("SFAS 154"). SFAS 154 is a
replacement of APB No. 20, "Accounting Changes", and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements". SFAS 154 applies to all
voluntary changes in accounting principle and changes the requirements for
accounting and reporting of a change in accounting principle. This statement
establishes that, unless impracticable, retrospective application is the
required method for reporting of a change in accounting principle in the absence
of explicit transition requirements specific to the newly adopted accounting
principle. It also requires the reporting of an error correction which involves
adjustments to previously issued financial statements similar to those generally
applicable to reporting an accounting change retrospectively. SFAS 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005.
  50
  In
September 2006, the FASB issued SFAS 157, "Fair Value Measurements." This
standard 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 SFAS 157 is not expected to have a material impact
on the financial statements.
  In
September 2006, the FASB issued SFAS 158, "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158 requires an employer to recognize
the over-funded or under-funded status of a defined benefit postretirement plan
(other than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income. SFAS 158 also requires the
measurement of defined benefit plan assets and obligations as of the date of the
employer's fiscal year-end statement of financial position (with limited
exceptions). Management does not expect adoption of SFAS 158 to have a material
impact on the Company's financial statements.
  In
February 2007, the FASB issued FAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities - Including an amendment of FASB Statement No.
115", ("FAS 159") 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. FAS 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years.
  In July
2006, the FASB issued Interpretation No. 48 (FIN No. 48), "Accounting for
Uncertainty in Income Taxes." This interpretation requires recognition and
measurement of uncertain income tax positions using a "more-likely-than-not"
approach. FIN No. 48 is effective for fiscal years beginning after December 15,
2006. Management is still evaluating what effect this will have on the Company's
financial statements.
  In
September 2006, the United States Securities and Exchange Commission ("SEC")
issued SAB 108, "Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements."
  This SAB
provides guidance on the consideration of the effects of prior year
misstatements in quantifying current year misstatements for the purpose of a
materiality assessment. SAB 108 establishes an approach that requires
quantification of financial statement errors based on the effects of each of the
company's financial statements and the related financial statement disclosures.
SAB 108 permits existing public companies to record the cumulative effect of
initially applying this approach in the first year ending after November 15,
2006 by recording the necessary correcting adjustments to the carrying values of
assets and liabilities as of the beginning of that year with the offsetting
adjustment recorded to the opening balance of retained earnings. Additionally,
the use of the cumulative effect transition method requires detailed disclosure
of the nature and amount of each individual error being corrected through the
cumulative adjustment and how and when it arose. The Company does not anticipate
that SAB 108 will have a material impact on its financial
statements.
  51
  Results of Operations – Six
and Three Months Ended March 31, 2009 Compared to Six and Three Months
Ended March 31, 2008
  The
Company recorded sales of $644,395 of which $50,602 was hardware and $593,793
was services, for the six month period ending March 31, 2009 as compared to
$481,863 of which $30,542 was hardware and $451,321 was services, for the same
period ending March 31, 2008. This six month period ending March 31, 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. For the same period ending March 31, 2008, revenue was
derived from the sale of $383,755 of VoIP hardware and services to Residential
and Business Retail clients and $98,108 VoIP hardware and services to Wholesale
customers.
    The
Company recorded sales of $323,961 of which $33,896 was hardware and $290,065
was services, for the three month period ending March 31, 2009 as compared to
$291,895 of which $14,282 was hardware and $277,613 was services, for the same
period ending March 31, 2008. This six month period ending March 31, 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. For the same period ending March 31, 2008, revenue was
derived from the sale of $251,849 of VoIP hardware and services to Residential
and Business Retail clients and $40,046 VoIP hardware and services to Wholesale
customers.
 The Company'scost
of sales were $348,900 for the six month period ending March 31, 2009 compared
to $289,572 for the same period ending March 31, 2008, primarily as a
consequence of an increase in sales and related costs, specifically the cost of
managing higher levels of traffic over our telecommunications network. The net
result was a gross margin for the six month period ending March 31, 2009 of
$295,495 compared to $192,291 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.
  The
Company's cost of sales were $167,927 for the three month period ending March
31, 2009 compared to $178,221 for the same period ending March 31, 2008,
primarily as a consequence of a recent decrease in network costs as the Company
recently signed new agreements with its carriers to reduce its costs based on
the new volumes of telecommunications traffic achieved.  The net
result was a gross margin for the three month period ending March 31, 2009 of
$156,034 compared to $113,674 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.
 
 The
Company's aggregate operating expenses were $202,563 for the six month period
ending March 31, 2009 compared to $234,632 for the same period ending March 31,
2008. In particular, there was an increase in Selling and Promotion expenses
from $2,742 to $3,428 as the company increase its purchasing of promotional
media and sales travel as it concentrated it is seeking to expand its sales
outside of  its local market. There was an increase in Salaries and
wages from $11,467 to $90,183 as the Company re-hired certain employees who were
being paid as consultants in the prior period. There was a decrease in
Professional and Consulting Fees from $157,583 to $67,993 as the company reduced
the outsourcing of its computer software development services. There was an
increase in General and Administrative Expenses from $22,417 to 37,387 due
to an increase in costs to produce a printed-invoice based billing system for
Dialek Telecom customers.  There was a decrease in Depreciation
Expenses from $40,423 to $3,572 since the company did not acquire a significant
amount of new computer equipment during the period and has been leasing its new
computer equipment as part of a capital cost reduction plan. Likewise, the
original equipment received in 2004 during the formation of the Company’s
subsidiary Teliphone Inc. from its former parent company United American
Corporation had completely depreciated.
  As a
result, the Company had a net income of $41,744 for the six month period ending
March 31, 2009 (when considering a minority interest of $14,164) compared to a
net loss of ($73,624) for the prior period (when considering a minority interest
of $10,050). The principal reasons for company’s net income for the period
ending March 31, 2009 is due to the Company achieving a break-even point of
sales as compared to the costs of maintaining its VoIP network.
  52
  Plan of Operations and Need
for Additional Financing
 
 The
Company's plan of operations for most of 2009 and 2010 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.
 
 While the
Company has experienced its first interim six month period net profit for the
period ending March 31, 2009, there is still no guarantee that the Company will
be able to raise additional capital or generate the increase in revenues to
sustain its operations.  The Company has 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.The Company’s
management has made strides in the past year; however the continued losses and
working capital deficiency continue to raise substantial doubt about the
Company’s ability to continue as a going concern for a reasonable
period.
 
 The
Company will require additional capital in order to pay the costs associated
with developing its business plan. Even though we have secured adequate funding,
no assurances can be provided that our business activities will generate
sufficient revenues which may result in net profits for the Company. Our
auditors have raised substantial doubt as to our ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
  LIQUIDITY
AND CAPITAL RESOURCES
  For the
period ending March 31, 2009:
  On The
Company's balance sheet as of March 31, 2009, the Company had assets consisting
of accounts receivable in the amount of $234,222, inventory of $8,788, prepaid
expenses of $38,404 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, 2009 reflects an accumulated deficit of ($1,711,316) and a
stockholders equity of $89,430.
  The
Company used $91,230 in cash in operating activities during the six month period
ending March 31, 2009 compared to a use of $147,672 for the same period in 2008.
This change was attributable in large part to the decreased expenditures to
maintain our telecommunications network and related maintenance of its operation
along with the six months of net income positive operations.
  The
Company did not receive or use any cash from or to investing activities in 2008
but received $74,039 during the 2007 period related to the acquisition of net
assets of Dialek Telecom.
  The
Company was provided $92,688 net cash by financing activities in 2008 compared
to being provided $99,471 in case for the same prior period in
2007.
  In
pursuing its business strategy, the Company will require additional cash for
operating and investing activities, since the Company’s current level of gross
margin is not adequate to cover all of the operating expenses. The Company
therefore expects future cash requirements to continue to cover this shortfall.
The Company will continue to borrow money through its operating line of credit
at its subsidiary’s bank.  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 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.
  53
 
 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, 2009 of $160,898 of which $42,500 is current and $118,398 is long term. The
Company has made strides during the last period to convert a significant amount
of related party debt to common stock as it converted $953,159 worth of shares
at a price of $0.25 per share.
  The
accompanying financial statements have demonstrated two subsequent quarterly
positive net incomes, however has suffered recurring losses from operations in
prior years, and at March 31, 2009 and September 30, 2008 had working capital
deficits of $171,389 and $1,190,439. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. The Company
has been searching for new distribution channels to wholesale their services to
provide additional revenues to support their operations.
  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 the
first 10 months of operations, the Company had 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.  The entire debt and associated line of credit were
converted to common stock at December 31, 2008 as outlined above.
 
 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.  The entire balance along with any
unpaid advances were all converted to common stock at December 31, 2008 as
outlined above.
 
 There is
no guarantee that the Company will be able to raise additional capital or
generate the increase in revenues to sustain its operations, however, the
company has an effective registration statement to raise additional capital.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern for a reasonable period.
  54
 
 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.
  ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 We do not
hold any derivative instruments and do not engage in any hedging activities.
Because most of our purchases and sales are made in Canadian Dollars, any
exchange rate change affecting the value of the Canadian Dollar relative to the
U.S. dollar could have an effect on our financial results as reported in U.S.
dollars. If the Canadian Dollar were to depreciate against the U.S. dollar,
amounts reported in U.S. dollars would be correspondingly reduced. If the
Canadian Dollar were to appreciate against the U.S. dollar, amounts reported in
U.S. dollars would be correspondingly increased.
  ITEM 4.
CONTROL AND PROCEDURES.
 
 As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness
of our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period
covered by this report. Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls and
procedures as of the date of this filing were effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms.  Management, however, has
identified certain limitations in specific critical controls in their
accounting system which are increasingly resulting in lengthier time lapses
required in order for the company to accurately disclose its financial
statements.  In particular, these lengthier time lapses occur for the
following reasons:
  ·
              Lack
      of dedicated resources to track and keep records of supplier invoices on a
      daily basis·
              Lack
      of dedicated resources to track and keep records of daily disbursements
      against these invoices·
              Surplus
      accounting entries required to track intercompany expenses, post spin-off
      of the Company from its former parent company·
              Lack
      of a dedicated resource person to oversee daily record
      keeping
  Management
will look to dedicate resources to these tasks in the coming months in order to
accelerate the reporting of our financial statements.  This resource
dedication will result in the Company incurring additional costs which will
affect the Company’s profitability going forward.  The Company's
management anticipates that these costs will be up to $50,000 per year in order
to maintain compliance with timely financial reporting
requirements.
  55
  Changes
in Internal Controls
  There
have been no changes in our internal controls over financial reporting or in
other factors that could materially affect, or are reasonably likely to affect,
our internal controls over financial reporting during the six months ended March
31, 2009. There have not been any significant changes in the Company’s critical
accounting policies identified since the Company filed its Form 10-K as of
September 30, 2008.
  PART
II - OTHER INFORMATION
  ITEM 1
- LEGAL PROCEEDINGS
  The
Company received notice on February 11, 2009 from 9164-4898 Quebec Inc (known as
BR Communications Inc.”). The notice claims that the Company owes BR
Communications Inc. unpaid commissions totaling CDN$ 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 is in the process of evaluating this dispute and is also considering
counterclaims against BR Communications Inc. for lost sales due to BR’s default
of their distribution agreement with the Company.
  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.
  Other
than the dispute mentioned above, we are currently not involved in any
litigation that we believe could have a materially adverse effect on our
financial condition or results of operations. There is no action, suit,
proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the executive officers of our company or any of our subsidiaries,
threatened against or affecting our company, our common stock, any of our
subsidiaries or of our company’s or our company’s subsidiaries’ officers or
directors in their capacities as such, in which an adverse decision could have a
material adverse effect.
 
 ITEM 1A
- RISK FACTORS
 
 We have
updated the risk factors previously disclosed in Part I, Item 1A of our
Annual Report on Form 10–K for the year ended September 30, 2008, which
was  filed with the Securities and Exchange Commission on December 19, 2008
(the “Fiscal 2008 10–K”). We believe there are no changes that constitute
material changes from the risk factors previously disclosed in the Fiscal 2008
10–K.
  ITEM
2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  The
company issued 3,812,636 shares of the Common Stock in February, 2009 as part of
a debt conversion agreement with various creditors on December 31,
2008.  The total value of the stock issuance was $953,159 at $0.25 per
share.
 
 ITEM 3 - DEFAULTS UPON SENIOR
SECURITES
  There
have been no material defaults.
  ITEM 4
- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  No
matters have been submitted to a vote of security holders during the period
covered by this report.
  56
  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.
  57
  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 15,
2009
  TELIPHONE
      CORP./s/
      George MetrakosGeorge
      Metrakos
                Chief
      Executive Officer and President
  TELIPHONE
      CORP./s/
      George MetrakosGeorge
      Metrakos
                Principal
      Financial and Accounting Officer
   58