UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB  x
        QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period endedDecember 31, 2006 [
        ]
        TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from_________to__________ Commission file number000-52317 NETFONE, INC.(Exact name of small business issuer as specified in its charter)  Nevada
        
        98-0438201(State or other jurisdiction of incorporation or organization)
        
        (I.R.S. Employer Identification No.)  Suite 918-1030 West Georgia StreetVancouver, BC  V6E 2Y3(Address of principal executive offices)  604.676.3410(Issuers telephone number)  N/A(Former name, former address and former fiscal year, if changed since last report) Check whether the issuer: (1) 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.      YesxNo [   ] State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date:12,578,000common shares issued and outstanding as at February 10, 2007. Transitional Small Business Disclosure Format (Check one):
        Yes o
        Nox Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [
        ]
        No  [ X  ]        PART I Item 1.
        Financial Statements Our financial statements are stated in United States dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.          NETFONE, INC. (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 (Unaudited)           CONSOLIDATED BALANCE SHEETS  INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS  INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS  NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS                NETFONE, INC. (A Development Stage Company) CONSOLIDATED BALANCE SHEETS  ASSETS
        December 31,
2006
(Unaudited)
        September 30,
2006
(Audited)CurrentCash
        $      11,419
        $      7,418Accounts receivable
        76
        387Inventory
        4,228
        12,081Prepaid expenses and deposits
        685
        1,21516,408
        21,101Deposit (Note 2)
        13,079
        13,451Equipment (Note 3)
        9,647
        12,080$      39,134
        $      46,632LIABILITIES AND STOCKHOLDERS DEFICITCurrentAccounts payable and accrued liabilities
        $      53,506
        $      30,993Customer deposits
        4,914
        5,140Due to related party (Note 6)
        106,277
        132,400164,697
        168,533Common stock (Note 4)Authorized:100,000,000
        Shares; par value $0.001Issued and outstanding:12,578,000
        Shares (September 30, 2006: 12,578,000)
        12,578
        12,578Additional paid-in capital
        263,622
        263,622Accumulated other comprehensive loss
        (2,042)
        (2,592)Deficit accumulated during the development stage
        (399,721)
        (395,509)(125,563)
        (121,901)$      39,134
        $      46,632  The accompanying notes are an integral part of these interim consolidated financial statements.        NETFONE, INC. (A Development Stage Company) INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)  CumulativeQuarter ended
        Quarter ended
        from June 8, 2004 (Inception) throughDecember 31,
2006
        December 31,
2005
        December 31,
2006Revenue
        
        $     40,978
        $     31,049
        $     254,087Cost of goods sold
        
        23,802
        37,245
        222,696Gross profit (loss)
        
        17,176
        (6,196)
        31,391ExpensesAccounting fees
        
        5,000
        -
        40,490Amortization
        
        2,275
        2,263
        19,454Bad debts
        
        -
        -
        13,993Bank fees and interest
        
        2,584
        2,113
        14,558Consulting fees (Note 6)
        
        9,292
        11,237
        120,195Filing fees and incorporation costs
        
        1,570
        -
        6,732Foreign exchange gain (loss)
        
        (3,321)
        -
        (2,261)Legal fees
        
        343
        495
        41,989Office and general expenses
        
        1,214
        2,520
        27,968Salaries and benefits (Note 7)
        
        2,082
        12,674
        103,082Travel and promotion expenses
        
        348
        3,139
        44,912Total expenses
        
        21,387
        34,441
        431,112Net loss
        
        $      (4,211)
        $     (40,637)
        $     (399,721)Basic and diluted net loss per share
        
        $      (0.00)
        $     (0.00)Weighted average number of shares outstanding
        
        12,578,000
        12,000,000     The accompanying notes are an integral part of these interim consolidated financial statements.            NETFONE, INC. (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Cumulative fromJune 8, 2004Quarter ended December 31,
2006
        Quarter ended December 31,
2005
        (Inception) through December 31,2006Cash Flows From Operating ActivitiesNet loss
        
        $     (4,211)
        $     (40,637)
        $     (399,721)Add item not affecting cashAmortization
        
        2,275
        2,263
        19,454Write down of inventory
        
        7,322
        -
        7,322Changes in operating assets and liabilitiesAccounts receivable
        
        311
        1,856
        (76)Inventory
        
        531
        49
        (11,550)Prepaid expenses and deposits
        
        530
        4,434
        (685)Customer deposits
        
        (226)
        (4,135)
        4,914Accounts payable and accrued liabilities
        
        22,513
        38,928
        53,507Net cash from (used) in operations
        
        29,045
        2,758
        (326,835)Cash Flows From Financing ActivitiesDue to related party
        
        (26,123)
        -
        106,277Proceeds of common stock issuances
        
        -
        -
        276,200Net cash provided (used) by financing activities
        
        (26,123)
        -
        382,477Cash Flows From Investing ActivitiesEquipment (additions) dispositions
        
        157
        (851)
        (29,102)Letter of credit
        
        -
        54Deposits
        
        372
        -
        (13,079)Net cash from (used) in investing activities
        
        529
        (797)
        (42,181)Effect of exchange rate changes on cash
        
        550
        (727)
        (2,042)Net increase in cash
        
        4,001
        1,234
        11,419Cash, beginning
        
        7,418
        680
        -Cash, ending
        
        $     11,419
        $     1,914
        $     11,419  Supplementary disclosure of cash flow information:  Cash paid for:Interest
        
        $     -
        $     -
        $     -Income Taxes
        
        $     -
        $     -
        $     -   The accompanying notes are an integral part of these interim consolidated financial statements.     -11-   NETFONE, INC. (A Development Stage Company) NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 (Unaudited)  Note 1
        Nature and Continuance of Operations  The Company was incorporated in the State of Nevada, United States of America on June 8, 2004. The Company is a development stage company as defined by Statement of Financial Accounting Standard (SFAS) No. 7 Accounting and Reporting by Development Stage Enterprises.The Company offers its NetFone broadband voice over Internet protocol, or VoIP in select markets in Canada.  The Company intends to cease efforts to be a VoIP provider in the future and will become engaged in the business of providing facsimile by email and virtual calling card services. Going Concern The financial statements have been prepared on the basis of a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  The Company has a working capital  deficiency of $148,289 at December 31, 2006 and has incurred  losses since  inception of  $399,721  and further losses are  anticipated in the  development of its business  raising  substantial doubt as to the Company's ability to  continue  as a going  concern.  The  ability of the Company to continue as a going  concern is  dependent  on raising  additional capital to fund ongoing exploration and development and ultimately on  generating  future  profitable  operations.  The Company will continue to fund operations with advances, other debt sources and further equity placements.  Unaudited Interim Financial Statements  The accompanying  unaudited interim financial statements have been prepared in accordance  with  United  States  generally  accepted accounting  principles for interim financial information and with the  instructions  to Form 10-QSB of  Regulation  S-B. They do not include all information  and footnotes  required by United States generally  accepted  accounting  principles for complete financial statements. However, except as disclosed herein, there has been no material changes in the information  disclosed in the notes to the financial statements for the year ended September 30, 2006 included in the  Company's  Annual  Report on Form  10-KSB  filed  with the Securities  and  Exchange   Commission.   The unaudited interim financial statements should be read in conjunction with those financial  statements  included in the Form 10-KSB. In the opinion Management, all adjustments considered
necessary for a fair presentation,  consisting solely of normal recurring  adjustments, have been made. Operating results for the three months ended December 31, 2006 are not necessarily indicative of the results that may be expected for the year ending Septeber 30, 2007.          -12-   NETFONE, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 (Unaudited)  Note 2
        Deposit  During the year ended September 30, 2005, the Company obtained the use of an on-line credit card service to process customer payments. Pursuant to this service agreement, the Company was required to provide a deposit of $13,079 (September 30, 2006: $13,451).  Note 3
        Equipment  Equipment consisted of the following: December 31,
2006
        September 30,
2006Cost
        Accumulated
Amortization
        Net Book Value
        Net Book
ValueFurniture &Equipment
        $     29,101
        $     19,454
        $     9,647
        $     12,080  Note 4
        Common Stock  At December 31, 2006, the following share purchase warrants were outstanding entitling the holder to purchase one common share for each warrant held as follows:  Number
        Type
        Exercise Price
        Expiry Date3,526,000
        Series A
        $ 0.10
        August 31, 20073,896,000
        Series B
        $ 0.20
        August 31, 20077,422,000  Note 5
        Income Taxes  As of September 30, 2006, the Company had net operating loss carry forwards of approximately $400,000 that may be available to reduce future years taxable income through 2029. Future tax benefits which may arise as a result of these losses have not been recognized in these financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the deferred tax asset relating to these tax loss carry-forwards.       -13-   NETFONE, INC. (A Development Stage Company) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006 (Unaudited)   Note 6
        Related Party Transactions  The Company was charged the following expenses by the President of the Company:  Quarter endedDecember 31,2006
        2005Consulting fees
        
        $     9,613
        $     9,332  The Company owes $104,134 (September 30, 2006: $130,160) to the President of the Company, and $2,143 to a related party (September 30, 2006: $2,240). These amounts are unsecured, non-interest bearing and have no set terms of repayment. These charges were measured by the exchange amount which is the amount agreed upon by the transacting parties, and are within the scope of normal operating activity.  Note 7
        Government Assistance  During the period ended December 31, 2006 the Company received $Nil (December 31, 2005: $16,749) in government grants.        -14-    Item2.
        Managements Discussion and Analysis and Plan of Operation. FORWARD-LOOKING STATEMENTS This quarterly report contains forward-looking statements as that term is defined in the Section 27A of the Securities Act and Section 21E of the Securities Exchange Act.  These statements relate to future events or our future financial performance.  In some cases, you can identify forward-looking statements by terminology such as may, should, expects, plans, anticipates, believes, estimates, predicts, potential or continue or the negative of these terms or other comparable terminology.  These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled Risk Factors, that may cause our or our industrys actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results. Our financial statements are stated in United States dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.  In this quarterly report, unless otherwise specified, all dollar amounts are expressed in United States dollars.  All references to common shares refer to the common shares in our capital stock. As used in this quarterly report, the terms we, us, our, and Netfone means Netfone, Inc. and our wholly owned subsidiary, Netfone Services, Inc., unless otherwise indicated. General We are in the business of acting as an internet protocol voice application service provider. We were incorporated in the State of Nevada on June 8, 2004. From inception of our business on June 8, 2004, we were engaged in the development of communication technology and services for internet protocol (IP), telephony and video applications. The address of our principal executive office is Suite 918  1030 West Georgia Street, Vancouver, BC, Canada, V6E 2Y3.  Our telephone number is 604-676-3410. We have one subsidiary, Netfone Services, Inc., a Canadian corporation incorporated on June 30, 2004. Our Current Business We are engaged in the development of communication technology and services for internet protocol (IP), telephone and video applications.  We are primarily focused on the development and sales of voice over internet protocol (VoIP) services. We currently offer our NetFone residential and single business line broadband VoIP in 13 cities in Canada.  We may decide, at a later point, to enter into the U.S. market. Such an expansion would depend on the availability of financing and on market conditions.  The NetFone voice communications service enables broadband internet users to add digital voice communications services to their high-speed internet connection.  Customers can choose a phone number from any of the rate centers offered by the service, and then use a NetFone-supplied terminal adapter to connect any telephone to a broadband internet connection and make or receive calls from a regular telephone number.  All NetFone telephone accounts come with voice mail, caller ID, call waiting, call waiting caller ID, call forwarding, hold, line-alternate, and web access to account controls.  NetFone customers are able to place calls to, and receive
calls from, traditional telephone networks.  NetFone customers may also place calls to each other for       -15-  free.  We will seek to interconnect with other VoIP players to establish a large free calling area for our subscribers.  We are not in any discussions at the moment with any other service providers. Business service has more features that meet the needs of businesses such as hunt groups, which, if a line is busy, a call hunts to the next available line; auto-attendant, where an automated receptionist welcomes a caller to a company and asks the caller to choose the desired extension; and multi-party conferencing, which provides the ability for a customer to set up multiple parties on a phone conference. The service is designed to have the look and feel of a regular telephone service. A caller is assigned a regular telephone number and can initiate and terminate calls through any broadband IP network.  One such network is the Asymmetric Digital Subscriber Line (ADSL), a new technology that allows more data to be sent over existing copper telephone lines.  ADSL requires a special modem, cable or Local Area Network (LAN), which is used to connect multiple computers together in a confined area.  Most LANs are confined to a single office, a building or group of buildings, fiber or any other broadband internet connection. The service works with any Session Initiation Protocol (SIP), which is a signaling protocol for internet conferencing, telephony, presence, events notification and instant messaging, IP phone, or gateway.  Multiple voice or fax lines could be provisioned through the same connection. The customer may sign up for our service through an easy-to-use web interface at www.netfone.ca. Our services are currently available in 13 major cities in Canada.  We expect to gradually expand into other markets in Canada. For the residential service and single line business users, we expect to use, primarily, VoIP system purchased from SNOM (www.snom.com). For more advance business services, we are evaluating several business grade products. Customers have the option to either rent a terminal adapter on a monthly basis or purchase one from NetFone. NetFone currently uses Linksys (www.linksys.com) terminal adapters. We purchase Linksys devices through Ingram Micro (www.ingram.com). NetFones terminal adapter charges cover the cost of the device, the programming of the device and shipping cost.  NetFone rental fee, which is in addition to the service fee, recovers the cost of the terminal adapter in 1 1/2 years. Pricing Structure NetFone charges customers: 
        A basic monthly fee as follows that includes unlimited free calling in a NetFone-defined free calling area: o
        Basic residential service of CDN$12.95 per month per line which includes free calling to the largest 24 cities in Canada; o
        Free North American calling, residential service of CDN$24.95 per month per line; and o
        Business service of CDN$24.95 per month per line. Currently this free calling area will cover the largest 24 cities in Canada. 
        Additional fees for calls outside this free calling area and billed on a per minute basis.  Currently, the rate is CDN$0.025 per minute in the United States and Canada.  International rates are published on our website. 
        For the purchase or rental of the terminal adapter.       -16-   Subsequent to the period ended December 31, 2006, our management determined that we will become engaged in the business of providing facsimile by e-mail and virtual calling card services. We intend, in the future, to cease our efforts to be a IP Voice Application Service Provider but we have not yet taken action in this regard. Management has based its decision based on the belief that the new direction for our business will be better for the company. On January 4, 2007, we entered into two purchase orders: one with Asterisk IT Pty Ltd., an Australian company, for software and services that will enable us to offer facsimile by e-mail. The other with Arezqui Belaid, the developer of an Asterisk-based virtual calling card, for installation and support services. The first purchase order is for Asterfax, a software application. Using this software application, users can send and receive faxes using a standard e-mail account without having to install any software on their computers. The software simply translates a normal e-mail message into a fax message for sending faxes and can also translate information back the other way when receiving faxes into an e-mail message.  The second purchase order is for the installation and support of a billing software for calling card and virtual calling card software. The software is known as Asterisk2Billing. We plan to use the software to offer our future customers virtual calling cards for both prepaid and post paid telephone calls. Through Asterisk2Billing, we also obtain user management services, web-based customer registration services and automatic PIN creation and authentication services. The system also includes a rating engine with self contained billing, reporting and statistics functions. We have agreed to pay Asterisk $1,410 for the installation of the Asterfax software, the license of the software for one year and one year of e-mail support from Asterisk. Following the first year, we will be billed $260 per server per year for e-mail support. Telephone support, if we choose that option in future, will cost $1,200 per server per year. We have agreed to pay Arezqui Belaid $450 for the installation of the Asterisk2billing software and 5 hours of technical support. We will be charged $50 per hour for additional hours of technical support, if we require them. The total cost under these purchase orders, except for any additional e-mail or phone support we may request, is $1,860, of which we have already paid $930. We intend to pay the remainder upon completion of the installation of the relevant software onto our servers. Results of Operations From the date of our incorporation on June 8, 2004 to December 31, 2006, we have been a development stage company that has generated minimal revenues. Three month period ended December 31, 2006 compared with the three month period ended December 31, 2005. We posted an operating loss of $4,211 for the three month period ended December 31, 2006 compared to operating losses of $40,637 for the three month period ended December 31, 2005, and operating losses of $399,721 since inception to December 31, 2006.   The principal component of the increase was due to a decrease in salaries and benefits. Operating expenses for the three month period ended December 31, 2006 were $21,387 compared to $34,441 for the three month period ended December 31, 2005. Our operating expenses for the three month period ended December 31, 2006 compared to the three month period ended December 31, 2005 are classified primarily into the following three categories: 
        professional fees, which consist primarily of legal fees and accounting and auditing fees for the year end audit.  The amount incurred by our company during for the three month period ended December 31, 2006 was $5,343, compared to the three month period ended December 31, 2005 of $495;       -17-   
        management/consulting fees, which consist primarily of fees paid by us to Rafeh Hulays, our president and director. The amount incurred by our company during the three month period ended December 31, 2006 was $9,613 compared to $9,332 for the three month period ended December 31, 2005; and 
        salaries and benefits.  The amount incurred by our company during the three month period ended December 31, 2006 was $2,208 compared to $12,674 for the three month period ended December 31, 2005. Financial Condition, Liquidity and Capital Resources From inception on June 8, 2004 we have been engaged in the development of communication technology and services for internet protocol (IP), telephony and video applications.  We are primarily focused on the development and sales of voice over internet protocol (VoIP) services. Our principal capital resources have been acquired through the issuance of common stock. At December 31, 2006, we had a working capital deficit of $148,289. At December 31, 2006, we had assets of $39,134. At December 31, 2006, our total liabilities were $164,697. At December 31, 2006 we had cash on hand of $11,419, receivables of $76 and inventory of $4,228. Plan of Operation We intend to continue the development of our business. Our personnel are continuously evaluating new opportunities that become available to better our product offering.  This includes: 
        Improvement of our current products for ease of use and further functionality; 
        Evaluating internet, managed IP network and public switched telephone network providers to extend our services, better their quality and reduce their cost; and 
        Evaluating terminal devices, network equipment and application servers that will improve the performance of our service and maintain our competitiveness. We anticipate we will require up to $120,000  $180,000 for the 12 months ending December 31, 2007 to fund our obligations in respect of our product development and for our ongoing operational expenses. Development and Deployment Plan Over the next twelve months, we will be continuously developing and improving our products.  We will: 
        Continue to automate our backend processes such as provisioning, billing and support; 
        Improve service and introduce new features; and 
        Deploy our Advanced Business Service. Employees As of January 10, 2007, we employed 2 people who are engaged in the deployment of the VoIP platform, the evaluation of new products and provide support to customers.  We are not subject to any collective bargaining agreements and we consider relations with our employee to be excellent.       -18-   Research and Development We did not spend any specific funds on research and development activities during the quarter ended December 31, 2006, other than expenses that were generally incurred in the development of our business.  We expect that our annual research and development expenses will increase as we complete work on other products that are currently in development. Marketing and Sales Plan Over the next 12 months, we will continue to develop a sales agent team that will hopefully drive both direct and indirect sales. Eventually, sales agents will be managed by regional sale managers. All sale managers and sales agents will be commission-based independent contractors. Personnel Plan We do not currently plan to add more personnel to our company. As the number of our subscribers increase, we will consider outsourcing customer support or hiring additional personnel. Cash Requirements Presently, our revenues are not sufficient to meet our operating and capital expenses.  Management projects that we will require additional funding to expand our current operations, although we anticipate that our current funds will enable us to address our minimal current and ongoing expenses and continue with the marketing and promotion activity connected with the development and marketing of our VoIP products and services throughout the period ending December 31, 2007. There is some doubt about our ability to continue as a going concern as the continuation of our business is dependent upon the successful and sufficient market acceptance of new VoIP products and services, the continuing successful promotion of our VoIP products and services, obtaining additional financing, and finally, maintaining a break even or profitable level of operations. The issuance of additional equity securities by us will result in a dilution in the equity interests of our current stockholders.  Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments. We have incurred operating losses since inception.  As we had cash on hand of $11,419 as at December 31, 2006, management projects that we may require an additional $150,000 to fund our ongoing operating expenditures, offering expenses and working capital requirements for the twelve month period ending December 31, 2007, broken down as follows:  Estimated Funding Required During the Twelve Month Period Ending December 31, 2007 Operating  expendituresMarketing & Sales
        $45,000General and Administrative
        $15,000Product development and deployment
        $50,000Working capital
        $40,000Total (including Offering Costs)
        $150,000 Due to the uncertainty of our ability to meet our current operating and capital expenses, in their report on the annual financial statements for the period from incorporation on June 8, 2004 to September 30, 2006, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern.  Our       -19-  financial statements contain additional note disclosures describing the circumstances that lead to this disclosure by our independent auditors. There are no assurances that we will be able to obtain further funds as may be required for our continued operations.  If required, we will pursue various financing alternatives to meet our immediate and long-term financial requirements, which we anticipate will consist of further private placements of equity securities, advances from related parties or shareholder loans.  We have not entered into any definitive agreements with any shareholders or related parties for the provision of loans or advances.  There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms.  If we are not able to obtain the additional financing on a timely basis, we will not be able to meet our other obligations as they become due and we will be forced to scale down or perhaps even cease our operations. Purchase of Significant Equipment We do not anticipate that we will expend any significant amount on equipment for our present or future operations. Going Concern Due to our being a development stage company and not having generated revenues, in their report on our financial statements for the period from incorporation on June 8, 2004 to December 31, 2006, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Our financial statements contain additional note disclosures describing the circumstances that lead to this disclosure. We have historically incurred losses, and through December 31, 2006 have incurred losses of $399,712 from our inception. Because of these historical losses, we will require additional working capital to develop our business operations. We intend to raise additional working capital through private placements, public offerings, bank financing and/or advances from related parties or shareholder loans. The continuation of our business is dependent upon obtaining further financing and achieving a break even or profitable level of operations. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current or future stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments. There are no assurances that we will be able to either (1) achieve a level of revenues adequate to generate sufficient cash flow from operations; or (2) obtain additional financing through either private placements, public offerings and/or bank financing necessary to support our working capital requirements. To the extent that funds generated from operations and any private placements, public offerings and/or bank financing are insufficient, we will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to us. If adequate working capital is not available we may not increase our operations. These conditions raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might be necessary should we be unable to continue as a going concern. Application Of Critical Accounting Policies Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States.  Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by managements application of accounting policies.  We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our financial statements is critical to an understanding of our financials.       -20-   In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period.  Actual results could differ from those estimates. For purposes of the cash flow statements, we consider all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. Property and equipment are stated at cost and depreciated using the declining balance method over estimated economic useful life of 5 years.  Maintenance and repairs are charged to expense as incurred.  Major improvements are capitalized. The carrying amounts of our stockholder loan payable approximate fair value due to the relatively short period to maturity for this instrument. We account for income taxes under the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (Statement 109).  Under Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectability is assured.  We recognize revenue from usage, storage and system modifications at the time the services are performed. Basic and diluted net loss per common share is computed based upon the weighted average common shares outstanding as defined by Financial Accounting Standards No. 128, Earnings Per Share.  As of December 31, 2006 and 2005, there were no common share equivalents outstanding. Principles of Consolidation Our consolidated financial statements include our accounts and the accounts of our wholly-owned Canadian subsidiary, NetFone Services Inc. which we incorporated on June 30, 2004.  All inter-company transactions have been eliminated. Development Stage Company We comply with Financial Accounting Standard Board Statement (FAS) No. 7 and The Securities and Exchange Commission Act Guide 7 for our characterization as development stage. Government Assistance We receive government assistance in respect to the employment an employee. The amount of the assistance is credited to wage expense and is recognized as a receivable when the related wage expense is incurred. Capital Assets and Amortization Capital assets consists of computer equipment and software and are recorded at cost.  Amortization is provided using the straight-line method over three years, the estimated useful life of the asset.       -21-   Impairment of Long-lived Assets Capital assets are reviewed for impairment in accordance with FAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets.  Under FAS 144, these assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.  An impairment charge is recognized for the amount, if any, which the carrying value of the asset exceeds the fair value. Basic Loss Per Share We report basic loss per share in accordance with FAS No. 128 Earnings per Share.  Basic loss per share is computed using the weighted average number of shares outstanding during the period. Fair Value of Financial Instruments The carrying value of our financial instruments consisting of cash and accounts payable and accrued liabilities approximate their carrying value due to the short-term maturity of such instruments.  Unless otherwise noted, it is managements opinion that we are not exposed to significant interest, currency or credit risks arising from these financial instruments. Comprehensive Loss We have adopted FAS No. 130 Reporting Comprehensive Income.  Comprehensive loss is comprised of net loss and foreign currency translation adjustments. Recent Accounting Pronouncements Management does not believe that any recently issued, but not yet effective accounting standards if currently adopted could have a material effect on the accompanying financial statements. RISK FACTORS Much of the information included in this quarterly report includes or is based upon estimates, projections or other forward-looking statements.  Such forward-looking statements include any projections or estimates made by us and our management in connection with our business operations.  While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions, or other future performance suggested herein.  We undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of such statements. Such estimates, projections or other forward-looking statements involve various risks and uncertainties as outlined below.  We caution readers of this quarterly report that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other forward-looking statements.  In evaluating us, our business and any investment in our business, readers should carefully consider the following factors. The fact that we have not earned substantial revenues since our incorporation raises substantial doubt about our ability to continue as a going concern. We have generated small revenues since our incorporation and we will continue to incur operating loss for the foreseeable future.  We had cash in the amount of $11,419as of December 31, 2006.  We estimate our average monthly operating expenses to be approximately $25,000 .  As a result, we need to generate significant revenues from our operations or acquire financing.  We cannot assure that we will be able to successfully explore and develop our business.  These circumstances raise substantial doubt about our ability to continue as a going concern as       -22-  described in an explanatory paragraph to our independent auditors report on our financial statements for the year ended September 30, 2006. We have been unable to fund our operations with internally generated funds because our business has not generated substantial revenue.  Without additional financing, we will need to generate funds internally to fund our operations during the fiscal year ending September 30, 2007 or we will be unable to continue our operations and business. We currently do not have any operations which generate substantial income or cash flow.  We have not generated substantial revenues since our incorporation and we have required and will continue to require substantial capital to fund the operation and development of our business (estimated at $150,000 for the 12 month period ending December 31, 2007).  We will not generate any material funds internally in the near future.  If we are unable to generate revenue from our business during the fiscal year ending September 30, 2007, we may be forced to delay, scale back, or eliminate our sales activities.  If any of these actions were to become necessary, we may not be able to continue to operate our business and if this event happens, then there is a substantial risk our business would fail. We have not generated substantial revenue from our business and we may need to raise additional funds in the near future.  If we are not able to obtain future financing when required, we might be forced to discontinue our business. Because we have not generated substantial revenue from our business and we cannot anticipate when we will be able to generate revenue from our business, we will need to raise additional funds for the future development of our business and to respond to unanticipated requirements or expenses.  We anticipate that we will need to raise further financing for the 12 month period ending December 31, 2007 in the approximate amount of $150,000,.  We do not currently have any arrangements for financing and we can provide no assurance to investors we will be able to find such financing if required.  The most likely source of future funds presently available to us is through the sale of equity capital.  Any sale of share capital will result in dilution to existing shareholders.  Furthermore, there is no assurance that we will not incur debt in the future, that we will have sufficient funds to repay our future
indebtedness or that we will not default on our future debts, jeopardising our business viability.  Finally, we may not be able to borrow or raise additional capital in the future to meet our needs or to otherwise provide the capital necessary to conduct business, which might result in the loss of some or all of your investment in our common stock. The loss of Rafeh Hulays may affect our ability to raise additional capital. Our president, secretary and treasurer, Rafeh Hulays, was instrumental in the development of our business and the development of our fund raising strategy and locating the sources of our capital.  Our ability to raise additional capital depends upon the continued service and performance of Mr. Hulays. Because our officers, directors and principal shareholders control a majority of our common stock, investors will have little or no control over our management or other matters requiring shareholder approval. Our officers and directors, in the aggregate, beneficially own 63.6% of issued and outstanding shares of our common stock.  As a result, they have the ability to control matters affecting minority shareholders, including the election of our directors, the acquisition or disposition of our assets, and the future issuance of our shares. Because our officers, directors and principal shareholders control the company, investors will not be able to replace our management if they disagree with the way our business is being run.  Because control by these insiders could result in management making decisions that are in the best interest of those insiders and not in the best interest of the investors, you may lose some or all of the value of your investment in our common stock. Because we have two directors, deadlocks may occur in our boards decision-making process, which may delay or prevent critical decisions from being made. Given that we have an even number of directors, deadlocks may occur when such directors disagree on a particular decision or course of action.  Our Articles and by-laws do not contain any mechanisms for resolving any potential deadlocks. While our directors are under a duty to act in the best interest of our company, any deadlocks may impede       -23-  the further development of our business in that such deadlocks may delay or prevent critical decisions regarding our development. The VoIP telephony market is subject to rapid technological change and we depend on new product introduction in order to maintain and grow our business. VoIP telephony is an emerging market that is characterized by rapid changes in customer requirements, frequent introductions of new and enhanced products and services, and continuing and rapid technological advancement. To compete successfully in this emerging market, we must continue to design, develop, and sell new and enhanced VoIP telephony services that provide increasingly higher levels of performance and reliability at lower cost. These new and enhanced products and services must take advantage of technological advancements and changes, and respond to new customer requirements. Our success in designing, developing, and selling such products and services will depend on a variety of factors, including: 
        the identification of market demand for new products and services; 
        the scalability of our deployed VoIP telephony platforms; 
        product and feature selection; 
        timely implementation of product and service offering; 
        service performance; 
        cost-effectiveness of service; and; 
        success of promotional efforts. We currently deploy VoIP software (SIP Proxy and Media Servers  server software used to run a VoIP network) and hardware (PSTN Gateways that translate between VoIP calls and traditional telephony) from vendors which we will use to serve telephony applications to our customers.  Should these vendors fail or stop adding features to their platform, our ability to effectively compete will be affected. Additionally, we may also be required to collaborate with third parties to deploy services and may not be able to do so on a timely and cost-effective basis, if at all. We have in the past experienced delays in the deployment of our services and such delays will likely occur in the future. If we are unable, due to resource constraints or technological or other reasons, to develop and introduce new or enhanced services in a timely manner, if such new or enhanced services do not achieve sufficient market acceptance, or if such new services introductions decrease demand for existing services, our operating results would decline and our business would not grow. Decreasing telecommunications rates may diminish or eliminate our competitive pricing advantage. Decreasing telecommunications rates may diminish or eliminate the competitive pricing advantage of our services. International and domestic telecommunications rates have decreased significantly over the last few years in most of the markets in which we operate, and we anticipate that rates will continue to be reduced in all of the markets in which we do business or expect to do business. Users who select our services to take advantage of the current pricing differential between traditional telecommunications rates and our rates may switch to traditional telecommunications carriers as such pricing differentials diminish or disappear, and we will be unable to use such pricing differentials to attract new customers in the future. In addition, our ability to market our services to other service providers depends upon the existence of spreads between the rates offered by us and the rates offered by traditional
telecommunications carriers, as well as a spread between the retail and wholesale rates charged by the carriers from which we obtain wholesale services. Continued rate decreases will require us to lower our rates to remain competitive and will reduce or possibly eliminate our gross profit from our services. If telecommunications rates continue to decline, we may lose users for our services. We are a small company with limited resources compared to some of our current and potential competitors and we may not be able to compete effectively and increase market share.  Also intense competition in the markets in which       -24-  we compete could prevent us from increasing or sustaining our revenue and prevent us from achieving profitability. Most of our current and potential competitors have longer operating histories, significantly greater resources and name recognition and a larger base of customers than we have. As a result, these competitors may have greater credibility with our existing and potential customers. They also may be able to adopt more aggressive pricing policies and devote greater resources to the development, promotion and sale of their products than we can to ours. Our competitors may also offer bundled service arrangements offering a more complete product despite the technical merits or advantages of our products. These competitors include traditional telephone service providers, such as Telus and Bell and cable television companies, such as Shaw and Rogers. They also include VoIP competitors such as Vonage and Primus Canada. Competition could decrease our prices, reduce our sales, lower our gross profits and/or decrease our market share. Our competitors, such as local exchange carriers and cable television providers, may be able to bundle services and products that we do not offer together with long distance or VoIP telephony services. These services could include wireless communications, voice and data services, internet access and cable television. This form of bundling would put us at a competitive disadvantage if these providers can combine a variety of services offerings at a single attractive price. To be competitive, we must continue to invest significant resources in research and development, sales and marketing, and customer support. We may not have sufficient resources to make these investments or to make the technological advances necessary to be competitive, which in turn will cause our business to suffer and restrict our profitability potential. Our success depends on third parties in our distribution channels. We intend to sell our products directly to consumers and through resellers, and will be focusing efforts on our distribution channels. Our future revenue growth will depend on large part in sales of our products through reseller and other distribution relationships. We may not be successful in developing distribution relationships.  Entities that distribute our products may compete with us. In addition, distributors and resellers may not dedicate sufficient resources or give sufficient priority to selling our products. Our failure to develop distribution channels, the loss of a distribution relationship or a decline in the efforts of a material reseller or distributor could prevent us from generating sufficient revenues to become profitable. We need to retain key personnel to support our products and ongoing operations. The development and marketing of our VoIP products will continue to place a significant strain on our limited personnel, management, and other resources. Our future success depends upon the continued services of our executive officers and other key employees and contractors who have critical industry experience and relationships that we rely on to implement our business plan.  The loss of the services of any of our officers (specifically Rafeh Hulays), key employees, (we currently have one employee, Jan Forcier) and contractors could delay the development and introduction of, and negatively impact our ability to sell our products which could adversely affect our financial results and impair our growth. We currently do not maintain key person life insurance policies on any of our employees. We currently have one full time staff and several contractors including the president of the company, Rafeh Hulays.  We
have a consulting agreement with our president, Rafeh Hulays, which is terminable at the will of either party.  The agreement is non-exclusive and, as a result, Mr. Hulays may provide consulting services to other companies, on the condition that such services do not conflict with the terms of our consulting agreement.  Should Mr. Hulays provide consulting services to another company, this would detract from the attention paid to our operations and as a result would slow our product development and marketing efforts. We rely on third-party companies products for our VoIP service. These include the application servers and the terminal adapter located at the customers location.  Any delay, interruption or financial difficulties by these vendors would result in delayed or reduced shipments to our customers and may harm our business. We do not have long-term purchase agreements with any of our suppliers. There can be no assurance that our suppliers will be able to or willing to reliably deliver products, in volumes, on a cost-effective basis or in a timely manner. For our VoIP terminal adaptors that are used with our service, we rely on the availability of these devices       -25-  from the vendors. For our application server software and services, we rely on vendors whose financial stability or commitment to the service is unknown to us. We rely on subcontractors for the programming and maintenance of critical elements of our products and services. This includes the web-based service sign-up interface, integrating the billing process and the basic maintenance and backup of our servers. While we perform most of our server maintenance internally, we rely on subcontractors for tasks such as firewall protection, application of security patches and regular backup of our servers data. Since we do not have long term contract with these subcontractors with penalty clauses for non-delivery, there is no assurance that they will continue to reliably deliver the above services. Should a subcontractor cease to provide their services to us, our operations will be terminated until such time as we can locate and retain a replacement subcontractor. We rely on third party network service providers to originate and terminate substantially all of our public switched telephone network calls. Our service depends on the availability of third party network service providers that provide telephone numbers and public switched telephone network (PSTN) call termination and origination services for our customers. These network service providers supply us with digital telephone lines and numbers that interface to our VoIP network through Netfones owned gateways. Many of these network service providers have been affected by the downturn in the telecommunications industry and may be forced to terminate the services that we will depend on. The time to interface our technology to another network service provider, if available, and the time to transfer our customers numbers to the new carrier, if at all possible may take up to two months, would impair our operations and ability to generate revenue. There can be no assurance that any service provider will be able or willing to supply services to us in the future or that we will be successful in signing up alternative or additional providers. If our products and services do not interoperate with our customers networks and back-end processes (such as billing software, customer support software, monitoring software), orders for our products and services will be delayed or cancelled, which could harm our business. Many of the potential wholesale customers for our service may request that our products and services be designed to interoperate with their existing networks and back-end processes, each of which may have different specifications and use multiple standards. Our customers networks and back-end processes may contain multiple generations of products from different vendors that have been added over time. Our products and services must interoperate with these products as well as with future products in order to meet our customers requirements. In some cases, we may be required to modify our products and services to achieve a sale, which may result in a longer sales cycle, increased research and development expense, and reduced operating margins. If our products and services do not interoperate with existing equipment or software in our customers networks, installations could be delayed, or orders
for our products and services could be cancelled. We may have difficulty identifying the source of the problem when there is a problem in a network. Our service must successfully integrate with products from other vendors, such as gateways to traditional telephone systems. As a result, when problems occur in a network, it may be difficult to identify the source of the problem. The occurrence of hardware and software errors, whether caused by our service or another vendors products, may result in the delay or loss of market acceptance of our products and any necessary revisions may force us to incur significant expenses.       -26-   If we do not develop and maintain successful partnerships for VoIP telephony products, we may not be able to successfully market our solutions. We are entering into new market areas and our success is partly dependent on our ability to forge new marketing and engineering partnerships. VoIP telephony communication systems are extremely complex and few, if any, companies possess all the required technology components needed to build a complete end to end solution. We will likely need to enter into partnerships to augment our capabilities and to assist us in marketing complete solutions to our targeted customers. We may not be able to develop such partnerships in the course of our product development due to our products not being compatible or our competitors developing such partnerships before we are able to.  Even if we do establish the necessary partnerships, we may not be able to adequately capitalize on these partnerships to aid in the success of our business as a result of any potential conflicts, differing strategies or other difficulties with
such partners. In addition, such partnerships may require minimum financial commitments on our parts that we may not be able to meet. The failure of IP networks to meet the reliability and quality standards required for voice and video communications could render our products obsolete. Circuit-switched telephony networks feature very high reliability, with a guaranteed quality of service. In addition, such networks have imperceptible delay and consistently satisfactory audio quality. Emerging broadband IP networks, such as LANs, Wide Area Networks, and the internet, or emerging last mile technologies such as cable, digital subscriber lines, and wireless local loop, may not be suitable for telephony unless such networks and technologies can provide reliability and quality consistent with these standards. IP networks do not currently have the same reliability as circuit-switched telephony networks and may never do so in the foreseeable future.  This is especially true for the public internet which is used by our subscribers to connect to our service.  The public internet suffers from problems associated with traffic congestion and uneven performance. Future legislation or regulation of the internet and/or voice and video over IP services could restrict our business, prevent us from offering service or increase our cost of doing business. At present there are few laws, regulations or rulings that specifically address access to or commerce on the internet, including IP telephony. We are unable to predict the impact, if any, that future legislation, legal decisions or regulations concerning the internet may have on our business, financial condition, and results of operations. Regulation may be targeted towards, among other things, assessing access or settlement charges, imposing taxes related to internet communications, imposing tariffs or regulations based on encryption concerns or the characteristics and quality of products and services, imposing additional regulations and requirements related to the handling of emergency 911 services, any of which could restrict our business or increase our cost of doing business.   We currently support basic 911 service as mandated by the government of Canada.  The increasing growth of the broadband IP
telephony market and popularity of broadband IP telephony products and services heighten the risk that governments or other legislative bodies will seek to regulate broadband IP telephony and the internet. In addition, large, established telecommunication companies may devote substantial lobbying efforts to influence the regulation of the broadband IP telephony market, which may be contrary to our interests. The effects of federal or provincial regulatory actions could have a material adverse effect on our business, financial condition and operating results. We may lose customers if we experience system failures that significantly disrupt the availability and quality of the services that we provide. The operation of our service will depend on our ability to avoid and mitigate any interruptions in service or reduced capacity for customers. Interruptions in service or performance problems, for whatever reason, could undermine confidence in our services and cause us to lose customers or make it more difficult to attract new ones. In addition, because our services may be critical to the businesses of our customers, any significant interruption in service could result in lost profits or other loss to our customers. Although we will attempt to disclaim liability in our service agreements, a court might not enforce a limitation on liability, which could expose us to financial loss. In addition,       -27-  we may provide our customers with guaranteed service level commitments. If we are unable to meet these guaranteed service level commitments as a result of service interruptions, we may be obligated to provide credits, generally in the form of free service for a short period of time, to our customers, which could negatively affect our revenues. Consumer access to our websites will directly affect our ability to sign new subscribers and the account management services we offer and thus affects our service revenues. We will experience occasional system interruptions that make our websites unavailable or prevent us from efficiently fulfilling orders or providing services to consumers, which may reduce our service revenues and the attractiveness of our products and services. If we are unable to continually add additional software and hardware and upgrade our systems and network infrastructure in an effective manner, it could cause service interruption and adversely affect our ability to deliver the service. The failure of any equipment or facility on our network, or those of our partners or customers, could result in the interruption of customer service until necessary repairs are made or replacement equipment is installed. Network failures, delays and errors could also result from natural disasters, terrorist acts, power losses, security breaches and computer viruses. These failures, faults or errors could cause delays, service interruptions, expose us to customer liability or require expensive modifications. Our success will depend on our ability to handle a large number of simultaneous calls, which our network may not be able to accommodate. We expect the volume of simultaneous calls to increase significantly as the subscriber base grows. Our network hardware and software may not be able to accommodate this additional volume. If we fail to maintain an appropriate level of operating performance, or if our service is disrupted, our reputation would be harmed and we could lose customers. Intellectual property and proprietary rights of others could prevent us from using necessary technology to provide IP voice services. While we do not know of any technologies that are patented by others that we believe are necessary for us to provide our services, certain necessary technology may in fact be patented by other parties either now or in the future. If such technology were held under patent by another person, we would have to negotiate a license for the use of that certain technology. We may not be able to negotiate such a license at a price that is acceptable. The existence of such a patent, or our inability to negotiate a license for any such technology on acceptable terms, could force us to cease using such technology and offering products and services incorporating such technology. If we discover product defects, we may have product-related liabilities which may cause us to lose revenues or delay market acceptance of our products. Products and services as complex as those we will offer frequently contain errors, defects, and functional limitations when first introduced or as new versions are released. We have in the past experienced such errors, defects or functional limitations. We will sell products and services into markets that are extremely demanding of robust, reliable, fully functional products and services. Therefore, delivery of products and services with production defects or reliability, quality or compatibility problems could significantly delay or hinder market acceptance of such products and services, which could damage our credibility with our customers and adversely affect our ability to retain our existing customers and to attract new customers. Moreover, such errors, defects or functional limitations could cause problems, interruptions, delays or a cessation of sales to our customers. Alleviating such problems may
require significant expenditures of capital and resources by us. Despite our testing, our suppliers or our customers may find errors, defects or functional limitations in new products and services after commencement of commercial production. This could result in additional development costs, loss of, or delays in, market acceptance, diversion of technical and other resources from our other development efforts, product repair or replacement costs, claims by our customers or others against us, or the loss of credibility with prospective customers.       -28-   Risks Associated with Our Common Stock Trading on the OTC Bulletin Board may be volatile and sporadic, which could depress the market price of our common stock and make it difficult for our stockholders to resell their shares. Our common stock is quoted on the OTC Bulletin Board service of the National Association of Securities Dealers.  Trading in stock quoted on the OTC Bulletin Board is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with the companys operations or business prospects.  This volatility could depress the market price of our common stock for reasons unrelated to operating performance.  Moreover, the OTC Bulletin Board is not a stock exchange, and trading of securities on the OTC Bulletin Board is often more sporadic than the trading of securities listed on a quotation system like Nasdaq or a stock exchange like Amex.  Accordingly, shareholders may have difficulty reselling any of the shares. Sales of a substantial number of shares of our common stock into the public market by the selling stockholders may result in significant downward pressure on the price of our common stock and could affect the ability of our stockholders to realize any current trading price of our common stock. Sales of a substantial number of shares of our common stock in the public market could cause a reduction in the market price of our common stock, when and if such market develops.  When our registration statement was declared effective, the selling stockholders had the ability to sell up to 33% of the issued and outstanding shares of our common stock.  As a result of such registration statement, a substantial number of our shares of common stock which have been issued may be available for immediate resale when and if a market develops for our common stock, which would have the effect of decreasing the price of our common stock.  As a result of any such decreases in price of our common stock, purchasers who acquire shares from the selling stockholders may lose some or all of their investment. Any significant downward pressure on the price of our common stock as the selling stockholders sell the shares of our common stock could encourage short sales by the selling stockholders or others.  Any such short sales could place further downward pressure on the price of our common stock, which may result in the loss of some or all of an investment in our common stock. Our stock is a penny stock.  Trading of our stock may be restricted by the SECs penny stock regulations and the NADSDs sales practice requirements, which may limit a stockholders ability to buy and sell our stock. Our stock is a penny stock.  The Securities and Exchange Commission has adopted Rule 15g-9 which generally defines penny stock to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.  Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and accredited investors.  The term accredited investor refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse.  The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market.  The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customers account.  The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customers confirmation.  In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the
purchasers written agreement to the transaction.  These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules.  Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities.  We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.       -29-   In addition to the penny stock rules promulgated by the Securities and Exchange Commission, the NASD has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer.  Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customers financial status, tax status, investment objectives and other information.  Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers.  The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock. Other Risks Because some of our officers and directors are located in non-U.S. jurisdictions, you may have no effective recourse against the management for misconduct and may not be able to enforce judgement and civil liabilities against our officers, directors, experts and agents. All of our directors and officers are nationals and/or residents of countries other than the United States, specifically Canada, and all or a substantial portion of such persons assets are located outside the United States. As a result, it may be difficult for investors to enforce within the United States any judgments obtained against our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof.  Similar difficulties will exist for enforcements of judgments against our Canadian operating subsidiary that we utilize, or any effort to attach the assets of such subsidiary, to the extent that such assets are located outside of the United States. Item 3. Controls and Procedures As required by Rule 13a-15 under the Exchange Act, as of the end of the period covered by this quarterly report, being December 31, 2006, we have carried out an evaluation of the effectiveness of the design and operation of our companys disclosure controls and procedures.  This evaluation was carried out under the supervision and with the participation of our companys management, including our companys president and chief financial officer.  Based upon that evaluation, our companys president along with our companys chief financial officer concluded that our companys disclosure controls and procedures are effective as at the end of the period covered by this report.  There have been no changes in our companys internal controls that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect our internal
controls subsequent to the date we carried our evaluation. Disclosure controls and procedures and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commissions rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our president and chief financial officer as appropriate, to allow timely decisions regarding required disclosure. Part II - OTHER INFORMATION Item 1.
        Legal Proceedings. We know of no material, active or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation.  There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.       -30-   Item 2.
        Unregistered Sales of Equity Securities and Use of Proceeds. None. Item 3.
        Defaults Upon Senior Securities. None. Item 4.
        Submission of Matters to a Vote of Security Holders. None. Item 5.
        Other Information. None. Item 6.
        Exhibits. Exhibits Required by Item 601 of Regulation S-B. (3)
        Charter and By-laws3.1
        Articles of Incorporation (incorporated by to our Registration Statement on Form SB-2 filed December 1, 2004)3.2
        By-laws (incorporated by to our Registration Statement on Form SB-2 filed December 1, 2004)(10)
        Material Contracts10.1
        Consulting Agreement dated July 1, 2004 between Rafeh Hulays and Netfone Services Inc. (incorporated by to our Registration Statement on Form SB-2 filed December 1, 2004)10.2
        Form of Subscription Agreement (incorporated by to our Registration Statement on Form SB-2 filed December 1, 2004)10.3
        Purchase Order to Asterisk IT Pty Ltd. dated January 4, 2007 (incorporated by reference from our current report on Form 8-K filed January 10, 2007)10.4
        Purchase Order to Arezqui Belaid dated January 4, 2007 (incorporated by reference from our current report on Form 8-K filed January 10, 2007)(21)
        SubsidiariesNetfone Services Inc., a federal Canadian Company(31)
        Section 302 Certifications31.1*
        Certification of Rafeh Hulays(32)
        Section 906 Certifications32.1*
        Certification of Rafeh Hulays * filed herewith       -31-   SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NETFONE, INC.  By:/s/ Rafeh Hulays Rafeh Hulays, President, Secretary, Treasurer and Director (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) Date:  February 14, 2007