UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington, D.C.
20549




FORM 10-Q




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





FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008




COMMISSION
FILE NUMBER: 000-51046







TRITON
DISTRIBUTION SYSTEMS, INC.


(Name
of small business issuer in its charter)





Colorado
            
            84-1039067(State
      or jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer
              I.D.
      Number)





One
Harbor Drive, Suite 300, Sausalito, California 94965


(415) 339-4606


(Address
and telephone number of principal executive offices)





Indicate
by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 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.   Yes
[  ]   No [X]




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one)




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one)





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). YES o NO x





Indicate the number of shares outstanding of each
of the issuer's classes of common stock as of: November 10, 2008.





CLASS
            
            NUMBER
      OF SHARES OUTSTANDINGCommon
      Stock, no par value per share
            
            48,964,415
      shares















TRITON
DISTRIBUTION SYSTEMS, INC.


Index




PageNumberPART
      I.
            FINANCIAL
      INFORMATIONItem
      1.
            Financial
      StatementsConsolidated
      Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007
      (audited)
            1Consolidated
      Statements of Operations for the three and nine months ended September 30,
      2008 (unaudited) , the three and nine months ended September 30, 2007
      (unaudited) and from
      inception (January 10, 2006) to September 30, 2008
      (unaudited)
            2Consolidated
      Statement of Stockholders Equity from inception (January
      10, 2006) to September 30, 2008 (unaudited)
            3Consolidated
      Statements of Cash Flows for the nine months ended September 30, 2008
      (unaudited), the nine months ended September 30, 2007 (unaudited) and the
      period from inception (January 10, 2006) to September 30, 2008
      (unaudited).
            4Notes
      to Consolidated Financial Statements (unaudited)
            5Item
      2.
            Management's
      Discussion and Analysis or Plan of Operations
            23Item
      3.
            Controls
      and Procedures
            27PART
      II.
            OTHER
      INFORMATION
            28Item
      1.
            Legal
      Proceedings
            28Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            28Item
      3.
            Defaults
      Upon Senior Securities
            29Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            29Item
      5.
            Other
      Information
            29Item
      6.
            Exhibits
            29SIGNATURES
            30










TRITON
DISTRIBUTION SYSTEMS, INC.
 (A
DEVELOPMENT STAGE COMPANY)
  CONSOLIDATED
BALANCE SHEET
 AS
OF SEPTEMBER 30, 2008 AND DECEMBER 31, 2007


ASSETSSeptember
      30,2008
              
              
              December
      31,2007(Unaudited)CURRENT
      ASSETSCash
      and cash equivalents
              
              $
              21,047
              
              
              $
              8,382Other
      current assets
              
              
              182,731
              
              
              
              143,823Prepaid
      consulting
              
              
              675,521
              
              
              
              1,457,440TOTAL
      CURRENT ASSETS
              
              
              879,299
              
              
              
              1,609,645DEPOSIT
      FOR ACQUISITION
              
              
              250,000
              
              
              
              -FURNITURE
      AND EQUIPMENT, net
              
              
              280,200
              
              
              
              364,203WEBSITE
      DEVELOPMENT COSTS, net
              
              
              2,463
              
              
              
              7,388INTELLECTUAL
      PROPERTY, net
              
              
              172,931
              
              
              
              190,820TOTAL
      ASSETS
              
              $
              1,584,893
              
              
              $
              2,172,056LIABILITIES AND
      STOCKHOLDERS' EQUITYCURRENT
      LIABILITIESDeferred
      Income
              
              $
              25
              
              
              $
              1,470Accounts
      payable
              
              
              1,593,362
              
              
              
              653,321Accrued
      expenses
              
              
              114,481
              
              
              
              21,577Accrued
      payroll
              
              
              1,019,821
              
              
              
              170,689Accrued
      lease liability
              
              
              16,120
              
              
              
              20,978Loan
      Payable
              
              
              3,590,000
              
              
              
              2,465,967Loan
      Payable Related Party
              
              
              3,543,000
              
              
              
              250,000TOTAL
      CURRENT LIABILITIES
              
              
              9,876,809
              
              
              
              3,584,002CONVERTIBLE
      PROMISSORY NOTES, net of debt discount of $116,000 and $0as of
      September 30, 2008 and December 31, 2007
respectively
              
              
              4,000
              
              
              
              -TOTAL
      LIABILITIES
              
              $
              9,880,809
              
              
              $
              3,584,002STOCKHOLDERS'
      EQUITYPreferred
      stock; no par value; 2,000,000 shares

                  authorized;
      0 shares issued and outstandingCommon
      stock; no par value; 100,000,000 shares authorized;48,928,036
      and 47,999,566 shares issued and outstandingas of September 30, 2008
      and December 31, 2007, respectively
              
              $
              13,869,056
              
              
              $
              13,686,896Additional
      paid-in capital
              
              
              5,316,016
              
              
              
              3,991,118Deficit
      accumulated during the development stage
              
              
              (27,451,371
              )
              
              
              (19,077,248
              )Accumulated
      balance of other comprehensive income
              
              
              (29,617
              )
              
              
              (12,712
              )TOTAL
      STOCKHOLDERS' EQUITY
              
              
              (8,295,916
              )
              
              
              (1,411,946
              )TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              1,584,893
              
              
              $
              2,172,056




The
accompanying notes are an integral part of these financial
statements.




1




TRITON
DISTRIBUTION SYSTEMS, INC.
 (A
DEVELOPMENT STAGE COMPANY)
  CONSOLIDATED
STATEMENTS OF OPERATIONSAND
OTHER COMPREHENSIVE INCOME
 FOR
THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 (UNAUDITED)




InceptionThree
      months ended September 30,
              
              
              Nine
      months ended September 30,
              
              
              (January
      10, 2006) to2008
              
              
              2007
              
              
              2008
              
              
              2007
              
              
              September
      30, 2008(restated)
              
              
              
              
              
              (restated)NET
      SALES
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -COST
      OF SALES
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -GROSS
      PROFIT
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -OPERATING
      EXPENSES:Payroll
      and related benefits
              
              
              886,783
              
              
              
              1,293,788
              
              
              
              3,294,728
              
              
              
              5,592,299
              
              
              
              12,315,859Professional
      fees
              
              
              405,681
              
              
              
              436,915
              
              
              
              1,284,348
              
              
              
              1,744,355
              
              
              
              5,738,565Marketing
      and advertising
              
              
              2,230
              
              
              
              42,307
              
              
              
              40,282
              
              
              
              226,432
              
              
              
              598,064Other
      general and administrative expenses
              
              
              158,951
              
              
              
              353,452
              
              
              
              753,050
              
              
              
              1,078,157
              
              
              
              3,956,167TOTAL
      OPERATING EXPENSES
              
              
              1,453,645
              
              
              
              2,126,462
              
              
              
              5,372,408
              
              
              
              8,641,243
              
              
              
              22,608,655LOSS
      FROM OPERATIONS
              
              
              (1,453,645
              )
              
              
              (2,126,462
              )
              
              
              (5,372,408
              )
              
              
              (8,641,243
              )
              
              
              (22,608,655
              )OTHER
      INCOME (EXPENSE)Interest
      income
              
              
              12
              
              
              
              3,743
              
              
              
              31
              
              
              
              24,235
              
              
              
              67,817Note
      Amort Interest expense
              
              
              (4,000
              )
              
              
              -
              
              
              
              (4,000
              )
              
              
              -
              
              
              
              (4,000
              )Note
      Amort Interest expense – related party
              
              
              (16,862
              )
              
              
              (662,623
              )
              
              
              (1,498,034
              )
              
              
              (662,623
              )
              
              
              (2,909,383
              )Interest
      Expense
              
              
              (70,845
              )
              
              
              (92,833
              )
              
              
              (452,446
              )
              
              
              (120,402
              )
              
              
              (761,386
              )Interest
      Expense  - related party
              
              
              (191,188
              )
              
              
              -
              
              
              
              (209,518
              )
              
              
              -
              
              
              
              (209,518
              )Finance
      expense
              
              
              (526,891
              )
              
              
              -
              
              
              
              (837,748
              )
              
              
              -
              
              
              
              (1,026,339
              )Loss
      on disposal of assets
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (30,373
              )
              
              
              -TOTAL
      OTHER INCOME (EXPENSE)
              
              
              (809,774
              )
              
              
              (751,713
              )
              
              
              (3,001,715
              )
              
              
              (789,163
              )
              
              
              (4,842,809
              )LOSS
      BEFORE PROVISION FOR INCOME TAXES
              
              
              (2,263,419
              )
              
              
              (2,878,175
              )
              
              
              (8,374,123
              )
              
              
              (9,430,406
              )
              
              
              (27,451,464
              )PROVISION
      FOR INCOME TAXES
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -NET
      LOSS
              
              
              (2,263,419
              )
              
              
              (2,878,175
              )
              
              
              (8,374,123
              )
              
              
              (9,430,406
              )
              
              
              (27,451,464
              )OTHER
      COMPREHENSIVE INCOMEForeign
      currency translation adjustment
              
              
              9,765
              
              
              
              22,038
              
              
              
              (16,905
              )
              
              
              2,872
              
              
              
              11,621COMPREHENSIVE
      LOSS
              
              $
              (2,253,654
              )
              
              $
              (2,856,137
              )
              
              $
              (8,391,028
              )
              
              $
              (9,427,534
              )
              
              $
              (27,439,843
              )NET
      LOSS PER SHARE:
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -BASIC
      AND DILUTED
              
              $
              (0.05
              )
              
              $
              (0.06
              )
              
              $
              (0.17
              )
              
              $
              (0.20
              )
              
              $
              (0.62
              )WEIGHTED
      AVERAGE SHARES OUTSTANDING:BASIC
      AND DILUTED
              
              
              48,643,463
              
              
              
              47,094,678
              
              
              
              48,295,269
              
              
              
              46,099,579
              
              
              
              44,369,347





The
accompanying notes are an integral part of these financial
statements.




2




TRITON
DISTRIBUTION SYSTEMS, INC.
 (A
DEVELOPMENT STAGE COMPANY)
  CONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY
 FOR THE PERIOD FROM
INCEPTION (JANUARY 10, 2006) TO SEPTEMBER 30, 2008


DeficitAccumulatedDuring
      the
              
              
              Accumulated
              
              
              TotalAdditional
              
              
              Development
              
              
              Other
              
              
              ShareholdersCommon
      Stock
              
              
              Paid-in
              
              
              Stage
              
              
              Comprehensive
              
              
              EquityShares
              
              
              Par
      Value
              
              
              Capital
              
              
              Restated
              
              
              Income
              
              
              (Deficit)Balance
      at inception (January 10, 2006)
              
              
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -Issuance
      of common stock for cash and contributionof intellectual property in
      January 2006
              
              
              35,821,198
              
              
              
              338,625
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              338,625Issuance
      of common stock in private placement for cash,net of $822,902 in
      commissions and expenses in July 2006
              
              
              7,148,710
              
              
              
              4,924,598
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,924,598Issuance
      of common stock to placement agent for fees
              
              
              598,029
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Cancellation
      of investor shares in July 2006
              
              
              (6,218,958
              )
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Issuance
      of common stock in connection with transactionwith Petramerica Oil,
      Inc. in July 2006
              
              
              2,087,910
              
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Repurchase
      of shares from Petramerica Oil, Inc. stockholders in July
      2006
              
              
              (400,000
              )
              
              
              (400,000
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (400,000
              )Issuance
      of shares to investor relation firms for services in 2006
              
              
              2,238,824
              
              
              
              1,800,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,800,000Issuance
      of common stock in private placement for cash,net of $149,500 in
      commissions in September 2006
              
              
              3,737,500
              
              
              
              2,840,500
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,840,500Fair
      value of employee stock compensation
              
              
              
              
              
              
              
              
              
              
              139,979
              
              
              
              
              
              
              
              
              
              
              
              139,979Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,552,079
              )
              
              
              
              
              
              
              (6,552,079
              )Balance
      at December 31, 2006
              
              
              45,013,213
              
              
              
              9,503,723
              
              
              
              139,979
              
              
              
              (6,552,079
              )
              
              
              -
              
              
              
              3,091,623Issuance
      of shares to investor relation firms for services
              
              
              1,100,000
              
              
              
              2,271,156
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,271,156Issuance
      of warrant for short term loan
              
              
              
              
              
              
              
              
              
              
              2,884,381
              
              
              
              
              
              
              
              
              
              
              
              2,884,381Fair
      value of employee stock compensation
              
              
              860,147
              
              
              
              1,607,047
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,607,047Fair
      value of employee stock options
              
              
              
              
              
              
              
              
              
              
              760,246
              
              
              
              
              
              
              
              
              
              
              
              760,246Exercise
      of employee stock options
              
              
              99,478
              
              
              
              79,582
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              79,582Exercise
      of warrants
              
              
              186,875
              
              
              
              149,501
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              149,501Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (9,430,406
              )
              
              
              
              
              
              
              (9,430,406
              )Foreign
      currency translation gain (loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,872
              
              
              
              2,872Balance
      at September 30, 2007, unaudited47,259,713
              
              
              
              13,611,009
              
              
              
              3,784,606
              
              
              
              (15,982,485
              )
              
              
              2,872
              
              
              
              1,416,002Cancellations
      of stock compensation
              
              
              (260,147
              )
              
              
              (554,113
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (554,113
              )Fair
      value of employee stock options
              
              
              
              
              
              
              
              
              
              
              137,417
              
              
              
              
              
              
              
              
              
              
              
              137,417Issuance
      of shares to consultants
              
              
              1,000,000
              
              
              
              630,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              630,000Capital
      contribution
              
              
              
              
              
              
              
              
              
              
              188,500
              
              
              
              
              
              
              
              
              
              
              
              188,500Cancellations
      and terminations
              
              
              
              
              
              
              
              
              
              
              (119,405
              )
              
              
              
              
              
              
              
              
              
              
              (119,405
              )Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,094,763
              )
              
              
              
              
              
              
              (3,094,763
              )Foreign
      currency translation gain (loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (15,584
              )
              
              
              (15,584
              )Balance
      at December 31, 2007
              
              
              47,999,566
              
              
              
              13,686,896
              
              
              
              3,991,118
              
              
              
              (19,077,248
              )
              
              
              (12,712
              )
              
              
              (1,411,946
              )Fair
      value of employee stock options
              
              
              
              
              
              
              
              
              
              
              661,436
              
              
              
              
              
              
              
              
              
              
              
              661,436Issuance
      of Shares to Legal Counsel
              
              
              928,470
              
              
              
              182,160
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              182,160Warrants
      attached to convertible notes
              
              
              
              
              
              
              
              
              
              
              63,901
              
              
              
              
              
              
              
              
              
              
              
              63,901Beneficial
      conversion feature on notes
              
              
              
              
              
              
              
              
              
              
              56,099
              
              
              
              
              
              
              
              
              
              
              
              56,099Capital
      contribution
              
              
              
              
              
              
              
              
              
              
              543,462
              
              
              
              
              
              
              
              
              
              
              
              543,462Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (8,374,123
              )
              
              
              
              
              
              
              (8,374,123
              )Foreign
      currency translation gain (loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (16,905
              )
              
              
              (16,905
              )Balance
      at September 30, 2008, unaudited
              
              
              48,928,036
              
              
              $
              13,869,056
              
              
              $
              5,316,016
              
              
              $
              (27,451,371
              )
              
              $
              (29,617
              )
              
              $
              (8,295,916
              )


The
accompanying notes are an integral part of these financial
statements.
  3




TRITON
DISTRIBUTION SYSTEMS, INC.


(A
DEVELOPMENT STAGE COMPANY)
  CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (UNAUDITED)


For
      the
                Nine
      Months
              
              
              For
      the
                  Nine
      Months
              
              
              Inception
                (January 10,Ended
              
              
              Ended
              
              
              2006) toSeptember
      30,
              
              
              September
      30,
              
              
              September
      30,2008
              
              
              2007
              
              
              2008(restated)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (8,374,123
              )
              
              $
              (9,430,406
              )
              
              $
              (27,451,370
              )Adjustments
      to reconcile net loss to net cash used
      in operating activities:Amortization
      of discount on note
              
              
              1,502,033
              
              
              
              662,623
              
              
              
              3,999Depreciation
      and amortization expense
              
              
              106,817
              
              
              
              137,935
              
              
              
              332,124Loss
      on disposal of leasehold improvements
              
              
              -
              
              
              
              30,373
              
              
              
              -Amortization
      of prepaid consulting
              
              
              787,500
              
              
              
              1,284,991
              
              
              
              6,388,926Finance
      Fees
              
              
              543,462
              
              
              
              -
              
              
              
              731,962Stock
      compensation for consultants
              
              
              -
              
              
              
              -
              
              
              
              630,000Fair
      value of employee stock options
              
              
              661,436
              
              
              
              2,367,293
              
              
              
              2,596,332Changes
      in assets and liabilitiesPrepaid
      insurance
              
              
              -
              
              
              
              29,577
              
              
              
              (31,328
              )Other
      current assets
              
              
              (38,908
              )
              
              
              (83,034
              )
              
              
              (151,402
              )Deferred
      income
              
              
              (1,445
              )
              
              
              1,190
              
              
              
              25Accounts
      payable
              
              
              1,095,212
              
              
              
              19,116
              
              
              
              1,748,279Accrued
      expenses
              
              
              92,904
              
              
              
              44,100
              
              
              
              285,170Accrued
      interest - related party
              
              
              -
              
              
              
              5,069
              
              
              
              -Accrued
      payroll
              
              
              849,132
              
              
              
              -
              
              
              
              870,110Lease
      Liability
              
              
              (4,858
              )
              
              
              4,982
              
              
              
              (4,858
              )Net
      cash used in operating activities
              
              
              (2,780,838
              )
              
              
              (4,926,191
              )
              
              
              (14,052,031
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Deposit
      for acquisition
              
              
              (250,000
              )
              
              
              -
              
              
              
              (250,000
              )Purchase
      of furniture and equipment
              
              
              -
              
              
              
              (159,165
              )
              
              
              (541,949
              )Payment
      for web development costs
              
              
              -
              
              
              
              -
              
              
              
              (19,700
              )Net
      cash used in investing activities
              
              
              (250,000
              )
              
              
              (159,165
              )
              
              
              (811,649
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from the issuance of common stock
              
              
              -
              
              
              
              229,083
              
              
              
              8,999,626Payment
      of offering costs
              
              
              -
              
              
              
              -
              
              
              
              (972,402
              )Funds
      transferred to China
              
              
              -
              
              
              
              -
              
              
              
              -Repurchase
      of shares of common stock
              
              
              -
              
              
              
              -
              
              
              
              (400,000
              )Proceeds
      from issuance of notes payable
              
              
              3,040,000
              
              
              
              -
              
              
              
              6,765,000Proceeds
      from issuance of convertible note
              
              
              120,000
              
              
              
              -
              
              
              
              120,000Proceeds
      from issuance of notes payable - related parties
              
              
              44,000
              
              
              
              3,000,000
              
              
              
              2,514,867Repayment
      on notes payable
              
              
              (15,000
              )
              
              
              -
              
              
              
              (15,000
              )Repayment
      on notes payable - related parties
              
              
              (150,000
              )
              
              
              -
              
              
              
              (2,131,867
              )Net
      cash provided by financing activities
              
              
              3,039,000
              
              
              
              3,229,083
              
              
              
              14,880,224EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
              
              
              4,503
              
              
              
              2,872
              
              
              
              4,503NET
      INCREASE (DECREASE) IN CASH ANDCASH
    EQUIVALENTS
              
              
              12,665
              
              
              
              (1,853,401
              )
              
              
              21,047CASH
      AND CASH EQUIVALENTS,
              
              
              
              
              
              
              
              
              
              
              -Beginning
      of period
              
              
              8,382
              
              
              
              1,944,287
              
              
              
              8,382CASH
      AND CASH EQUIVALENTS,
              
              
              
              
              
              
              
              
              
              
              -End
      of period
              
              $
              21,047
              
              
              $
              90,886
              
              
              $
              29,429SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONInterest
      paid
              
              $
              187,367
              
              
              $
              62,833
              
              
              $
              298,615Income
      taxes paid
              
              $
              -
              
              
              $
              -
              
              
              $
              800NON
      CASH ITEMS:Contribution
      of intellectual property for common stock
              
              $
              238,525
              
              
              $
              238,525
              
              
              $
              477,050Issuance
      of shares of common stock for consulting services
              
              $
              -
              
              
              $
              2,438,923
              
              
              $
              4,138,885Issuance
      of shares of common stock for compensation
              
              $
              -
              
              
              $
              -
              
              
              $
              1,052,934Cashless
      exercise of options
              
              $
              30,782
              
              
              $
              -
              
              
              $
              61,564Share
      Contribution by CEO
              
              $
              543,462
              
              
              $
              -
              
              
              $
              1,349,832Issuance
      of stock for legal fees
              
              $
              182,160
              
              
              $
              -
              
              
              $
              305,721




The
accompanying notes are an integral part of these financial
statements.


4




TRITON
DISTRIBUTION SYSTEMS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)


Note
1 - Basis of presentation, organization and significant accounting
policies





Basis of
presentation





The
unaudited consolidated financial statements have been prepared by Triton
Distribution Systems, Inc. (the “Company”), pursuant to the rules and
regulations of the Securities and Exchange Commission. The information furnished
herein reflects all adjustments (consisting of normal recurring accruals and
adjustments) which are, in the opinion of management, necessary to fairly
present the operating results for the respective periods. Certain information
and footnote disclosures normally present in annual consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the audited financial statements and footnotes for the period
ended December 31, 2007 included in the Company's Current Report on 10KSB filed
with the Securities and Exchange Commission on April 17, 2008. The results for
the nine months ending September 30, 2008 are not necessarily indicative of the
results to be expected for the full year ending December 31, 2008.





Organization and line of
business





Triton
Distribution Systems, Inc. (“TDS”) was incorporated in the State of Nevada on
January 10, 2006. On July 10, 2006, TDS entered into an exchange agreement with
Petramerica Oil, Inc. (“Petra”), a publicly traded
company.  Subsequent to the exchange agreement, the acquisition was
accounted for as a reverse acquisition of Petra by TDS resulting in a
recapitalization of TDS for accounting purposes, the Company changed its name to
Triton Distribution Systems, Inc.





The
Company is a commercially established, “next generation” web-based travel
services distribution business.  The Company has developed a
proprietary technology platform that provides considerable pricing advantages,
better distribution methods and superior travel product offerings compared to
established competitors.  The travel marketplace is a global arena in
which millions of “buyers” (travel agents and consumers) and “sellers” (hotels,
airlines, car rental agencies, cruise ship lines, tour operators and
entertainment companies) intersect.





Our core
competency is the electronic distribution of travel inventory from airlines, car
rental companies, hotels, tour and cruise operators, and other travel sellers to
travel agencies and their clients.





The
Company is currently a development stage company as defined
by  Statement of Financial Accounting Standards ("SFAS") No. 7 Accounting and Reporting by
Development Stage Enterprisesas it has not generated revenues since its
inception.  The accompanying financial information has been prepared
in accordance with accounting principles generally accepted in the United States
of America (“US GAAP”)





Principles of
consolidation





The
accompanying consolidated financial statements include the accounts of Triton
Distribution Systems, Inc. (formerly Petramerica Oil, Inc.), a Colorado
corporation and its wholly owned subsidiaries; Triton Distribution Systems
Philippines, Inc. (“Triton Philippines”), a Philippine  Corporation;
and Triton Distribution Systems Beijing (“Triton Beijing”), a Chinese
Corporation. All inter-company accounts and transactions have been eliminated in
consolidation. Triton Distribution Systems Philippines Inc. was formed in May
2006 with an office in Manila, Philippines.  In August 2007, as a
consequence of these internal issues with Philippine Airlines, we ceased our
operations in the Philippines until these issues are resolved.  In
September 2007 we dissolved our Philippine subsidiary. Triton Distribution
Systems (Beijing) was formed in November 2006. Since November 2006 operations
have been primarily involved sales and marketing activities.




5




On
December 12, 2005 the Company opened an office in Manila, Philippines. The
subsidiary in the Philippines, Triton Distribution Systems Philippines Inc.
(“Triton Philippines”), was formed on May 29, 2006 as a Philippine corporation
(60% Filipino owned, 40% foreign owned) under the laws of the Securities and
Exchange Commission of the Republic of the Philippines. Triton Philippines had
an authorized capital stock of two million pesos (PHP) (US$40,000) divided into
20,000 shares with a par value of 100 pesos per share. The original ownership
group of five individuals was issued 5,000 shares in the aggregate and included
the President of the Company as a 20% owner. Thus, there remained unissued and
unsubscribed shares of 15,000 in the amount of 1.5 million pesos (US$30,000)
available for subscription by foreign subscribers which was subsequently
subscribed for in January of 2007 and fully paid by inward remittances that had
occurred subsequent to June 2006 by the Company. To complete the process of
establishing TDS as the majority foreign equity holder in Triton Philippines,
the authorized capital stock of Triton Philippines was increased from two
million Pesos (US$40,000) to thirty million Pesos (U$600,000) as of August 23,
2006. Under Philippine law, inward remittances by TDS towards the operations of
its subsidiary, Triton Philippines, may be treated as an increase in authorized
capital stock. Under this increase, the minority stockholders waived their
rights to subscribe to their proportionate share in the issuance of 280,000
shares of stock with total par value of Twenty Eight Million Pesos
(US$560,000).  This resulted in the Company owning approximately 98%
of Triton Philippines and this transaction was completed in February
2007.  The President of the Triton Philippines still currently owns
0.33% of Triton Philippines.





During
the initial discovery phase of our project at Philippine Airlines we encountered
certain internal issues that have put the project in jeopardy. As a consequence
in order to conserve resources, the Company has ceased the operations in the
Philippines until such time as Philippines Airlines can resolve their internal
issues.  In August of 2007 the Company ceased operation in the
Philippines and as a result its legal entity has dissolved.





In
September of 2006 the Company opened another office in Beijing, China. The
subsidiary in China, Triton Distribution Systems (Beijing) (“Triton Beijing”)
was formed November of 2006 as a Wholly Foreign Owned Enterprise under the laws
and regulations of the government of the People’s Republic of
China.  The Company is required to make a total investment in Triton
Beijing of $250,000 U.S. Dollars (USD).  The registered capital of
Triton Beijing is to be $175,000 USD of which 15% of this amount was required to
be contributed within 90 days of formation.  The Company has complied
with this requirement by making the initial funding in January of 2007. On
February 08, 2007 the Company transferred $26,250 USD as the initial deposit.
The remaining amount ($148,750) must be contributed within 2 years of the
issuance of the business license.  The business license was issued on
April 26, 2007.  Triton Beijing’s business license has a term of 20
years that is renewable upon appropriate approval.





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 disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods. Actual results could differ from these
estimates.





Fair value of financial
instruments





On
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements. SFAS
No. 157 defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures. The carrying amounts reported in the balance sheets for
receivables and current liabilities each qualify as financial instruments and
are a reasonable estimate of fair value because of the short period of time
between the origination of such instruments and their expected realization and
their current market rate of interest. The three levels are defined as
follow:





●
            Level
      1 inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.





●
            Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.





●
            Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.




6
 TRITON
DISTRIBUTION SYSTEMS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)


As of
September 30, 2008 the Company did not identify any assets and liabilities that
are required to be presented on the balance sheet at fair value.





Reclassifications





Certain
reclassifications have been made to the prior years' financial statements to
conform to the current year presentation. These reclassifications had no effect
on previously reported results of operations or cash flows.





Cash and cash
equivalents





For
purposes of the statements of cash flows, the Company defines cash equivalents
as all highly liquid debt instruments purchased with a maturity of three months
or less.





Concentration of credit
risk





Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist of cash and cash equivalents.  From time to time we may
exceed the FDIC $100,000 insurance limit. The deposits made in foreign banks are
not insured which amounted to $13,985 as of September 30, 2008. The Company has
not experienced any losses, nor do we anticipate incurring any losses related to
this credit risk.





Furniture and
equipment





Furniture
and equipment are stated at cost and are depreciated using the straight-line
method over their estimated useful lives of 3-7 years. Expenditures for
maintenance and repairs are charged to operations as incurred while renewals and
betterments are capitalized. Gains and losses on disposals are included in the
results of operations.





The
estimated service lives of furniture and equipment are as follows:





Computer
      equipment
            5
      yearsSoftware
            5
      yearsOffice
      equipment
            5
      yearsFurniture
      and fixtures
            7
      yearsTenant
      improvements
            3-7
      years





Website development
costs




Website
development costs are for the development of the Company's Internet website.
These costs have been capitalized when put into service, and are being amortized
over three years. The Company accounts for these costs in accordance with
Emerging Issues Task Force (“EITF”) 00-2, "Accounting for Website Development
Costs," which specifies the appropriate accounting for costs incurred in
connection with the development and maintenance of websites.





Intangible
assets





The
Company’s intangible asset was acquired and is carried at its purchase price,
net of accumulated amortization, which approximates fair value. In accordance
with SFAS No. 142, Goodwill and Other Intangible Assets, the Company evaluates
its intangible assets for impairment, on a periodic basis and whenever events or
changes in circumstances indicate that the carrying value may not be recoverable
from its estimated future cash flows. Amortization is computed using the
straight-line method over the estimated useful life of the intellectual property
of ten years.





The
intangible assets as of September 30, 2008 and December 31, 2007, net of
amortization, amounted to $175,394 and $198,208, respectively.




7
 TRITON
DISTRIBUTION SYSTEMS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)


Impairment of long-lived
assets





Per SFAS
No. 144, long-lived assets are analyzed for impairment. The Company tests for
impairment of long-lived assets at least annually or more often whenever there
is an indication that the carrying amount of the asset may not be recovered.
Recoverability of these assets is determined by comparing the forecasted
undiscounted cash flows generated by those assets to the assets' net carrying
value. The amount of impairment loss, if any, is measured as the difference
between the net book value of the assets and the estimated fair value of the
related assets.





Management
evaluates the recoverability of long-lived assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with them. At the time such flows of certain long-lived assets are
not sufficient to recover the carrying value of such assets, the assets are
adjusted to their fair values. As of September 30, 2008, the Company believes
that there were no significant impairments of long-lived assets.





Revenue
recognition





The
Company applies the guidance within SEC Staff Accounting Bulletin No. 104,
“Revenue Recognition in Financial Statements” (“SAB 104”) to determine when to
properly recognize revenue. SAB 104 states that revenue generally is realized or
realizable and earned when persuasive evidence of an arrangement exists,
services have been rendered, the seller's price to the buyer is fixed or
determinable and collectability is reasonably assured.





In order
to simplify its business process, the Company provides electronic travel
distribution services through its travel distribution system. These services are
provided for airlines, car rental companies, hotels, tour and cruise operators,
and other travel sellers to travel agencies and their clients: (1) the Company
charges a fee for reservations booked through its distribution system; (2)
revenue is recognized at the time the transactions are processed; (3) however,
if a transaction is subsequently canceled, the transaction fee or fees must be
credited or refunded; (4) therefore, revenue is recorded net of an estimated
amount reserved to account for cancellations which may occur in a future
months;  (5) this reserve is calculated based on industry historical
cancellation rates and will be based on the Company's own cancellation rates
once a sufficient history of cancellations is established; and  (6) in
estimating the amount of future cancellations that will require a transaction
fee to be refunded, the Company assumes that a significant percentage of
cancellations are followed by an immediate re-booking of the transaction,
without a net loss of revenue.





Leases





The
Company accounts for its leases under the provisions of SFAS No. 13,  
Accounting for Leases,
and subsequent amendments, which require that leases be evaluated and classified
as operating or capital leases for financial reporting purposes.  The
Company’s office leases are treated as current operating
expenses.  The office leases contain certain rent escalation clauses
over the life of the leases.  The total amount of rental payments due
over the lease term is being charged to rent expense on a straight-line method
over the term of the lease.  The difference between rent expense
recorded and the amount paid is credited or charged to “accrued lease liability”
on the accompanying consolidated balance sheet.





Comprehensive
Income





The
Company reports comprehensive income / (loss) and its components in accordance
with SFAS No. 130, Reporting
Comprehensive Income. The Company’s reporting currency is the US dollar
(“USD”).  The Company’s Chinese subsidiary’s financial records and
books are maintained in its local currency, Renminbi (RMB), as its functional
currency.  The Company’s former Philippines subsidiary’s financial
records and books are maintained in its local currency, Peso (PESO), as its
functional currency.  Results of operations and cash flow are
translated at average exchange rates during the period, and assets and
liabilities are translated at the unified exchange rate, at the end of the
period.  Translation adjustments resulting from this process are
included in accumulated other comprehensive income in the statement of
shareholders’ equity.  Since cash flows are translated at average
translation rates for the period, amounts reported on the statement of cash
flows will not necessarily agree with changes in the corresponding balances on
the balance sheet. Translation adjustments resulting from this process are
included in accumulated other comprehensive income in the statement of
shareholders’ equity.


8
 TRITON
DISTRIBUTION SYSTEMS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)


Translation
adjustments amounted to $29,617 and $12,712 as of September 30, 2008 and
December 31, 2007, respectively.  Asset and liability accounts at
September 30, 2008 were translated at 6.86 RMB to $1.00 USD as compared to 7.29
RMB at December 31, 2007.  Equity accounts were stated at their
historical rate. The average translation rates applied to income statements
accounts for the nine months ended September 30, 2008 and 2007 were 6.85 RMB and
7.55 RMB, respectively.




Transaction
gains and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are included in the
results of operations as incurred. These amounts are immaterial to the
consolidated financial statements.Historically, the Company
has not entered into any currency trading or hedging transactions, although
there is no assurance that the Company will not enter into such transactions in
the future.





Stock based
compensation




The
Company accounts for stock option grants in accordance with SFAS
No. 123(R), Share-Based Payment and the conclusions reached by EITF 96-18,
“Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring or in Conjunction with Selling Goods or Services.” Costs are measured
at the estimated fair market value of the consideration received or the
estimated fair value of the equity instruments issued, whichever is more
reliably determinable.  The Company records the cost of employee and
non-employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award. That cost is recognized over
the period during which an employee is required to provide service in exchange
for the award—the requisite service period (usually the vesting period). No
compensation cost is recognized for equity instruments for which employees do
not render the requisite service. The grant-date fair value of employee share
options and similar instruments is estimated using a Black-Scholes
option-pricing model. If an equity award is modified after the grant date,
incremental compensation cost will be recognized in an amount equal to the
excess of the fair value of the modified award, if any, over the fair value of
the original award.





Income
taxes




The
Company accounts for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes." Deferred taxes are provided on the liability method whereby
deferred tax assets are recognized for deductible temporary differences, and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.





On
January 1, 2007, the Company adopted Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement No. 109(“FIN 48”). The Interpretation gives guidance related to the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return, and requires that we recognize in our
financial statements the impact of a tax position, if that position is more
likely than not to be sustained upon an examination, based on the technical
merits of the position.





Loss per
share





The
Company reports loss per share in accordance with SFAS No. 128, Earnings per Share. Basic
loss per share is computed by dividing the net loss by the weighted average
number of common shares outstanding. Diluted loss per share is computed by
dividing net income by the weighted average number of common shares used in the
basic earnings per share calculation plus the number of common shares that would
be issued assuming exercise or conversion of all potentially dilutive common
shares outstanding. The Company excludes equity instruments from the calculation
of diluted weighted average shares outstanding if the effect of including such
instruments is anti-dilutive to earnings per share. For the periods presented,
all equity instruments are considered ant-dilutive.





9
 TRITON
DISTRIBUTION SYSTEMS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)


Recently issued accounting
pronouncements




In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"), providing
companies with an option to report selected financial assets and liabilities at
fair value. SFAS No. 159's objective is to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. SFAS No. 159 helps to
mitigate this type of accounting-induced volatility by enabling companies to
report related assets and liabilities at fair value, which would likely reduce
the need for companies to comply with detailed rules for hedge accounting. SFAS
No. 159 also establishes presentation and disclosure requirements designed
to facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. SFAS No. 159
requires companies to provide additional information that will help investors
and other users of financial statements to more easily understand the effect of
its choice to use fair value on its earnings. It also requires companies to
display the fair value of those assets and liabilities for which it has chosen
to use fair value on the face of the balance sheet. SFAS No. 159 is
effective on January 1, 2008. We are currently evaluating the impact of the
adoption of this statement on our financial statements.




In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations"
("SFAS No. 141(R)"), which establishes principles and requirements for the
reporting entity in a business combination, including recognition and
measurement in the financial statements of the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree. This
statement also establishes disclosure requirements to enable financial statement
users to evaluate the nature and financial effects of the business combination.
SFAS No. 141(R) applies prospectively to business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008 and interim periods within
those fiscal years. SFAS No. 141(R) will become effective for our fiscal
year beginning January 1, 2009. The Company believes adopting SFAS No. 141R
will significantly impact its financial statements for any business combination
completed after December 31, 2008.





In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests
in Consolidated Financial Statements an amendment of ARB No. 51. This
Statement is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008, which for us is the year
ending December 31, 2009, and the interim periods within that fiscal year.
The objective of this Statement is to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides in
its consolidated financial statements. We are currently evaluating the potential
impact, if any, of the adoption of SFAS No. 160 on our consolidated
financial statements.





In March
2008, the FASB issued SFAS No. 161 ("SFAS 161"), "Disclosures about Derivative
Instruments and Hedging Activities." SFAS 161 is intended to improve financial
reporting of derivative instruments and hedging activities by requiring enhanced
disclosures to enable financial statement users to better understand the effects
of derivatives and hedging on an entity's financial position, financial
performance and cash flows. The provisions of SFAS 161 are effective for interim
periods and fiscal years beginning after November 15, 2008. The Company does not
anticipate that the adoption of SFAS 161 will have a material impact on its
consolidated results of operations or financial position.





In April
2008, the FASB issued 142-3 “Determination of the useful life of Intangible
Assets”, which amends the factors a company should consider when developing
renewal assumptions used to determine the useful life of an intangible asset
under SFAS142. This Issue is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. SFAS 142 requires companies to consider whether renewal can be
completed without substantial cost or material modification of the existing
terms and conditions associated with the asset. FSP 142-3 replaces the previous
useful life criteria with a new requirement—that an entity consider its own
historical experience in renewing similar arrangements. If historical experience
does not exist then the Company would consider market participant assumptions
regarding renewal including 1) highest and best use of the asset by a market
participant, and 2) adjustments for other entity-specific factors included in
SFAS 142. The Company is currently evaluating the impact that adopting SFAS
No.142-3 will have on its financial statements.




In May
2008, the FASB issued SFAS No. 162 (“SFAS 162”), "The Hierarchy of Generally
Accepted Accounting Principles." SFAS 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with GAAP for nongovernmental entities. SFAS 162 is
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles." The Company does not
expect the adoption of SFAS 162 will have a material impact on its consolidated
results of operations or financial position.


10
 TRITON
DISTRIBUTION SYSTEMS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)





In June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
No. 07-5”). This Issue is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. Early application is not permitted. Paragraph 11(a) of Statement of
Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the Company’s own
stock and (b) classified in stockholders’ equity in the statement of
financial position would not be considered a derivative financial instrument.
EITF No.07-5 provides a new two-step model to be applied in determining whether
a financial instrument or an embedded feature is indexed to an issuer’s own
stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception.
The Company believes adopting this statement will have a material impact on the
financial statements because among other things, any option or warrant
previously issued and all new issuances denominated is US dollars will be
required to be carried as a liability and marked to market each reporting
period.





In June
2008, the FASB issued Emerging Issues Task Force Issue 07-5 “Determining whether
an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock” (“EITF
No. 07-5”). This Issue is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. Early application is not permitted. Paragraph 11(a) of Statement of
Financial Accounting Standard No 133 “Accounting for Derivatives and Hedging
Activities” (“SFAS 133”) specifies that a contract that would otherwise meet the
definition of a derivative but is both (a) indexed to the Company’s own
stock and (b) classified in stockholders’ equity in the statement of
financial position would not be considered a derivative financial instrument.
EITF No.07-5 provides a new two-step model to be applied in determining whether
a financial instrument or an embedded feature is indexed to an issuer’s own
stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception.
The Company is currently evaluating the impact that adopting EITF 07-5 will have
on its financial statements.




In June
2008, FASB issued EITF Issue No. 08-4, “Transition Guidance for Conforming
Changes to Issue No. 98-5 (“EITF No. 08-4”)”. The objective of EITF No.08-4
is to provide transition guidance for conforming changes made to EITF No. 98-5,
“Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios”, that result from EITF No. 00-27
“Application of Issue No. 98-5 to Certain Convertible Instruments”, and SFAS No.
150, “Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity”. This Issue is effective for financial statements issued
for fiscal years ending after December 15, 2008. Early application is
permitted. Management does not expect the impact of adoption of EITF No.
08-4 on the accounting for the convertible notes and related warrants
transactions will have a material effect on the consolidated financial
statements..





On
October 10, 2008, the FASB issued FSP 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” which clarifies
the application of SFAS 157 in a market that is not active and provides an
example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP
157-3 became effective on October 10, 2008, and its adoption did not have a
material impact on our financial position or results for the quarter ended
September 30, 2008.








Note
2 - Development stage company and going concern





The
Company is subject to risks and uncertainties, including new product
development, actions of competitors, reliance on the knowledge and skills of its
employees to be able to service customers, and availability of sufficient
capital and a limited operating history. Accordingly, the Company presents its
financial statements in accordance with the accounting principles generally
accepted in the United States of America that apply in establishing new
operating enterprises. As a development stage enterprise, the Company discloses
the deficit accumulated during the development stage and the accumulated
statement of operations and cash flows from inception of the development stage
to the date on the current balance sheet. Contingencies exist with respect to
this matter, the ultimate resolution of which cannot presently be
determined.




11




TRITON
DISTRIBUTION SYSTEMS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)


The
accompanying consolidated financial statements have been prepared in conformity
with generally accepted accounting principles in the United States of America,
which contemplates continuation of the Company as a going concern. However, the
Company has not generated revenues, has incurred significant operating losses of
to date and has a negative cash flow from operations, which raises substantial
doubt about its ability to continue as a going concern.





Management
has been historically successful at raising capital to fund the Company’s
short-term obligations and operating needs.  The Company’s plan to
continue as going concern, for at least the next twelve months, includes:
raising capital through a long-term debt financing arrangement; further equity
issuances target acquisitions in China and Europe to provide future revenue
stream; and an overall reduction in operating expenses by cutting employees and
limiting travel and related expenses.  While the Company believes its
plans ultimately will resolve the going concern issue, there is no assurance
that the intended results will occur.





In the
event the Company is unsuccessful in its plans to finance operations through the
above means it could be forced to significantly reduce its level of operations.
The accompanying financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.








Note
3 - Furniture and equipment





The cost
of furniture and equipment consisted of the following:





September
      30,
            
            
            December
      31,2008
            
            
            
            2007Computer
      equipment
            
            $
            162,552
            
            
            $
            162,360Software
            
            
            67,182
            
            
            
            67,182Office
      equipment
            
            
            94,339
            
            
            
            94,294Furniture
      and fixtures
            
            
            74,924
            
            
            
            74,925Tenant
      improvements
            
            
            63,677
            
            
            
            137,299462,674
            
            
            
            536,060Less
      accumulated depreciation
            
            
            (182,474
            )
            
            
            (171,857
            )$
            280,200
            
            
            $
            364,203




Depreciation
expense was $10,114, $29,681, $73,685, $63,571 and $262,376 for the three months
ended September 30, 2008 and the three months ended September 30, 2007, for the
nine months ended September 30, 2008 and the nine months ended September 30,
2007 and for the period from inception (January 10, 2006) to September 30, 2008,
respectively.





Note
4 - Notes payables





On March
28, 2007 the Company entered into a Line of Credit Agreement with JMW Fund, LLC
(“JMW”) to receive up to $1,000,000 for six months.  The Company paid
a $10,000 commitment fee related to the Line of Credit.





On June
28, 2007 the Line of Credit became part of a $3,000,000 Convertible Senior Note
Agreement (Loan) between the Company, JMW, San Gabriel Fund LLC, Underwood
Family Partners LTD., and Battersea Capital Inc (Lenders).  The Loan
began accruing interest at 1% per month on July 1, 2007 and matures on July 1,
2008, if not prepaid without penalty.    The Lenders, at
their sole discretion, may convert the outstanding principal balance into shares
of common stock at an exercise price of $3.00 per share including a cashless
exercise option.  The accrued interest, at the time of conversion, may
be paid in either cash or shares of common stock at the Company’s
discretion.  The Company is currently in default on the convertible
note.




12


TRITON
DISTRIBUTION SYSTEMS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)




Pursuant
to the terms of the Convertible Note, the Company agreed to a commitment fee via
the issuance of warrants exercisable for an aggregate of 2,000,000 shares of the
Company’s common stock at an exercise price of $3.00 per share for five years,
including a cashless exercise option.  The Company agreed to register
the shares underlying the warrants no later than December 31,
2007.  Additionally, the Company agreed to “piggyback” register the
shares underlying the warrants in any future registration prior to the
expiration date, if any.  Finally, the warrants contain certain
adjustment provisions related to issuing equity instruments at prices lower than
the current exercise price.





As of
September 30, 2008, the entire $3,000,000 of the Loan was
outstanding.  The Company recorded $2,884,381 as discount on loan to
account for value of the warrants.  The Company has reviewed the
provisions of EITF 00-19 “Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s Own Stock” and has
determined that the warrants do not qualify for derivative accounting and
accounted for the warrants under APB No. 14 “Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants”.  The discount is being
amortized over the life of the loan to interest expense. For the three and nine
months ended September 30, 2008 we amortized $16,861 and $1,481,172 of the
discount to loan interest expense.




Under the
terms of the loan agreement, the Company was required to register the warrants
by December 31, 2007.  On May 20, 2008 the Company obtained consent from
the warrant holders deferring the registration of the warrants, pending the
outcome of its current financing activities.





In
October 2007 the Company entered into several one month short-term loan
arrangements with other investors totaling $200,000 at December 31, 2007 with
12% interest (1.5% per month extra in event of default) expiring from November
2007. The Company did not repay the notes when due and is currently accruing
interest at the default interest rate of 1.5% per month on the unpaid principal
balance.





In
December 2007 the Company entered into several one month short-term loan
arrangements with other investors totaling $525,000 at December 31, 2007 with
12% interest expiring in January 2008.





From
October and November 2007 we entered into short-term loan arrangements of
$469,000 and $20,000 with our CFO and CEO, respectively.  The loans
accrue interest at 12% and are due upon receipt of sufficient
financing.





From
January 2008 to June 2008, the Company entered into several short-term loan
arrangements with other investors totaling $1,670,000 with 12% interest (1.5%
per month in event of default) expiring on dates between February 09, 2008 and
August 17, 2008.  The Company did not repay the notes when due and is
currently accruing interest at the default interest rate of 1.5% per month on
the unpaid principal balance.





During
the three months ended September 30, 2008, the Company entered into several
short-term loan arrangements with other investors totaling $1,570,000 with 12%
to 18% interest expiring on dates between August 17, 2008 and February 7, 2009.
As of September 30, 2008, notes totaling $920,000 are in default.





In July
2008 the Company received $120,000 in subscription notes through our agreement
with Scottsdale Capital.  The notes are convertible at $0.25 per share
with 200% warrant coverage.  Interest is payable at 10% on a
semi-annual basis from the date of issuance.  Notes mature on June 30,
2011, unless previous converted. The Company is obligated to issue warrants to
purchase 240,000 shares of the Company’s common stock for $0.50 per share. The
warrants expire three years from the date of issuance. The value of the warrants
of $75,250 was calculated using the Black-Scholes model using the following
assumptions: discount rate of 3.2%; volatility of 400%; dividend yield of 0%;
and expected term of 3 year. The value of the warrants is recorded as a discount
to the notes payable in the financial statements.





In
connection with the July subscription notes, the Company is obligated to issue a
warrant to purchase 96,000 shares of the Company common stock for $0.50 per
share. The warrants expire three years from the date of issuance. The value of
the warrants of $30,100 issued to the placement agent is considered additional
offering cost. The value of the warrants was calculated using the Black-Scholes
model using the following assumptions: discount rate of 3.20%; volatility of
400%; dividend yield of 0%; and expected term of 3 year.




13


TRITON
DISTRIBUTION SYSTEMS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)


The
Company accounted for the secured convertible notes issued pursuant to the
subscription agreement discussed in Note 9 under EITF 00-27, ‘‘Application of
Issue 98-5 to Certain Convertible Instruments’’.   Based on EITF
00-27, the Company has determined that the convertible notes contained a
beneficial conversion feature because at date of note issuance, the effective
conversion price of the convertible notes was $0.13 when the average market
value per share was $3.0.




The
Company recorded a discount on the note related to the intrinsic value of the
beneficial conversion feature totaling $63,901 and $56,099 for the fair value of
the warrants issued. The discount on notes payable is amortized over the term of
notes.





During
the nine months ended September 30, 2008, the Company entered into short-term
loan arrangements of $44,000 with our CFO, The loans accrue interest at 12% and
are due upon receipt of sufficient financing.





The
Company has not paid majority of the above mentioned loans and have accrued
interest of $825,742 as of September 30, 2008.








Note
6 - Stockholders' equity





In July,
Richardson and Patel accepted 363,621 shares of stock as payment on account
towards the balance due from May through June of 2008. The value of the payment
was $58,599 using prices ranging from $0.11 to $0.32, less a 15%-25% discount to
market on the average closing date for the first five days of June and July
2008.





On June
9, 2008, Richardson and Patel accepted 395,525 shares of stock as payment on
account towards the balance due from January through April of 2008. The value of
the payment was $55,832 using prices ranging from $0.13 to $0.17, less a 15%
discount to market on the average closing date for the first five days of
April and May 2008.





On May
28, 2008, we set aside 2,000,000 shares of stock from the 2006 Equity Incentive
Plan for payments towards qualified legal fees incurred in 2008.





On
January 17, 2008 Richardson and Patel accepted 112,168 shares of stock as
payment on account towards the balance due as of December 31,
2007.  The value of the payment was $38,137 prices at $0.34, $0.40
less a 15% discount to market on the closing date of January 16,
2008.  The remaining amount was not eligible for payment via
stock.





In
addition 57,156 shares valued at $0.34, $0.40 less 15% discount to
market on January 16, 2008 were issued as payment toward a retainer used in
the defense of  the Terry et all vs. Triton matter.  Total value
of the payment was $29,592.





In
November 2007, the Company issued to a consulting firm 1,000,000 shares of
common stock. The Company valued the shares on grant date based on the closing
price on that date. The total value of the shares issued was
$630,000.





In
September 2007 the Company issued 186,875 shares of common stock at $0.80 per
share for the exercise of warrants for total consideration of
$149,501.





From July
to September 2007 the Company issued 38,478 shares of common stock at $0.80 per
share for cashless exercise of employee stock options





In June
2007 the Company issued 61,000 shares of common stock at $0.80 per share for the
exercise of employee stock options for total consideration of
$48,800.




14


TRITON
DISTRIBUTION SYSTEMS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)


On June
11, 2007 the Board of Directors approved the grant of a total of 149,868
restricted shares of common stock to Michael W. Overby, CFO. The shares were
valued at $2.13 which was the closing price on June 11, 2007 for a total value
of $319,219.





In May
and June 2007, the Company issued to two investor relations firms a total of
1,000,000 shares of common stock (500,000 shares each) for 2 years of services.
The company valued each set of 500,000 shares based on the closing price on new
contract start date. The total value of the shares issued was
$2,100,000.





In March,
2007, the Company issued to an investor relations firm a total of 100,000 shares
of common stock valued at $1.71 per share, the closing price of the stock on the
date of issuance. The value of these shares of $171,156 is being amortized over
the terms of the agreements. The shares were actually issued on March 29, 2007,
and the value of these shares is being amortized over the service period of the
agreement which began on March 8, 2007.





On March
2, 2007 the Board of Directors approved the grant of 450,132 restricted shares
of common stock to Michael W.Overby, CFO, consistent
with his offer letter. The shares were valued at $1.63 which was the closing
price on March 2, 2007 for a total value of $733,715.





In
connection with the September 2006 private placement offerings, the Company
issued a warrant to purchase 185,000 shares of the Company common stock for
$0.80 per share. The warrants expire five years from the date of issuance. The
value of the warrants of $43,293 issued to the placement agent is considered
additional offering cost. The value of the warrants was calculated using the
Black-Scholes model using the following assumptions: discount rate of 4.5%;
volatility of 22%; dividend yield of 0%; and expected terms of 5 year. The
impact of recording the value of the warrants in the financial statements is $0
as the Company increased stockholders’ equity by $43,293 for the issuance of
these warrants and decreased stockholders’ equity by the same amount to record
the value of these warrants as offering costs.





In July
2006 the Company sold a total of 7,148,710 shares of its common stock at $0.80
per share through a private placement offering for gross proceeds of $5,747,500.
After commission and offering expenses, the Company received net proceeds of
$4,924,598. In addition, the Company issued to the placement agent 598,029 share
of common stock and issued a warrant to purchase 1,429,742 shares of common
stock for $0.80 per share. The warrants expire five years from the date of
issuance. The value of the common stock and warrants of $478,423 and $334,580,
respectively, issued to the placement agent are considered additional offering
cost. The value of the warrants was calculated using the Black-Scholes model
using the following assumptions: discount rate of 4.5%; volatility of 22%;
dividend yield of 0%; and expected terms of 5 years.





In July
2006, in connection with the private placement offering described above, the
Company’s original investors agreed to cancel an aggregate of 6,218,958 of their
shares of common stock upon the successful completion of selling at least
$5,000,000 in the private placement.




In July
2006, in connection with the transaction with Petra, the Company issued
2,087,910 shares of common stock in exchange for the outstanding shares of Petra
on a one for one basis, the Company repurchased and retired 400,000 shares of
its common stock for $400,000 that were owned by certain shareholders of
Petra.




In July
2006, the Company issued to two investor relation firms a total of 2,238,824
(1,119,412 each) shares of common stock valued at $0.80 per share. The value of
these shares of $1,800,000 is being amortized over the terms of the respective
agreements. The shares were actually issued on July 26, 2006, but the value of
these shares is being amortized over the respective service periods for each
agreement which both began on July 10, 2006 the date of the transaction with
Petra.





Upon the
formation of the Company, the founding stockholders contributed $100,100 in cash
and intellectual property valued at $238,525 in exchange for 35,821,198 shares
of common stock.




15




TRITON
DISTRIBUTION SYSTEMS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)




Stock
Options





In
December of 2007, 1,235,537 options were approved by the board of directors for
the grant of options to employees In January 2008, the Company issued 220,852
options were granted to new employees and for promotions at an exercise price of
..38. The price was determined on the day the last board member approved the
grant January 7, 2008.  The grant notices were distributed to
employees January 18, 2008. The shares vest over 2 years. The price was
determined on the day the last board member approved the grant January 7,
2008.  The grant notices were distributed to employees January 18,
2008. The options expire in December 2017.  The Company valued these
options using the Black Scholes model with the following factors: market price
of $0.38; volatility of 223%; risk free rate of 4.75%; exercise price of $0.38;
and an estimated life of 10 years.





The
additional 361,780 shares were issued as a bonus to employees at an
exercise price of $0.38, with a vesting period of over one year, the grant
distributed and communicated to employees on July, 2, 2008. In addition, 548,904
shares were issued to managers at an exercise price of $0.38. This grant has not
been distributed or communicated to the managers, the shares vest upon
issuance.





On June
12, 2006, the Company's board of directors approved the Triton Distribution
Systems, Inc. 2006 Equity Incentive Plan (the “Plan”) that provides for the
issuance of up to 8,600,000 shares under the Amended Plan.





The fair
value of each option award was estimated on the date of grant using a
Black-Scholes option valuation model.  The exercise price of all
options outstanding equals the closing market value of the Company’s common
stock on the grant date. Expected volatilities are based on historical
volatility of similar companies for the expected term of the option considering
characteristics such as industry, stage of life cycle, size, financial leverage,
and other factors.  The expected dividend yield is based on the
history our having never paid dividends and our expectation that we will not pay
dividends in the near future.  The following reflects the significant
assumptions used to estimate the fair value of options on the corresponding
grant dates:





Prior
      to July 14, 2006
            Risk-free
      interest rate
            4.50%Expected
      life of the options
            9.00
      yearsExpected
      volatility
            22%Expected
      dividend yield
            0For
      options Granted
            Risk-free
      interest rate
            4.50%December
      01, 2006
            Expected
      life of the options
            8.78
      yearsExpected
      volatility
            86%Expected
      dividend yield
            0For
      options Granted
            Risk-free
      interest rate
            4.50%March
      02, 2007
            Expected
      life of the options
            10.00
      yearsExpected
      volatility
            121%Expected
      dividend yield
            0For
      options Granted
            Risk-free
      interest rate
            4.75%June
      11, 2007
            Expected
      life of the options
            10.00
      yearsExpected
      volatility
            164%For
      options Granted
            Risk-free
      interest rate
            4.75%September
      11, 2007
            Expected
      life of the options
            3.00
      yearsExpected
      volatility
            171%For
      options Granted
            Risk-free
      interest rate
            4.75%January
      18, 2008
            Expected
      life of the options
            9.87
      yearsExpected
      volatility
            223%Expected
      dividend yield
            0




16


TRITON
DISTRIBUTION SYSTEMS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)


The
following table illustrates our stock option activity from inception (January
10, 2006) through September 30, 2008.




Option
      Shares
            
            Options
            
            
            Weighted
      Ave.
            
            
            AggregateOutstanding
            
            
            Exercise
      Price
            
            
            Intrensic
      ValueOutstanding
      at January 10, 2006
            
            
            -
            
            
            $
            -
            
            
            $
            -Granted
            
            
            3,333,177
            
            
            $
            1.47
            
            
            $
            0.84Exercised
            
            
            99,478
            
            
            $
            0.80
            
            
            $
            0.17Forfeited
      and cancelled
            
            
            1,661,557
            
            
            $
            1.80
            
            
            $
            1.02Outstanding
      at September 30, 2008
            
            
            1,572,142
            
            
            $
            1.35
            
            
            $
            0.72




As of
September 30, 2008, 3,411,455 options have vested.





During
the period ended September 30, 2008, the Company issued 361,780 options of
which, 163,616 were forfeited or cancelled during the quarter. In addition,
126,089 options were forfeited during the quarter ended June 30, 2008 unrelated
to the options above. The weighted average remaining contractual life of options
outstanding is 8.87 years.  For all options granted, the exercise
price was equal to the market price of the Company's stock at the date of grant.
All the options expire in 2017.





The
Company recognized $183,569 $663,655, $638,492, $723,971, and $2,598,551 in
stock option-based compensation expense for the three months and nine months
ended September 30, 2008, three months and nine months ended September 30, 2007
and for the period from inception (January 10, 2006) to September 30, 2008,
respectively. The fair values of our stock options are estimated using the
Black-Scholes option pricing model.





Warrants





From time
to time the Company issues warrants to non employees in connection with the
entry into various financing arrangements.  The following table
private placement offerings and shares issued for other services as described
above.  The following table is a summary of the warrant
activity:





Below is
a summary of the warrant activity:




Warrant
      Shares
            
            Warrants
            
            
            Weighted
      Ave.
            
            
            AggregateOutstanding
            
            
            Exercise
      Price
            
            
            Intrensic
      ValueOutstanding
      at January 10, 2006
            
            
            1,614,742
            
            
            $
            0.80Granted
            
            
            2,000,000
            
            
            $
            2.90
            
            
            $
            0.78Exercised
            
            
            186,875
            
            
            $
            0.80Forfeited
      and cancelled
            
            
            -Outstanding
      at September 30, 2008
            
            
            3,427,867
            
            
            $
            1.98
            
            
            $
            0.78




17




TRITON
DISTRIBUTION SYSTEMS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)




The
Company estimates the fair value of warrants using a Black-Scholes valuation
model. The assumptions used in estimating the fair value of the warrants issued
on the date of grant are as follows:





For
      Warrants Issued
            Risk-free
      interest rate
            
            4.50%In
      2006
            Expected
      life of the options
            
            5.00
      yearsExpected
      volatility
            
            22%Expected
      dividend yield
            
            0For
      Warrants Issued
            Risk-free
      interest rate
            
            4.50%In
      2007
            Expected
      life of the options
            
            5.00
      yearsExpected
      volatility
            
            164%Expected
      dividend yield
            
            0




The
weighted average fair value of the warrants issued was $1.44 and $1.82 for the
nine months ended September 30, 2008 and the years ended December 31, 2007 and
2006, respectively.





The
warrants issued during the year ended December 31, 2007 in the amount of
$2,884,381 were initially recorded as a discount to notes
payable.  The Company recognized $740,586, $1,481,172, and $2,867,549
of interest expense related to the amortization of the discount for the three
months and nine months ended September 30, 2008, and for the period from
inception (January 10, 2006) to September 30, 2008, respectively. The value
of the warrants issued in 2006 reflected a reduction in the net amount of
proceeds received in the private placements noted above.





As of
September 30, 2008, all of the warrants are vested. All warrants begin to expire
in 2011.





Note
7 - Income taxes





Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial statement purposes and
the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows:




September
      30, 2008
            
            
            December
      31, 2007Deferred
      tax assets:Federal
      net operating loss
            
            $
            6,310,869
            
            
            $
            4,276,973State
      net operating loss
            
            
            1,813,351
            
            
            
            1,228,936Equity
      compensation
            
            
            2,803,657
            
            
            
            2,071,383Total
      deferred tax assets
            
            
            10,927,877
            
            
            
            7,577,292Less
      valuation allowance
            
            
            (10,927,877)
            )
            
            
            (7,577,292
            )Total
            
            $
            -
            
            
            $
            -




At
September 30, 2008, the Company had federal and state net operating loss ("NOL")
carryforwards of approximately $10,927,877. Federal NOLs could, if unused,
expire in 2021. State NOLs, if unused, could expire in 2011.





The
valuation allowance increased by $3,350,585, $3,749,602 and $10,927,877 the nine
months ended September 30, 2008, for the nine months ended September 30, 2007
and for the period from inception (January 10, 2006) to September 30, 2008,
respectively. The Company has provided a 100% valuation allowance on the
deferred tax assets at September 30, 2008 to reduce such asset to zero, since
there is no assurance that the Company will generate future taxable income to
utilize such asset. Management will review this valuation allowance requirement
periodically and make adjustments as warranted.




18




TRITON
DISTRIBUTION SYSTEMS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)




The
reconciliation of the effective income tax rate to the federal statutory rate
for the period from inception (January 10, 2006) to September 30, 2008 is as
follows:





Federal
      income tax rate
            
            
            (34.0%)State
      tax, net of federal benefit
            
            
            (8.9%)Equity
      compensation
            
            
            15.6%Non-deductible
      items
            
            
            0.2%Increase
      in valuation allowance
            
            
            27.1%Effective
      income tax rate
            
            
            0.0%




We have
considered the implications of FIN 48 Uncertain Tax Positions and
believe that all of our positions taken in tax filings are more likely than not
to be sustained on examination by tax authorities. In the event that a taxing
authority challenged a position taken by us, no actual liability for tax would
result since we have available tax loss carry forwards which would be applied in
those circumstances.




Note
8 - Commitments and contingencies





Employment
agreement





In July,
2006, the Company entered into a three-year employment agreement with its CEO,
Gregory Lykiardopoulos to be effective as of February 2006 pursuant to which
Mr. Lykiardopoulos will receive an annual base salary of $250,000 and other
compensation to be determined by the Board of Directors. In addition to Mr.
Lykiardopoulos is entitled to receive additional shares of common stock if
certain profitability requirements are met. These shares will be issued from
existing shares. No new shares will be issued pertaining to this
agreement.





Contracts





In order
to obtain and distribute travel products, the Company has entered into
agreements with travel sellers and telecommunications service and infrastructure
providers. All of these agreements may be terminated by either party on 30 days
written notice to the other. Each agreement provides for the payment by travel
sellers of customary travel commissions to the Company’s travel agent buyers and
to the Company. All of the agreements are non-exclusive to the Company. There
are no minimums or required monthly obligations for any of these
agreements.





Leases





The
Company leases office space in an office building in Sausalito, California,
Beijing, China, and Amsterdam, the Netherlands under an operating lease
agreements that expire from September 2008 through May 2010. The leases provide
for current monthly lease payments ranging from $1,000 to $26,173 which
increase over the term of the lease.




Future
minimum lease payments under non-cancelable operating leases with initial or
remaining terms of one year or more are as follows:




OperatingLeasesPeriod
      ending September 30,2008
            
            $
            403,5052009
            
            
            336,7162010
            
            
            200,1372011
            
            
            41,5142012
            
            
            -




19




TRITON
DISTRIBUTION SYSTEMS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)




The
Company incurred rent expense of $43,499, $107,089, $322,301, $340,019 and
$1,089,958 for the three months ended September 30, 2008 and 2007, the nine
months ended September 30, 2008 and 2007 and for the period from inception
(January 10, 2006) to September 30, 2008, respectively.





Note
9 - Related parties





On March
28, 2007 the Company entered into a Line of Credit Agreement with JMW Fund, LLC
(“JMW”) owned by a director to receive up to $1,000,000 for six
months.





On June
28, 2007 the Line of Credit became part of a $3,000,000 Convertible Senior Note
Agreement (Loan) between the Company, JMW (director), San Gabriel Fund LLC,
Underwood Family Partners LTD., and Battersea Capital Inc who are the
shareholders of the Company.





From
October to December 2007 the Company entered into several one month short-term
loan arrangements with other investors totaling $425,000 for short term cash
flow purpose at December 31, 2007 with 12% interest (1.5% per month extra in
event of default) expiring from November 2007.





From
October 2007, the Company entered into short-term loan arrangements of
$513,000 and $20,000 with the Company’s CFO and CEO, respectively for short term
cash flow purpose. During the three months ended September 30, 2008 the Company
has made a payment of $140,000 and $10,000 to the Company’s CFO and CEO
respectively.





During
2007, Gregory Lykiardopoulos contributed 165,000 shares of common stock to
investors and lenders on behalf of the Company. There shares are valued at
$188,500 which is recorded as finance expense and paid in capital for the
Company.





In
February 2006 the Company entered into a revolving credit agreement with certain
investors for a maximum amount of $2,500,000. The investors, also shareholders,
consisted of the following:





A.
            The
      Elevation Fund, LLC holds 4,394,730 shares of common
  stock;B.
            West
      Hampton Special Situations Fund, LLC holds 4,394,730 shares of common
      stock which L. Michael Underwood is the manager of the fund and is a
      former director of the Company;


C.
            LMU
      and Company - L. Michael Underwood has ownership in this company;
      andD.
            Battersea
      Capital Inc. holds 2,104,082 shares of common
  stock





L.
Michael Underwood, a former director of the Company, personally holds 2,259,555
shares of common stock.





From
January to September, 2008, Gregory Lykiardopoulos contributed 2,859,000 shares
of common stock to investors and lenders on behalf of the Company. There shares
are valued at $543,462 which is recorded as finance expense and paid in
capital for the Company.





Note
10 – Restatement of prior quarter financial statements





The
Company discovered errors to previously issued financial statements for the
first quarter ended March 31, 2007 and second quarter ended June 30,
2007.  The Company intends to restate its financial statements
for both of these periods.  The Company has not filed the restated
financial statements for these periods.  However, the current financial
statements are stated as if the correction of this error had been made. 
One error related to the Company's issuance of 450,132 shares of common stock in
the first quarter that were improperly reported as stock options.  An
additional 410,015 shares of common stock were issued in the second quarter and
were also improperly reported as stock options. The other error relates to
the incorrect valuation of warrants issued in connection with a note payable in
the second quarter. The Company should have recorded the full value of the
warrants issued to additional paid in capital, discount on note payable, and a
prepaid asset. The Company did not record the prepaid asset portion of this
transaction and incorrectly valued the discount on the note
payable.




20




TRITON
DISTRIBUTION SYSTEMS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)




Quarterly
financial information for the three month periods ending March 31,
2007, June 30, 2007, and September 30, 2007 as restated, is presented
below:




As
      RestatedIncome
      Statement
              
              3
      Months Ended
                March
      31,2007
              
              
              3
      Months Ended
                June
      30,2007
              
              
              6
      Months Ended
                June
      30,2007
              
              
              3
      Months Ended
                September
      30,
                2007
              
              
              9
      Months Ended
                September
      30,
                2007Operating
      expenses
              
              $
              2,502,084
              
              
              $
              4,020,411
              
              
              $
              6,522,495
              
              
              $
              2,126,462
              
              
              $
              8,641,243Operating
      loss
              
              
              2,502,084
              
              
              
              4,020,411
              
              
              
              6,522,495
              
              
              
              2,126,462
              
              
              
              8,648,957Net
      loss
              
              
              2,509,674
              
              
              
              4,042,557
              
              
              
              6,552,231
              
              
              
              2,878,175
              
              
              
              9,430,406Net
      loss per share
              
              $
              0.06
              
              
              $
              0.09
              
              
              $
              0.14
              
              
              $
              0.06
              
              
              $
              0.20
  Balance
      Sheet
              
              As
      of
                March
      31,2007
              
              
              
              
              
              
              As
      of
                June
      30,2007
              
              
              
              
              
              
              As
      of
                September
      30,
                2007Prepaid
      compensation (asset)
              
              
              706,541
              
              
              
              
              
              
              
              -Prepaid
      expenses
              
              
              13,790
              
              
              
              
              
              
              
              1,004,179
              
              
              
              
              
              
              
              39,850Additional
      paid in capital
              
              
              427,067
              
              
              
              
              
              
              
              3,621,141
              
              
              
              
              
              
              
              3,784,606Note
      payable, net
              
              
              -
              
              
              
              
              
              
              
              77,079
              
              
              
              
              
              
              
              778,242Common
      stock
              
              
              10,408,594
              
              
              
              
              
              
              
              13,430,726
              
              
              
              
              
              
              
              13,611,009As
      ReportedIncome
      Statement
              
              3
      Months Ended
              
              
              3
      Months Ended
              
              
              6
      Months Ended
              
              
              3
      Months Ended
              
              
              9
      Months EndedMarch
      31,2007
              
              
              June
      30,2007
              
              
              June
      30,2007
              
              
              September
      30,2007
              
              
              September
      30,2007Operating
      expenses
              
              $
              3,006,064
              
              
              $
              3,186,766
              
              
              $
              6,192,831
              
              
              $
              2,126,463
              
              
              $
              8,641,243Operating
      loss
              
              
              3,006,064
              
              
              
              3,186,766
              
              
              
              6,192,831
              
              
              
              2,126,463
              
              
              
              8,641,243Net
      loss
              
              
              3,013,655
              
              
              
              3,208,910
              
              
              
              6,222,565
              
              
              
              2,719,663
              
              
              
              9,271,893Net
      loss per share
              
              $
              0.07
              
              
              $
              0.07
              
              
              $
              0.14
              
              
              $
              0.06
              
              
              $
              0.20
  Balance
      Sheet
              
              As
      of
                March
      31,2007
              
              
              
              
              
              
              As
      of
                June
      30,2007
              
              
              
              
              
              
              As
      of
                September
      30,
                2007Prepaid
      compensation (asset)
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              -Prepaid
      expenses
              
              
              13,790
              
              
              
              
              
              
              
              42,719
              
              
              
              
              
              
              
              39,850Additional
      paid in capital
              
              
              958,225
              
              
              
              
              
              
              
              4,014,143
              
              
              
              
              
              
              
              2,900,225Note
      payable, net
              
              
              -
              
              
              
              
              
              
              
              -
              
              
              
              
              
              
              
              1,504,110Common
      stock
              
              
              9,674,879
              
              
              
              
              
              
              
              11,823,679
              
              
              
              
              
              
              
              13,611,009
   21




TRITON
DISTRIBUTION SYSTEMS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008
 (UNAUDITED)


Note 11 -
Acquisition





In March
2008, the Company has entered into a non-binding letter of intent which has been
amended in October 2008 to acquire a 100% ownership of a European Company that
serves as the general sales agent for the German Railway System and has a
network of over 25,000 travel agents in Germany, Switzerland, Austria, Russia,
and Poland.  The approximate cost of this acquisition would be 7.5
million euro (approximately USD$11.06mil) .  Approximately $500,000 in
cash is payable at closing with the remainder due payable over a five year
period. We advanced $250,000 on August 15, 2008. Certain dates set forth in the
non-binding letter of intent and the October 2008 Addendum for payments and
closing of the transaction have elapsed. We are currently discussing revisions
that are acceptable to both parties and anticipate formalizing them in a second
addendum in the near future.





Note
11 - Subsequent events





The
Company issued several short term notes payable totaling $350,000 between
10/15/08 to 11/11/08 with annual interest rates between 12% to
14%.


22


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





Special
Note Regarding Forward-Looking Information





This
Annual Report of Triton Distribution Systems, Inc. on Form 10-KSB contains
certain “forward-looking statements” All statements in this Annual Report other
than statements of historical fact are “forward-looking statements” for purposes
of these provisions, including any statements of the plans and objectives for
future operations and any statement of assumptions underlying any of the
foregoing. Statements that include the use of terminology such as “may,” “will,”
“expects,” “believes,” “plans,” “estimates,” “potential,” or “continue,” or the
negative thereof or other and similar expressions are forward-looking
statements. Forward-looking statements in this report include, but are not
limited to, statements regarding expanding the use of our technologies in
existing and new markets; diversification of sources of; our expected profit
margin from all product sales; the future impact of our critical accounting
policies, including those regarding revenue recognition, allowance for doubtful
accounts, accounting for income taxes, and stock-based compensation; statements
regarding the sufficiency of our cash reserves; and our expected rate of return
on investments, if any.  Actual results may differ materially from
those discussed in these forward looking statements due to a number of factors,
including: the rate of growth of the markets for our technology; the accuracy of
our identification of critical accounting policies and the accuracy of the
assumptions we make in implementing such policies; the accuracy of our estimates
regarding our taxable income and cash needs for the next twelve months; and
fluctuations in interest rate and foreign currencies These forward-looking
statements involve risks and uncertainties, and it is important to note that our
actual results could differ materially from those projected or assumed in such
forward-looking statements.  Among the factors that could cause actual
results to differ materially are the factors detailed under the heading “Risk
Factors” as well as elsewhere in this Annual Report on Form 10-KSB. All
forward-looking statements and risk factors included in this document are made
as of the date hereof, based on information available to us as of the date
hereof, and we assume no obligation to update any forward-looking statement or
risk factor. You should consider the factors affecting results and risk factors
listed from time to time in our filings with the Securities and Exchange
Commission (SEC), including our Annual Report on Form 10-KSB, our Quarterly
Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to such
reports. Such filings are available on our website, free of charge, at www.tritonds.com, but
the information on our website does not constitute part of this Annual
Report.




As used
herein, unless the context otherwise requires, Triton Distribution Systems,
Inc., together with our Chinese subsidiary, Triton Distribution Systems
(Beijing) and our Philippine subsidiary, Triton Distribution Systems Philippines
Inc. are referred to in this Annual Report on Form 10-KSB as “Triton”,
“Company,” “we,” “us” and “our.”





Overview





We are an
emerging, next generation Web-based travel services and distribution
company.  Our core business is the electronic distribution of travel
inventory from airlines, car rental companies, hotels, tour and cruise
operators, and other travel sellers to travel agencies and their clients on a
global basis.




We
commenced operations in January 2006 with an initial emphasis on Southeast Asia
and intend to expand to other international locations, including South America
and Europe.  Unlike the travel industry in the United States, which is
highly fragmented and decentralized, emerging countries in Asia have only one or
two flagship airlines for international routes, the airlines are controlled by
the government, the travel agencies are clustered in large associations, and the
government has considerable influence over decisions which affect bookings and
the issuance of tickets to domestic and foreign
travelers.





Critical
Accounting Policy and Estimates




Our
discussion and analysis of our financial condition and results of operations are
based on our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of the financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.  Since these estimates are
inherently uncertain, actual results may materially differ.





The
following is a discussion of our accounting policies that are both most
important to the portrayal of our financial condition and results, and that
require management’s most difficult, subjective, or complex
judgments.




23




Intangible
Assets




The
determination of the fair value of certain acquired intangible assets is
subjective in nature and often involves the use of significant estimates and
assumptions.  Further, estimating the useful lives of these assets
requires the exercise of judgment due to the rapidly changing technology
environment.  Historically, we have estimated the fair value of our
intangible assets based on the purchase price.





In
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we
evaluate our intangible assets and other long-lived assets for impairment, at
least on an annual basis and whenever events or changes in circumstances
indicate that the carrying value may not be recoverable from our estimated
future cash flows. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired and it is written down
to the undiscounted cash flow value.  We have determined, at the
acquisition date, the useful life of our currently held intellectual property
was 10 years.  We amortize intellectual property using the
straight-line method.





As of
September 30, 2008 we have no internally developed intangible
assets.




Stock
Based Compensation




We
estimate the fair value of stock option awards to employees using a
Black-Scholes pricing model on the grant date in accordance with SFAS
No. 123(R) Share Based
Payment.  The pricing model requires us to make assumptions
related to the expected term of the options, which generally differs from the
contractual term; expected volatility of our stock price, accounting for known
significant events which may have a material impact on the market value of our
stock; the risk free interest rate on the grant date for instruments with
maturities commensurate with the expected term of the options; and the dividend
yield.





Due to
the limited history of our company, for all options granted in 2006 we have
estimated that the expected term of the employee options to be three
years.   We currently do not have a trading history that allows
us to reasonably estimate the expected volatility of our common stock, therefore
the expected volatility of our stock was based on the historical volatility of
public companies with similar characteristics.  These characteristics
include    industry, stage of life cycle, size, financial
leverage, and other factors.  We periodically review and adjust these
assumptions in determining the fair value of future option grants.




Adoption of new accounting
policies





On
January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements. SFAS
No. 157 defines fair value, establishes a three-level valuation hierarchy for
disclosures of fair value measurement and enhances disclosures requirements for
fair value measures. The carrying amounts reported in the balance sheets for
receivables and current liabilities each qualify as financial instruments and
are a reasonable estimate of fair value because of the short period of time
between the origination of such instruments and their expected realization and
their current market rate of interest. The three levels are defined as
follow:




·
            Level
      1 inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.





·
            Level
      2 inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.





·
            Level
      3 inputs to the valuation methodology are unobservable and significant to
      the fair value measurement.




24




As of
March 31, 2008 the Company did not identify any assets and liabilities that are
required to be presented on the balance sheet at fair value.





Liquidity
and Capital Resources





We have
not generated any revenue from our operations since our inception on January 10,
2006.  As a result, our primary source of liquidity is through debt
and equity financing arrangements with independent third party investors, as
well as related parties.  Further, we have been successful at entering
into agreements with several of our service providers to accept shares of our
common stock in consideration for services received.





Debt
issuances throughout the period ended September 30, 2008, all of which are
short-term, resulted in a working capital deficit of approximately $8.4 million
at September 30, 2008.  As of September 30, 2008 we had approximately
$7.2 million in loans that mature on or prior to February 7, 2009.  Of
this amount, $3 million, plus accrued interest, may be converted to shares of
Company common stock any time prior to its maturity on September 30, 2009 at the
sole discretion of the loan holder. The remaining balances of our notes as of
September 30, 2008 do not contain any conversion options. The 120,000
convertible notes we obtained in July matured in 2011.See Note 5 of our
consolidated financial statements for a complete description of the terms of our
loans payable at September 30, 2008.





For the
period ended September 30, 2008 we received $128,160 from issuances of our
common stock which was applied towards account payable for legal fees.
Throughout the period we issued an aggregate 928,470 shares of our common stock
for compensation to our legal counsel.  We recognized approximately
$661,436 in stock based compensation for options issued to our
employees.  The value of the amount issued to third party service
providers was approximately $272,500 which is being recognized over the
remaining lives of the corresponding service contracts. See Note 6 of our
consolidated financial statements for a complete description of our stock
issuances during the period ended September 30, 2008.





Our
current and historic liquidity concerns have resulted in our focus being near
term based.  Our efforts are concentrated on developing revenue
generating activities in geographical areas that appear most likely for
success.  Initially, these areas appear to be Southeast Asia, China,
and Europe.





Our
current forecasts are that our 2008 operations will be insufficient to meet our
current debt obligations, or our other working capital needs.  As a
result, throughout 2008, we entered into additional short term loan arrangements
to meet our on-going working capital needs.  We are actively pursuing
longer term debt financing arrangements on terms that are more favorable to the
Company. We obtained $120,000 convertible notes from Scottsdale, See Note
5. In addition to seeking the above debt financing, we are contemplating
raising additional capital through equity issuances in 2008.  Any
additional equity issuances will be dependent upon market conditions,
achievement of certain milestones in our technology development, and
identification of specific needs.





In the
event we are unsuccessful in our capital raising efforts or generating revenue
from our operations we will not continue as a going concern.




Results
of Operations





Revenue





We have
not generated any revenue since our inception on January 10, 2006.  We
have made significant progress in the development of our technology and have
entered into a series of distribution agreements as of September 30,
2008.  Based on these agreements and improvements we have made to our
technology our objective is to emerge from the development stage during fiscal
year 2008.





Operating
Expenses





Our
operating expenses from inception to September 30, 2008 were $22,638,854 which
consisted of payroll and related benefits of $12,315,859, professional fees of
$5,738,565, marketing and advertising of $598,064 and other general and
administrative expenses of $3,986,366.




25




Interest
expense from inception to September 30, 2008 was $3,884,287 which consisted of
interest accrued on the notes payable to related parties and interest income for
the period was $67,817.





Related
Parties





During
the fiscal years ending December 31, 2006 and December 31, 2007, and the nine
month period ending September 30, 2008, we borrowed money from shareholders and
officers to meet operating cash flow, see “Note 9” of the financial
statements.





Plan
of Operation





At
December 31, 2007 our cash resources were insufficient to fund the Company’s
current and expected operations.  Throughout the fourth quarter of
2007 and the first nine months of 2008 our concentration was centered on
obtaining the necessary funding to meet our current obligations and expected
additional 2008 needs.  For the period ended September 30, 2008, we
obtained additional short-term debt financing of approximately $4.5 million to
meet our obligations and working capital needs through the first three quarters
of 2008.  Additionally, we have focused on reducing and reallocating
our expenses to activities that are essential to distributing our products and
services to our target markets.  To that end, we have reduced our
workforce from 45 to 29; limited travel and related expenses; and entered into
equity payment arrangements with several of our service providers.





As noted
in our Part I, Item 1 – Description of Business, our initial emphasis was on
Southeast Asia and China.  Our current plans consist of continued
focus in China and Europe.  The lack of decentralization of the travel
industry in these geographic areas remains attractive for the implementation and
use of our electronic distribution system of travel inventory from airlines,
travel agencies, cruise operators, and other travel related service
providers.  Additionally, we are concentrating our efforts on the
business to business (B2B) market which appears to be relatively “un-tapped” by
our significant competitors.  Current estimates indicate 80% of global
airline tickets and 70% of all travel is booked by service providers in our
target markets.  Travel and Tourism Forecast World,as of May 2006, estimated the global travel distribution market at over
$10 billion.





We
believe our internet-based distribution platform and low-fee structure provides
us certain advantages in penetrating our target markets since our main
competitors’ distribution systems generally operate on high-cost, legacy
mainframe technology platforms.  This appears to be particularly true
in less technologically advanced countries such as China.





We are
building on our already strong Chinese infrastructure.  Our Red Dragon
Express TM is the only comprehensive travel solution where any agent can create a
local Chinese itinerary, including international and domestic segments;
construct passenger records; and clear payments, all on a seamless and low cost
basis.  We also enjoy an association with the China International
Travel Service (CITS), an important Chinese government supported entity and
China’s largest and most influential tourist enterprise group.  CITS
has a network of more than 1,400 agents and tour companies nationwide and has
hosted more than 10 million international visitors to China.





We have
entered into a non-binding letter of intent to acquire a 100% ownership of a
European Company that serves as the general sales agent for the German Railway
System and has a network of over 25,000 travel agents in Germany, Switzerland,
Austria, Russia, and Poland.  The approximate cost of this acquisition
would be $7.5 million.





We expect
to continue to devote funding and personnel to research and product development
as well as to the enhancement of existing product lines and the fulfillment of
foreign joint ventures.  We plan to develop new “add-ons” and
extension modules in response to client needs and requests.  Included
in the our development pipeline are booking systems for private corporate
executive jets and regional air flights, air cargo carriers, railroad travel,
ferries, private clubs and bed and breakfast establishments.





Our
plans, including the above potential acquisitions, are dependent upon our
ability to obtain financing on terms that are not further detrimental to the
Company.  If we are unable to obtain financing in 2008 we will likely
become insolvent by the end of 2008.




26


Employees





Our
employee head count was 29 as of September 30, 2008.





Off-Balance
Sheet Arrangements





There are
no off balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors.








Item
3.  Controls and Procedures





Disclosure
Controls and Procedures





Audit
Committee. Our audit committee reports to the board regarding the
appointment of our independent auditors, the scope and results of our annual
audits, compliance with our accounting and financial policies and management’s
procedures and policies relatively to the adequacy of our internal accounting
controls.





As of the
date of this amended quarterly report, our audit committee consists of Adrie
Reinders and Jay McCann.




(a) As of
the end of the period covered by this report ("the Evaluation Date"), our
management, including our chief executive officer and chief financial officer,
conducted an evaluation ("Evaluation") of the effectiveness of the design and
operation of our disclosure controls and procedures, as defined in Rule
13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934. In the
course of the Evaluation, we identified significant material weaknesses in our
internal disclosure controls and procedures.




The
Company has had discussions with its independent registered public accounting
firm with respect to the valuation and disclosure of equity securities issued to
employees.




Moore
Stephens Wurth Frazer and Torbet, LLP advised Triton that these internal control
deficiencies constitute a material weakness as defined in Statement of Auditing
Standards No. 112. Certain of these internal control weaknesses also constitute
material weaknesses in our disclosure controls. Management has considered the
effects of the financial statement restatements on its evaluation of disclosure
controls and procedures and has concluded that weaknesses are present. Our chief
executive officer and our chief financial officer concluded that as of the
Evaluation Date our disclosure controls and procedures were not effective, and
as of the date of the filing of this amended report, our chief executive officer
and our chief financial officer concluded that we do not maintain disclosure
controls and procedures that are effective in providing reasonable assurance
that information required to be disclosed in our reports under the Securities
Exchange Act of 1934 is recorded, processed, summarized and
reported  within the time periods  specified  in
the SEC's rules and forms, and that such information is accumulated and
communicated to our  management, including our chief executive officer
and our chief financial officer, to allow timely decisions regarding required
disclosure.




We are
committed to improving our financial organization. However, the Company does not
possess the financial resources to address other than the most rudimentary of
accounting and reporting requirements, and therefore relies heavily on outside
advisors. The Company's inability to independently prepare its financial reports
to the standards of Generally Accepted Accounting Principles and the Rules and
Regulations of the Securities and Exchange Commission rise to the level of a
material weakness in internal control.





Management
of the Company intends to promptly remediate this deficiency by:





(i)
acquiring the appropriate level of internal financial support





(ii)
access current developments training programs for financial employees
and




27


(iii)
provide financial employees with adequate technical resources to research
financial accounting and reporting requirements.





We
currently believe we will need to take additional steps to remediate the
above-referenced material weaknesses, and we will continue to evaluate the
effectiveness of our design and operation of our disclosure controls and
procedures on an ongoing basis, and will take further action as
appropriate.





Internal
Control Over Financial Reporting





There has
been no change in our internal control over financial reporting that occurred
during our last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.




Part
II.  OTHER INFORMATION




Item
1.  Legal Proceedings





On August 10, 2007 Terry Byers, Arthur Griggs, & Jeff
Wheaton filed suit against the Company; GRSNetwork Inc., a California
Corporation; Internet Travel Technologies, Inc, a California Corporation; and
Gregory Lykiardopoulos, our CEO in Marin County California (Case
No.  CV072075). The suit alleges causes of action for back wages,
breach of contract and age discrimination. The Company denies the
plaintiff’s claims and intends to vigorously defend against them if such
complaint is properly served on the Company.





On or
around November 1, 2007, a complaint was filed in Marin County Superior Court,
Case No. CV07-5186, by Grace Terry, Georgia Schley, and Serena McCallum
(“Plaintiffs”) against Gregory Lykiardopoulos (“Lykiardopoulos”), Internet
Travel Technologies, Inc. (“ITT”), the Company, as well as numerous other
entities and individuals (collectively, the “Defendants”).  The
Plaintiffs allege that they made loans, collectively, in an amount of less than
$200,000 to GRS Networks, Inc. (“GRS”) or possibly others in 2004 or
2005.  They allege that oral agreements were created enabling them to
convert the funds they claim they loaned to GRS to equity or shares in ITT or
TDS.  The Plaintiffs are all relatives of Walter Terry (allegedly his
mother, sister, and domestic partner), who Plaintiffs allege acted as a “dual
agent” representing them and the Defendants in connection with the purported
loans. Based on these facts, the Plaintiffs assert causes of action for (1)
breach of oral contract, (2) breach of the implied covenant of good faith and
fair dealing, (3) intentional interference with contract, (4) intentional
interference with prospective economic advantage, (5) breach of fiduciary duty,
(6) fraud, and (7) violation of Corporations Code § 25401.





Defendants
deny the existence of any such purported oral agreements, or that Terry was
authorized to act as the Company’s agent in such capacity.  It is the
Company’s contention that all the Plaintiffs’ alleged claims are barred and were
released under a settlement agreement and general releases entered into with
Walter Terry in 2005.  Accordingly, the Defendants, including TDS,
deny any liability to Plaintiffs and intend to vigorously defend in the
case.  A demurrer and motion to strike the complaint filed on behalf
of certain of the Defendants is currently pending, and the Court has ordered the
parties to mediation, to be completed by September 30, 2008.





Additionally,
three former employees have filed complaints with the California Department of
Fair Employment and Housing alleging wrongful termination.  We believe
none of the complaints have merit and the Company intends to vigorously defend
itself against the complaints.





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





In July
2006 we acquired all of the outstanding common stock of Triton Distribution
Systems, Inc. for 36,750,950 shares of our common stock pursuant to a Share
Exchange Agreement with Triton and its stockholders.





In July
2006 we issued an aggregate of 7,148,710 shares of our common stock to a group
of 230 accredited investors through Brookstreet Securities Corporation, as
Placement Agent, at $.80 per share pursuant to the exemption provided by Section
4(2) of the Act and Rule 506 of Regulation D promulgated thereunder.  The
shares were offered solely to accredited investors, no form of general
advertising was used, and all investors took the shares as an investment and not
with the intent to distribute and all shares were issued with a restrictive
legend thereon. As additional consideration for acting as our Placement Agent,
we issued to Brookstreet warrants to acquire 1,429,742 shares of our common
stock at $.80 per share and also issued to it 598,029 shares for investment
banking consulting services valued at $.80 per share.




28




In July
2006 we issued 1,119,412 shares each valued at $.80 per share to Capital Group
Communications, Inc. and Livestrong Venture Capital Partners, Inc. for investor
relations services pursuant to the exemption provided by Section 4(2) of the
Act.





In
September 2006 we issued 3,450,000 and 287,500 shares of our common stock to two
accredited Kuwaiti corporate investors, pursuant to the exemption provided by
Section 4(2) of the Act, for $.80 per share and paid a finder's fee of 185,000
common stock purchase warrants. The warrants are exercisable at $.80 per share
until September 18, 2007. Both investors took the common stock for investment
purposes and not with the intent to distribute and the certificates were issued
with a restrictive legend thereon.





On March
2, 2007 the Board of Directors approved the grant of 450,132 restricted shares
to Michael W.Overby, CFO, consistent
with his offer letter. The shares were valued at $1.63 which was the closing
price on March 2, 2007 for a total value of $733,715.








Item 3. Defaults Upon Senior
Securities





None.





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





On August
17, 2006, the shareholders of Triton at a Shareholders' Meeting approved
amendments to Triton's Articles of Incorporation to change its name to Triton
Distribution Systems, Inc. and to increase its authorized shares of no par
common stock to 100,000,000 shares effective August 17, 2006.In addition, on August 17, 2006, the
shareholders of Triton at a Shareholders' Meeting approved Triton's 2006 Equity
Incentive Plan.




Item 5. Other Information





Not
applicable




Item
6. Exhibits





(a)
Exhibits





Number
            Exhibit3.1
            Articles
      of Incorporation (1)3.2
            Bylaws
      (1)10.1
            Line
      of Credit Loan Agreement dated March 28, 2007, by and between JMW
      Fund,
              LLC
      and Triton Distribution Systems, Inc. (1)31.1
            Certification
      of Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14 of the
      Securities Exchange Act of 193431.2
            Certification
      of Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 of the
      Securities Exchange Act of 193432.1
            Certification
      Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 200232.2
            Certification
      Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002


(1)
Previously filed.




29





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.





TRITON
      DISTRIBUTION SYSTEMS, INC.November
      14, 2008
            By:
            /s/ Gregory
      LykiardopolousGregory
      Lykiardopolous
              Chief
      Executive Officer






30