IJAZ:
What you are saying is incorrect. Telephone line coupling transformers are specifically designed to terminate the loop current of a telephone line!! I have done it many times. Clearly if you use a transformer not designed for this purpose it _may_ saturate and then again it may not.

It is very standard practice to design a telephone coupling using the simplified circuit as shown below:



The following links provide additional information about techniques for connecting to telephone lines:

Philips App Note AN812 Data Access Arrangement (DAA) Design

CML Microcircuits Modem DAA Ideas

Michael Karas