UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

[X]      ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
         EXCHANGE ACT OF 1934

                   For the fiscal year ended November 30, 2006

[_]      TRANSITION  REPORT  PURSUANT  TO SECTION 13 OR 15(d) OF THE  SECURITIES
         EXCHANGE ACT OF 1934

          For the transition period from ____________ to _____________.

                           Commission File No. 0-4465

                            eLEC COMMUNICATIONS CORP.
             (Exact Name of Registrant as Specified in Its Charter)

                 New York                                13-2511270
      (State or Other Jurisdiction           (I.R.S Employer Identification No.)
    of  Incorporation or Organization)

75 South Broadway, Suite 302, White Plains, New York             10601
     (Address of Principal Executive Offices)                  (Zip Code)

                                 (914) 682-0214
              (Registrant's Telephone Number, Including Area Code)

         Securities registered under Section 12(b) of the Exchange Act:

                                      None

         Securities registered under Section 12(g) of the Exchange Act:

                     Common Stock, par value $.10 per share

         Indicate  by check  mark if the  registrant  is a  well-known  seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes |_| No |X|

         Indicate  by  check  mark if the  registrant  is not  required  to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|

         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 of
1934  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 |X| No |_|

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K |_|

         Indicate by check mark whether the  registrant  is a large  accelerated
filer,  an accelerated  filer,  or a  non-accelerated  filer.  See definition of
"accelerated  filer and large  accelerated  filer" in Rule 12b-2 of the Exchange
Act. (Check One):

  Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|.

         Indicate by check mark whether the  registrant  is a shell  company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|

         On February 15, 2007,  22,434,282  shares of registrant's  common stock
were  outstanding.  The  aggregate  market  value of the  voting  stock  held by
non-affiliates as of May 31, 2006 was approximately $5,463,000.

         Documents  Incorporated  by Reference:  The definitive  proxy statement
relating to the registrant's 2007 Annual Meeting of Stockholders is incorporated
by reference into Part III of this Form 10-K to the extent described therein.

<page>

                                TABLE OF CONTENTS


                                     PART I

Item 1.    Business
Item 1A.   Risk Factors
Item 1B.   Unresolved Staff Comments
Item 2.    Properties
Item 3.    Legal Proceedings
Item 4.    Submission of Matters to a Vote of Security Holders


                                     PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters
           and Issuer Purchases of Equity Securities
Item 6.    Selected Financial Data
Item 7.    Management's Discussion and Analysis of Financial Condition and
           Results of Operations
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
Item 8.    Financial Statements and Supplementary Data
Item 9.    Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure
Item 9A.   Controls and Procedures
Item 9B.   Other Information


                                    PART III

Item 10.   Directors, Executive Officers and Corporate Governance
Item 11.   Executive Compensation
Item 12.   Security Ownership of Certain Beneficial Owners and Management and
           Related Stockholder Matters
Item 13.   Certain Relationships and Related Transactions, and Director
           Independence
Item 14.   Principal Accounting Fees and Services


                                     PART IV

Item 15.   Exhibits and Financial Statement Schedules

                                   SIGNATURES

<page>

         The statements  contained in this Report that are not historical  facts
are  "forward-looking  statements"  within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to our financial  condition,  results
of   operations   and   business,   which  can  be  identified  by  the  use  of
forward-looking   terminology,   such  as  "estimates,"   "projects,"   "plans,"
"believes,"  "expects,"  "anticipates,"  "intends,"  or the negative  thereof or
other variations  thereon,  or by discussions of strategy that involve risks and
uncertainties.  Management  wishes to caution the reader of the  forward-looking
statements that such statements, which are contained in this Report, reflect our
current  beliefs  with  respect to future  events and involve  known and unknown
risks, uncertainties and other factors, including, but not limited to, economic,
competitive,  regulatory,  technological,  key  employee,  and general  business
factors affecting our operations,  markets, growth, services, products, licenses
and  other  factors  discussed  in our other  filings  with the  Securities  and
Exchange   Commission,   and  that  these   statements  are  only  estimates  or
predictions.  No assurances  can be given  regarding the  achievement  of future
results, as actual results may differ materially as a result of risks facing us,
and actual events may differ from the assumptions underlying the statements that
have been made regarding  anticipated events.  Factors that may cause our actual
results, performance or achievements,  or industry results, to differ materially
from those  contemplated by such  forward-looking  statements  include,  without
limitation:

         o  The  availability  of additional  funds to  successfully  pursue our
            business plan;
         o  The impact of changes the Federal Communications Commission or State
            Public Service  Commissions  may make to existing  telecommunication
            laws  and   regulations,   including   laws  dealing  with  Internet
            telephony;
         o  The ability  to comply with  provisions of our financing  agreements
            (we are currently in default in certain of the  covenants  contained
            therein);
         o  The highly competitive nature of our industry;
         o  The  acceptance  of telephone  calls over the Internet by mainstream
            consumers;
         o  Our ability to retain key personnel;
         o  Our ability to maintain  adequate customer care and manage our churn
            rate;
         o  The cooperation of incumbent  carriers and industry service partners
            that have signed agreements with us;
         o  Our ability to maintain,  attract and integrate internal management,
            technical information and management information systems;
         o  Our ability to market our services to current and new  customers and
            generate  customer  demand  for our  products  and  services  in the
            geographical areas in which we operate;
         o  The availability  and maintenance of suitable vendor  relationships,
            in a timely manner, at reasonable cost;
         o  Our  ability  to manage  rapid  growth  while  maintaining  adequate
            controls and procedures;
         o  The  decrease  in  telecommunications  prices  to  consumers;  and
         o  General economic conditions.

These forward-looking statements are subject to numerous assumptions,  risks and
uncertainties that may cause our actual results to be materially  different from
any future results expressed or implied by us in those statements. Some of these
risks are described in "Risk Factors" in Item 1A of this Report.

These risk  factors  should be  considered  in  connection  with any  subsequent
written or oral  forward-looking  statements  that we or  persons  acting on our
behalf may issue.  All  written  and oral  forward  looking  statements  made in
connection with this Report that are attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these cautionary statements.
Given  these  uncertainties,  we  caution  investors  not to unduly  rely on our
forward-looking  statements.  We do not  undertake  any  obligation to review or
confirm analysts' expectations or estimates or to release publicly any revisions

<page>

to any  forward-looking  statements to reflect events or circumstances after the
date of this  document or to reflect the  occurrence  of  unanticipated  events.
Further,  the information  about our intentions  contained in this document is a
statement of our  intention  as of the date of this  document and is based upon,
among other things, the existing regulatory  environment,  industry  conditions,
market  conditions and prices,  the economy in general and our assumptions as of
such date. We may change our intentions,  at any time and without notice,  based
upon any changes in such factors, in our assumptions or otherwise.

                                     PART I

         In  this   Annual   Report  on  Form  10-K,   we  will  refer  to  eLEC
Communications Corp., a New York corporation,  as "our company," "we," "us," and
"our."

Item 1. - Business

Overview

         We are a provider  of local,  long  distance  and  international  voice
telephone  services.  We provide  these  services over  wirelines,  using leased
facilities  of  other  carriers,  and over  broadband  services,  using  our own
Internet  Protocol  ("IP")  telephony  product.  IP  telephony  is the real time
transmission  of voice  communications  in the form of  digitized  "packets"  of
information  over the Internet or a private  network,  which is analogous to the
way in which e-mail and other data is transmitted. We use proprietary softswitch
technology that runs on Cisco and Dell hardware to provide  broadband  telephone
services to other service providers,  such as cable operators,  Internet service
providers,  WiFi and  fixed  wireless  broadband  providers,  data  integrators,
value-added resellers, and satellite broadband providers. Our technology enables
these carriers to quickly and inexpensively  offer premiere broadband  telephone
services,  complete  with  order flow  management  for  efficient  provisioning,
billing and support  services and user interfaces that are easily  customized to
reflect the carrier's unique brand.

         The worldwide rollout of broadband voice services has allowed consumers
and  businesses to communicate  at  dramatically  reduced costs in comparison to
traditional telephony networks. Traditionally,  telephone service companies have
built  networks  based  on  circuit  switching  technology,  which  creates  and
maintains  a dedicated  path for  individual  telephone  calls until the call is
terminated.   While  circuit-switched  networks  have  provided  reliable  voice
communications  services for more than 100 years,  transmission  capacity is not
efficiently  utilized  in a  circuit-switched  system.  Under  circuit-switching
technology,  when a person  makes a  telephone  call,  a circuit is created  and
remains  dedicated for the entire  duration of that call,  rendering the circuit
unavailable for the  transmission  of any other calls.  Because of the high cost
and  inefficiencies  of a  circuit-switched  network,  we  have  never  owned  a
circuit-switched  network.  Instead,  we have  leased  circuit-switched  network
elements from other carriers in order to provide wireline services to customers.

         Data networks, such as IP networks, utilize packet switching technology
that divides signals into packets and simultaneously  routes them over different
channels to a final  destination  where they are  reassembled  into the original
order in which they were transmitted.  No dedicated  circuits are required and a
fixed amount of bandwidth is not needed for the duration of each call.  The more
efficient  use  of  network   capacity   results  in  the  ability  to  transmit
significantly  higher amounts of traffic over a  packet-switched  network than a
circuit-switched network.  Packet-switching technology enables service providers
to  converge  traditional  voice and data  networks  in an  efficient  manner by
carrying voice,  fax, video and data traffic over the same network.  IP networks
are therefore less expensive for carriers to operate, and these cost savings can
be passed on to the consumer in the form of lower costs for local, long distance
and international long distance telephone services.

                                       2
<page>

         We have created our own  proprietary IP platform and have  transitioned
into a  facilities-based  broadband  service  provider to take  advantage of the
network  cost  savings  that are  inherent  in an IP  network.  We have signed a
contract to sell our leased lines telephone business to another company, so that
we can focus our resources and our energies on our broadband  voice product.  In
addition  to the cost  savings  we  obtain  from the  efficient  use of  network
capacity,  we  believe  our  network  equipment  costs are lower than most other
carriers  as our network  and  technology  require  significantly  less  capital
expenditures  than a traditional  Class 5 telecom  switch in a  circuit-switched
network,  and less equipment  costs than our broadband  voice  competitors  that
utilize a packet-switched network. Our proprietary softswitch provides more than
20 of the Class 5 call  features,  voice mail and enhanced  call handling on our
own Session  Initiation  Protocol  ("SIP")  server suite.  We control all of the
features we offer to broadband voice customers,  because instead of a relying on
a  software  vendor,  we write the code for any new  features  that we desire to
offer our customers.  We have no software  licensing fees and our other variable
network costs are expected to drop as we increase our network  traffic and as we
attract more pure IP  telephony  users with traffic that does not incur the cost
of originating or terminating on a circuit- switched network.

         Our SIP servers are part of a cluster of servers,  which we refer to as
a server farm, in which each server performs different network tasks,  including
back-up and  redundant  services.  We believe the server farm  structure  can be
easily and  cost-effectively  scaled as our broadband  voice business  grows. In
addition,  servers  within our server  farm can be assigned  different  tasks as
demand on the network dictates. If an individual server ceases to function,  our
server  farm is designed  in a manner  that  subscribers  should not have a call
interrupted.  We support  origination and  termination  using both the G.711 and
G.729 voice  codecs.  Codecs are the  algorithms  that enable us to carry analog
voice  traffic  over  digital  lines.  There  are  several  codecs  that vary in
complexity,  bandwidth  required and voice  quality.  We primarily use G.711 and
G.729  codecs.  G.711 is a standard  to  represent 8 bit  compressed  pulse code
modulation  samples for signals of voice frequency.  It creates a 64 kilobit per
second bitstream, and we find that approximately 90% of the current IP telephony
traffic in the United  States uses G.711.  We  frequently  process G.711 traffic
because some of our wholesale customers do not have the ability to handle G.729.
We prefer the G.729 codec,  which allows us to utilize the Internet in more cost
effective  ways.  It allows for  compressing  more  calls in limited  bandwidth,
reducing the call to 8 kilobits per second.  For all of our retail customers and
our more sophisticated wholesale accounts, we use G.729 to save cost and enhance
the quality of the call.


Development of Business

         We were  incorporated  in the State of New York in 1964  under the name
Sirco  Products Co. Inc. and developed a line of high quality  handbags,  totes,
luggage  and sport bags.  Between  1995 and 1999,  we  divested  our handbag and
luggage operations, which had experienced several years of operating losses.

         We commenced  operations in the  telecommunications  industry in fiscal
1998  by  acquiring  Essex  Communications,   Inc.  ("Essex"),   a  newly-formed
Competitive  Local  Exchange  Carrier  ("CLEC")  formed to attract  and retain a
geographically  concentrated  customer base in the metropolitan New York region,
primarily  through  the  resale  of  products  and  services  of  incumbent  and
alternative facilities-based local providers.

                                       3
<page>

         In January 2000, we acquired Telecarrier Services, Inc. ("TSI"), a CLEC
that  operated  primarily in the states of New Jersey and New York provided long
distance  service in 13 states.  Most of TSI's operations were acquired by Essex
after the  acquisition  was  complete,  and TSI  maintained  its  licenses as an
inactive subsidiary.  On July 29, 2002, TSI commenced a case under chapter 11 of
the  Bankruptcy  Code.  In  February  2004,  TSI filed a plan of  reorganization
pursuant  to which  the  capital  stock of a  reorganized  TSI  would be sold by
competitive  bid and the  proceeds  from the sale of such stock would be used to
make  distributions  to creditors of TSI. In April 2004,  the court accepted our
plan to purchase all the stock of a reorganized TSI for a price of $325,000. The
purchase of TSI and its emergence from bankruptcy was completed in October 2004.

         On  December  31,  2002,  we sold  certain  assets  of  Essex  to Essex
Acquisition Corp. ("EAC"), a wholly-owned subsidiary of BiznessOnline.com,  Inc.
("Biz").  EAC  purchased  selected  assets and assumed  certain  liabilities  in
conjunction with this transaction. The remaining shell of Essex was sold to Glad
Holdings, LLC on September 11, 2003.

         In November  2002, we began the  operations  of New Rochelle  Telephone
Corp.  ("NRTC") as a start-up  CLEC. We built a customer base in NRTC similar to
the one we had sold to EAC. On December 14,  2006,  we entered into two separate
definitive  purchase  agreements  ("Agreements")  to sell  TSI  and  NRTC to two
wholly-owned  subsidiaries  of Cyber  Digital,  Inc.  ("Purchaser"),  a publicly
traded shell  company.  The planned sales are subject to the receipt of required
regulatory approvals and other closing conditions.

         If the sale of our CLECs is consummated, Purchaser will acquire all the
outstanding  shares of the CLECs  and  either  pay or  assume  $1.3  million  of
outstanding  debt that we owe to Laurus  Master Fund,  Ltd.  ("Laurus").  In the
Agreements, we have guaranteed maximum levels of negative working capital of the
CLECs and we indemnified  the Purchaser  against  liabilities  that would reduce
working capital, as defined in the Agreements,  below the agreed upon levels. In
accordance  with  an  amendment  to  the  Agreements,  if  the  closing  of  the
transaction  has not  occurred  by  April  12,  2007,  we or the  Purchaser  may
terminate the Agreements  with no penalty to the  terminating  party, so long as
such delay in closing the  transaction is not the result of willful and material
breach by the terminating party of any of its obligations under the Agreements.

         On August 4, 2004, we incorporated VoX Communications  Corp. ("VoX") as
our  wholly-owned  IP subsidiary to pursue the  deployment of our own IP network
for broadband telephony services.  In addition to the general cost advantages of
broadband  telephone  service  noted  above,  we believe  that IP  communication
technologies will continue to rapidly advance and will further the potential for
the  Internet to become the  preferred  medium of  communication  and  commerce.
Consequently, in fiscal 2005 and 2006 we expended a vast amount of our resources
on the planning,  development and implementation of our IP network.  Although we
allow  individual  users to  purchase  our  broadband  voice  service on the VoX
website at www.voxcorp.net,  we have focused our efforts on becoming a wholesale
provider of broadband  voice  services.  As a wholesaler,  we empower  broadband
service  providers  with the ability to sell a broadband  voice product to their
existing  customers before the broadband voice retail companies,  such as Vonage
Holdings Corp. ("Vonage") and SunRocket,  Inc. try to sell their broadband voice
product.  This wholesale model contains many cost advantages for us,  especially
with regard to customer  acquisition costs.  Companies that sell broadband voice
services on a retail level typically experience significant customer acquisition
costs because of the high marketing  expenses and special promotions they use to
attract an  end-user  who  already has  broadband  service.  We do not incur the
expense  of  retail  customer  acquisitions,  as these  costs  are  borne by our
wholesale customers. Our wholesale customers,  however, often can attract retail
customers  in a more cost  effective  manner than we can  because the  wholesale
customer  already has a customer base of end-users  who are utilizing  broadband
services.

                                       4
<page>

Available Information

         We maintain a corporate website with the address www.elec.net.  We also
maintain a corporate website with the address  www.pervasip.com  in anticipation
of  our  shareholders   approving  a  name  change  of  our  company  from  eLEC
Communications  Corp. to Pervasip  Corp. We have not  incorporated  by reference
into this Report on Form 10-K the  information  on any of our  websites  and you
should not consider any of such  information to be a part of this document.  Our
website  addresses  are included in this  document for  reference  only. We make
available  free of charge  through our corporate  website our Annual  Reports on
Form 10-K or 10-KSB,  Quarterly  Reports on Form 10-Q or Form 10-QSB and Current
Reports on Form 8-K,  and  amendments  to these  reports,  through a link to the
EDGAR database,  as soon as reasonably  practicable after we electronically file
such material  with, or furnish such  material to, the  Securities  and Exchange
Commission.


Our Products and Services

         Our broadband voice service offerings are tailored to meet the specific
needs of unique wholesale customers. We focus on marketing to wholesale accounts
that have an existing  customer base of residential and small business users. We
believe we provide  compelling  product  offerings  to Cable  Operators,  CLECs,
Internet Service Providers ("ISPs"),  and other broadband service providers,  as
we enable them to quickly roll out private-labeled  broadband voice solutions to
their residential and small business customers. We have identified approximately
3,000 U.S.  independent cable companies that can use our product.  Many of these
companies are already providing  high-speed  Internet access to their customers.
As a result,  we believe  upselling  broadband voice services to their broadband
subscribers is a natural fit.  Under our private label program,  we provide each
reseller  with its own  customer  support  web  site,  allowing  them to offer a
transparent  user experience for customers  without risking their own capital on
expensive  switches and custom IP software.  Our broadband voice solution offers
each reseller:

      o  Rapid market entry in U.S. and eventually worldwide
      o  High-quality, reliable voice services
      o  Disruptive technology
      o  Free use of our softswitch and application servers
      o  Low priced services
      o  Flexibility to change platform to needs of individual carrier
      o  Customer service web site
      o  End user web site
      o  Automatic sign-up on the Internet

         Our retail customers consist of small businesses and residential users.
These customers consist primarily of our landline customers. Our broadband voice
services are available  nationwide,  while our landline  services are limited to
the states of New Jersey,  New York and  Pennsylvania.  We primarily  market our
services through two distribution channels. We use third-party  telemarketers to
attract  small  business and  residential  accounts  (typically  less than three
telephone  lines for each  account),  and we use agents and direct  marketing to
attract small business and  residential  accounts  (typically one to 10 lines in
size for each  account).  To  further  help our  customers  manage  their  phone
service, and to differentiate

                                       5
<page>

ourselves from other service  providers,  we provide a secure  customer web site
with the tools to help our  customers  to manage  their  accounts.  These  tools
include the following:

      o  Billing  management:  we provide  customers  with  Web-based  access to
         billing records, invoices, payment history and individual call records;
      o  Payment processing: we provide customers with the ability to process or
         change secure credit card  information over the Web to make payments to
         us;
      o  Account provisioning: we provide customers with Web pages through which
         they can  order new  services,  new phone  numbers,  including  virtual
         numbers, and advanced features;
      o  Customer  care: we provide  customers  with first tier customer care to
         explain how to use features,  to perform simple  diagnostic  checks and
         repairs and to contact us via email.

         The pricing  and robust  nature of our  feature  packages  also help to
differentiate us from our competitors. For landline customers, we offer the same
calling  features  offered by the Incumbent Local Exchange Carrier ("ILEC") from
which we are buying and reselling  services,  but we charge less for each of the
features.  We also  bundle  certain  key  features,  such as  Caller ID and Call
Waiting,  in  an  unlimited  monthly  calling  plan.  For  our  broadband  voice
customers,  we offer differentiating  features,  such as fax lines and toll free
numbers. The following features are offered to our broadband voice customers, at
no extra charge:

      o  911 Dialing
      o  Voicemail
      o  Caller ID
      o  Call Waiting
      o  Call Forwarding
      o  Three Way Calling
      o  Free In-Network Calls
      o  Call Return
      o  Caller ID Block
      o  International Call Blocking
      o  Directory Assistance Blocking
      o  Do Not Disturb
      o  Speed Dial
      o  Online Account Management

For an additional  competitive charge, our broadband voice customers can receive
additional premium features, such as:

      o  411 Directory Assistance
      o  Virtual numbers
      o  Local number portability

Our Network

         We operate a  sophisticated  IP network to deliver our broadband  voice
services.  We carefully  monitor the network as it  automatically  minimizes the
route taken by packets carrying a voice conversation, and self-regulates traffic
volumes to directly  control the quality of service from the  origination to the
termination of a call. Calls are connected on our network with minimal post dial
delay

                                       6
<page>

and our G.729  compression  yields  virtually no jitter.  When compared to other
broadband voice  carriers,  or wireline  connections,  we deliver a high quality
call. Our softswitch  utilizes  advanced SIP  infrastructure on a cluster of SIP
servers  and has the ability to scale at a low cost.  We believe the  collective
thought  process of our SIP servers makes us unique,  as our servers are capable
of "thinking" about what they are doing and will perform self-healing  functions
when necessary to ensure a call is not dropped.  Unlike many of our competitors,
we do not  rely  on  Microsoft  to  power  our  softswitch.  By  using  our  own
open-source  software  platform,  we are able to update  the  network as needed,
avoid the delays of waiting for software  upgrades from  Microsoft and avert the
problems  associated with having too much reliance on one vendor in order to run
our network.

         We consider voice to be an application on an IP transport.  Our network
does not use the  mainframe  technology  approach that Sonus  Networks,  Inc. or
BroadSoft,  Inc.  promotes.  Instead,  we  have  a  fully-scalable,   redundant,
power-backed  stable  platform with a server farm that contains no  specifically
designed telecom equipment.  By not relying on the telecom equipment and related
software of the larger equipment vendors, we are able to own and control our own
proprietary  source  code  and to  scale  without  the  limitations  and  delays
associated with equipment financing,  installation,  integration and source code
updates that equipment  vendors impose on other broadband  voice  carriers.  Our
approach  is very  similar  to the  server  cluster  type of  approach  that has
provided Google, Inc. substantial computing resources at a relatively low cost.

Business Strategy

         Our  objective is to build a profitable  telephone  company on a stable
and scalable  platform with minimal  network costs.  We want to be known for our
high quality of service,  robust features and ability to deliver any new product
to a wholesale customer or a web store without delay. We believe that to achieve
our objective we need to have "cradle to grave"  automation  of our  back-office
web and billing  systems.  We have written our software for maximum  automation,
flexibility and changeability.

         We know from  experience in  provisioning  complex  telecom orders that
back-office automation is a key factor in keeping overhead costs low. Technology
continues  to work for 24 hours a day and we  believe  that the  fewer  people a
company has in the back office,  the more  efficiently  it can run, which should
drive down the cost per order.

         Furthermore, our strategy is to grow rapidly by leveraging the capital,
customer base and marketing  strength of our  wholesale  customers.  Many of our
targeted wholesale  customers and some of our existing wholesale  customers have
ample  capital  to market a  private-labeled  broadband  voice  product to their
existing  customer  base or to new  customers.  We believe  our  strength is our
technology-based  platform.  By providing  our  technology  to cable  companies,
CLECs,  ISPs, WiFi and  fixed-wireless  broadband  providers,  data integrators,
value-added  resellers,  and satellite  broadband providers and any other entity
that desires to offer a broadband  telephony product, we believe we will require
significantly less cash resources than other providers will require to attract a
similar number of subscribers.

         By taking a  wholesale  approach,  our goal is to obtain and manage 500
customers that have an average customer base of 1,000  end-users.  We believe we
will be more  successful  and more  profitable  taking this approach to reaching
500,000  end-users  than we would be if we tried to attract  and manage  500,000
individual end-users by ourselves.


                                       7
<page>

Sales and Marketing

         In  establishing  our  broadband  voice  business,  we do not  want our
selling  price to be the only  reason  we win a  wholesale  customer.  We do not
intend to be the  broadband  voice  carrier  that sells  services  at the lowest
price.  We believe the price savings that  broadband  voice  services  offer our
customers, when compared to traditional wireline telephone services,  provides a
significant  monetary value that will help us attract customers.  In addition to
our price advantage over  traditional  wireline  services,  we believe we have a
stable,  high-quality,  feature-rich  service  that  allows  us  to  distinguish
ourselves from lower-priced alternatives.  Our extensive pool of local telephone
numbers  that we offer  broadband  carriers in remote  areas,  coupled  with the
customization  of our  customer  web  portals,  helps to  create  an  attractive
offering for  broadband  carriers.  In addition to our  in-house  staff of sales
professional,  we partner  with  various  resellers,  wholesalers  and  referral
channels to assist in the sale of our services.

Competition

         The  communications  industry is highly  competitive and the market for
enhanced Internet and IP communications services is new and rapidly evolving. We
believe the primary  competitive  factors that will determine our success in the
Internet and IP communications market are:

      o  Quality of service
      o  Responsive customer care services
      o  Ability to provide  customers  with a  telephone  number in their local
         calling area
      o  Pricing levels and policies
      o  Ability to provide E911 and 911 service
      o  Bundled service offerings
      o  Innovative features
      o  Ease of use
      o  Accurate billing
      o  Brand recognition
      o  Quality of analog telephone adapter ("ATA") supported by us and used by
         our customer

         Future competition could come from a variety of companies,  both in the
Internet and telecommunications  industries.  This includes major companies that
have been in  operation  for many years and have  greater  resources  and larger
subscriber  bases than we have,  as well as  companies  operating in the growing
market of discount  telecommunications  services,  including  calling  cards and
prepaid  cards.  In addition,  some  Internet  service  providers  have begun to
aggressively  enhance  their  real-  time  interactive  communications,  and are
focusing  initially  on instant  messaging,  with the intent to progress  toward
providing PC-to-Phone services and broadband telephony services.

         We anticipate that competition will also come from several  traditional
telecommunications  companies,  including  industry leaders,  such as AT&T Inc.,
Sprint  Nextel  Corporation,  Deutsche  Telekom  AG,  and  Qwest  Communications
International,  Inc., as well as established broadband services providers,  such
as Time Warner Inc.,  Comcast  Corporation and Cablevision  Inc. These companies
all  have  announced  their   intention  to  offer  enhanced   Internet  and  IP
communications  services in both the United States and  internationally.  All of
these competitors are significantly larger than we are and have:

      o  substantially greater financial, technical and marketing resources;
      o  stronger name recognition and customer loyalty;
      o  well-established relationships with many of our target customers;
      o  larger networks; and
      o  large existing user base to cross sell new services.

                                       8
<page>

         These and other competitors may be able to bundle services and products
that are not offered by us together with enhanced Internet and IP communications
services, which could place us at a significant competitive  disadvantage.  Many
of our  competitors  enjoy  economies  of scale  that can  result in lower  cost
structure for  transmission  and related  costs,  which could cause  significant
pricing pressures within the industry.

Government Regulation

         The  FCC has  jurisdiction  over  all  U.S.  telecommunications  common
carriers to the extent they provide  interstate or international  communications
services,  including  the use of local  networks to originate or terminate  such
services.  The FCC  also  has  jurisdiction  over  certain  issues  relating  to
interconnection between providers of local exchange service and the provision of
service via fixed wireless spectrum.

         Universal  Service - In 1997,  the FCC issued an order,  referred to as
the  Universal  Service  Order,  that requires all  telecommunications  carriers
providing interstate  telecommunications  services to periodically contribute to
universal  service  support  programs  administered  by the FCC (the  "Universal
Service Fund").  These periodic  contributions are currently assessed based on a
percentage  of  each   contributor's   interstate  and  international  end  user
telecommunications   revenues   reported  to  the  FCC.  We,  and  most  of  our
competitors,  pass through these  Universal  Service Fund  contributions  in the
price of our  services,  either as a separate  surcharge  or as part of the base
rate.  In  addition  to the FCC  universal  service  support  mechanisms,  state
regulatory  agencies also operate parallel universal service support systems. As
a result, we are subject to state, as well as federal, universal service support
contribution requirements, which vary from state to state.

         Interconnection and Unbundled Network Elements - The Telecommunications
Act requires ILECs to allow competitors to interconnect with their networks in a
nondiscriminatory  manner at any technically feasible point on their networks at
cost-based  prices,  which are more  favorable  than past  pricing  based on the
historic  regulated costs of the ILEC.  Since the FCC's 1996 "Local  Competition
Order,"  CLECs have  enjoyed the right to lease  unbundled  network  elements at
rates determined by state public utility  commission  employing the FCC's TELRIC
(Total Element Long Run Incremental  Cost) forward looking,  cost-based  pricing
model.

         The  FCC's  rules  governing  availability  of ILEC  unbundled  network
elements to CLECs have been the subject of on-going  litigation  and  rulemaking
proceedings.  In February 2005, the FCC eliminated the availability of unbundled
local switching at TELRIC prices, and thereby eliminated the ability of CLECs to
obtain a full "UNE  Platform"  that  provides  all  elements of local  dial-tone
service at TELRIC prices. The FCC also limited the availability of high-capacity
loops and dedicated transport elements at TELRIC prices; these elements will now
be available only in particular  markets that do not meet tests for the presence
of competitive facilities as detailed in the FCC's rules.

         The FCC's  unbundling  rules  continue  to be the  subject  of  further
litigation  and could change in ways we cannot now  predict,  which could have a
material affect on the cost of telephony  services and the business  strategy of
carriers that use wirelines that are leased from the ILECs,  as is the case with
our subsidiaries, NRTC and TSI.

                                       9
<page>

         Pursuant to the FCC's rules, we negotiate interconnection  arrangements
with each ILEC,  generally on a  state-by-state  basis,  which allows us to sell
local  telephone  service  over leased  wirelines.  While  current FCC rules and
regulations  require the incumbent  provider to provide certain network elements
necessary for us to provision  end-user  services on an individual  and combined
basis,  we cannot assure you that the ILECs will provide  these  components in a
manner and at a price that will support competitive operations.  If we sell NRTC
and TSI, as we have planned, we will no longer need  interconnection  agreements
with the ILECs in order to operate.  Our  Internet  telephony  product  does not
require an  interconnection  agreement  with the ILECs,  as the  Internet is our
network.

         Internet Telephony - The use of the Internet and private IP networks to
provide  a  voice   communications   services  is  a  relatively  recent  market
development.  Although the provision of such services is currently  permitted by
United  States law and largely  unregulated  within the United  States,  several
foreign  governments have adopted laws and/or regulations that could restrict or
prohibit the  provision of voice  communications  services  over the Internet or
private IP networks.  More aggressive regulation of the Internet in general, and
Internet  telephony  providers and services  specifically,  may  materially  and
adversely affect our business.

         On March 10,  2004,  the FCC  initiated a broad  rulemaking  proceeding
concerning the provision of voice and other services and applications  utilizing
IP  technology.  While  the  Commission  has  not  released  an  order  in  this
proceeding,  it has addressed some of the questions  raised by the rulemaking in
subsequent  proceedings.  Although  the  Commission  has not  adopted  a  formal
definition of broadband voice services, we use the term generally to include any
IP-enabled services offering real-time,  multidirectional  voice  functionality,
including, but not limited to, services that mimic traditional telephony.

         In June 2005,  the FCC adopted rules  requiring  providers of broadband
voice services to provide 911 emergency  access. We believe we are in compliance
with this order. In August 2005, the FCC adopted rules that these providers must
design  their  systems  to  facilitate   authorized  wiretaps  pursuant  to  the
Communications  Assistance to Law  Enforcement  Act. We anticipate  that we will
continue to develop  technologies  as required by  governmental  regulation that
support emergency access and enhanced services.

         In June 2006, the FCC announced  that  interconnected  broadband  voice
providers, such as VoX, would be required to contribute to the USF on an interim
basis, beginning October 2006. The Commission permitted interconnected broadband
voice  providers to determine their USF  contribution  according to one of three
different  calculation  methods.  Implementation of the regulatory  requirements
compelled by the  Commission's  action take  considerable  time and cost, and we
cannot guarantee that we have implemented these  requirements  fully. If we fail
to  report  our  revenue  and remit USF on that  revenue  accurately,  we may be
subject to late fees, penalties or other actions,  which could negatively affect
our business.

         Recent  action by the FCC has also  expanded the  possibility  that our
broadband  voice  services may become  subject to state  regulation,  which will
likely  lead to  higher  costs  and  reduce  some of the  competitive  advantage
broadband voice services hold over traditional telecommunications services.


         Regulation by state public utility commissions - Our telecommunications
services  that  originate and terminate  within the same state,  including  both
local  service  and  in-state  long  distance  toll  calls,  are  subject to the
jurisdiction of that state's utility commission.  The  Telecommunications Act of
1996  generally  preempts  state  statutes  and  regulations  that  prevent  the
provision of  competitive  services,

                                       10
<page>

but  permits  state  utility  commissions  to  regulate  the  rates,  terms  and
conditions  of  intrastate   services,   so  long  as  such  regulation  is  not
inconsistent  with the  requirements  of federal law. Our CLECs are certified to
provide  facilities-based  and/or resold long distance  service in the states in
which we operate.  In  addition to  requiring  certification,  state  regulatory
authorities  may  impose  tariff and filing  requirements,  consumer  protection
measures,  and  obligations to contribute to universal  service and other funds.
Rates  for  intrastate  switched  access  services,  which  we both pay to local
exchange companies and collect from long-distance  companies for originating and
terminating  in-state toll calls,  are subject to the  jurisdiction of the state
commissions.  State  commissions  also have  jurisdiction to approve  negotiated
rates, or establish rates through arbitration,  for  interconnection,  including
rates for unbundled network  elements.  Changes in those access charges or rates
for unbundled  network  elements could have a substantial and material impact on
our business if we do not complete the sale of NRTC and TSI.


Employees

         As of February  15,  2007,  we employed 35  employees,  of whom 34 were
employed on a full-time basis and one was employed on a part-time  basis. We are
not  subject  to  any  collective   bargaining  agreement  and  we  believe  our
relationship with our employees is good.

Item 1A. Risk Factors

         This report contains forward-looking  statements that involve risks and
uncertainties,   such  as  statements  of  our  objectives,   expectations   and
intentions.  The cautionary statements made in this report are applicable to all
forward-looking  statements  wherever  they  appear in this  report.  Our actual
results could differ materially from those discussed  herein.  Risk factors that
could cause or contribute to such differences  include those discussed below, as
well as those  discussed  elsewhere  in this  report.  In  addition to the other
information  contained in this Form 10-K,  the following  risk factors should be
considered  carefully  in  evaluating  our  business.  Our  business,  financial
condition,  or results of operations may be materially adversely affected by any
of these risks.  Please note that additional  risks not presently known to us or
that we currently deem immaterial may also impair our business and operations.

Risks Relating to Our Business

We have incurred  operating losses since inception of our telephone business and
we may be unable to achieve profitability or generate positive cash flow.

         We have not generated  operating  profits  since fiscal 1996.  While we
reported  net  income  of  $170,253  and  $8,323,211  in  fiscal  2004 and 2003,
respectively,  we  reported  losses  from  our  telecommunications   operations.
Furthermore,  in fiscal 2006 and 2005,  we reported net losses of  approximately
$2,345,000 and $2,266,000,  respectively. In fiscal 2004, net income of $170,253
resulted  primarily  from the gain of  approximately  $743,000  resulting from a
settlement  with  creditors in the bankruptcy  proceedings  of a subsidiary.  In
fiscal 2003,  net income of $8,323,211  resulted  primarily from the gain on the
disposition  of a subsidiary and the  disposition  of property of  approximately
$11,306,000. In fiscal 2006, fiscal 2005 and fiscal 2004, we generated operating
losses of approximately $2,287,000 $2,402,000 and $642,000,  respectively,  from
our  telecommunications  operations.  We expect to continue  to incur  operating
losses until we develop our telecommunications operations to a level at which it
generates sufficient revenues to cover operating expenses.

We have an unproven  business  model and our  inability  to scale our  broadband
voice business could delay or prevent our future profitability.

         Our  business  strategy  is  unproven  and we do not know  whether  our
business  model and strategy  will be  successful.  We intend to sell  wholesale
broadband  voice  services to other  carriers,  primarily  those  carriers  that
already have broadband customers.  We also plan to sell our wireline business by
April 12, 2007,  that has  generated  substantially  all of our  revenues  since
fiscal 2000. We have developed our own proprietary IP platform and for the first
time in our operating history, we are a facilities-based carrier. We believe our
network is robust and efficient, but it has not carried the hundreds of millions
of minutes that we anticipate will eventually use our network.  Our inability to
scale our IP network and execute effectively as a broadband voice provider would
significantly  diminish  our ability to generate

                                       11
<page>

sufficient revenue to achieve profitability.

We have a need for  additional  financing  and without such  financing we may be
forced to curtail or cease our operations or sell our business,  which may cause
the value of your investment to decline.

         Due to our recent operating losses and our additional  requirements for
working capital to establish and grow our business, over the past several months
we have sold debt and  additional  shares of capital  stock to fund our  working
capital needs. We expect that we will continue to sell our capital stock,  incur
additional  indebtedness  or sell  other  assets  we  currently  own to fund the
anticipated growth of our telecommunications business and implement our business
objectives.  There can be no assurance that we will be able to obtain additional
funding when needed,  or that such funding,  if available,  will be available on
terms we find acceptable.  If we cannot obtain  additional funds when needed, we
may be forced to curtail or cease our  activities,  or sell our business,  which
may result in the loss of all or a substantial portion of your investment.

We depend on other  carriers as a key component for our business and any failure
of these  carriers to continue  service to us could  damage our  reputation  and
cause us to lose customers .

         To  limit  our  capital   expenditures   and  support  staff,  we  rely
extensively on third parties. For our CLECs, we lease our local exchange network
and our long  distance  network.  As a result,  we depend  entirely on incumbent
carriers  for  the  transmission  of  customer  telephone  calls  for  our  CLEC
subsidiaries.  The risk factors inherent in this approach  include,  but are not
limited to, the following:

         o  the inability to negotiate and renew favorable wholesale agreements;

         o  lack  of  timeliness  of the  ILEC  in  processing  our  orders  for
            customers seeking to utilize our services;

         o  dependence   on  the   effectiveness   of  internal   and   external
            telemarketing services to attract new customers;

         o  dependence on third-party contractors to install necessary equipment
            and wiring at our customers facilities; and

         o  dependence  on a  facilities-based  carrier to provide our customers
            with repair services and new installation services.

         If we are  successful  in selling our CLECs this year, we will still be
reliant on third party  carriers in  conjunction  with the  operations of our IP
network.

We depend on a third-party  billing system to bill our wireline customers and we
are exposed to a loss of revenues and customers if we cannot generate timely and
accurate invoices to our customers.

         The  accurate and prompt  billing of our  customers is essential to our
operations and future profitability.  Our CLECs utilize a third-party system for
billing,  tracking and customer service.  Our former Chairman,  who beneficially
owns stock in our company,  is the Chairman and CEO of our billing company,  and
we believe  that all  transactions  with this  company are at  arms-length.  The
system is  designed to provide us with a high  degree of  flexibility  to handle
custom rate plans that provide  consumers  discounts  from the  incumbent  local
carriers'  rate plans or bundled  plans that include  various

                                       12
<page>

features  and long  distance  services.  Although  we believe the system is very
functional,  it is currently set up to support approximately 500,000 local lines
in six states,  and its ability to handle  substantially  more  customers is not
fully tested. In addition,  the billing company we utilize competes with us as a
CLEC and may terminate  its billing  services at any time.  Furthermore,  in the
most recent  quarterly  financial  statements of the billing company we utilize,
the billing company  reported a quarterly loss of $932,409 and negative  working
capital of $832,760, raising some doubt about its ability to continue as a going
concern.  This strategy  exposes us to various  risks that include,  but are not
limited to, the following:

         o  the  inability to adapt the billing  system to process the number of
            customers we are targeting in our marketing plans;

         o  the  failure of the system to provide  all of the  billing  services
            that we require;

         o  the   possibility   that  the  billing   company  could  hinder  the
            anticipated sale of our CLECs;

         o  the  possibility  that we may need to quickly  engage a new  billing
            company to process our invoices to our customers, and devote a large
            amount of internal resources at one time to work on this transition.

A portion of our business is dependent  upon our ability to resell long distance
services,  for which we currently rely on only one third-party  carrier, and any
service  disruption  form this  carrier  could  cause us to lose  customers  and
revenues.

         Our CLECs  offer  long  distance  telephone  services  as part of their
service  package.  We currently  have a wholesale  agreement  with only one long
distance carrier to provide transmission and termination services for all of our
long distance traffic. Recently, several long distance carriers have encountered
financial  difficulties,   including  the  carrier  utilized  by  us.  Financial
difficulties  encountered by our current carrier or any other carrier with which
we are  negotiating  could  cause  disruption  to our  operations  and  loss  of
customers and revenues.

We  could be  liable  for  breaches  of  security  on our web  site,  fraudulent
activities of our users, or the failure of third-party vendors to deliver credit
card transaction processing services.

         A fundamental requirement for operating a customer-friendly CLEC and an
internet-based,   worldwide   voice  service  is  the  secure   transmission  of
confidential  information  over  public  networks.  Although  we have  developed
systems and  processes  that are designed to protect  consumer  information  and
prevent fraudulent credit card transactions and other security breaches, failure
to mitigate such fraud or breaches may adversely  affect our operating  results.
The law relating to the  liability of  providers of online  payment  services is
currently  unsettled.  We rely on third party providers to process and guarantee
payments  made by our  customers up to certain  limits,  and we may be unable to
prevent our users from fraudulently  receiving goods and services.  Any costs we
incur as a result  of  fraudulent  transactions  could  harm  our  business.  In
addition,  the  functionality  of our current  billing  system relies on certain
third-party  vendors  delivering  services.  If  these  vendors  are  unable  or
unwilling to provide services, we will not be able to charge for our services in
a timely or scalable fashion.

We may face difficulties  managing our anticipated rapid expansion,  which would
adversely affect our operations.

                                       13
<page>

         We are  attempting to grow our business  rapidly in terms of the number
of services we offer, the number of customers we serve and the regions we serve.
In particular,  we are expending  substantial sums to expand our broadband voice
services,  including the utilization of  international  routes.  There can be no
assurance that our marketing  initiatives  will proceed as expected or that they
will be  successful,  particularly  in light of the  legal  and  regulatory  and
competitive uncertainties described elsewhere in this report. Furthermore, there
is no assurance that we will successfully manage our efforts to:

         o  expand, train, manage and retain our employee base;

         o  expand and improve our customer service and support systems;

         o  introduce  and market new  products  and  services  and new  pricing
            plans;

         o  capitalize on new opportunities in the competitive marketplace; or

         o  control our expenses.

         The strains  posed by these new demands are  magnified  by the emerging
nature of our  operations.  If we cannot  manage  our  growth  effectively,  our
results of operations could be adversely affected.

The  failure  of our  customers  to pay  their  bills  on a timely  basis  could
adversely affect our cash flow.

         Our target customers consist primarily of broadband service  providers.
Although  we  required a deposit for most  accounts,  we give  credit  limits in
excess of the deposited  amounts and we offer payment  terms.  We may experience
difficulty  in  collecting  amounts  due  on  a  timely  basis,   especially  if
competition on the broadband  services market becomes more intense.  Our failure
to collect  accounts  receivable  owed to us by our  customers on a timely basis
could have a  material  adverse  effect on our  business,  financial  condition,
results of operations and cash flow.

Acquisitions  could divert  management's  time and attention,  dilute the voting
power  of  existing  shareholders  and have a  material  adverse  effect  on our
business.

         As  part  of  our  growth   strategy,   we  may   continue  to  acquire
complementary businesses and assets. Acquisitions that we may make in the future
could result in the diversion of time and personnel  from our business.  We also
may  issue  shares  of  common  stock or other  securities  in  connection  with
acquisitions, which could result in the dilution of the voting power of existing
shareholders  and could dilute  earnings per share.  Any  acquisitions  would be
accompanied by other risks commonly encountered in such transactions,  including
the following:

         o  difficulties  integrating  the  operations and personnel of acquired
            companies;

         o  the additional  financial  resources required to fund the operations
            of acquired companies;

         o  the potential disruption of our business;

         o  our ability to maximize our financial and strategic  position by the
            incorporation of acquired  technology or businesses with our product
            and service offerings;

         o  the  difficulty  of   maintaining   uniform   standards,   controls,
            procedures and policies;

                                       14
<page>

         o  the potential loss of key employees of acquired companies;

         o  the impairment of employee and customer relationships as a result of
            changes in management; and

         o  significant expenditures to consummate acquisitions.

         As a part of our  acquisition  strategy,  we may engage in  discussions
with various businesses  respecting their potential  acquisition.  In connection
with these  discussions,  we and each potential  acquired  business may exchange
confidential  operational  and  financial  information,  conduct  due  diligence
inquiries,  and consider the  structure,  terms and  conditions of the potential
acquisition.  In certain cases, the prospective  acquired business may agree not
to discuss a potential acquisition with any other party for a specific period of
time, may grant us certain rights in the event the acquisition is not completed,
and may agree to take other actions  designed to enhance the  possibility of the
acquisition. Potential acquisition discussions may take place over a long period
of time, may involve difficult  business  integration and other issues,  and may
require solutions for numerous family  relationship,  management  succession and
related matters. As a result of these and other factors,  potential acquisitions
that from time to time  appear  likely to occur may not result in binding  legal
agreements and may not be consummated.  Our  acquisition  agreements may contain
purchase  price  adjustments,  rights of set-off and other remedies in the event
that  certain  unforeseen  liabilities  or issues  arise in  connection  with an
acquisition.  These remedies, however, may not be sufficient to compensate us in
the event that any unforeseen liabilities or other issues arise.

We need to  retain  key  management  personnel  and  hire  additional  qualified
personnel.  We are dependent on the efforts of our executive officers and senior
management and on our ability to hire and retain qualified management personnel.

         A  small  number  of  key  management   and  operating   employees  and
consultants manage our  telecommunications  business. Our loss of such employees
or consultants or their failure to work  effectively as a team could  materially
adversely  impact our  telecommunications  business.  Competition  for qualified
executives  in the  telecommunications  and  data  communication  industries  is
intense and there are a limited number of persons with applicable experience. We
believe that our future success in the telecommunications business significantly
depends on our  ability  to attract  and retain  highly  skilled  and  qualified
telecommunications  personnel.  We have not entered into  employment  agreements
with any of our  senior  officers.  The loss of any of Paul H.  Riss,  our Chief
Executive  Officer,  or Mark  Richards,  our Chief  Information  Officer and the
President  of our  Vox  Communications  subsidiary,  or the  loss of one or more
programmers or engineers employed by Vox could adversely affect our business.

We may be unable  to adapt to rapid  technology  trends  and  evolving  industry
standards, which would limit our growth.

         The communications industry is subject to rapid and significant changes
due to technology  innovation,  evolving  industry  standards,  and frequent new
service  and product  introductions.  New  services  and  products  based on new
technologies  or new  industry  standards  expose  us to risks of  technical  or
product obsolescence. We will need to use technologies effectively,  continue to
develop our technical  expertise and enhance our existing  products and services
in a timely manner to compete successfully and grow our business.  We may not be
successful in using new  technologies  effectively,  developing  new products or
enhancing  existing  products  and  services in a timely  manner or that any new
technologies or enhancements used by us or offered to our customers will achieve
market acceptance.

                                       15
<page>

The telecommunications industry is highly regulated and amendments to or repeals
of existing  regulations  or the  adoption of new  regulations  could  adversely
affect our business, financial condition or results of operations.

         Federal,  state and local regulation may affect our  telecommunications
business.  Since  regulation  of the  telecommunications  industry is frequently
changing,  we cannot predict  whether,  when and to what extent new  regulations
will affect us. The following  factors,  among others,  may adversely affect our
business, financial condition and results of operations:

         o  delays in obtaining required regulatory approvals;

         o  new court decisions;

         o  the enactment of new adverse regulations; and

         o  the establishment of strict regulatory requirements.

The communications  services industry is highly competitive and we may be unable
to compete effectively, which could delay or prevent our future profitability.

         The communications  industry,  including Internet and data services, is
highly  competitive,  rapidly  evolving  and subject to  constant  technological
change and intense marketing by providers with similar products and services. We
expect  that new  competitors  are likely to join  existing  competitors  in the
communications industry,  including the market for broadband voice, Internet and
data services. Many of our current competitors are significantly larger and have
substantially greater market presence, as well as greater financial,  technical,
operational,  marketing and other resources and  experience,  than we do. In the
event that such a competitor expends  significant sales and marketing  resources
in one or several  markets,  we may not be able to compete  successfully in such
markets. We believe that competition will continue to increase, placing downward
pressure on prices. Such pressure could adversely affect our gross margins if we
are not able to reduce our costs  commensurate  with such price  reductions.  In
addition, the pace of technological change makes it impossible for us to predict
whether we will face new competitors using different technologies to provide the
same or  similar  services  offered  or  proposed  to be  offered  by us. If our
competitors  were to provide better and more cost effective  services than ours,
our business initiatives could be materially and adversely affected.

Industry  consolidation could make it more difficult for us to compete and limit
our growth.

         Companies offering Internet,  data and communications  services are, in
some circumstances,  consolidating.  We may not be able to compete  successfully
with businesses that have combined,  or will combine,  to produce companies with
substantially  greater financial,  sales and marketing resources,  larger client
bases, extended networks and infra-structures and more established relationships
with  vendors,  distributors  and partners than we have.  With these  heightened
competitive  pressures,  there is a risk that our financial performance could be
adversely impacted and the value of our common stock could decline.


Our  inability  to adjust to new product  developments  and rapid  technological
changes  would  negatively  impact  our  ability  to grow  our  broadband  voice
business.

         IP  telephony  is an  emerging  market that is  characterized  by rapid
changes in customer  requirements,  frequent  introductions  of new and enhanced
products,  and  continuing  and  rapid

                                       16
<page>

technological  advancement.  To compete successfully in this emerging market, we
must continue to design, develop and sell new and enhanced software products and
services that provide  increasingly higher levels of performance and reliability
at  lower  cost.  These  new  and  enhanced  products  must  take  advantage  of
technological   advancements   and   changes,   and  respond  to  new   customer
requirements. Our success in designing, developing and selling such products and
services will depend on a variety of factors, including:

         o  the identification of market demand for new products;

         o  the scalability of our IP telephony software products;

         o  product and feature selection;

         o  timely implementation of product design and development;

         o  product performance;

         o  cost-effectiveness of products under development;

         o  effective distribution processes; and

         o  success of promotional efforts.

         Additionally, we may also be required to collaborate with third parties
to  develop  our  products  and  may  not  be  able  to do so  on a  timely  and
cost-effective  basis, if at all. We have in the past experienced  delays in the
development of new products and the enhancement of existing  products,  and such
delays  will  likely  occur in the  future.  If we are  unable,  due to resource
constraints or technological  or other reasons,  to develop and introduce new or
enhanced  products in a timely manner,  if such new or enhanced  products do not
achieve  sufficient  market  acceptance,  or if such new  product  introductions
decrease demand for existing  products,  our operating results would decline and
our business would not grow.

If  broadband  voice  technology  fails  to  gain  acceptance  among  mainstream
consumers, our ability to grow our business will be limited.

         If the market for IP-based communications and the related services that
we will make  available  does not grow at the rate we  anticipate  or at all, we
will  not be able to  realize  our  anticipated  revenues  with  respect  to our
broadband  phone service.  To be  successful,  IP-based  communications  require
validation as an effective means of communication and as a viable alternative to
traditional  phone service.  Demand and market  acceptance for newly  introduced
services are subject to a high level of uncertainty.  The Internet may not prove
to be a viable alternative to traditional phone service for reasons including:

      o  inconsistent quality or speed of service;

      o  traffic congestion on the Internet;

      o  potentially inadequate development of the necessary infrastructure;

      o  lack of acceptable security technologies;

                                       17
<page>

      o  lack  of  timely  development  and   commercialization  of  performance
         improvements; and

      o  unavailability of cost-effective, high-speed access to the Internet.


Future legislation or regulation of the Internet and/or broadband voice services
could  restrict our business,  prevent us from offering  service or increase our
cost of doing business.

         At present there are few laws, regulations or rulings that specifically
address  access  to or  commerce  on the  Internet,  including  broadband  voice
services.  We are unable to predict the impact, if any, that future legislation,
legal decisions or regulations concerning the Internet may have on our business,
financial condition or results of operations. Regulation may be targeted toward,
among other things,  assessing  access or  settlement  charges,  imposing  taxes
related to Internet  communications,  imposing  tariffs or regulations  based on
encryption concerns or the characteristics and quality of products and services,
imposing  additional  regulations  and  requirements  related to the handling of
emergency 911 services, any of which could restrict our business or increase our
cost of doing  business.  The increasing  growth of the broadband voice services
market and  popularity  of a variety of new  wireless IP products  and  services
heighten  the risk that  governments  or other  legislative  bodies will seek to
further regulate IP telephony and the Internet. In addition,  large, established
telecommunication companies may devote substantial lobbying efforts to influence
the  regulation of the broadband IP telephony  market,  which may be contrary to
our interests.

         Many  regulatory  actions  are  underway or are being  contemplated  by
federal and state  authorities,  including  the FCC and other  state  regulatory
agencies.  There is risk that a  regulatory  agency may require us to conform to
rules that are unsuitable for broadband  voice  communications  technologies  or
rules that  cannot be  complied  with due to the nature and  efficiencies  of IP
routing,  or are  unnecessary or unreasonable in light of the manner in which we
offer service to our customers.  It is not possible to separate the Internet, or
any service  offered over it, into intrastate and interstate  components.  While
suitable  alternatives  may be developed  in the future,  the current IP network
does not enable us to identify the geographic  nature of the traffic  traversing
the Internet.

Our emergency  calling  services are different from those offered by traditional
wireline telephone companies and may expose us to significant liability.

         Our 911 calling  service is more limited,  in certain  areas,  than the
emergency calling services offered by traditional  wireline telephone companies.
In each case, those differences may cause  significant  delays, or even failure,
in a caller's receipt of the emergency assistance he or she needs.

         Traditional  wireline telephone  companies route emergency calls over a
dedicated  infrastructure  directly to an emergency  services  dispatcher at the
public safety  answering  point, or PSAP, in the caller's area.  Generally,  the
dispatcher  automatically receives the caller's phone number and actual location
information.  While our 911  service  being  deployed  in the  United  States is
designed to route calls in a fashion similar to traditional  wireline  services,
our 911  capabilities  may not  reach the  intended  PSAP,  although  we do have
procedures  in place to  ensure  that a  dispatcher  somewhere  is  reached.  In
addition,  the only location information that our E911 service can transmit to a
dispatcher at a PSAP is the information  that our customers have registered with
us. A customer's registered location may be different from the customer's actual
location at the time of the call  because  customers  can use their  enabled ATA
device to make calls almost  anywhere a broadband  connection is  available.  In
such  cases,  as  described  below,  we offer  customers  alternative  access to
emergency services.

                                       18
<page>

         We are also  providing E911 service that is comparable to the emergency
calling  services  obtained  by  customers  of  traditional  wireline  telephone
companies in the same area.  For those  customers,  emergency  calls are routed,
subject to the limitations  discussed below,  directly to an emergency  services
dispatcher at the PSAP in the area of the customer's  registered  location.  The
dispatcher  will have automatic  access to the customer's  telephone  number and
registered location information. However, if a customer places an emergency call
using  the  customer's  enabled  ATA  device  and the  device  is in a  location
different from the one registered  with us, the E911 system will still route the
call to a dispatcher  in the  registered  location,  not the  customer's  actual
location at the time of the call. Every time a customer moves his or her enabled
ATA device to a new location,  the customer's  registered  location  information
must be updated and verified.  Until that takes place, the customer will have to
verbally  advise the emergency  dispatcher of his or her actual  location at the
time of the call and wait for the call to be  transferred,  if possible,  to the
appropriate local emergency  response center before emergency  assistance can be
dispatched.

         In some  cases,  even under our E911  service,  emergency  calls may be
routed  to a  local  PSAP,  designated  statewide  default  answering  point  or
appropriate  local  emergency  authority  that is not capable of  receiving  our
transmission of the caller's registered location information and, in some cases,
the caller's phone number.  Where the emergency call center is unable to process
the  information,  the caller is provided a service that is similar to the basic
911 services offered to some wireline telephone  customers.  In these instances,
the emergency  caller may be required to verbally  advise the operator of his or
her  location at the time of the call and, in some cases,  a call back number so
that  the  call  can  be  handled  or  forwarded  to  an  appropriate  emergency
dispatcher.  We are  continuing our efforts to deploy our E911 service such that
all relevant information is displayed and will be routed to the appropriate PSAP
in the first instance.

         Customers who are located in areas in which we are currently  unable to
provide either E911 or the basic 911 described  above, as well as WiFi telephone
and  SoftPhone  users,  are supported by a national call center that is run by a
third-party  provider  and  operates  24 hours a day,  seven  days a week.  When
reaching the call center, a caller must provide his or her physical location and
call back number, after which an operator will coordinate  connecting the caller
to the appropriate PSAP or emergency services provider.

         Our softswitching  platform and back office systems are technologically
advanced and the essential service delivery of providing emergency call handling
is of  paramount  importance  to  us.  We  have  developed  a web  portal  where
subscribers  can  maintain  the  flexibility  of  providing  us with a currently
correct  physical  location  should  they  take  the ATA  device  away  from the
registered  location.  We cannot guarantee they will actually  remember to enter
this information in the web portal when they move their ATA device,  and if they
do not make this update,  the emergency  call will be routed to the address that
was previously notified.  This flexibility,  along with the ability to call into
our customer  support call center to update the address,  is compliant  with the
current requirements of the FCC regarding emergency calling.

         If one of our customers  experiences a broadband or power outage, or if
a network  failure  were to  occur,  the  customer  will not be able to reach an
emergency services provider.

         Delays our customers  encounter when making E911 or basic 911 calls and
any inability of the  answering  point to  automatically  recognize the caller's
location or telephone number can have devastating consequences. Customers may in
the future attempt to hold us responsible for any loss, damage,  personal injury
or death suffered as a result. Some traditional  telephone companies also may be

                                       19
<page>

unable to provide the precise  location or the  caller's  telephone  number when
their  customers  place emergency  calls.  However,  while we are not covered by
legislation  exempting us from  liability for failures of our emergency  calling
services,  traditional  telephone companies are covered. This liability could be
significant. In addition, we have lost, and may in the future lose, existing and
prospective  customers  because of the  limitations  inherent  in our  emergency
calling  services.  Any of these factors could cause us to lose revenues,  incur
greater expenses or cause our reputation or financial results to suffer.


The success of our planned  expansion is dependent upon market  developments and
usage  patterns  which are  needed in order for us to  efficiently  utilize  our
network equipment.

         Our  purchase of network  equipment  and  placement of our IP telephony
software will be based in part on our  expectations  concerning  future  revenue
growth and market developments. As we expand our network, we will be required to
make capital expenditures,  in addition to making financial commitments for DS-3
circuits and colocation space, and to add additional  employees.  If our traffic
volume were to decrease, or fail to increase to the extent expected or necessary
to make  efficient  use of our network,  our costs as a  percentage  of revenues
would increase  significantly,  which would have a materially  adverse effect on
our financial condition and results of operations.

Regulation of VoIP services is developing  and therefore  uncertain,  and future
legislative,  regulatory or judicial actions could adversely impact our business
and expose us to liability.

         To date, the FCC has treated Internet service  providers as information
service  providers.  Information  service  providers are  currently  exempt from
federal  and  state  regulations   governing  common  carriers,   including  the
obligation to pay access charges.  The FCC is currently  examining the status of
Internet  service  providers and the services  they provide.  If the FCC were to
determine that Internet  service  providers,  or the services they provide,  are
subject to FCC  regulation,  including  the  payment of access  charges or other
fees,  it could  have a  material  adverse  effect  on our  business,  financial
condition and operating results.

If our network is unable to handle a large  number of  simultaneous  calls,  our
growth will be limited.

         We expect the volume of simultaneous calls to increase significantly as
our broadband voice subscriber base grows. Our network hardware and software may
not be able to accommodate  this  additional  volume.  If we fail to maintain an
appropriate level of operating performance, or if our broadband voice service is
disrupted, our reputation could be hurt and we could lose customers, which could
have a material adverse effect on our business,  financial condition and results
of operations.

Our growth in our  broadband  voice  business is  dependent  upon our ability to
build new relationships  with a wide range of other carriers and to bring on new
customers.

         Our ability to grow through quick and cost effective  deployment of our
broadband  voice  services  is due,  in  part,  to our  ability  to  create  new
agreements  with other carriers that can provide us with  telephone  numbers and
termination  service.  We also will need to sign  contracts  with new customers,
and, in many cases,  to enter into joint  venture or strategic  agreements  with
local partners,  as well as to satisfy newly enacted regulatory  requirements to
operate   in   emerging   markets.   While  we  pursue   several   opportunities
simultaneously,  we might not be able to create the necessary  partnerships  and
interconnections,  expand  our  customer  base,  deploy  networks  and  generate
profitable traffic over these networks within the time frame envisioned.

                                       20
<page>

We are pursuing new business  lines that  require  specialized  skill sets.  Our
ability to effectuate  our business plan is due, in part, to the roll out of new
services.

         Our  ability to deploy new  products  and  services  may be hampered by
technical  and  operational  issues  that  could  delay  our  ability  to derive
profitable  revenue  from these  service  offerings.  These  issues  include our
ability to competitively price such products and services. In addition,  certain
broadband  voice service  offerings are relatively new in our industry and their
market  potential is relatively  untested.  Additionally,  our ability to market
these products and service offerings may prove difficult. To date, our customers
use only  approximately  3,000,000  minutes  per month on our IP  network.  As a
result  we have  derived  limited  revenue  from  our  broadband  voice  service
offerings, and there can be no assurance that we will increase our current focus
and/or derive significant revenue from such offerings.

We rely on third party  equipment  suppliers  and the failure of such  equipment
could cause  interruptions  of our service,  damage our reputation,  cause us to
lose customers and limit our growth.

         We are dependent on third party equipment  suppliers for equipment,  IP
phones and adapter  devices,  including  companies  such as UTStarcom  Inc., and
Cisco Systems,  Inc. If these suppliers fail to continue product  development or
research and development or fail to deliver quality products or support services
on a timely basis, or we are unable to develop  alternative  sources,  if and as
required,  our financial  condition or results of operations could be materially
adversely impacted.


We may not be able to maintain  adequate  customer care during periods of growth
or in  connection  with our addition of new and complex IP devices,  which could
adversely  affect  our  ability  to grow and cause our  financial  results to be
negatively impacted.

         Good customer  care is important to acquiring and retaining  customers.
As we continue to grow our broadband voice business,  we will need to expand our
customer  care  operations  quickly  enough to meet the  needs of our  increased
customer base. We may face  additional  challenges in training our customer care
staff.  If we are  unable to hire,  train and  retain  sufficient  personnel  to
provide adequate customer care, we may experience slower growth, increased costs
and  higher  churn  levels,  which  would  cause  our  financial  results  to be
negatively impacted.

If  we  are  unable  to  improve  our  process  for  local  number   portability
provisioning, our growth may be negatively impacted.

         We support local number portability for our customers,  which allow our
customers to retain their  existing  telephone  numbers when  subscribing to our
services.  Transferring  numbers is a manual process that in the past could have
taken us 20  business  days or longer,  although we have taken steps to automate
this process to reduce the delay.  A new VoX  customer  must  maintain  both VoX
service and the customer's  existing  telephone  service during the transferring
process. By comparison,  transferring  wireless telephone numbers among wireless
service  providers  generally  takes several hours,  and  transferring  wireline
telephone numbers among traditional wireline service providers generally takes a
few days. The additional  delay that we experience is due to our reliance on the
telephone  company  from which the customer is  transferring  and to the lack of
full  automation  in our  process.  Further,  because  VoX  is  not a  regulated
telecommunications  provider, it must rely on the telephone companies, over whom
we have no control, to transfer numbers.  Local number portability is considered
an  important  feature  by many  potential  customers,  and if we fail to reduce
related  delays,  we  may  experience  increased  difficulty  in  acquiring  new
customers.

                                       21
<page>

Our failure to adequately  protect our proprietary  rights may adversely  affect
our business, increase our costs and limit our sales growth.

         We rely on  unpatented  trade  secrets and  know-how  to  maintain  our
competitive position.  Our inability to protect these secrets and know-how could
have a material  adverse  effect on our business and  prospects.  We protect our
proprietary  information  by  entering  into  confidentiality   agreements  with
employees  and  consultants  and  business  partners.  These  agreements  may be
breached or terminated.  In addition, third parties,  including our competitors,
may assert  infringement  claims  against us. Any of such claims could result in
costly litigation,  divert management's attention and resources,  and require us
to pay damages and/or to enter into license or similar agreements under which we
could be required to pay license fees or royalties.

Flaws in our  technology  and systems  could cause  delays or  interruptions  of
service, damage our reputation, cause us to lose customers and limit our growth.

         Our  operations  depend  upon our  ability to support a highly  complex
network infrastructure and avoid damage from fires,  earthquakes,  floods, power
losses,  excessive sustained or peak user demand,  telecommunications  failures,
network software flaws, computer worms and viruses,  transmission cable cuts and
similar  events.  The  occurrence of a natural  disaster or other  unanticipated
interruption  of service at our  facilities  could  cause  interruptions  in our
services. In addition,  failure of a traditional telephone company,  competitive
telecommunications  company or other service provider to provide  communications
capacity or other services that we require, as a result of a natural disaster or
other unanticipated  interruptions,  operational disruption or any other reason,
could cause  interruptions  in our  services.  Any damage or failure that causes
sustained  interruptions  in our operations could have a material adverse effect
on our business.

A breach of our  network  security  could  result in  liability  to us and deter
customers from using our services

         Our network may be vulnerable to unauthorized access,  computer viruses
and other  disruptive  problems.  Any of the foregoing  problems could result in
liability to us and deter customers from using our service.  Unauthorized access
could jeopardize the security of confidential information stored in the computer
systems of our customers.  Eliminating  computer  viruses and alleviating  other
security problems may require  interruptions,  delays or cessation of service to
our customers,  cause us to incur significant  costs to remedy the problem,  and
divert  management's  attention.  We can provide no assurance  that the security
measures we have  implemented  will not be  circumvented  or that any failure of
these measures will not have a material  adverse effect on our ability to obtain
and retain customers.  Any of these factors could have a material adverse effect
on our business and prospects.

We may not be able to obtain sufficient or cost-effective  termination  capacity
to particular destinations, causing us to lose customers and limit our growth.

         Most  of  our   telecommunications   traffic  is   terminated   through
third-party  providers.  In order to  support  our  minutes-of-use  demands  and
geographic expansion,  we may need to obtain additional  termination capacity or
destinations.  We may not be able to obtain sufficient termination capacity from
high-quality carriers to particular  destinations or may have to pay significant
amounts to obtain  such  capacity.  This  could  result in our not being able to
support our minutes-of-use  demands or in a higher cost-per-minute to particular
destinations, which could adversely affect our revenues and margins.

We are subject to acts of God, war, sabotage and terrorism risk.

         Acts of God, war,  sabotage and  terrorist  attacks or any similar risk
may affect our operations in unpredictable  ways,  including  disruptions of the
behavior of our customers,  changes in the insurance  markets and disruptions of
markets.  Acts of God,  war and risk of war also have an  adverse  effect on the
economy.  Instability in the financial  markets as a result of war,  sabotage or
terrorism  could  adversely  affect  our  ability to raise  capital,  as well as
adversely  affect the  industries  in which we do business  and  restrict  their
future growth.

                                       22
<page>

Risks Relating to Our Common Stock

Disappointing  quarterly  revenue or operating  results could cause the price of
our common stock to fall.

         Our quarterly  revenue and  operating  results are difficult to predict
and may  fluctuate  significantly  from  quarter to  quarter.  If our  quarterly
revenue  or  operating  results  fall below the  expectations  of  investors  or
security analysts,  the price of our common stock could fall substantially.  Our
quarterly  revenue and operating  results may fluctuate as a result of a variety
of factors, many of which are outside our control, including:

            o  the amount and timing of expenditures  relating to the rollout of
               our service offerings;

            o  our ability to obtain,  and the timing of,  necessary  regulatory
               approvals;

            o  the rate at which we are able to  attract  customers  within  our
               target  markets  and our  ability to retain  these  customers  at
               sufficient aggregate revenue levels;

            o  our ability to deploy our network on a timely basis;

            o  the availability of financing to continue our expansion;

            o  technical difficulties or network downtime;

            o  the timing of the implementation of additional points of presence
               for our IP services; and

            o  the   introduction   of  new  services  or  technologies  by  our
               competitors  and  resulting  pressures  on  the  pricing  of  our
               service.

We do not intend to pay dividends on our common stock in the foreseeable future,
which  could  cause the market  price of our common  stock and the value of your
investment to decline.

         We expect to retain  earnings,  if any,  to finance the  expansion  and
development of our business.  Our Board of Directors will decide whether to make
future cash dividend payments. Such decision will depend on, among other things,
the following factors:

            o  our earnings;

            o  our capital requirements;

            o  our operating condition;

            o  our financial condition; and

                                       23
<page>

            o  our compliance with various  financing  covenants to which we are
               or may become a party.  Our  agreement  with our  primary  lender
               currently precludes the payment of dividends.

The  market  for our  common  stock is  thinly  traded,  which  could  result in
fluctuations in the value of our common stock.

         Although there is a public market for our common stock,  the market for
our common stock is thinly traded.  The trading prices of our common stock could
be subject to wide  fluctuations in response to, among other events and factors,
the following:

            o  variations in our operating results;

            o  sales of a large number of shares by our existing shareholders;

            o  announcements by us or others;

            o  developments affecting us or our competitors; and

            o  extreme price and volume fluctuations in the stock market.

Our common  stock price is likely to be highly  volatile,  which could cause the
value of your investment to decline.

         The market price of our common stock is likely to be highly volatile as
the  stock  market  in  general,  and the  market  for  small  cap and micro cap
technology  companies  in  particular,  has been highly  volatile.  For example,
during  the last 12 months our common  stock has traded at prices  ranging  from
$0.16 to $0.50 per share.  Investors  may not be able to resell  their shares of
our common stock following periods of volatility because of the market's adverse
reaction to volatility. We cannot assure you that our common stock will trade at
the same  levels of our stocks in our  industry or that our  industry  stocks in
general will sustain their current market prices.  Factors that could cause such
volatility may include, among other things:

            o  actual or  anticipated  fluctuations  in our quarterly  operating
               results;

            o  large purchases or sales or our common stock;

            o  announcements of technological innovations;

            o  changes in financial estimates by securities analysts;

            o  investor perception of our business prospects;

            o  conditions or trends in the telecommunications industry;

            o  changes  in  the  market  valuations  of  other  industry-related
               companies;

                                       24
<page>

            o  the  acceptance of market makers and  institutional  investors of
               our business model and our common stock; and

            o  worldwide economic or financial conditions.

Effect of certain charter provisions could cause the value of your investment to
decline.

         Authority of Board of Directors to Issue Preferred  Stock.  Pursuant to
the terms of our charter,  our Board of Directors  has the authority to issue up
to  1,000,000  shares of  preferred  stock in one or more  series.  Our Board of
Directors may also  determine the prices,  rights,  preferences,  privileges and
restrictions,  including voting rights, of the shares within each series without
any  further  shareholder  vote or  action.  The  rights of the  holders  of our
preferred stock may adversely  affect the rights of the holders of common stock.
While  the  issuance  of  such  preferred   stock  could   facilitate   possible
acquisitions  and  other  corporate  activities,  it could  also  impede a third
party's ability to acquire control of our company.

         Limitation  of  Liability  of  Directors.  Pursuant to the terms of our
charter and to the extent New York law permits,  we and our shareholders may not
hold our  directors  personally  liable for  monetary  damages in the event of a
breach of fiduciary duty.

Provisions  of New York law may  discourage a takeover  attempt even if doing so
may be beneficial to our shareholders.

         Certain anti-takeover  provisions of New York law could delay or hinder
a change of control of our company.  While such provisions  generally facilitate
our  Board  of  Directors'  ability  to  maximize  shareholder  value,  they may
discourage takeovers that could be in the best interest of certain shareholders.
Such  provisions  could  adversely  affect the market  value of our stock in the
future.

We are exposed to potential risks from recent legislation requiring companies to
evaluate  internal  controls under Section 404 of the Sarbanes Oxley Act of 2002
which could adversely  affect our financial  results and cause or stock price to
decline.

         We are evaluating and documenting our internal controls systems so that
when we are required to do so, our management will be able to report on, and our
independent  auditors to attest to, our internal  controls,  as required by this
legislation. We will be performing the system and process evaluation and testing
(and any  necessary  remediation)  required  in an  effort  to  comply  with the
management  certification and auditor attestation requirements of Section 404 of
the Sarbanes Oxley Act. As a result, we expect to incur additional  expenses and
diversion  of  management's  time.  We have  reported  material  weaknesses  and
significant  deficiencies  in our  disclosure  controls and  procedures  and our
internal control over financial  reporting because of a deficiency in the number
of qualified personnel in our accounting  department.  While we anticipate being
able to rectify this weakness and to fully implement the  requirements  relating
to internal  controls and all other aspects of Section 404 in a timely  fashion,
we cannot be certain as to the timing of completion of our  evaluation,  testing
and remediation  actions or the impact of the same on our operations.  If we are
not able to implement the requirements of Section 404 in a timely manner or with
adequate  compliance,  we might be  subject to  sanctions  or  investigation  by
regulatory authorities, such as the Securities and Exchange Commission. Any such
action could  adversely  affect our financial  results and could cause our stock
price to decline.

Item 1B. Unresolved Staff Comments

                                       25
<page>

None.

Item 2. - Properties

         The following table sets forth  pertinent  facts  concerning our office
leases at February 15, 2006.


           Location              Use      Approximate Square Feet    Annual Rent
           --------              ---      -----------------------    -----------

    75 South Broadway           Office            4,000                $79,000
    White Plains, NY 10601

    118 Celebration Avenue      Office            2,000                $54,000
    Celebration, FL 34747

         The lease for our office space in White Plains, New York is a five-year
lease  that  began on  December  1, 2003 and our lease for our  office  space in
Celebration,  Florida is a three-year  lease that began on February 1, 2005.  We
also lease  colocation  space in two  locations  in Orlando  that are subject to
written  agreements  that are  renewable  each year.  We believe we will need to
lease  additional  office space of between  6,000 and 10,000 square feet to meet
our operating needs in fiscal 2007. We have been considering  leases in Orlando,
Florida with annual rentals between approximately $100,000 and $150,000.


Item 3. - Legal Proceedings

         We are  subject  to legal  proceedings  and  claims  that  arise in the
ordinary  course of  business.  In the  opinion  of  management,  the  amount of
ultimate  liability,  if any,  is not  likely to have a  material  effect on our
financial condition, results of operations or liquidity. However, as the outcome
of  litigation or legal claims is difficult to predict,  significant  changes in
exposures could occur.

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

         None.


                                       26
<page>

                                     PART II

Item 5. -  Market for Common Equity, Related Stockholder Matters and Issuer
           Purchases of Equity Securities

         Our  common  stock  currently  trades  on  The  OTC  Bulletin  Board(R)
("OTCBB")  under  the  symbol  ELEC.  The high and low  closing  price  for each
quarterly period of our last two fiscal years are listed below:

                                                  High              Low
                                                  ----              ---
              Fiscal 2005
              -----------
                       1st  Quarter              $0.74             $0.28
                       2nd Quarter                0.69              0.35
                       3rd Quarter                0.58              0.36
                       4th Quarter                0.53              0.35

              Fiscal 2006
              -----------
                       1st  Quarter              $0.48             $0.37
                       2nd Quarter                0.50              0.35
                       3rd Quarter                0.40              0.25
                       4th Quarter                0.27              0.17

         The  quotations  set  forth in the  table  above  reflect  inter-dealer
prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual  transactions.  As of February 15, 2007, there were 190 holders
of record of our common stock and approximately 3,000 beneficial holders.

         We have never paid  dividends  on our common stock and do not expect to
do so in the foreseeable future. Our loan agreements with Laurus do not allow us
to  directly  or  indirectly  declare  or pay any  dividends  so long as certain
amounts of our secured convertible term notes to Laurus remain outstanding.


                                       27
<page>

         The following  table provides  information as of November 30, 2006 with
respect  to  shares  of  our  common  stock  that  are  issuable   under  equity
compensation plans.

<table>
<caption>
                                                                                       Number of Securities
                                                                                      remaining available to
                                          Number of securities    Weighted-average     future issuance under
                                           to be issued upon     exercise price of      equity compensation
                                              exercise of           outstanding          plans (excluding
                                          outstanding options,   options, warrants    securities reflected in
                                          warrants and rights        and rights             column (a))
             Plan Category                        (a)                   (b)                     (c)
-------------------------------------------------------------------------------------------------------------

                                        <c>                     <c>                     <c>

Equity compensation plans approved
   by security holders:

   1995 Stock Option Plan(1)                          810,500                $0.28                         -
                                                                                                 -----------
   1996 Restricted Stock Plan(2)                            -                                        400,000
                                                  -----------                                    -----------

                               Subtotal               810,500                                        400,000
                                                  -----------                                    -----------

Equity compensation plans not
    approved by security holders:

    Employee stock options                          1,900,000                 0.24                         -
    2004 Equity Incentive Plan(3)                     708,000                 0.39                   292,000
    Laurus Master Fund, Ltd.(4)                     5,837,434                 0.20                         -
    Source Capital Group, Inc.(4)                   1,347,234                 0.36                         -
    Institutional Marketing Services,
     Inc. (5)                                         100,000                 0.63                         -
    Capital TT, LLC(6)                                150,000                 0.63                         -
                                                  -----------                                    -----------

                               Subtotal            10,042,668                                        292,000
                                                  -----------                                    -----------

                                  Total            10,853,168                                        692,000
                                                  ===========                                    ===========
</table>

---------------------------

(1)  Options are no longer issuable under our 1995 Stock Option Plan.

(2)  Our  Restricted  Stock Plan provides for the issuance of  restricted  share
     grants to officers and non-officer employees.

(3)  Our 2004 Equity  Incentive Plan allows for the granting of share options to
     members of our board of  directors,  officers,  non-officer  employees  and
     consultants.

(4)  Warrants  were issued in  conjunction  with  financings  provided by Laurus
     Master Fund, Ltd.

(5)  Warrants were granted for investor relation services.

(6)  Warrants were issued for consulting services.


                                       28
<page>

Item 6. - Selected Financial Data

         The following  selected  financial  information has been taken from our
consolidated  financial  statements.  The  information set forth below should be
read in  conjunction  with  "Management's  Discussion  and Analysis of Financial
Condition and Results of  Operations"  and the financial  statements and related
notes included elsewhere in this Report.

<table>
<caption>
                                                         Fiscal Years Ended November 30,
(In thousands, except per share amounts)
                                             2006        2005        2004        2003        2002
                                             ----        ----        ----        ----        ----

                                           <c>         <c>         <c>         <c>         <c>
Selected Income Statement Data
Net Sales                                  $  8,357    $ 15,881    $  9,558    $  5,568    $ 14,242
Gross Profit                                  3,227       7,279       4,820       2,802       5,266
Earnings (Loss)                              (2,345)     (2,266)        170       8,323      (3,319)
Earnings (Loss) per Common Share:
     Basic                                    (0.14)      (0.14)       0.01        0.53       (0.21)
     Diluted                                  (0.14)      (0.14)       0.01        0.53       (0.21)
Cash Dividends                                   --          --          --          --          --

Selected Balance Sheet Data
Working Capital Deficiency                 $ (5,087)   $   (974)   $ (1,939)   $ (1,938)   $(11,214)
Property, Plant and Equipment                   903         594         192          25       1,827
Total Assets                                  4,188       4,385       1,904       1,637       4,885
Long-Term Debt (Less Current Maturities)        215       2,722          --          --       1,145
Stockholders' Equity Deficiency              (4,249)     (2,364)     (1,696)     (1,864)    (10,162)

</table>


                                       29
<page>

Item 7. - Management's Discussion and Analysis of Financial Condition and
          Results of Operation

         Certain  statements  set forth  below  under  this  caption  constitute
"forward-looking  statements"  within  the  meaning  of the  Private  Securities
Litigation  Reform  Act of  1995.  Please  refer  to page 1 of this  Report  for
additional factors relating to such statements.

Overview

         We have operated as a telephone  service  provider since 1998. We built
our telephony  business by leasing lines from incumbent local exchange  carriers
and reselling their services, while maintaining the vision of becoming a carrier
that provides voice services over the Internet. We have succeeded in our efforts
to transition to a facilities-based  broadband voice provider,  and we currently
offer  telephony  services  over the  Internet or over a wireline.  We offer our
Internet  services  throughout the United States and in many foreign  countries,
whereas our wireline  services  are offered only in the States of  Pennsylvania,
New Jersey and New York. Our IP technology enables voice communications over the
Internet through the conversion of voice signals into data packets.  In order to
use our  broadband  voice  service,  customers  must have access to a high-speed
Internet  connection.  We believe  broadband voice services utilize a technology
that is so invasive,  that we have entered into a definitive  purchase agreement
to sell our wireline business.

         The roll-out of our  broadband  voice  product has taken  significantly
longer than we anticipated.  A key reason for the delay was the extensive effort
required for us to become a customized  wholesale service  provider.  Because of
the intense  competition on the retail level and the high  marketing  costs that
broadband voice providers have incurred to acquire a subscriber, we decided that
we should not compete in the retail  arena.  Our goal is to obtain 500 customers
that will  private  label and  resell  our  broadband  voice  services  to their
customer base. We target cable  operators  that already are providing  broadband
Internet services, Internet service providers, WiFi and fixed wireless broadband
providers,  data integrators,  value-added  resellers,  and satellite  broadband
providers.  We anticipate that our wholesale customers will be able to obtain an
average of at least 1,000 broadband voice end-users. We believe our approach, in
which we are seeking 500 customers that we will manage,  and a total of at least
500,000 end users,  which our  customers  will manage,  will provide us with the
quickest  and  least  expensive  way of  leveraging  our  technology.  Under our
approach,  we will avoid the  expensive  customer  acquisition  costs that other
broadband  voice  carriers  are  experiencing  as they  try to find a  broadband
end-user to try their product.  Instead of us incurring this cost, our customer,
who  should  be able to incur a  reduced  marketing  expense  because  it has an
imbedded customer base already buying broadband  service,  incurs it. We believe
we can empower small and  medium-sized  broadband  providers with the ability to
take customers away from the traditional telephone companies.

         Through February 15, 2007, we have signed  agreements with 59 wholesale
customers.  We categorize  them as 22 resellers,  14 agents,  seven CLECs,  five
cable operators,  four ISPs, four data integrators and three ASPs. The resellers
include  other  broadband  voice  carriers  that use our platform and the agents
include  CompUSA,  which is selling our product in its stores in Puerto Rico. We
do not  anticipate  large  volumes  of  traffic  from the  CLECs,  at least  not
initially,  because  they are the least  likely to market  our  product to their
existing customer bases. If a CLEC sells broadband voice services to an existing
telephone  customer,  it will reduce the sales dollars and gross margin  dollars
that its existing  customer is generating.  We find that CLECs try to market the
broadband voice services to end-users who are not existing  customers,  and thus
they incur significantly  higher marketing costs,  similar to the way Vonage has
to incur these  costs,  in order to sign up a new  subscriber  that had no prior
relationship with the company.  In general, we anticipate that our customers who
are cable  operators,  resellers and ISPs

                                       30
<page>

will be more  successful  in  generating  sales of our  broadband  voice product
without overspending to complete the sale.

         Some of our wholesale  accounts  experience  delays before they develop
and execute their  marketing  plans. We provide the technology and the technical
assistance  they  need to offer a  broadband  voice  product.  We also give them
suggested marketing  information and customer service training to encourage them
to begin selling the broadband voice product immediately,  but we cannot control
the marketing  budget,  the  personnel  resources or the timing of the launch of
their broadband  voice  services.  As of February 15, 2007, we have billed 31 of
our 59 accounts.  28 accounts had not yet turned up our service.  We  anticipate
that some of our wholesale  customers will never  actually sell our service.  We
are optimistic  that our broadband  voice services are beginning to generate the
rapid sales  growth we have been  anticipating,  as we have one account  that is
sending  us orders  for  approximately  20 new  lines a day and we have  similar
accounts testing our services. We have completed a successful trial agreement in
which a restaurant chain with 11,000 locations used our broadband voice service,
and we are  negotiating  to add  them  as a  customer.  We are  also  attracting
customers  who do not  require an ATA,  but are using our  services  for minutes
only, which we can provide at competitive rates for certain routes. Furthermore,
we recently  secured a wholesale  customer who sells broadband over power lines.

Revenues

         Revenues consist of telephony  services revenue and customer  equipment
revenue.

         Telephony services revenue. Substantially all of our operating revenues
are telephony services revenue. We offer several bundled plans,  unlimited plans
and basic plans for  residential and business  customers.  Each of our unlimited
plans offers unlimited domestic calling,  subject to certain  restrictions,  and
each of our basic plans  offers a limited  number of calling  minutes per month.
Under  our basic  plans,  we charge on a per  minute  basis  when the  number of
calling minutes included in the plan is exceeded for a particular month. For all
of our U.S.  plans, we charge on a per minute basis for  international  calls to
destinations  other than  Canada.  These per minute fees are not included in our
monthly  subscription  fees.  Any plan we offer to individual  end-users is also
available to our wholesale customers at a reduced rate.

         We  derive  most  of  our  telephony   services  revenue  from  monthly
subscription fees we charge our customers under our service plans. We also offer
a fax service over broadband, virtual phone numbers, toll free numbers and other
services,  for  each of  which we may  charge  an  additional  monthly  fee.  We
automatically  charge service fees monthly in advance to the credit cards of all
of our broadband voice retail  customers and  approximately  10% of our wireline
customers.  We  automatically  charge the per minute  fees not  included  in our
monthly  subscription  fees to our  customers'  credit cards  monthly in arrears
unless they exceed a certain  dollar  threshold,  in which case they are charged
immediately.

         By collecting  monthly  subscription  fees in advance and certain other
charges immediately after they are incurred, we are able to reduce the amount of
accounts  receivable  we have  outstanding,  which  lowers our  working  capital
requirements.  Collecting fees and charges in this manner also helps us mitigate
bad debt  exposure and is one of the  industry-accepted  practices for broadband
voice services. Approximately 90% of our leased wireline customers do not pay by
credit  card and are  mailed an  invoice  that is due  within  25 days.  We have
experienced  growth periods with significant bad debts from wireline  customers.
We do not anticipate the same level of bad debt exposure in our broadband  voice
service offerings,  as our wholesale customers are required to place a one-month
deposit  and our retail  customers  are  required  to pay by credit  card.  If a
customer's credit card is declined,  we generally suspend  international calling
capabilities  as well as the customer's  ability to incur domestic usage charges
in excess  of its plan  minutes.  Historically,  in most  cases,  we are able to
correct the problem with the

                                       31
<page>

customer within the current  monthly billing cycle. If a customer's  credit card
cannot be  successfully  processed  during the current month's billing cycle, we
generally terminate the account.

         We also  generate  revenue by  charging a fee for  activating  service.
Further,  we generally  charge a disconnect  fee to customers  who do not return
their ATA to us upon  termination  of  service,  if the  length of time  between
activation and  termination is less than one year.  Disconnect fees are recorded
as revenue and are recognized at the time the customer terminates service. These
revenues were nominal in fiscal 2006.

         Telephony  services  revenue is offset by the cost of certain  customer
acquisition activities, such as rebates and promotions.

         Customer  equipment  revenue.  Customer  equipment  revenue consists of
revenue  from sales of  customer  equipment  to our  wholesalers  or directly to
customers.  In addition,  customer equipment revenue includes the fees we charge
our customers for shipping any equipment to them. These revenues were nominal in
fiscal 2006.

Cost of Revenues

         Direct cost of telephony  services.  Direct cost of telephony  services
primarily  consists of fees that we pay to third  parties on an ongoing basis in
order to provide our services. These fees include:

         o Usage charges and line and port costs from reselling wireline service
of incumbent carriers.

         o Access  charges  we pay to other  telephone  companies  to  terminate
broadband voice calls on the public switched telephone network ("PSTN").  When a
VoX subscriber calls another VoX subscriber,  we do not pay an access charge, as
the call routes through our network without touching the PSTN.

         o The cost of leasing interconnections to route calls over the Internet
and transfer  calls  between the Internet and the PSTN of various long  distance
carriers.

         o The cost of leasing  from other  telephone  companies  the  telephone
numbers we provide  to our  customers.  We lease  these  telephone  numbers on a
monthly basis.

         o The cost of co-locating our connection point equipment in third-party
facilities owned by other telephone companies.

         o  The  cost  of  providing  local  number  portability,  which  allows
customers to move their existing  telephone numbers from another provider to our
service.  Only  regulated   telecommunications  providers  have  access  to  the
centralized number databases that facilitate this process.  Because VoX is not a
regulated  telecommunications  provider,  we must pay  other  telecommunications
providers to process our local number portability requests.

         o The  cost  of  complying  with  the  new  FCC  regulations  regarding
emergency  services,  which  require us to provide  enhanced  emergency  dialing
capabilities  to  transmit  911  calls for all of our  customers.  This cost may
increase in future periods.

         o Taxes we pay on our purchases of telecommunications services from our
suppliers.

                                       32
<page>

         Direct cost of customer  equipment and  shipping.  Direct cost of goods
sold primarily  consists of costs we incur when a customer  first  subscribes to
our service. These costs include:

         o The cost of the  equipment we provide to customers  who  subscribe to
our  service  through  our  direct  sales  channel,  in each  case in  excess of
activation fees.

         o The cost of shipping and handling  for customer  equipment,  together
with the installation manual, we ship to customers.

Results of Operations

Fiscal Year 2006 Compared to Fiscal Year 2005

         Our revenues for fiscal 2006 decreased by approximately  $7,524,000, or
approximately  47%, to  approximately  $8,357,000  as compared to  approximately
$15,881,000  reported  for fiscal  2005.  The  decrease in revenues was directly
related to the cessation of our marketing program for new wireline customers, as
we did not have new wireline  customers to replace the normal  monthly  churn of
our existing  wireline  customers.  In conjunction with our decision to become a
wholesale  broadband  voice  provider,  almost all of our marketing  efforts are
focused on attracting  broadband voice customers.  We anticipate we will be able
to sell our wireline business, as planned, in April 2007. Thereafter, all of our
revenue will come from IP telephony  services.  As noted above, we are beginning
to  experience  more rapid  month-to-month  sales growth in this area. We do not
control, however, the marketing dollars of our wholesale customers or the timing
of their marketing efforts.  Consequently, we are unable to model or predict the
future sales growth in our broadband telephony business.

         Our gross profit for fiscal 2006 decreased by approximately  $4,052,000
to approximately  $3,227,000 from  approximately  $7,279,000  reported in fiscal
2005, while our gross profit  percentage of 38.6% in fiscal 2006, as compared to
45.8% in fiscal 2005,  decreased by 7.2 percentage  points  primarily due to the
higher fees we were charged for leasing  lines and ports from  Verizon  Services
Corp. ("Verizon"). The decrease in our dollars of gross profit resulted from the
decrease in our customer base in fiscal 2006 over fiscal 2005.  Our gross profit
percentage  of  approximately  38.6%  included  fixed  network  costs for our IP
telephony  network that we were not able to recover based upon the limited sales
dollars we achieved  for  broadband  voice  services in fiscal  2006.  If we are
successful in selling our wireline  business in fiscal 2007, we anticipate  that
our gross  margins  will be  significantly  lower  because we employ a wholesale
model for our broadband voice business. As a wholesaler,  we will not be able to
enjoy  the same  mark-up  that a  retail  seller  can  achieve.  However,  on an
operating  basis,  the lower  margin  should be  offset by  significantly  lower
customer service and customer acquisition costs.

         Selling,  general and  administrative  expenses  ("SG&A")  decreased by
approximately  $1,079,000,  or approximately 18.4%, to approximately  $4,794,000
for fiscal 2006 from approximately  $5,873,000 reported in the prior year fiscal
period.  Of this  decrease,  approximately  $935,000 was for marketing  expense,
approximately  $339,000 was for billing  costs,  offset by  increased  personnel
costs of  approximately  $117,000.  Bad debt expense  decreased by approximately
$3,440,000,  or approximately 95%, to approximately $172,000 in fiscal 2006 from
approximately $3,612,000 in fiscal 2005. From January 2005 until mid-April 2005,
our CLECs  attracted an unusually high number of residential  consumers that did
not pay our invoices,  and for which we subsequently  terminated services,  even
though such customers had qualifying  credit scores. We discontinued most of our
marketing  efforts  for  new  CLEC  customers  and  concentrated  on  attracting
broadband  voice  customers in fiscal 2006. With our existing CLEC customer base
and with our broadband voice customers,  we anticipate minimal bad debt expense,
as our CLEC customers are an embedded  customer base that has historically  paid
its bills, and

                                       33
<page>

our broadband voice customers are primarily wholesale accounts, which are credit
checked and required to pay us a deposit for future services.

         Depreciation  and  amortization   expense  increased  by  approximately
$351,000 to approximately  $547,000 for fiscal 2006 as compared to approximately
$196,000 for the prior fiscal year.  Approximately  $241,000 of the increase was
for deferred  financing  costs related to the Laurus  financings we completed in
November 2005 and May 2006 (See Note 8) and approximately $102,000 related to an
increase in depreciation of our IP platform.

         Interest expense  increased by approximately  $474,000 to approximately
$1,156,000  for the year ended  November  30, 2006 as compared to  approximately
$682,000  for  the  prior  fiscal  year,  primarily  as a  result  of  increased
borrowings under our financing agreements (See Note 8).

         Other  income  amounted to  approximately  $108,000  for the year ended
November  30, 2006 as compared to $66,000  for the prior  fiscal  year.  In both
years,  other income resulted primarily from commission income. For fiscal 2006,
other  income  also  included  approximately  $36,000  for  the  reduction  of a
liability previously accrued and $13,000 of miscellaneous refunds.

         For  the  year  ended   November  30,  2006,  we  recorded   income  of
approximately  $990,000, an increase of approximately  $813,000 over fiscal 2005
amounts of approximately $177,000,  which resulted from the change in the market
value of the warrants issued to Laurus as part of the Laurus financing (See Note
8).  The  increase  in  income in  fiscal  2006 was a direct  result of a larger
decrease in the market value of our common  stock at the end of fiscal 2006,  as
compared to the decrease in fiscal 2005.

         For the fiscal year ended  November 30, 2005, we recorded a gain on the
sale of investment  securities and other investments of approximately  $378,000.
No gains were  recorded in fiscal 2006.  In fiscal 2005,  the gain resulted from
the sale of shares of Cordia  Corporation  of  approximately  $160,000  and Talk
America Holding, Inc. warrants of approximately $218,000.

         In fiscal 2005,  we reversed  liabilities  related to our  discontinued
luggage business in the amount of approximately $198,000. No such adjustment was
made in fiscal 2006.


Fiscal Year 2005 Compared to Fiscal Year 2004

         Our revenues for fiscal 2005 increased by approximately  $6,323,000, or
approximately  66%, to  approximately  $15,881,000 as compared to  approximately
$9,558,000 reported for fiscal 2004. The growth in revenues was directly related
to the  increased  number of leased local access lines we served in fiscal 2005.
The bulk of our  marketing  dollars in fiscal 2005 were expended to generate new
customers for our wireline telephony business.

         Our gross profit for fiscal 2005 increased by approximately  $2,459,000
to approximately  $7,279,000 from  approximately  $4,820,000  reported in fiscal
2004, while our gross profit  percentage of 45.8% in fiscal 2005, as compared to
50.4% in fiscal 2004,  decreased by 4.6 percentage  points  primarily due to the
higher  fees we were  charged  for  leasing  lines and ports from  Verizon.  The
increase  in our  dollars of gross  profit  resulted  from the  increase  in our
customer  base in fiscal 2005 over fiscal 2004.  Our gross profit  percentage of
approximately 45.8% reflected our sales strategy of selling only in those states
in which we believe we will be able to achieve a gross margin of over 40%.

                                       34
<page>

         SG&A increased by approximately  $1,474,000, or approximately 33.5%, to
approximately  $5,873,000 for fiscal 2005 from approximately $4,399,000 reported
in the prior year fiscal period.  Of this increase,  approximately  $816,000 was
for increased  personnel costs, of which  approximately  $403,000 was related to
VoX,  approximately  $230,000 was for billing costs,  approximately $144,000 was
for  non-employee  option  costs and  approximately  $187,000  was for other VoX
operating costs.  Bad debt expense  increased by  approximately  $2,563,000,  or
approximately   244%,  to   approximately   $3,613,000   for  fiscal  2005  from
approximately  $1,049,000 reported in the prior year fiscal period. From January
2005 until  mid-April  2005,  our CLECs  attracted an  unusually  high number of
residential   consumers  that  did  not  pay  our  invoices  and  for  which  we
subsequently  terminated  services,  even though such  customers had  qualifying
credit scores.

         Depreciation  and  amortization   expense  increased  by  approximately
$182,000 to approximately  $196,000 for fiscal 2005 as compared to approximately
$14,000 for the prior  fiscal year.  Approximately  $143,000 of the increase was
for deferred  financing  costs  related to the Laurus  financing we completed in
February 2005 (See Note 8) and approximately $40,000 related to our IP telephony
platform.

         Interest expense  increased by approximately  $679,000 to approximately
$682,000  for the year ended  November  30, 2005 as  compared  to  approximately
$3,000 for the prior fiscal year, as a result of increased  borrowings under our
financing agreements (See Note 8).

         Other  income  amounted  to  approximately  $66,000  for the year ended
November 30, 2005 as compared to $46,000 for the prior  fiscal year.  For fiscal
2005, other income of approximately  $66,000 resulted  primarily from commission
income.  For  fiscal  2004,  other  income  of  approximately  $46,000  resulted
primarily from commission income of approximately  $91,000,  which was partially
offset by approximately  $45,000 in additional costs associated with the sale of
our headquarters building in the fourth quarter of fiscal 2003.

         For  the  year  ended   November  30,  2005,  we  recorded   income  of
approximately  $177,000,  which  resulted from the change in the market value of
the warrants  issued to Laurus as part of the Laurus  financing (See Note 8). No
such income was recorded in fiscal 2004.

         For the fiscal years ended November 30, 2005 and 2004, we recorded gain
on the sale of investment  securities  and other  investments  of  approximately
$378,000 and $1,000,  respectively.  In fiscal 2005,  the gain resulted from the
sale of shares of Cordia Corporation of approximately  $160,000 and Talk America
Holding, Inc. warrants of approximately $218,000.

         In fiscal  2005 we  reversed  liabilities  related to our  discontinued
luggage business in the amount of approximately $198,000. No such adjustment was
made in fiscal 2004.

         For the fiscal  year ended  November  30,  2004,  we reported a gain on
settlement with creditors of approximately $904,000, which was offset in part by
approximately  $161,000 in  professional  fees. No such gain was recorded in the
fiscal year ended November 30, 2005 (See Note 10).

         For the fiscal year ended  November 30, 2004, we recorded a tax benefit
of $26,000 that resulted from the reduction of an estimated accrual of corporate
tax expense for fiscal  2003.  No such  benefit was  recorded in the fiscal year
ended November 30, 2005.


Liquidity and Capital Resources

                                       35
<page>

         At November 30, 2006, we had cash and cash equivalents of approximately
$1,338,000 and negative working capital of approximately  $5,087,000  (including
deferred  finance  costs in  current  assets  of  approximately  $1,013,000)  as
compared to cash and cash  equivalents  of  approximately  $206,000 and negative
working capital of approximately $974,000 at November 30, 2005.

         Net  cash  used  in  operating  activities   aggregated   approximately
$1,511,000  $1,741,000 and $80,000 in fiscal 2006, 2005 and 2004,  respectively.
The principal use of cash from operating  activities in fiscal 2006 and 2005 was
the loss for the year of approximately $2,345,000 and $2,266,000,  respectively.
The  principal  use of cash from  operating  activities  in fiscal  2004 was the
increase in accounts receivable of approximately $1,590,000, which was offset by
a  non-cash  item,  an  increase  in the  provision  for  doubtful  accounts  of
approximately $1,049,000.

         Net  cash  used  in  investing  activities   aggregated   approximately
$263,000, $12,000 and $186,000 in fiscal 2006, 2005 and 2004, respectively.  The
principal use of cash from investing  activities in fiscal 2006 was the purchase
of property and equipment of approximately  $259,000.  The principal use of cash
from investing  activities in fiscal 2005 was the net proceeds of  approximately
$385,000  received from sale of  investment  securities  and other  investments,
which was offset by the  purchase of property  and  equipment  of  approximately
$390,000. The principal use of cash from investing activities in fiscal 2004 was
the purchase of property and equipment of approximately $182,000.

         Net  cash  provided  by  (used  in)  financing  activities   aggregated
approximately  $2,905,000,  $1,587,000  and  ($31,000) in fiscal 2006,  2005 and
2004,  respectively.  The principal source of cash from financing  activities in
fiscal 2006 was the proceeds  from a private  equity  placement,  net of fees of
$490,000 and net proceeds from secured term notes of  approximately  $3,379,000.
These  amounts  were  partially   offset  by  repayment  of  loan  principal  of
approximately  $593,000.  The principal source of cash from financing activities
in fiscal 2005 was the net proceeds from short-term  borrowings of approximately
$274,000  and net  proceeds  from a secured  convertible  note of  approximately
$1,744,000.  In fiscal 2004, net cash used in financing activities resulted from
the repayment of debt.

         In fiscal 2006 and 2005, we spent  approximately  $472,000 and $390,000
on capital expenditures,  primarily for software, servers and routers related to
our IP network. We intend to continue additional software  development in fiscal
2007. We believe we also will make capital  expenditures for our IP platform and
that capital  additions will be flexible  depending upon the number of customers
that we are able to attract to our network.

         We did not make the  principal  payments  to  Laurus  in the  aggregate
amount of approximately $93,000 that were due on October 1, 2006 under the terms
of our  promissory  notes  payable  to  Laurus.  Laurus  issued us a waiver  for
non-payment  and changed the due date of the $93,000 to the final  maturity date
of the notes. We have not made any principal payments to Laurus that were due on
and after  December 1, 2006.  We have  negotiated  a principal  deferral of nine
months for one of our notes and we anticipate  paying off another note to Laurus
if we close on the purchase agreement we signed on December 14, 2006 to sell our
CLEC subsidiaries.  We have not executed a signed document with Laurus regarding
this deferral.  We are also in default with Laurus for other items, such as late
payment of taxes. We plan to remedy the defaults in conjunction with the sale of
our CLEC  subsidiaries.  Because of the default on the Laurus debt, the debt can
be called  immediately and the entire amount including the warrant liability has
been classified as a current liability. We would not be able to make payments to
Laurus if they called our debt to them.

         The report of our  independent  registered  accounting firm on our 2006
financial  statements  indicates there is substantial doubt about our ability to
continue as a going concern. We have sustained

                                       36
<page>

net losses from  operations  during the last three  years,  as we have worked to
build  our  customer  base  since  the sale of almost  all of our  customers  on
December 31, 2002, and subsequently worked to build the software and back-office
systems required to provide broadband telephony  services.  Our operating losses
have been  funded  through the sale of  non-operating  assets,  the  issuance of
equity  securities  and  borrowings.  We believe  that we will need to make some
capital  changes  to our  business,  including  the  potential  sale of our CLEC
subsidiaries  and the  injection  of money from  individual  investors  into our
company,  in order to have the  resources  required  to finance  our  operations
through the next  twelve  months.  We  continually  evaluate  our cash needs and
growth  opportunities  and we  believe  we  require  additional  equity  or debt
financing in order to achieve our overall business  objectives.  There can be no
assurance  that such financing  will be available,  or, if available,  that such
financing  will be at a price that will be acceptable to us. Failure to generate
sufficient  revenues,  raise additional capital, or renegotiate payment terms of
our debt would have an adverse impact on our ability to achieve our  longer-term
business  objectives,  and  would  adversely  affect  our  ability  to  continue
operating as a going concern.


New Accounting Standards

         The  new  accounting  pronouncements  in  Note  1 to  our  consolidated
financial   statements,   which  are  included  in  this   Report,   are  herein
incorporated.

Critical Accounting Policies and Estimates

         The  preparation of financial  statements in conformity  with generally
accepted accounting principles ("GAAP") in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets,  liabilities and disclosures of contingent assets and liabilities at the
date of the financial  statements and reported  amounts of revenues and expenses
during the reporting period. The most significant estimates include:

            *  revenue   recognition  and  estimating   allowance  for  doubtful
               accounts;
            *  valuation of long-lived assets;
            *  income tax valuation allowance; and
            *  valuation of debt discount.

         We continually  evaluate our  accounting  policies and the estimates we
use to prepare our consolidated financial statements.  In general, the estimates
are  based  on  historical   experience,   on   information   from  third  party
professionals  and on various other sources and assumptions that are believed to
be reasonable  under the facts and  circumstances at the time such estimates are
made. Management considers an accounting estimate to be critical if:

            *  it requires  assumptions  to be made that were  uncertain  at the
               time the estimate was made; and
            *  changes  in the  estimate,  or the  use of  different  estimating
               methods, could have a material impact on our consolidated results
               of operations or financial condition.

         Actual   results  could  differ  from  those   estimates.   Significant
accounting  policies  are  described  in  Note 1 to our  consolidated  financial
statements,  which are included in this Report.  In many cases,  the  accounting
treatment of a particular  transaction is specifically  dictated by GAAP.  There
are  also  areas in which  management's  judgment  in  selecting  any  available
alternative would not produce a materially different result.

                                       37
<page>

         Certain  of our  accounting  policies  are deemed  "critical",  as they
require management's highest degree of judgment,  estimates and assumptions. The
following  critical  accounting  policies are not intended to be a comprehensive
list of all of our accounting policies or estimates:

Revenue Recognition

         We apply the  provisions  of Staff  Accounting  Bulletins  relating  to
revenue recognition. We recognize revenue from telecommunication services in the
period that the service is  provided.  We  estimate  amounts  earned for carrier
interconnection and access fees based on usage.

Allowance for Doubtful Accounts

         We maintain  allowances for doubtful accounts for estimated losses that
result from the  inability or  unwillingness  of our  customers to make required
payments.  We base our  allowances  on our  determination  of the  likelihood of
recoverability of trade accounts receivable based on past experience and current
collection trends that are expected to continue. In addition, we perform ongoing
credit  evaluations  of our  significant  customers  and we require  most of our
wholesale  customers to post a deposit,  typically an amount  between $2,500 and
$5,000, which may be refunded after several months of prompt payments.

Impairment of Long-Lived Assets

         We  follow  the  provisions  of  SFAS  No.  144,  "Accounting  for  the
Impairment  or Disposal of  Long-Lived  Assets."  This  statement  requires that
certain assets be reviewed for impairment  and, if impaired,  remeasured at fair
value  whenever  events or changes in  circumstances  indicate that the carrying
amount  of the asset  may not be  recoverable.  Impairment  loss  estimates  are
primarily based upon  management's  analysis and review of the carrying value of
long-lived assets at each balance sheet date,  utilizing an undiscounted  future
cash flow  calculation.  During fiscal years 2006, 2005 and 2004,  there were no
impairment losses.

Income Taxes

         We estimate the degree to which tax assets and loss  carryforwards will
result in a benefit  based on  expected  profitability  by tax  jurisdiction.  A
valuation  allowance for such tax assets and loss carryforwards is provided when
it is  determined  that such assets  will more likely than not go unused.  If it
becomes more likely than not that a tax asset or loss carryforward will be used,
the related  valuation  allowance on such assets is reversed.  If actual  future
taxable income by tax jurisdiction varies from estimates,  additional allowances
or reversals of reserves may be necessary.

Item 7A. - Quantitative and Qualitative Disclosure About Market Risk

         Our debt is  primarily  under  three  borrowing  arrangements  with one
lender  and such  borrowings  are at a base rate of 2% over the prime  rate.  We
currently do not use interest rate derivative instruments to manage our exposure
to interest  rate  changes.  As a result of warrants and lender  discounts,  the
effective  rate of  interest  on our  lender  agreements  as  modified  has been
calculated at rates of approximately 38% on our February 2005 financing,  47% on
our November  2005  financing  and 185% on the $650,000  portion of our May 2006
financing.

Item 8. - Financial Statements and Supplementary Data

         The  following  consolidated   financial  statements,   notes  thereto,
supplemental  schedule,  and the  report of the  independent  registered  public
accounting firm contained on page F-1 to our consolidated  financial  statements
are herein incorporated:

   Report of the independent registered public accounting firm

   Consolidated balance sheets - November 30, 2006 and 2005

   Consolidated  statements of operations - Years ended November 30, 2006,  2005
   and 2004

   Consolidated  statements  of  stockholders'  equity  deficiency - Years ended
   November 30, 2006, 2005 and 2004

   Consolidated  statements of cash flows - Years ended November 30, 2006,  2005
   and 2004

   Notes to consolidated  financial  statements - Years ended November 30, 2006,
   2005 and 2004

   Schedule II, Valuation and Qualifying Accounts

   All other  schedules  have been omitted as not required or not  applicable or
   because  the  information  required  to  be  presented  is  included  in  the
   consolidated  financial  statements and related notes. For more  information,
   see Part IV, Item 15, Exhibits, below.

                                       38
<page>

Item 9. - Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure

         None.

Item 9A. Controls and Procedures.

         (a)  Disclosure  Controls  and  Procedures.  Our  management,  with the
participation  of our  chief  executive  officer/chief  financial  officer,  has
evaluated the  effectiveness of our disclosure  controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e)  under the Securities  Exchange
Act of 1934,  as  amended  (the  "Exchange  Act"))  as of the end of the  period
covered  by  this  Report.  Based  on  such  evaluation,   our  chief  executive
officer/chief  financial  officer  has  concluded  that,  as of the  end of such
period, for the reasons set forth below, our disclosure  controls and procedures
were not effective.  We are presently  taking the necessary steps to improve the
effectiveness of such disclosure controls and procedures.

         (b) Internal Control Over Financial Reporting.  There have not been any
changes  in our  internal  control  over  financial  reporting  (as such term is
defined in Rules  13a-15(f)  and  15d-15(f)  under the Exchange  Act) during the
fourth quarter of 2006 that have materially  affected,  or are reasonably likely
to  materially  affect,  our  internal  control  over  financial  reporting.  In
connection  with our year-end  November 30, 2006 audit,  our  management  became
aware of an inadequately  designed  accounting  system as it pertains to our VoX
subsidiary.  We expect to address  this  issue in the  second  quarter of fiscal
2007.  As reported in fiscal  2005,  we also have a lack of staffing  within our
accounting department, both in terms of the small number of employees performing
our financial and  accounting  functions and their lack of experience to account
for complex financial  transactions.  This lack of staffing continued throughout
fiscal 2006 and at the time this report is issued.  Management believes the lack
of qualified  personnel,  in the aggregate and the inadequate  accounting system
for VoX amounts to a material  weakness in our internal  control over  financial
reporting.  We will  continue to evaluate the  employees  involved,  the need to
engage outside  consultants with technical and accounting  related  expertise to
assist us in accounting  for complex  financial  transactions  and the hiring of
additional accounting staff with complex financing experience.

                                       39
<page>

         We are also  evaluating our internal  controls  systems so that when we
are  required  to do so,  our  management  will be able to  report  on,  and our
independent auditors to attest to, our internal controls, as required by Section
404 of the  Sarbanes-Oxley  Act of 2002.  We will be  performing  the system and
process  evaluation and testing (and any necessary  remediation)  required in an
effort to comply  with the  management  certification  and  auditor  attestation
requirements  of Section 404 of the  Sarbanes-Oxley  Act. In connection with our
year-end  November 30, 2006 and 2005 audits,  we have  identified  the following
control  deficiencies  and issues  with our  internal  controls  over  financial
reporting that we believe amount in the aggregate to a significant deficiency in
our internal controls over financial reporting:


                  Due to the voluminous  nature of state and local telecom taxes
         and the small quantity of taxes payable to certain  municipalities,  we
         do not remit all our telecom  taxes in a timely  manner.  Certain taxes
         that we should be remitting on a monthly basis,  we remit  quarterly or
         semi-annually  because  many  of the  checks  and  returns  that we are
         processing  are  for  insignificant  amounts.  We are  aware  of  other
         telephone  companies  that follow this process.  We continue to monitor
         the responses,  if any, we receive from the tax  authorities  regarding
         late  filings  and we intend to remit such taxes in a timely  manner in
         the future.

                  Due to the complex nature and changing  regulations  regarding
         telecom  taxes,  we do not always  calculate and remit the  appropriate
         amount of taxes due. We are challenging taxes that one state claims are
         owed to them.  At least some of the taxes are due  because of  improper
         calculation of taxes that should have been billed to and collected from
         our wireline telephone customers in one particular state.




Item 9B. Other Information

None.


                                       40
<page>

                                    PART III

Item 10. - Directors, Executive Officers and Corporate Governance.

         The  information  required  by  this  Item  will  be  contained  in the
Company's Proxy  Statement for its Annual  Stockholders  Meeting,  which will be
filed with the Securities and Exchange Commission,  is incorporated by reference
herein.

Item 11. - Executive Compensation.

         The  information  required  by  this  Item  will  be  contained  in the
Company's Proxy  Statement for its Annual  Stockholders  Meeting,  which will be
filed with the Securities and Exchange Commission,  is incorporated by reference
herein.

Item 12. - Security  Ownership of Certain  Beneficial  Owners and Management and
Related Stockholder Matters.

         The  information  required  by  this  Item  will  be  contained  in the
Company's Proxy  Statement for its Annual  Stockholders  Meeting,  which will be
filed with the Securities and Exchange Commission,  is incorporated by reference
herein.


Item  13.  -  Certain  Relationships  and  Related  Transactions,  and  Director
Independence.

         The  information  required  by  this  Item  will  be  contained  in the
Company's Proxy  Statement for its Annual  Stockholders  Meeting,  which will be
filed with the Securities and Exchange Commission,  is incorporated by reference
herein.

Item 14.  Principal Accounting Fees and Services.

         The  information  required  by  this  Item  will  be  contained  in the
Company's Proxy  Statement for its Annual  Stockholders  Meeting,  which will be
filed with the Securities and Exchange Commission,  is incorporated by reference
herein.

                                     PART IV

Item 15. - Exhibits  and Financial Statement Schedules.

         (a)(1)  Financial  Statements.  Reference  is  made  to  the  financial
         statements  listed in Section 1 of the Index to Consolidated  Financial
         Statements and Schedules in this Report.

         (a)(2) Financial Statement Schedule. Reference is made to the financial
         statement  schedule  listed in  Section 2 of the Index to  Consolidated
         Financial  Statements and Schedules in this Report. All other schedules
         have been  omitted as not  required,  not  applicable  or  because  the
         information  required to be  presented  is  included  in the  financial
         statements and related notes.

                                       41
<page>

(2)   Schedules for the years ended November 30, 2006, 2005 and 2004
      Schedule II - Valuation and Qualifying Accounts.

(b)   Exhibits

(3)   Articles of Incorporation and By-laws

      (a)   Certificate of Incorporation,  as amended, incorporated by reference
            to our Registration  Statement on Form S-1 filed with the Securities
            and Exchange Commission on August 27, 1969 under Registration Number
            2-34436.
      (b)   Certificate  of  Amendment  of  the  Certificate  of  Incorporation,
            incorporated  by reference to our definitive  proxy  statement filed
            with the Securities and Exchange  Commission in connection  with our
            Annual Meeting of Shareholders held in May 1984.
      (c)   Certificate  of  Amendment  to  the  Certificate  of  Incorporation,
            incorporated  by reference  to Exhibit 3(b) to our Annual  Report on
            Form 10-K for the year ended November 30, 1988.
      (d)   Certificate  of  Amendment  to  the  Certificate  of  Incorporation,
            incorporated  by reference  to Exhibit 3(e) to our Annual  Report on
            Form 10-K for the year ended November 30, 1994, as amended.
      (e)   Certificate  of  Amendment  of  the  Certificate  of  Incorporation,
            incorporated  by reference to Exhibit 3 to our  Quarterly  Report on
            Form 10-Q for the quarter ended August 30, 1995.
      (f)   Certificate  of  Amendment  of  the  Certificate  of  Incorporation,
            incorporated  by reference  to Exhibit 3(f) to our Annual  Report on
            Form 10-K for the year ended November 30, 1998.
      (g)   Certificate  of  Amendment  of  the  Certificate  of  Incorporation,
            incorporated by reference to Exhibit 3.2 to our Quarterly  Report on
            Form 10-Q for the quarter ended August 31, 1998.
      (h)   Certificate  of  Amendment  of  the  Certificate  of  Incorporation,
            incorporated  by reference to Exhibit 3(1) to our Current  Report on
            Form 8-K dated November 16, 1999.
      (i)   By-laws,  amended and restated as of December 1996,  incorporated by
            reference to Exhibit 3(e) to our Annual  Report on Form 10-K for the
            year ended November 30, 1996.

(10)  Material Contracts

      (a)   1995 Stock Option Plan,  incorporated  by reference to Exhibit 10(I)
            to our Annual  Report on Form 10-K for the year ended  November  30,
            1995, as amended.
      (b)   1996  Restricted  Stock Award Plan,  incorporated  by  reference  to
            Exhibit A to our Proxy Statement dated October 24, 1996.
      (c)   Non-Employee  Director  Stock  Option  Plan,  dated March 30,  2001,
            incorporated  by reference to Exhibit  10(c) to our Annual Report on
            Form 10-KSB for the year ended November 30, 2003.
      (d)   Lease Agreement  between South Broadway WP, LLC,  Landlord,  and New
            Rochelle Telephone Corp., Tenant, dated August 2003, incorporated by
            reference to Exhibit  10(d) to our Annual  Report on Form 10-KSB for
            the year ended November 30, 2003.
      (e)   Office Lease between Lexin  Celebration,  LLC, as Landlord,  and Vox
            Communications   Corp.,   as  Tenant,   dated   January  25,   2005,
            incorporated  by reference to Exhibit  10(e) to our Annual Report on
            Form 10-KSB for the year ended November 30, 2005.
      (f)   Securities Purchase Agreement, dated as of February 8, 2005, between
            eLEC Communications Corp. and Laurus Master Fund, Ltd., incorporated
            by reference to Exhibit 10.1 to our Current Report on Form 8-K dated
            February 8, 2005.
      (g)   Master Security  Agreement,  dated as of February 8, 2005, among us,
            New  Rochelle  Telephone  Corp.,  Telecarrier  Services,  Inc.,  Vox
            Communications   Corp.,  Line  One,  Inc.,  AVI  Holding  Corp.  and
            TelcoSoftware.com  Corp.  in  favor of  Laurus  Master  Fund,  Ltd.,
            incorporated  by reference to Exhibit 10.3 to our Current  Report on
            Form 8-K dated February 8, 2005.

                                       42
<page>

      (h)   Stock Pledge  Agreement,  dated as of February 8, 2005,  executed by
            eLEC  Communications  Corp.  in favor of Laurus  Master Fund,  Ltd.,
            incorporated  by reference to Exhibit 10.4 to our Current  Report on
            Form 8-K dated February 8, 2005.
      (i)   Subsidiary  Guaranty,  dated as of February 8, 2005, executed by New
            Rochelle   Telephone   Corp.,   Telecarrier   Services,   Inc.,  Vox
            Communications   Corp.,  Line  One,  Inc.,  AVI  Holding  Corp.  and
            TelcoSoftware.com  Corp.,  incorporated by reference to Exhibit 10.5
            to our Current Report on Form 8-K dated February 8, 2005.
      (j)   Registration Rights Agreement, dated as of February 8, 2005, between
            eLEC Communications Corp. and Laurus Master Fund, Ltd., incorporated
            by reference to Exhibit 10.6 to our Current Report on Form 8-K dated
            February 8, 2005.
      (k)   Common Stock Purchase Warrant, dated as of February 8, 2005, between
            eLEC Communications Corp. and Laurus Master Fund, Ltd., incorporated
            by reference to Exhibit 10.7 to our Current Report on Form 8-K dated
            February 8, 2005.
      (l)   Form of Common Stock Purchase Warrant, dated as of February 8, 2005,
            issued  by eLEC  Communications  Corp.  to or on the order of Source
            Capital Group,  Inc.,  incorporated  by reference to Exhibit 10.8 to
            our Current Report on Form 8-K dated February 8, 2005.
      (m)   Securities  Purchase  Agreement,  dated  as of  November  30,  2005,
            between eLEC  Communications  Corp.  and Laurus  Master Fund,  Ltd.,
            incorporated  by reference to Exhibit 10.1 to our Current  Report on
            Form 8-K dated November 30, 2005.
      (n)   Reaffirmation and Ratification  Agreement,  dated as of November 30,
            2005, executed by eLEC Communications  Corp., New Rochelle Telephone
            Corp.,  Telecarrier  Services,  Inc., Vox Communications Corp., Line
            One,   Inc.,   AVI  Holding  Corp.   and   TelcoSoftware.com   Corp.
            incorporated  by reference to Exhibit 10.3 to our Current  Report on
            Form 8-K dated November 30, 2005.
      (o)   Registration  Rights  Agreement,  dated  as of  November  30,  2005,
            between eLEC  Communications  Corp.  and Laurus  Master Fund,  Ltd.,
            incorporated  by reference to Exhibit 10.4 to our Current  Report on
            Form 8-K dated November 30, 2005.
      (p)   Common  Stock  Purchase  Warrant,  dated as of  November  30,  2005,
            between eLEC  Communications  Corp.  and Laurus  Master Fund,  Ltd.,
            incorporated  by reference to Exhibit 10.5 to our Current  Report on
            Form 8-K dated November 30, 2005.
      (q)   Form of Common  Stock  Purchase  Warrant,  dated as of November  30,
            2005,  issued  by eLEC  Communications  Corp.  to or on the order of
            Source Capital  Group,  Inc.,  incorporated  by reference to Exhibit
            10.6 to our Current Report on Form 8-K dated November 30, 2005.
      (r)   Securities  Purchase  Agreement,  dated as of May 31, 2006,  between
            eLEC Communications Corp. and Laurus Master Fund, Ltd., incorporated
            by reference to Exhibit 10.1 to our Current Report on Form 8-K dated
            May31, 2006.
      (s)   Secured  Term  Note,  dated  as  of  May  31,  2006,   between  eLEC
            Communications  Corp. and Laurus Master Fund, Ltd.,  incorporated by
            reference  to Exhibit  10.2 to our Current  Report on Form 8-K dated
            May 31, 2006.
      (t)   Reaffirmation and Ratification Agreement,  dated as of May 31, 2006,
            executed by eLEC Communications Corp., New Rochelle Telephone Corp.,
            Telecarrier  Services,  Inc., Vox  Communications  Corp.,  Line One,
            Inc., AVI Holding Corp. and TelcoSoftware.com  Corp. incorporated by
            reference  to Exhibit  10.3 to our Current  Report on Form 8-K dated
            May 31, 2006.
      (u)   Funds  Escrow  Agreement,  dated as of May 31,  2006,  between  eLEC
            Communications  Corp. and Laurus Master Fund, Ltd.,  incorporated by
            reference  to Exhibit  10.4 to our Current  Report on Form 8-K dated
            May 31, 2006.

                                       43
<page>

      (v)   Restricted Account Agreement, dated as of May 31, 2006, between eLEC
            Communications  Corp. and Laurus Master Fund, Ltd.,  incorporated by
            reference  to Exhibit  10.5 to our Current  Report on Form 8-K dated
            May 31, 2006.
      (w)   Common Stock  Purchase  Warrant,  dated as of May 31, 2006,  between
            eLEC Communications Corp. and Laurus Master Fund, Ltd., incorporated
            by reference to Exhibit 10.7 to our Current Report on Form 8-K dated
            May 31, 2006.
      (x)   Form of Common  Stock  Purchase  Warrant,  dated as of May 31, 2006,
            issued  by eLEC  Communications  Corp.  to or on the order of Source
            Capital Group,  Inc.,  incorporated  by reference to Exhibit 10.8 to
            our Current Report on Form 8-K dated May 31, 2006.
      (y)   Amended and Restated  Secured  Term Note,  dated as of May 31, 2006,
            between eLEC  Communications  Corp.  and Laurus  Master Fund,  Ltd.,
            incorporated  by reference to Exhibit 10.9 to our Current  Report on
            Form 8-K dated May 31, 2006.
      (z)   Amended and Restated  Secured  Term Note,  dated as of May 31, 2006,
            between eLEC  Communications  Corp.  and Laurus  Master Fund,  Ltd.,
            incorporated  by reference to Exhibit 10.10 to our Current Report on
            Form 8-K dated May 31, 2006.
      (aa)  Stock Purchase  Agreement dated as of December 14, 2006 by and among
            eLEC Communications Corp., CYBD Acquisition, Inc. and Cyber Digital,
            Inc.,  with respect to the capital  stock of New Rochelle  Telephone
            Corp.,  incorporated  by  reference  to Exhibit  10.1 to our Current
            Report on Form 8-K dated December 14, 2006.
      (bb)  Stock Purchase  Agreement dated as of December 14, 2006 by and among
            eLEC  Communications  Corp.,  CYBD  Acquisition  II, Inc.  and Cyber
            Digital,  Inc.,  with  respect to the capital  stock of  Telecarrier
            Services,  Inc.,  incorporated  by  reference to Exhibit 10.2 to our
            Current Report on Form 8-K dated December 14, 2006.
      (cc)  Amendment No.1 to Stock Purchase  Agreement dated as of February 27,
            2007 by and among eLEC Communications Corp., CYBD Acquisition,  Inc.
            and Cyber  Digital,  Inc.,  with respect to the capital stock of New
            Rochelle Telephone Corp.
      (dd)  Amendment No.1 to Stock Purchase  Agreement dated as of February 27,
            2007 by and among eLEC  Communications  Corp.,  CYBD Acquisition II,
            Inc. and Cyber Digital,  Inc.,  with respect to the capital stock of
            Telecarrier Services, Inc.

(22)     Subsidiaries  -  The  significant  wholly-owned   subsidiaries  are  as
         follows:

         Name                                   Jurisdiction of Organization
         ----                                   ----------------------------

         New Rochelle Telephone Corp.                    New York
         Telecarrier Services, Inc.                      Delaware
         VoX Communications Corp.                        Delaware

(23)     Consent of Nussbaum Yates & Wolpow, P.C.

(31.1)   Certification  of our  Chief  Executive  Officer  and  Chief  Financial
         Officer,  Paul H. Riss,  pursuant to Section 302 of the  Sarbanes-Oxley
         Act of 2002.

(32.1)   Certification  of our  Chief  Executive  Officer  and  Chief  Financial
         Officer,  Paul H. Riss,  pursuant to Section 906 of the  Sarbanes-Oxley
         Act of 2002.

                                       44
<page>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, we have duly caused this Report to be signed on our behalf
by the undersigned, thereunto duly authorized on the 8th day of March 2007.

                                                      eLEC COMMUNICATIONS CORP.
                                                              (Company)



                                                      By:   /s/ Paul H. Riss
                                                         -----------------------
                                                         Paul H. Riss
                                                         Chief Executive Officer


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  Report has been  signed  below by the  following  persons on behalf of the
Company and in the capacities and on the dates indicated.

        Signature                        Title                         Date
-------------------------    ----------------------------------    -------------

/s/  Paul H. Riss            Chairman of the Board of Directors    March 8, 2007
-------------------------    Chief Executive Officer
Paul H. Riss                 Chief Financial Officer
                             (Principal Accounting Officer)

/s/ Greg M. Cooper           Director                              March 8, 2007
-------------------------
Greg M Cooper

/s/ Gayle Greer              Director                              March 8, 2007
-------------------------
Gayle Greer

/s/ Michael Khalilian        Director                              March 8, 2007
-------------------------
Michael Khalilian


                                       45
<page>


                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
            INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

                                                                           Page
                                                                          Number
                                                                          ------

1. Financial Statements

      Report of Independent Registered Public Accounting Firm                F-1

      Consolidated Financial Statements

         Balance Sheets                                                      F-2

         Statements of Operations                                            F-3

         Statements of Stockholders' Equity Deficiency                       F-4

         Statements of Cash Flows                                            F-5

         Notes to Financial Statements                                       F-7

2. Financial Statement Schedule

      Schedule II                                                            S-1



<page>

             Report of Independent Registered Public Accounting Firm
             -------------------------------------------------------


The Board of Directors
eLEC Communications Corp.
White Plains, New York

We have audited the consolidated balance sheets of eLEC Communications Corp. and
subsidiaries  as of  November  30, 2006 and 2005,  and the related  consolidated
statements of operations,  stockholders'  equity deficiency,  and cash flows for
the years ended  November 30, 2006,  2005 and 2004. Our audits also included the
financial  statement  schedule  on page  S-1.  These  financial  statements  and
financial statement schedule are the responsibility of the Company's management.
Our  responsibility  is to express an opinion on the  financial  statements  and
schedule based on our audits.

We conducted our audits in accordance  with the Standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial position of eLEC
Communications  Corp. and subsidiaries as of November 30, 2006 and 2005, and the
consolidated  results of their  operations  and cash  flows for the years  ended
November 30, 2006,  2005 and 2004, in conformity  with U.S.  generally  accepted
accounting principles.  Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects,  the information set forth
therein.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern.  As further discussed in Note
2 to the financial  statements,  the Company has suffered  recurring losses from
operations  and is in default of its  financing  agreements  with its  principal
lender which raises substantial doubt about the Company's ability to continue as
a going  concern.  Management's  plans  in  regard  to  these  matters  are also
described in Note 2. The  consolidated  financial  statements do not include any
adjustments that might result from the outcome of this uncertainty.


/s/ NUSSBAUM YATES & WOLPOW, P.C.

Melville, New York
February 9, 2007

                                      F-1
<page>
<table>
<caption>

                              eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

                                     CONSOLIDATED BALANCE SHEETS

                                      NOVEMBER 30, 2006 AND 2005



                                                ASSETS

                                                                             2006            2005
                                                                         ------------    ------------

                                                                           <c>             <c>
Current assets:
    Cash and cash equivalents                                            $  1,337,525    $    205,998
    Loan proceeds receivable                                                       --       1,753,500
    Accounts receivable, net of allowance of
        $230,009 and $258,336 in 2006 and 2005                                630,197         989,887
    Prepaid expenses and other current assets                                 154,749         103,193
    Deferred finance costs, net                                             1,012,941              --
                                                                         ------------    ------------

                  Total current assets                                      3,135,412       3,052,578

Property and equipment, net                                                   903,281         593,811

Deferred finance costs, net                                                        --         542,893

Other assets                                                                  149,525         195,809
                                                                         ------------    ------------

                  Total assets                                           $  4,188,218    $  4,385,091
                                                                         ------------    ------------

                           LIABILITIES AND STOCKHOLDERS' EQUITY DEFICIENCY

Current liabilities:
    Short-term borrowings                                                $         --    $    326,103
    Current portion of long-term debt and capital
        lease obligations                                                   3,347,707          43,891
    Warrant liability                                                       1,251,182              --
    Accounts payable and accrued expenses                                   2,897,495       2,746,360
    Taxes payable                                                             559,617         632,147
    Deferred revenues                                                         166,100         278,200
                                                                         ------------    ------------

                  Total current liabilities                                 8,222,101       4,026,701

Long-term debt and capital lease obligations, less
    current maturities                                                        214,907       1,654,591
Warrant liability                                                                  --       1,067,526
                                                                         ------------    ------------

                  Total liabilities                                         8,437,008       6,748,818
                                                                         ------------    ------------

Stockholders' equity deficiency:
    Preferred stock, $.10 par value; 1,000,000 shares
        authorized, none issued and outstanding                                    --              --
    Common stock, $.10 par value; 50,000,000 shares
        authorized; 22,434,282 and 16,839,282 shares
        issued and outstanding in 2006 and 2005                             2,243,428       1,683,928
    Capital in excess of par value                                         27,071,584      27,169,409
    Deficit                                                               (33,554,700)    (31,209,645)
    Accumulated other comprehensive loss, unrealized
        loss on securities                                                     (9,102)         (7,419)
                                                                         ------------    ------------

                  Total stockholders' equity deficiency                    (4,248,790)     (2,363,727)
                                                                         ------------    ------------

                  Total liabilities and stockholders'
                       equity  deficiency                                $  4,188,218    $  4,385,091
                                                                         ------------    ------------


                          See accompanying notes to consolidated financial statements.

                                                 F-2
</table>
<page>
<table>
<caption>

                              eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

                                CONSOLIDATED STATEMENTS OF OPERATIONS

                             YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004


                                                               2006            2005            2004
                                                           ------------    ------------    ------------

                                                             <c>           <c>             <c>
Revenues                                                   $  8,356,595    $ 15,880,803    $  9,557,600
                                                           ------------    ------------    ------------

Cost and expenses:
    Costs of services                                         5,129,971       8,601,525       4,738,038
    Selling, general and administrative                       4,793,920       5,872,848       4,398,673
    Provision for bad debts                                     172,268       3,612,005       1,048,559
    Depreciation and amortization                               546,978         196,377          14,480
                                                           ------------    ------------    ------------

              Total costs and expenses                       10,643,137      18,282,755      10,199,750
                                                           ------------    ------------    ------------

Loss from operations                                         (2,286,542)     (2,401,952)       (642,150)
                                                           ------------    ------------    ------------

Other income (expense):
    Interest expense                                         (1,156,427)       (682,266)         (3,126)
    Other income, net                                           107,807          65,521          45,795
    Indebtedness adjustment                                          --         198,059              --
    Mark to market adjustment in warrant carrying amount
                                                                990,107         176,657              --
    Gain on sale of investment securities
      and other investments                                          --         378,186             770
                                                           ------------    ------------    ------------

              Total other income (expense)                      (58,513)        136,157          43,439
                                                           ------------    ------------    ------------

Loss before bankruptcy reorganization items
  and income tax benefit                                     (2,345,055)     (2,265,795)       (598,711)
                                                           ------------    ------------    ------------

Reorganization items:
    Gain on settlement with creditors                                --              --         904,027
    Professional fees                                                --              --        (161,000)
                                                           ------------    ------------    ------------

                                                                     --              --         743,027
                                                           ------------    ------------    ------------

Income (loss) before income tax benefit                      (2,345,055)     (2,265,795)        144,316

Income tax benefit                                                   --              --         (25,937)
                                                           ------------    ------------    ------------

Net income (loss)                                          $ (2,345,055)   $ (2,265,795)   $    170,253
                                                           ------------    ------------    ------------

Basic earnings (loss) per share                            $       (.14)   $       (.14)   $        .01
                                                           ------------    ------------    ------------
Diluted earnings (loss) per share                          $       (.14)   $       (.14)   $        .01
                                                           ------------    ------------    ------------

Weighted average number of common shares outstanding:
       Basic                                                 17,338,268      16,770,789      16,254,282
                                                           ------------    ------------    ------------
       Diluted                                               17,338,268      16,770,789      16,715,808
                                                           ------------    ------------    ------------

                     See accompanying notes to consolidated financial statements.

                                                 F-3
</table>
<page>
<table>
<caption>

                                             eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES
                                     CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY DEFICIENCY
                                            YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004
                                                                                                         Accumulated   Stockholders'
                                            Common Stock           Capital                            Other Stockholders'  Total
                                      ------------------------   in Excess of                 Treasury  Comprehensive     Equity
                                        Shares       Amount       Par Value        Deficit     Stock        Loss        Deficiency
                                      ----------  ------------   ------------   ------------  --------   -----------   ------------

                                  <c>         <c>            <c>            <c>           <c>        <c>           <c>

Balance, December 31, 2003            16,265,282  $  1,626,528   $ 25,650,634   $(29,114,103) $(27,500)  $        --   $ (1,864,441)
                                                                                                                       ------------
    Net income                                                                       170,253                                170,253
    Unrealized holding loss                                                                                   (2,251)        (2,251)
                                                                                                                       ------------
    Comprehensive income                                                                                                    168,002
    Retirement of treasury stock         (11,000)       (1,100)       (26,400)                  27,500                           --
                                      ----------  ------------   ------------   ------------  --------   -----------   ------------
Balance, November 30, 2004            16,254,282     1,625,428     25,624,234    (28,943,850)       --        (2,251)    (1,696,439)
                                                                                                                       ------------
    Net loss                                                                      (2,265,795)                            (2,265,795)
    Unrealized holding loss                                                                                   (5,168)        (5,168)
                                                                                                                       ------------
    Comprehensive loss                                                                                                   (2,270,963)
    Exercise of common stock
     options                             425,000        42,500         18,000                                                60,500
    Stock issued for debt issue
     costs                               160,000        16,000         16,000                                                32,000
    Beneficial conversion feature of
      convertible notes payable                                       973,545                                               973,545
    Options and warrants granted for
     services                                                         537,630                                               537,630
                                      ----------  ------------   ------------   ------------  --------   -----------   ------------
Balance, November 30, 2005            16,839,282      1,683,928     27,169,409   (31,209,645)                 (7,419)    (2,363,727)
                                                                                                                       ------------
    Net loss                                                                      (2,345,055)                            (2,345,055)
    Unrealized holding loss                                                                                   (1,683)        (1,683)
                                                                                                                       ------------
    Comprehensive loss                                                                                                   (2,346,738)
    Exercise of common stock options
                                         390,000        39,000         60,800                                                99,800
    Issuance of common stock           5,180,000       518,000        (28,240)                                              489,760
    Employee stock based
     compensation                                                     188,595                                               188,595
    Cancellation of beneficial
     conversion feature of
     convertible notes payable                                       (534,676)                                             (534,676)
    Stock, options and warrants
     granted for services                 25,000         2,500        215,696                                               218,196
                                      ----------  ------------   ------------   ------------  --------   -----------   ------------
Balance, November 30, 2006            22,434,282  $  2,243,428   $ 27,071,584   $(33,554,700) $     --   $    (9,102)  $ (4,248,790)
                                      ----------  ------------   ------------   ------------  --------   -----------   ------------


                                    See accompanying notes to consolidated financial statements.

                                                                 F-4
</table>
<page>
<table>
<caption>

                                 eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

                                   CONSOLIDATED STATEMENTS OF CASH FLOWS

                                YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004


                                                                    2006           2005            2004
                                                                 -----------    -----------    -----------

                                                                  <c>            <c>            <c>
Operating activities:
   Net income (loss)                                             $(2,345,055)   $(2,265,795)   $   170,253
   Adjustments to reconcile net income (loss)
     to net cash used in operating activities:
       Depreciation and amortization                                 546,978        196,377         14,480
       Gain on sale of investment securities and
              other investments                                           --       (378,186)            --
       Gain on settlement with creditors                                  --             --       (904,027)
       Non-cash stock based compensation                             188,595             --             --
       Common stock, options and warrants granted for services        75,358        143,162             --
       Provision for bad debts                                       172,268      3,612,005      1,048,559
       Amortization of debt discount                                 751,890        454,990             --
       Non-cash mark to market adjustment                           (990,107)      (176,657)            --
       Indebtedness adjustment                                            --       (198,059)            --
       Changes in assets and liabilities:
          Accounts receivable                                        187,422     (3,354,829)    (1,590,973)
          Prepaid expenses and other current assets                  (51,556)       (61,014)       140,251
          Distribution to bankruptcy creditors                            --             --       (301,170)
          Other assets                                               (12,818)       (49,837)            --
          Accounts payable and accrued expenses                      151,135        489,088        807,020
          Taxes payable                                              (72,530)       (88,961)       315,011
          Deferred revenues                                         (112,100)       (63,502)       220,564
                                                                 -----------    -----------    -----------

Net cash used in operating activities                             (1,510,520)    (1,741,218)       (80,032)
                                                                 -----------    -----------    -----------

Investing activities:
   Purchase of property and equipment                               (258,687)      (389,758)      (181,502)
   Proceeds from sale of investment securities                            --        385,192             --
   Purchase of investment securities                                  (4,001)        (7,006)        (4,546)
                                                                 -----------    -----------    -----------

Net cash used in investing activities                               (262,688)       (11,572)      (186,048)
                                                                 -----------    -----------    -----------

                                                (Continued)

                       See accompanying notes to consolidated financial statements.

                                                    F-5
</table>
<page>
<table>
<caption>

                            eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

                         CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                           YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004


                                                            2006          2005           2004
                                                        -----------    -----------    -----------

                                                        <c>            <c>              <c>
Financing activities:
    Net proceeds from short-term borrowing              $        --    $   273,686    $        --
    Repayment of short-term borrowings                     (326,103)            --             --
    Proceeds of issuance of common stock, net of fees       489,760             --             --
    Proceeds from exercise of stock options                  99,800         60,500             --
    Net proceeds from secured term note                   3,379,000      1,744,500             --
    Debt issuance costs paid                               (145,047)       (65,977)            --
    Payments of long-term debt                             (592,675)      (425,773)        (7,260)
    Principal payments on pre-petition bank debt
        in bankruptcy proceedings                                --             --        (23,830)
                                                        -----------    -----------    -----------

Net cash provided by (used in) financing activities
                                                          2,904,735      1,586,936        (31,090)
                                                        -----------    -----------    -----------

Increase (decrease) in cash and cash equivalents
                                                          1,131,527       (165,854)      (297,170)

Cash and cash equivalents at beginning of year              205,998        371,852        669,022
                                                        -----------    -----------    -----------

Cash and cash equivalents at end of year                $ 1,337,525    $   205,998    $   371,852
                                                        -----------    -----------    -----------


Cash paid during the year for:
    Interest                                            $   421,038    $   551,667    $     3,126
                                                        -----------    -----------    -----------
    Taxes                                               $        --    $        --    $    27,593
                                                        -----------    -----------    -----------


Supplemental disclosure of non-cash investing and financing activities:


           See Notes 5, 6, 7, 8 and 12 for non-cash investing and financing activities.


                   See accompanying notes to consolidated financial statements.

                                                F-6
</table>
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

1.       Description of Business and Summary of Accounting Principles
         ------------------------------------------------------------

         Description of Business and Concentrations

         eLEC  Communications  Corp. ("eLEC" or the "Company") is a full-service
         telecommunications   company  that  focuses  on  developing  integrated
         telephone  service in the competitive  local exchange  carrier ("CLEC")
         industry  (wireline   telecommunication)   services  and  by  utilizing
         high-speed  internet  connections to provide  broadband voice telephony
         (IP   telecommunication   services).   The  Company  offers  small  and
         medium-sized  businesses and residential customers an integrated set of
         telecommunications  products and services,  including  local  exchange,
         local access, and domestic and international long distance telephone.

         The principal focus of the Company, as a communications provider, is to
         resell and provide low-cost alternative  telecommunication services and
         other  bundled   services,   focusing  on  small   business  users  and
         residential    customers.    With   the    development    of   the   IP
         telecommunications services business, the Company is shifting its focus
         towards  providing   broadband  telephone  services  to  other  service
         providers.

         Principles of Consolidation

         The  consolidated  financial  statements  include  the  accounts of the
         Company  and  its  wholly-owned   subsidiaries   after  elimination  of
         significant intercompany balances and transactions. Investments in less
         than 20% owned  companies  that do not have readily  determinable  fair
         values were carried at cost prior to their disposition.

         Investment Securities

         The Company  follows  Statement of Financial  Accounting  Standards No.
         115,   "Accounting   for  Certain   Investments   in  Debt  and  Equity
         Securities", which requires that investment securities be classified as
         trading, held-to-maturity or available-for-sale.  Investment securities
         at November 30, 2006 and 2005 consisted of equity securities classified
         as  available-for-sale  and are  carried at fair value with  unrealized
         gains or losses  reported  in a  separate  component  of  shareholders'
         equity.

         Property, Plant and Equipment and Depreciation

         Property,  plant and  equipment are recorded at cost.  Depreciation  is
         computed primarily by use of accelerated and straight-line methods over
         the estimated  useful lives of the assets.  The estimated  useful lives
         are three to five years for computer  equipment and  software,  five to
         ten years for machinery and equipment, and five years for furniture and
         fixtures.

         Computer Software Development Costs

         Direct development costs associated with internal-use computer software
         are accounted for under Statement of Position 98-1  "Accounting for the
         Costs of Computer Software  Developed or Obtained for Internal Use" and
         are capitalized.  Costs incurred during the preliminary  project stage,
         as well as for  maintenance  and  training,  are  expensed as incurred.
         Amortization is provided on a  straight-line  basis over the shorter of
         five years or the estimated useful life of the software.

                                      F-7
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

1.       Description   of  Business   and  Summary  of   Accounting   Principles
         -----------------------------------------------------------------------
         (Continued)
         -----------

         Computer software  developed or obtained for internal use were included
         in  property  and  equipment  at  November  30,  2006 and 2005 and were
         carried at $705,220  and  $508,000,  respectively,  net of  accumulated
         depreciation  of $158,917  and $39,275,  respectively,  at November 30,
         2006 and 2005.  Amortization  expense  was  $119,642,  $39,275  and $0,
         respectively, for the years ended November 30, 2006, 2005 and 2004.

         Income Taxes

         The Company  accounts for income taxes  according to the  provisions of
         Statement  of  Financial   Accounting   Standards   ("SFAS")  No.  109,
         "Accounting for Income Taxes." Under the liability  method specified by
         SFAS No. 109,  deferred tax assets and liabilities are determined based
         on the  difference  between the  financial  statement  and tax bases of
         assets and liabilities,  as measured by the enacted tax rates that will
         be in effect  when  these  differences  reverse,  and the effect of net
         operating  loss  carryforwards.  Deferred  tax expense is the result of
         changes in deferred tax assets and liabilities.  A valuation  allowance
         has been established to eliminate the deferred tax assets as it is more
         likely than not that such deferred tax assets will not be realized.

         Revenue Recognition

         Revenues from voice, data and other telecommunications-related services
         are  recognized  in the  period in which  subscribers  use the  related
         services.   Revenues  for  carrier   interconnection   and  access  are
         recognized  in the period in which the  service is  provided.  Deferred
         revenue represents the unearned portion of telephone service plans that
         are billed a month in advance.

         Collectibility of Accounts Receivable

         Trade receivables  potentially  subject the Company to credit risk. The
         Company  extends credit to its customers and generally does not require
         collateral. During fiscal years ended November 30, 2006, 2005 and 2004,
         the Company  accepted most new customers  and extended  initial  credit
         based upon credit scored lists and payment history of telephone  bills,
         when  available.  Once a customer is billed for  services,  the Company
         actively  manages the  accounts  receivable  to minimize  credit  risk.
         Approximately  $46,000  and  $93,000 as of  November  30, 2006 and 2005
         represented net amounts due (after  allowance for doubtful  collection)
         from  entities in the  telecommunications  industry  related to carrier
         interconnection and access.

                                      F-8
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

1.       Description   of  Business   and  Summary  of   Accounting   Principles
         -----------------------------------------------------------------------
         (Continued)
         -----------

         Collectibility of Accounts Receivable (Continued)

         In order to  record  the  Company's  accounts  receivable  at their net
         realizable  value,  the Company  must assess  their  collectibility.  A
         considerable  amount  of  judgment  is  required  in order to make this
         assessment,  including  an analysis of  historical  bad debts and other
         adjustments,  a review of the aging of the Company's  receivables,  and
         the current  creditworthiness  of the Company's  customers.  Generally,
         when a customer  account  reaches a certain level of  delinquency,  the
         Company  disconnects  the customer's  service and provides an allowance
         for the related amount  receivable  from the customer.  The Company has
         recorded  allowances for receivables that it considered  uncollectible,
         including  amounts for the  resolution  of  potential  credit and other
         collection  issues,  such as disputed invoices,  customer  satisfaction
         claims  and  pricing  discrepancies.  However,  depending  on how  such
         potential issues are resolved,  or if the financial condition of any of
         the  Company's  customers  was to  deteriorate  and its ability to make
         required payments became impaired, increases in these allowances may be
         required. The Company writes off the accounts receivable balance from a
         customer and the related allowance  established when it believes it has
         exhausted all reasonable  collection  efforts.  As of November 30, 2006
         and 2005, the Company had no individual  customer that constituted more
         than 10% of its accounts  receivable.  For the years ended November 30,
         2006, 2005 and 2004, no individual customer accounted for more than 10%
         of the Company's revenues.

         Deferred Finance Costs

         Deferred  finance  costs  represent  fees  paid to third  parties  that
         provided  services  in  connection  with  securing  financing  and  are
         amortized  over  the  loan  term.  Management  believes  they  will  be
         successful  in  obtaining  a waiver  with its  lender  to  sustain  the
         long-term  nature of its debt (see Note 8), and has determined that the
         associated   deferred  finance  charges  should  not  be  written  off.
         Accordingly,  since  the  entire  amount of the debt is  classified  as
         current, the related deferred finance costs are classified as a current
         asset.

         Earnings (Loss) Per Share

         Basic  earnings  (loss) per share is computed  by  dividing  net income
         (loss) by the  weighted-average  number of shares  outstanding.  To the
         extent  that stock  option  warrants  and  convertible  securities  are
         anti-dilutive,  they are  excluded  from  the  calculation  of  diluted
         earnings  (loss) per share.  Diluted  earnings  per share  includes the
         dilutive effect of stock options and warrants.  Approximately 1,130,000
         of the Company's stock options and warrants were excluded from the 2004
         calculation  of the diluted  earnings  per share  because the  exercise
         price of the stock  options and warrants  were greater than the average
         price of the common shares, and, therefore,  their inclusion would have
         been  anti-dilutive.  For 2006 and 2005, the Company  excluded from its
         loss per share  calculations  all  dilutive  securities  because  their
         effect on loss per share was anti-dilutive.

                                      F-9
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

1.       Description   of  Business   and  Summary  of   Accounting   Principles
         -----------------------------------------------------------------------
         (Continued)
         -----------

         Cash and Cash Equivalents

         The Company  considers all highly  liquid  investments  purchased  with
         original maturities of three months or less to be cash equivalents.

         Impairment of Long-Lived Assets

         The Company reviews long-lived assets for impairment whenever events or
         changes in circumstances  indicate that the carrying amount of an asset
         may not be recoverable. Recoverability of assets to be held and used is
         measured by a comparison  of the carrying  amount of an asset to future
         forecasted net undiscounted  cash flows expected to be generated by the
         asset. If such assets are considered to be impaired,  the impairment to
         be recognized is measured by the amount by which the carrying amount of
         the assets  exceeds the fair  values.  For the year ended  November 30,
         2006, the Company's IP  telecommunications  services  business incurred
         significant  operating  and cash flow losses.  Combined with a previous
         history of such losses,  as of November 30, 2006, the Company evaluated
         whether the carrying  amount of the long-lived  assets of this business
         were  recoverable.  The Company had recently received an offer for this
         business  from a third party for an amount  substantially  in excess of
         the carrying  value of the  long-lived  assets,  and  accordingly,  the
         Company determined that such assets were not impaired. In addition, the
         Company   had   entered   into  a   contract   to  sell  its   wireline
         telecommunications  business (see Note 20). The contract  selling price
         would  result  in  a  book  gain,  if  the  sale  is  consummated,  and
         accordingly,  the  Company  has  determined  that such  assets were not
         impaired.

         Use of Estimates

         In preparing financial statements in conformity with generally accepted
         accounting  principles,  management  is required to make  estimates and
         assumptions that affect the reported amounts of assets and liabilities,
         the disclosure of contingent  assets and liabilities at the date of the
         financial statements, and the reported amounts of revenues and expenses
         during  the  reporting  period.  Significant  estimates  relate  to the
         allowance  for  doubtful  accounts  receivable,  income  tax  valuation
         allowance,  and  conclusions  regarding  the  impairment  of long-lived
         assets.  On  a  continual  basis,  management  reviews  its  estimates,
         utilizing  currently  available  information,   changes  in  facts  and
         circumstances,  historical experience and reasonable assumptions. After
         such reviews,  and if deemed appropriate,  those estimates are adjusted
         accordingly. Actual results could differ from those estimates.

         Advertising

         Advertising  costs  are  expensed  as  incurred.  Such  costs  were not
         significant in any of the years presented herein.

                                      F-10
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

1.       Description   of  Business   and  Summary  of   Accounting   Principles
         -----------------------------------------------------------------------
         (Continued)
         -----------

         Accounting for Derivative Instruments

         The Company accounts for derivative instruments in accordance with SFAS
         No. 133 "Accounting for Derivative Instruments and Hedging Activities,"
         as amended,  which establishes  accounting and reporting  standards for
         derivative  instruments  and  hedging  activities,   including  certain
         derivative  instruments  imbedded  in other  financial  instruments  or
         contracts and requires  recognition  of all  derivatives on the balance
         sheet  at  fair  value,   regardless   of  the   hedging   relationship
         designation.  Accounting  for the  changes  in the  fair  value  of the
         derivative  instruments  depends on whether the derivatives  qualify as
         hedge  relationships and the types of the relationships  designated are
         based on the exposures hedged. Changes in the fair value of derivatives
         designated as fair value hedges are  recognized in earnings  along with
         fair value  changes of the  hedged  item.  Changes in the fair value of
         derivatives  designated  as cash  flow  hedges  are  recorded  in other
         comprehensive  income  (loss) and are  recognized  in earnings when the
         hedged item affects  earnings.  Changes in the fair value of derivative
         instruments  which are not  designated  as  hedges  are  recognized  in
         earnings as other income  (loss).  At November  30, 2006 and 2005,  the
         Company did not have any derivative instruments that were designated as
         hedges.

         Fair Value of Financial Instruments

         The following  methods and  assumptions  were used to estimate the fair
         value of each class of significant financial instruments:

         o        Cash and Cash Equivalents

                  The carrying  amount  approximates  fair value  because of the
                  short maturity of those instruments.

         o        Investment Securities

                  The  fair  value of the  Company's  investment  in  marketable
                  equity securities is based upon the quoted market price.

         o        Short-Term Borrowings and Capital Lease Obligations

                  The fair value of the Company's capital lessee obligations are
                  estimated  based on current  rates  offered to the Company for
                  debt of the same  remaining  maturities and  approximates  the
                  carrying amount.

                                      F-11
<page>
                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

1.       Description   of  Business   and  Summary  of   Accounting   Principles
         -----------------------------------------------------------------------
         (Continued)
         -----------

         o        Derivative Instruments

                  The Company has issued debt and/or equity instruments, some of
                  which have required a determination of their fair value and/or
                  the fair value of certain  related  derivatives,  where quoted
                  market  prices were not  published or readily  available.  The
                  Company  bases  its  fair  value   determinations   using  the
                  Black-Scholes  method,  which requires judgments and estimates
                  including,  the  volatility  of the  Company's  common  stock,
                  expected  dividends on the Company's  common  stock,  interest
                  rate   assumptions   and   expected   length  of  the  related
                  instruments.

         The Company has no instruments with significant off-balance-sheet risk.

         Stock Compensation Plan

         The Company  issues stock options to its employees,  outside  directors
         and consultants pursuant to stockholder approved and non-approved stock
         option programs.

         In December 2004,  the Financial  Accounting  Standards  Board ("FASB")
         issued SFAS No. 123R, "Share-Based Payment." SFAS 123R is a revision of
         SFAS  123,  and  supersedes  APB  25.  Among  other  items,  SFAS  123R
         eliminates  the  use of  APB  25 and  the  intrinsic  value  method  of
         accounting,  and requires  companies  to  recognize in their  financial
         statements  the cost of employee  services  received  in  exchange  for
         awards of equity  instruments,  based on the grand  date fair  value of
         those  awards.  SFAS 123R permits  companies to adopt its  requirements
         using   either  a   "modified   prospective"   method  or  a  "modified
         retrospective"   method.  Under  the  "modified   prospective"  method,
         compensation cost is recognized in the financial  statements  beginning
         with the effective date, based on the requirements of SFAS 123R for all
         share-based  payments  granted  after  that  date,  and  based  on  the
         requirements  of SFAS 123 for all unvested  awards granted prior to the
         effective date of SFAS 123R. Under the "modified retrospective" method,
         the  requirements  are the same as  under  the  "modified  prospective"
         method,  but this method  also  permits  entities to restate  financial
         statements of previous  periods based on proforma  disclosures  made in
         accordance  with  SFAS  123.  Beginning  in fiscal  2006,  the  Company
         accounts for stock-based compensation in accordance with the provisions
         of SFAS 123R and have  elected the  "modified  prospective"  method and
         have not  restated  prior  financial  statements.  For the  year  ended
         November  30,  2006,  the Company  recorded  approximately  $189,000 in
         employee  stock-based  compensation  expense,  which is included in our
         selling,  general and administrative expenses. As of November 30, 2006,
         there was  approximately  $227,000 of  unrecognized  stock-compensation
         expense for previously granted unvested options that will be recognized
         over a two-year period.

                                      F-12
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

1.       Description   of  Business   and  Summary  of   Accounting   Principles
         -----------------------------------------------------------------------
         (Continued)
         -----------

         Prior to fiscal 2006, the Company accounted for its stock option awards
         under the intrinsic value based method of accounting  prescribed by APB
         Opinion No. 25, "Accounting for Stock Issued to Employees," and related
         interpretations,   including  Financial   Accounting   Standards  Board
         ("FASB")  Interpretation No. 44,  "Accounting for Certain  Transactions
         Including Stock Compensation," an interpretation of APB Opinion No. 25.
         Under  the  intrinsic  value  based  method,  compensation  cost is the
         excess,  if any, of the quoted  market price of the stock at grant date
         or other  measurement  date  over the  amount an  employee  must pay to
         acquire the stock.  The  Company  makes pro forma  disclosures  for the
         years ended  November  30, 2005 and 2004 of net income and earnings per
         share as if the fair value based method of accounting  had been applied
         as required by SFAS No. 123, "Accounting for Stock-Based  Compensation"
         and SFAS 148 "Accounting for  Stock-Based  Compensation-Transition  and
         Disclosure-an Amendment of SFAS 123."

         The Company's 1995 Stock Option Plan (the "1995 Plan") provides for the
         grant of up to 3,400,000  incentive stock options,  non-qualified stock
         options,  tandem  stock  appreciation  rights,  and stock  appreciation
         rights  of  shares of common  stock.  Under the Plan,  incentive  stock
         options  may be  granted at no less than the fair  market  value of the
         Company's  stock on the date of grant,  and in the case of an  optionee
         who owns directly or indirectly more than 10% of the outstanding voting
         stock ("an Affilitate"), 110% of the market price on the date of grant.
         As of November  30,  2006,  approximately  440,000  option  shares were
         unissued and will not be available for future issuance, as the plan can
         no longer be used for option grants.

         The  Company's  2004  Equity  Incentive  Plan  (the  "Incentive  Plan")
         provides  for the grant of up to  1,000,000  incentive  stock  options,
         non-qualified  stock options,  tandem stock  appreciation  rights,  and
         stock  appreciation  rights  of  shares  of  common  stock.  Under  the
         Incentive Plan,  incentive stock options may be granted at no less than
         the fair market value of the Company's stock on the date of grant,  and
         in the case of an optionee who owns  directly or  indirectly  more than
         10% of the  outstanding  voting  stock  ("an  Affiliate"),  110% of the
         market  price  on  the  date  of  grant.   As  of  November  30,  2006,
         approximately  292,000 option shares remain  unissued and are available
         for future issuance.

         The Company's  Non-employee Director Stock Option Plan provides for the
         grant of options to  purchase  10,000  shares of the  Company's  common
         stock to each non-employee director on the first business day following
         each annual  meeting of the  shareholders  of the  Company.  Under this
         Plan,  options may be granted at no less than the fair market  value of
         the Company's common stock on the date of grant.

         For disclosure  purposes,  the fair value of each stock option grant is
         estimated on the date of grant using the Black  Scholes  option-pricing
         model with the following  weighted  average  assumptions used for stock
         options  granted in 2005 and 2004,  respectively:  annual  dividends of
         $-0- for both years,  expected  volatility of 152% and 158%,  risk-free
         interest rate of 4.3% and 3.1%, and expected life of five years for all
         grants.  The  weighted-average  fair value of stock options  granted in
         2005 and 2004 was $.31 and $.21, respectively.

                                      F-13
<page>
                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

1.       Description   of  Business   and  Summary  of   Accounting   Principles
         -----------------------------------------------------------------------
         (Continued)
         -----------

         Stock Compensation Plan (Continued)

         Under the above model, the total value of stock options granted in 2005
         and 2004 was approximately $503,000 and $466,000,  respectively,  which
         would be  amortized  ratably  on a pro  forma  basis  over the  related
         vesting periods,  which range from immediate vesting to five years. Had
         compensation  cost been  determined  based  upon the fair  value of the
         stock  options at grant date for all awards,  the  Company's net income
         (loss) and earnings (loss) per share would have been changed to the pro
         forma amounts indicated below:

<table>
<caption>
                                                                 2005          2004
                                                             -----------    ----------

                                                          <c>            <c>
         Net income (loss):
            As reported                                      $(2,265,795)   $  170,253
            Stock-based compensation cost, net of
              related tax effects,  that would have been
              included in the determination of net
              income in the fair value based method
              has been applied to all awards                     356,533       279,145
                                                             -----------    ----------
         Pro forma net income (loss)                         $(2,622,328)   $ (108,892)
                                                             -----------    ----------

         Basic earnings (loss) per share:
              As reported                                    $      (.14)   $      .01
              Pro forma                                      $      (.16)   $     (.01)

         Diluted earnings (loss) per share:
              As reported                                    $      (.14)   $      .01
              Pro forma                                      $      (.16)   $     (.01)

            Stock-based employee compensation cost, net of
              related tax effects, included in the
              determination of net income as reported        $        --    $       --
                                                             -----------    ----------
</table>

         Segment Reporting

         The  Company  has  utilized  the  management  approach  as  defined  by
         Statement of Financial  Accounting  Standards No. 131 Disclosures about
         Segments of an  Enterprise  and  Related  Information  ("SFAS  131") to
         determine if the Company has reportable  operating  segments.  Based on
         this evaluation,  the Company is organized into two operating segments:
         1)  Wireline  Telecommunication  Services  and 2) IP  Telecommunication
         Services.  Each segment is organized and managed separately to make key
         decisions such as sales/marketing and product development.  Ultimately,
         the chief operating  decision maker evaluates and makes decisions based
         on the financial  information  available about these two segments.  The
         chief  operating  decision maker for the Company is the chief executive
         officer.

         Reclassifications and Corrections

         Certain  2005 and 2004 items have been  reclassified  to conform to the
         2006  presentation.  The  statement  of cash  flows for the year  ended
         November  30,  2005  has  been  corrected  for  the  classification  of
         amortization  of  debt  discounts  in  the  amount  of  $424,242.  Such
         amortization was originally  classified in financing activities instead
         of in operating  activities.  The effect was that  previously  reported
         cash  flows  used by  operating  activities  of  $(2,165,460)  has been
         corrected  to  reflect  cash  flows  used by  operating  activities  of
         $(1,741,218)  and previously  reported cash flows provided by financing
         activities  of  $2,011,178  has been  corrected  to reflect  cash flows
         provided by financing activities of $1,586,936.  There was no effect on
         net loss or on loss per share.

         Recent Accounting Pronouncements

         In December  2006,  the FASB issued FASB Staff  Position  EITF  00-19-2
         "Accounting for  Registration  Payment  Arrangements."  The guidance in
         this staff position  addresses an issuer's  accounting for registration
         payment arrangements and shall be effective for

                                      F-14
<page>
                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

1.       Description   of  Business   and  Summary  of   Accounting   Principles
         -----------------------------------------------------------------------
         (Continued)
         -----------

         Recent Accounting Pronouncements  (Continued)

         financial  statements  issued for fiscal years beginning after December
         15, 2006,  and interim  periods with those fiscal years.  Management is
         assessing the impact on the Company's  financial  condition and results
         of operations.

         In September 2006, the FASB issued SFAS No. 158 "Employers'  Accounting
         for Defined  Benefit  Pension and Other  Postretirement  Plans,"  which
         amends SFAS No. 87 "Employers'  Accounting for Pensions" (SFAS No. 87),
         SFAS No. 88 "Employers'  Accounting for Settlements and Curtailments of
         Defined Benefit  Pension Plans and for Termination  Benefits" (SFAS No.
         88), SFAS No. 106 "Employers'  Accounting for  Postretirement  Benefits
         Other Than  Pensions"  (SFAS No.  106),  and SFAS No. 132R  "Employers'
         Disclosures About Pensions and Other  Postretirement  Benefits (revised
         2003"" (SFAS No. 132R). This Statement  requires companies to recognize
         as asset or liability for the overfunded or underfunded status of their
         benefit plans in their financial statements. SFAS No. 158 also requires
         the  measurement  date for plan assets and liabilities to coincide with
         the  sponsor's   year  end.  The  standard   provides  two   transition
         alternatives related to the change in measurement date provisions.  The
         recognition  of an  asset  and  liability  related  to  the  change  in
         measurement date provisions.  The recognition of an asset and liability
         related to the funded  status  provision is  effective  for fiscal year
         ending  after  December  15,  2006 and the change in  measurement  date
         provisions is effective for fiscal years ended after December 15, 2008.
         Management is assessing the impact on the Company's financial condition
         and results of operations.

         In September 2006, the SEC issued Staff  Accounting  Bulletin  108("SAB
         108"),  which  expresses  the Staff's  views  regarding  the process of
         quantifying  financial  statement   misstatements.   The  bulletin  was
         effective at fiscal year end 2006. The  implementation of this bulletin
         had no impact on the  Company's  results of  operations,  cash flows or
         financial position.

         In  September  2006,  the FASB issued  Statement  No.  157,  Fair Value
         Measurements  ("SFAS 157"). SFAS 157 defines fair value,  establishes a
         framework for  measuring  fair value in generally  accepted  accounting
         principles   (GAAP),   and   expands   disclosures   about  fair  value
         measurements.  SFAS  157  will be  applied  prospectively  and  will be
         effective for periods beginning after November 15, 2007. The Company is
         currently  evaluating the effect,  if any, of SFAS 157 on the Company's
         consolidated financial statements.

         In  June  2006,  the  FASB  issued   Interpretation   ("FIN")  No.  48,
         "Accounting for Uncertainty in Income Taxes - an interpretation of FASB
         Statement  ("SFAS")  No.  109."  This   Interpretation   clarifies  the
         accounting for  uncertainty  in income taxes  recognized in an entity's
         financial  statements in accordance with SFAS No. 109,  "Accounting for
         Income Taxes." The interpretation describes a recognition threshold and
         measurement  attribute  for the financial  statement  disclosure of tax
         positions  taken or expected to be taken. It also provides for guidance
         on derecognition, classification, interest and penalties, accounting in
         interim  periods,  disclosures and transition.  FIN No. 48 is effective
         for fiscal years  beginning  after  December  15, 2006.  The Company is
         still  evaluating  the effect of adopting FIN 48 and does not expect it
         to have a  material  effect  of the  Company's  consolidated  financial
         statements.

         In June 2006,  the Emerging  Issues Task Force  ("EITF")  ratified EITF
         Issue  06-3,  "How Taxes  Collected  From  Customers  and  Remitted  to
         Governmental  Authorities  Should Be Presented in the Income  Statement
         (That Is, Gross versus Net Presentation)." A consensus was reached that
         entities may adopt a policy of presenting taxes in the income statement
         on either a gross or net basis. An entity should disclose its policy of
         presenting taxes and the amount of any taxes presented on a gross basis
         should be  disclosed,  if  significant.  The guidance is effective  for
         periods  beginning after December 15, 2006. We present  revenues net of
         taxes.  EITF 06-3 will not impact the method for recording  these sales
         taxes in our consolidated financial statements.

                                      F-15
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

1.       Description   of  Business   and  Summary  of   Accounting   Principles
         -----------------------------------------------------------------------
         (Continued)
         -----------

         Recent Accounting Pronouncements (Continued)

         In May 2005,  the FASB  issued SFAS No.  154,  "Accounting  Changes and
         Error  Corrections"  ("SFAS 154"),  which  replaces APB Opinion No. 20,
         "Accounting  Changes," and FASB Statement No. 3, "Reporting  Accounting
         Changes  in  Interim  Financial  Statements."  APB  Opinion  No. 20 had
         required  that  changes  in  accounting  principles  be  recognized  by
         including  the  cumulative  effect of the change in the period in which
         the  new   accounting   principle   was  adopted.   SFAS  154  requires
         retrospective  application  of the change to prior  periods'  financial
         statements, unless it is impracticable to determine the period-specific
         effects of the change.  The FASB identified the reason for the issuance
         of SFAS 154 to be part of a broader  attempt to  eliminate  differences
         with  the  International   Accounting  Standards  Board  ("IASB").  The
         Statement is effective for fiscal years  beginning  after  December 15,
         2005.  The Company  does not  anticipate  that the adoption of SFAS 154
         will have a significant impact on the Company'  consolidated  financial
         position or results of operations.

2.       Going Concern Matters and Realization of Assets
         -----------------------------------------------

         The  accompanying  financial  statements  have been prepared on a going
         concern basis,  which  contemplates  the  realization of assets and the
         satisfaction  of  liabilities  in  the  ordinary  course  of  business.
         However,  the  Company  has  sustained   substantial  losses  from  its
         continuing  operations in recent years and has negative working capital
         and a  stockholders'  equity  deficiency.  In addition,  the Company is
         experiencing  difficulty in generating sufficient cash flow to meet its
         obligations  and sustain its  operations and is currently in default of
         its financing agreement with its principal lender (Note 8). The Company
         expects its  operating  losses and cash  deficits  from  operations  to
         continue through fiscal 2007.

         Based on its current  business  plans,  the Company  believes  that its
         existing cash  resources  will only be sufficient to fund its operating
         losses,  capital  expenditures,  lease and debt  payments  and  working
         capital  requirements through a portion of the second quarter of fiscal
         2007.  As a result,  the  Company  will need to raise  additional  cash
         through  some  combination  of  borrowings,  sale  of  equity  or  debt
         securities   or  sale  of   assets  to  enable  it  to  meet  its  cash
         requirements.

         The Company may not be able to raise sufficient additional debt, equity
         or other cash on  acceptable  terms,  if at all.  Failure  to  generate
         sufficient revenues,  achieve certain other business plan objectives or
         raise  additional  funds  could have a material  adverse  effect on the
         Company's  results of  operations,  cash flows and financial  position,
         including its ability to continue as a going  concern,  and may require
         it to significantly  reduce,  reorganize,  discontinue or shut down its
         operations.

         In view  of the  matters  described  above,  recoverability  of a major
         portion of the recorded asset amounts shown in the accompanying balance
         sheet is dependent upon continued  operations of the Company which,  in
         turn,  is dependent  upon the  Company's  ability to meet its financing
         requirements  on a  continuing  basis,  and to  succeed  in its  future
         operations.  The financial  statements  do not include any  adjustments
         relating to the  recoverability  and  classification  of recorded asset
         amounts or amounts  and  classification  of  liabilities  that might be
         necessary should the Company be unable to continue in its existence.

                                      F-16
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004


2.       Going Concern Matters and Realization of Assets (Continued)
         -----------------------------------------------------------

         Management's plans include (1) evaluating offers to sell part or all of
         its  wireline  subscriber  base and plans to use the proceeds to reduce
         its debt payments,  (2) seeking additional financing to purchase target
         businesses  that are  generating  positive  cash flow,  and (3) seeking
         additional  financing  to  continue  operations  as a  broadband  voice
         carrier  and  increasing  its sales  channels  and  sales  staff so its
         broadband voice facilities are more fully utilized.

         There can be no assurance  that the Company will be able to achieve its
         business plan  objectives or that it will achieve or maintain cash flow
         positive  operating  results.  If the  Company  is unable  to  generate
         adequate funds from its operations or raise  additional  funds,  it may
         not be able to  repay  its  existing  debt,  continue  to  operate  its
         network, respond to competitive pressures or fund its operations.  As a
         result,   the  Company  may  be  required  to   significantly   reduce,
         reorganize,  discontinue  or shut down its  operations.  The  Company's
         financial  statements do not include any adjustments  that might result
         from this uncertainty.

3.       Investment  and Other Securities
         --------------------------------
<table>
<caption>
                                                                Fair        Unrealized
                                                 Cost          Value       Holding Loss
                                             ------------   ------------   ------------

                                          <c>            <c>            <c>
         At November 30, 2006:

            Equity securities, included in
              other assets                   $     13,470   $      4,368   ($     9,102)
                                             ------------   ------------   ------------

         At November 30, 2005

           Equity securities, included in
             other assets                    $      9,469   $      2,050   ($     7,419)
                                             ------------   ------------   ------------
</table>

         The Company  exercised its warrant,  which was not publicly traded,  to
         purchase 95,238 shares of Talk America Holding,  Inc. ("Talk") at $6.30
         per share, in August 2005, the Company sold the warrant,  recognizing a
         gain of  approximately  $218,000.  As of November 30, 2005, the gain is
         included  in  the  Consolidated  Statements  of  Operations  under  the
         caption, "Gain on sale of investment securities and other investments."

4.       Other Investments
         -----------------

         The  Company   held  shares  in  Cordia   Corporation   ("Cordia"),   a
         publicly-held  company whose shares were quoted in the over-the-counter
         market.  Due to the  thinly-traded  nature of the Cordia  shares,  such
         shares had not been  accounted for as a marketable  equity  security in
         accordance  with Statement of Financial  Accounting  Standards No. 115,
         but instead were carried at cost.

         During the years ended  November  30, 2005 and 2004,  the Company  sold
         82,080 and 2,000 shares of Cordia stock, resulting in gains of $159,776
         and $770.  At  November  30, 2006 and 2005,  the  Company  held 100 and
         81,180 shares of Cordia.

                                      F-17
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

5.       Property, Plant and Equipment
         -----------------------------

                                                2006         2005
                                             ----------   ----------

         Machinery and equipment             $  447,612   $   82,605
         Computer equipment and software      1,010,276      903,532
         Furniture and fixtures                  90,452       90,452
                                             ----------   ----------
                                              1,548,340    1,076,589
         Less accumulated depreciation and
           amortization                         645,059      482,778
                                             ----------   ----------

                                             $  903,281   $  593,811
                                             ----------   ----------

6.       Deferred Finance Costs
         ----------------------

                                                2006         2005
                                             ----------   ----------

           Gross asset                       $1,494,775   $  676,342
           Less accumulated amortization        481,834      133,449
                                             ----------   ----------

                                             $1,012,941   $  542,893
                                             ----------   ----------

         Amortization  expense of  deferred  finance  costs for the years  ended
         November 30, 2006, 2005 and 2004 was $384,697, $133,448 and $0.

         Future amortization of deferred finance costs are as follows:

                   Years ended November 30,
                   ------------------------

                             2007                        $  638,016
                             2008                           338,660
                             2009                            36,265
                                                         ----------

                                                         $1,012,941
                                                         ----------

7.       Short-Term Borrowings
         ---------------------

         On December 17, 2004,  the Company sold a promissory  note (the "Note")
         in the  principal  amount of  $328,767  and  issued  160,000  shares of
         restricted common stock to an unaffiliated  party for $273,686,  net of
         related financing costs.  $32,000 of the proceeds has been allocated to
         the common  stock.  The Note was payable on  December  17, 2005 and was
         unsecured.  On December  16,  2005,  the Company  paid  $328,767 to the
         holder  of the  Note in full  settlement  of the  obligation.  The Note
         required  the  Company to spend the  proceeds  of the Note on sales and
         marketing efforts.  The Company incurred costs of $36,314 in connection
         with the issuance of the Note, which was amortized over the term of the
         Note.  Amortization of these costs for the year ended November 30, 2005
         was $34,722, and is included in depreciation and amortization  expense.
         Amortization  of the $32,000 debt discount for the year ended  November
         30, 2005 was $30,597 and was included in interest expense.  On November
         30,  2005,  $326,103  was due the  holder  of the Note.  The  effective
         interest rate on the Note was 22.7%.

                                      F-18
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

8.       Long-Term Debt and Capital Lease Obligations
         --------------------------------------------

         The following table summarizes components of long-term debt and capital
         lease obligations as of November 30, 2006 and 2005:

                                                               November 30
                                                        -----------------------
                                                           2006         2005
                                                        ----------   ----------

         Term note dated February 8, 2005               $1,006,799   $  695,651
         Term note dated November 30, 2005               1,205,408      907,266
         Term note dated May 31, 2006                    1,057,618
         Capital lease obligations                         292,789       95,565
                                                        ----------   ----------
                Total                                    3,562,614    1,698,482
         Less current portion                            3,347,707       43,891
                                                        ----------   ----------
         Long-term debt and capital lease obligations   $  214,907   $1,654,591
                                                        ----------   ----------

         Payments of long-term debt and capital lease  obligations are scheduled
         as follows:


                                          Term     Capital Lease
                                          Notes     Obligations     Total

                2007                   $2,114,616   $  120,702   $2,235,318
                2008                    2,855,846       80,013    2,935,859
                2009                      437,846       77,808      515,654
                2010                           --       66,198       66,198
                2011                           --       51,187       51,187
                                       ----------   ----------   ----------
                                        5,408,308      395,908    5,804,216

         Less amount representing
            interest                    2,138,483      103,119    2,241,602
                                       ----------   ----------   ----------

         Principal portion of future
         payments                       3,269,825      292,789    3,562,614

         Less current portion           3,269,825       77,882    3,347,707
                                       ----------   ----------   ----------

         Long-term portion             $       --   $  214,907   $  214,907
                                       ----------   ----------   ----------

         On  February  8, 2005,  the Company  entered  into a secured  financing
         arrangement  with a lender.  The  financing  consisted  of a $2 million
         secured  convertible term note (the "February 2005 Financing") that, as
         modified,  matures on February 8, 2008. The note was amended on May 31,
         2006 and is no longer convertible (see below).

                                      F-19
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

8.       Long-Term Debt and Capital Lease Obligations (Continued)
         --------------------------------------------------------

         In  connection  with this  financing,  the  Company  issued  the lender
         warrants to purchase up to 793,650 shares of common stock. The warrants
         are exercisable through February 8, 2012 as follows:  264,550 shares at
         $0.72 per share;  264,550 shares at $0.79 per share; and the balance at
         $0.95 per share. The underlying  contracts provide for a potential cash
         settlement and  accordingly,  the warrants were classified as debt. The
         Company  initially   recorded   discounts   aggregating   approximately
         $1,316,000,  of which,  approximately $504,000 represented the value of
         the warrants  using the  Black-Scholes  method with an interest rate of
         3.1%,  volatility  of 158%,  zero  dividends and expected term of seven
         years;  approximately  $706,000  represented the beneficial  conversion
         feature  inherent  in  the  instrument;   and  approximately   $106,000
         represented  debt issue costs paid to the lender.  Such  discounts  are
         being  amortized  using the effective  interest method over the term of
         the related debt.  Although the stated interest rate of the convertible
         note was the prime  rate  plus 3%,  as a result  of the  aforementioned
         discounts,  the  effective  interest  rate of the  note,  as  modified,
         approximated  38% per annum. The Company incurred fees to third parties
         in connection with this financing aggregating  approximately  $367,000,
         including  warrants to purchase up to 253,968  shares of common  stock.
         These warrants were valued at $150,000 using the  Black-Scholes  method
         using the same assumptions  described above and are included in equity.
         These  warrants are  exercisable  through  February 8, 2009 at $.63 per
         share.

         On November  30,  2005,  the Company  entered  into a second  financing
         arrangement  with the lender  (the  "November  2005  Financing").  This
         financing  consisted of a $2 million secured convertible term note that
         matures on November 30, 2008.  The note was amended on May 31, 2006 and
         is no longer  convertible  (see below).  The proceeds of the  financing
         were held in escrow, and received by the Company on December 1, 2005.

         In  connection  with this  financing,  the  Company  issued  the lender
         warrants to purchase up to  1,683,928  shares of the  Company's  common
         stock.  The warrants are exercisable at $.10 per share through November
         30,  2020.  The  underlying  contracts  provide  for a  potential  cash
         settlement, and accordingly, the warrants have been classified as debt.
         The Company  initially  recorded  discounts  aggregating  approximately
         $1,093,000,  of which,  approximately $740,000 represented the value of
         the warrants  using the  Black-Scholes  method with an interest rate of
         4.3%,  volatility of 152%,  zero dividends and expected term of fifteen
         years;  approximately  $268,000  represented the beneficial  conversion
         feature  inherent  in  the  instrument;   and   approximately   $85,000
         represented  debt issue costs paid to the lender.  Such  discounts  are
         being  amortized  using the effective  interest method over the term of
         the related debt.  Although the stated interest rate of the convertible
         note is the  prime  rate  plus 2%,  as a result  of the  aforementioned
         discounts,  the  effective  interest  rate  of  the  note  amounted  to
         approximately 47% per annum. The Company incurred fees to third parties
         in connection with this financing aggregating  approximately  $273,000,
         including  warrants to purchase up to 262,296  shares of common  stock.
         These  warrants  were  valued  at   approximately   $99,000  using  the
         Black-Scholes method using the same assumptions described above and are
         included in equity. These warrants are exercisable through November 30,
         2009 at $.61 per share. The warrant  liability will be adjusted at each
         future  reporting  date to fair  market  value (see  discussion  of the
         amendment to this Note below).

                                      F-20
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

8.       Long-Term Debt and Capital Lease Obligations (Continued)
         --------------------------------------------------------

         On May 31, 2006, the Company entered into a third financing arrangement
         with the lender (the "May 2006 Financing"). This financing consisted of
         a secured term note up to a maximum principal amount of $1,700,000 (the
         "Note"),  an amended and  restated  secured  term note that amended and
         restated the February 2005 Financing ("Amended Note 1"), an amended and
         restated  secured  term note that amended and restated the November 30,
         2005 Financing  ("Amended Note 2") and a common stock purchase  warrant
         (the "Warrant") that entitles Laurus to purchase up to 3,359,856 shares
         of the Company's  common stock,  par value $.10 per share.  The Warrant
         grants the lender the right to purchase for cash up to 3,359,856 shares
         of common  stock at an exercise  price of $0.10 per share.  The Warrant
         expires on May 31, 2020.  If the Company  repays the Note in full prior
         to May 31, 2007 plus an  additional  amount of $100,000,  the number of
         shares originally issuable upon exercise of the Warrant will be reduced
         by  1,175,950  shares,  and the  maximum  number of shares  that may be
         purchased upon exercise of the Warrant is reduced to 2,183,906  shares.
         The  Warrant  does not contain  registration  rights and  requires  the
         lender to limit  the sale on any  trading  day of any  shares of common
         stock  issued  upon the  exercise  of the  Warrant  to a maximum of ten
         percent (10%) of the aggregate  number of shares of common stock traded
         on such trading day. The value of the Warrant was $1,173,762 determined
         using  the  Black-Scholes   method  with  an  interest  rate  of  4.8%,
         volatility of 152%, zero dividends and expected term of fourteen years,
         and the  cost  has been  allocated  as  described  below.  The  Warrant
         provides  for  a  potential  cash  settlement,   and  accordingly,   is
         classified as debt.

         The warrant  liability  for all of the above  warrants  which have been
         classified as debt are adjusted to fair market value at each  reporting
         date.

                                      F-21
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

8.       Long-Term Debt and Capital Lease Obligations (Continued)
         --------------------------------------------------------

         The Company  received  $650,000 of the principal  amount of the Note on
         June 2,  2006 and  $1,050,000  on  November  14,  2006,  after  certain
         operating  milestones  were met. Had the Company not met the  operating
         milestones,  the  Company  could not have  access to the funds and such
         funds were kept in a restricted  account not controlled by the Company.
         Accordingly,  the Company did not record an obligation  until  November
         14, 2006. The Note requires  interest  payments at prime plus 2% on the
         first day of each month  during the term of the Note,  except  that the
         Company was not required to make  interest  payments on the  $1,050,000
         portion of the Note  until the  principal  proceeds  were  received  on
         November  14,  2006.  At such  time an  interest  payment  was  made of
         $49,423,  and the Company  received  interest income of $23,501,  which
         represented the interest  income earned on the $1,050,000  balance that
         was deposited in a restricted cash account from the time period of June
         2, 2006 to November 14, 2006.  Principal payments of $60,954 are due on
         a monthly basis beginning June 1, 2007 until May 31, 2009, when a final
         payment of $237,097 is due.

         The Company has accounted for this as two separate borrowings,  one for
         $650,000 borrowing and one for the $1,050,000  borrowing.  The value of
         the Warrant  allocated to the May 2006  Financing  ($650,000  principal
         component)  amounted  to  $586,881  and  is  accounted  for  as a  debt
         discount.  Debt issue  costs paid to the lender  amounted  to  $59,400.
         These discounts are being amortized using the effective interest method
         over the term of the related debt. Although the stated interest rate of
         the  $650,000  component  of the note is the  prime  rate plus 2%, as a
         result of the aforementioned  discounts, the effective interest rate of
         the $650,000 note is approximately 185% per annum. The Company incurred
         fees to third parties in  connection  with this  financing  aggregating
         approximately  $244,000,  including  warrants to purchase up to 548,571
         shares of common stock.  These  warrants  were valued at  approximately
         $108,000  using the  Black-Scholes  method  using the same  assumptions
         described  above and are included in equity.  148,571 of the shares can
         be purchased at $.35,  until May 31,  2010,  and 400,000  shares can be
         purchased at $.21 until November 15, 2010. The $1,050,000  borrowing is
         at prime plus 2%. The prime rate was 8 1/4% at November 30, 2006.

         The  principal  amendments  to the  February  8, 2005 note  effected in
         Amended Note 1 on May 31, 2006 were the  elimination  of the conversion
         features that permitted the conversion of unpaid principal and interest
         on the  February 8, 2005 note into shares of Company  common  stock and
         the reduction in the interest rate payable on the outstanding principal
         amount of the  February  8, 2005 note from the "prime  rate" plus three
         percent (3%) to the "prime rate" plus two percent  (2%).  The remaining
         principal  and interest  payments on this note,  in monthly  amounts of
         $60,606 plus interest, are no longer convertible.  Any unpaid principal
         balance at the  maturity  date of  February  8, 2008 is payable at that
         time.

                                      F-22
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

8.       Long-Term Debt and Capital Lease Obligations (Continued)
         --------------------------------------------------------

         The  principal  amendment  to the  November  30, 2005 note  effected in
         Amended Note 2 on May 31, 2006 was the  elimination  of the  conversion
         features that permitted the conversion of unpaid principal and interest
         on the November 30, 2005 note into shares of Company common stock.  The
         remaining principal and interest payments on this note, monthly amounts
         of $33,333 plus interest, are no longer convertible.  The interest rate
         is the "prime rate" plus two percent (2%). Any unpaid principal balance
         at the maturity date of November 30, 2008 is payable at that time.

         The amendments to Amended Note 1 and Amended Note 2 (the  "Amendments")
         were accounted for as modifications of debt instruments.  Consequently,
         the unamortized beneficial conversion features  (approximately $535,000
         at May 31, 2006)  arising  from the  original  issuance of the February
         2005 Financing and the November 2005 Financing were reversed to paid-in
         capital on May 31,  2006.  The value of the  Warrant  allocated  to the
         Amendments  was  $586,881 and the Company  recorded a deferred  finance
         cost for such amount. The deferred finance cost is being amortized over
         the life of the related indebtedness.

         The Company did not make the scheduled  monthly  principal  payments to
         the lender  under the terms of  Amended  Note 1 and  Amended  Note 2 of
         approximately  $93,000  that were due on October  1,  2006.  The lender
         issued a waiver for non-payment and changed the due date of the $93,000
         to the final  maturity  date of the  notes.  The  Company  has not made
         principal payments due to the lender for Amended Note 1 due on or after
         December  1,  2006 or for  Amended  Note 2 that  were due on and  after
         November  1, 2006.  The  Company is in the  process  of  negotiating  a
         principal  deferral of nine  months for Amended  Note 2 and a principal
         deferral for payments on Amended Note 1 until the time that the Company
         sells its CLEC operations in accordance with the agreement it signed on
         December  14, 2006 (see Note 19). The Company has not executed a signed
         document with the lender  regarding this deferral.  The Company remains
         in default  with its lender for late  principal  payments and for other
         items, such as late payment of taxes, and has recorded default interest
         of $42,733 in accordance with its lending agreement.  The Company plans
         to cure  the  default  and  negotiate  a  waiver  with  its  lender  in
         conjunction with the sale of its CLEC subsidiaries,  although there can
         be no assurance that this will be consummated. Because of the existence
         of a default,  the debt may become  callable and it is  classified as a
         current liability as of November 30, 2006.

                                      F-23
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

8.       Long-Term Debt and Capital Lease Obligations (Continued)
         --------------------------------------------------------

         The Company  determined,  in accordance with SFAS 133,  "Accounting for
         Derivative  Instruments  and  Hedging  Activities,"  that the  warrants
         issued to the lender in the February  2005,  November 2005 and May 2006
         Financings represented derivatives.  Accordingly,  the Company recorded
         the fair value of these  derivatives as a debt discount and a liability
         on its consolidated balance sheet. The discounts are being amortized to
         interest expense using the "Effective  Interest Method" of amortization
         over the term of the related  indebtedness.  At November 30, 2006,  the
         value of the  derivatives was decreased by $990,107 to the then current
         fair value of $1,251,182 with a  corresponding  credit to other income.
         At November 30, 2005,  the value of the  derivatives  was  decreased by
         $176,657  to  the  then  current  fair  value  of  $1,067,526,  with  a
         corresponding credit to other income. The Company will continue to mark
         these derivatives to market.

         In connection with the financings,  the Company has agreed,  so long as
         25% of the  principal  amount of the  financings  are  outstanding,  to
         certain  restrictive  covenants,  including,  among  others,  that  the
         Company  will not  declare or pay any  dividends,  issue any  preferred
         stock  that is subject to  mandatory  redemption  prior to the one year
         anniversary  of the maturity date as defined in the  agreement,  redeem
         any of  its  preferred  stock  or  other  equity  interests,  dissolve,
         liquidate  or  merge  with any  other  party  unless,  in the case of a
         merger, the Company is the surviving entity, materially alter or change
         the scope of the Company's  business incur any  indebtedness  except as
         defined in the agreement,  or assume,  guarantee,  endorse or otherwise
         become  directly or  contingently  liable in connection  with any other
         party's obligations.

         To secure  the  payment of all  obligations  to the  lender,  including
         warrants,  the Company  entered into a Master  Security  Agreement that
         assigns and grants to the lender a  continuing  security  interest  and
         first lien on all of the assets of the Company and its subsidiaries. In
         the event the Company or any of its  subsidiaries  wishes to finance an
         acquisition    in   the   ordinary    course   of   business   of   any
         hereafter-acquired  equipment  and has  obtained  a  commitment  from a
         financing  source to finance such  equipment  from an  unrelated  third
         party,  the lender has agreed to release its security  interest on such
         hereafter-acquired  equipment so financed by such third party financing
         source.

9.       Income Taxes
         ------------

         At November 30, 2005, the Company had net operating loss  carryforwards
         for Federal income tax purposes of approximately  $25,400,000  expiring
         in the  years  2008  through  2026.  There is an annual  limitation  of
         approximately  $187,000 on the utilization of approximately  $2,200,000
         of such  net  operating  loss  carryfowards  under  the  provisions  of
         Internal Revenue Code Section 382.

                                      F-24
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

9.       Income Taxes (Continued)
         ------------------------

         At November 30, 2006,  the Company's net operating  loss  carryforwards
         are scheduled to expire as follows:

                   Year ended November 30
                   ----------------------

                            2008                   $ 1,110,000
                            2009                     1,050,000
                            2010                     1,000,000
                            2012                     3,100,000
                            2018                     2,710,000
                            2019                     2,510,000
                            2020                     2,350,000
                            2021                     5,850,000
                            2022                       770,000
                            2024                       450,000
                            2025                     2,100,000
                            2026                     2,400,000
                                                   -----------

                                                   $25,400,000
                                                   -----------

         Deferred  income  taxes  reflect  the  net  tax  effects  of  temporary
         differences  between the carrying amounts of assets and liabilities for
         financial  reporting  purposes  and the  amounts  used for  income  tax
         purposes.  Significant  components of the Company's deferred tax assets
         and liabilities as of November 30, 2006 and 2005 were as follows:

                                                   2006           2005
                                               -----------    -----------

         Deferred tax assets:
            Net operating loss carryforwards   $ 8,636,000    $ 7,820,000
            Allowance for doubtful accounts         80,000         80,000
            Stock based compensation                64,000             --
            Other                                   76,000             --
                                               -----------    -----------
                                                 8,856,000      7,900,000
         Valuation allowance                    (8,856,000)    (7,900,000)
                                               -----------    -----------

         Net deferred assets                   $        --    $        --
                                               -----------    -----------

                                      F-25
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

9.       Income Taxes (Continued)
         ------------------------

         The following is a  reconciliation  of the tax provisions for the three
         years ended November 30, 2006, 2005 and 2004 with the statutory Federal
         income tax rates:

<table>
<caption>
                                                         Percentage of Pre-Tax Income
                                                         ----------------------------
                                                          2006       2005       2004
                                                         ------     ------     ------

                                                       <c>        <c>         <c>
         Statutory Federal income tax rate                (34.0)%    (34.0)%     34.0%

         Income (loss) generating no tax benefit or
           expense                                         36.1       28.8      (34.0)

         State taxes net of Federal effect                   --         --       15.3

         Reversal of accrual for prior year items            --         --      (33.3)

         Permanent differences                             (2.1)       5.2         --
                                                         ------     ------     ------

                                                             --         --      (18.0)%
                                                         ------     ------     ------
</table>

         For the year  ended  November  30,  2004,  the  Company  recorded a tax
         benefit of  approximately  $48,000 which resulted from the reduction of
         an  estimated  accrual of tax expense for the year ended  November  30,
         2003,  offset by tax expense of $22,000 for the year ended November 30,
         2004.

10.      Subsidiary's Plan of Reorganization
         -----------------------------------

         On April 8, 2004, the United States  Bankruptcy  Court for the Southern
         District of New York  confirmed a Plan of  Reorganization  (the "Plan")
         for  Telecarrier  Services,  Inc.  ("TSI").  On July 29,  2002,  TSI, a
         wholly-owned  subsidiary,  had filed a  voluntary  petition  for relief
         under  Chapter 11 of the Federal  Bankruptcy  Code in the United States
         Bankruptcy  Court  for the  Southern  District  of New  York.  The Plan
         authorized  the  Company to  disburse  $325,000  to  creditors  in full
         satisfaction of claims amounting to approximately $1,229,000.

                                      F-26
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

10.      Subsidiary's Plan of Reorganization (Continued)
         -----------------------------------------------

         For the year ended  November 30, 2004,  TSI reported a gain of $904,027
         as a result of being judicially released from liabilities and claims as
         follows:

           Pre-petition claims:
                Unsecured line of credit                  $  150,000
                Trade payables and due to related party      618,482
                Other accrued expenses                       103,250
                                                          ----------

                  Total pre-petition claims                  871,732

           Post-petition payables and accrued expenses        68,124
           Administrative claims and legal costs             289,171
                                                          ----------

                  Total claims                             1,229,027

                Distribution to creditors                    325,000
                                                          ----------

                  Gain on debt reduction                  $  904,027
                                                          ----------

         TSI had an agreement,  effective  January 2, 2002, with Telco Services,
         Inc.  ("Telco"),  a corporation  owned by a former  shareholder  of the
         Company,  under which Telco  provided  TSI with  collection,  sales and
         other services. As a result of a court-stipulated agreement between TSI
         and Telco,  entered into on February 6, 2004, the amount owed Telco for
         such services was reduced by approximately  $51,000. Such reduction was
         included in the gain on  settlement  with  creditors for the year ended
         November 30,  2004.  As of November  30,  2004,  all of Telco's  claims
         related to the TSI bankruptcy had been paid in full,  including $65,000
         in administrative claims and approximately $31,000 in unsecured claims.

11.      Pension Plans
         -------------

         The  Company  sponsors  a defined  benefit  plan  covering  one  active
         employee and a number of former employers. The Company's funding policy
         with respect to the defined benefit plan is to contribute  annually not
         less than the minimum  required by  applicable  law and  regulation  to
         cover the normal cost and to fund supplemental  costs, if any, from the
         date each supplemental cost was incurred. Contributions are intended to
         provide not only for benefits  attributed to service to date,  but also
         for those  expected  to be earned in the future.  Plan  assets  consist
         primarily of investments in  conservative  equity and debt  securities.
         The Company uses a November 30 measurement date for its pension plan.


                                      F-27
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

11.      Pension Plans (Continued)
         -------------------------

         Effective  June 30,  1995,  the plan was  frozen,  ceasing  all benefit
         accruals and resulting in a plan curtailment.

         Obligations and Funded Status at November 30:

         Pension Benefits                                    2006        2005
                                                          ---------   ---------

         Change in benefit obligation:
              Benefit obligation at beginning of year     $(961,536)  $(867,026)
              Interest cost                                 (60,362)    (58,435)
              Actuarial loss                                (30,401)    (99,785)
              Benefits paid                                  52,306      63,710
                                                          ---------   ---------

              Benefit obligation at end of year           $(999,993)  $(961,536)
                                                          ---------   ---------

         Change in plan assets:
              Fair value of plan assets at beginning of
               year                                       $ 634,743   $ 580,073
              Actuarial return on plan assets                54,154      48,380
              Employer contribution                         111,500      70,000
              Asset gain or loss deferred                    (3,496)         --
              Benefits paid                                 (52,306)    (63,710)
                                                          ---------   ---------

              Fair value of plan assets at end of year    $ 744,595   $ 634,743
                                                          ---------   ---------

                                         2006         2005         2004
                                      ---------    ---------    ---------

         Funded status                $(255,398)   $(326,793)   $(286,953)
                                      ---------    ---------    ---------
              Net amount recognized   $(255,398)   $(326,793)   $(286,953)
                                      ---------    ---------    ---------

         Amounts recognized in the statement of financial position consist of:

                                         2006         2005
                                      ---------    ---------

         Accrued benefit cost         $(255,398)   $(326,793)
                                      ---------    ---------
         Net amount recognized        $(255,398)   $(326,793)
                                      ---------    ---------

         The accumulated  benefit  obligation for the Company's  defined benefit
         pension  plan was  $999,993 and $961,536 at November 30, 2006 and 2005,
         respectively.


                                      F-28
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

11.      Pension Plans (Continued)
         -------------------------

         Information  required  for  pension  plan with an  accumulated  benefit
         obligation in excess of plan assets:

                                                      November 30
                                                ----------------------
                                                  2006         2005
                                                ---------    ---------

         Projected benefit obligation           $(999,993)   $(961,536)
         Accumulated benefit obligation          (999,993)   $(961,536)
         Fair value of plan assets                744,595    $ 634,743

          Components of Net Periodic Benefit Cost:

                                            2006        2005        2004
                                          --------    --------    --------

         Interest cost                    $ 60,362    $ 58,435    $ 52,125
         Expected return on plan assets    (54,154)    (45,474)    (41,930)
         Amortization of net loss           21,151      16,834      37,356
                                          --------    --------    --------

         Net periodic benefit cost        $ 27,359    $ 29,795    $ 47,551
                                          --------    --------    --------


          Assumptions

              Weighted-average   assumptions  used  to  determine  net  periodic
                benefit cost as of November 30:

                                             2006        2005        2004
                                             ----        ----        ----

         Discount rate                       6.25%       6.25%       6.25%
         Expected long-term return
           on plan assets                    8.00%       8.00%       8.00%

         The expected  return on Plan assets should remain constant from year to
         year since the long-term  expectation  should not change  significantly
         based on a single year's experience.  A rate of 8% was adopted for this
         purpose.

                                      F-29
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

11.      Pension Plans (Continued)

         Plan Assets

         The  Company's  pension  plan  weighted-average  asset  allocations  at
         November 30, 2006 and 2005, by asset category are as follows:

                                         November 30
                                      ----------------
                                       2006      2005
                                      ------    ------

         Asset Category
            Equity securities           59.0%     56.0%
            Debt securities             36.0%     22.0%
            Other                        5.0%     22.0%
                                      ------    ------

            Total                      100.0%    100.0%
                                      ------    ------

         The  current  investment  policy for  pension  plan assets is to reduce
         exposure to equity market risks.  The current  strategy for Plan assets
         is to invest in conservative equity and debt securities.  The Plan also
         maintains a significant cash balance.

         Equity securities  include the Company's common stock in the amounts of
         approximately  $13,500  (1.8% of plan assets) and $25,700 (4.4% of plan
         assets) at November 30, 2006 and 2005.

         Cash flows - Contributions

         The Company expects to contribute  approximately $50,000 to its defined
         benefit plan in fiscal 2007.

         Estimated Future Benefit Payments

         The following pension benefit payments are expected to be paid:

                2007                               $ 48,352
                2008                                 52,283
                2009                                 50,999
                2010                                 54,038
                2011                                 52,541
                2012-2016                           310,624
                                                   --------

                                                   $568,837
                                                   --------


                                      F-30
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

11.      Pension Plans (Continued)
         -------------------------

         Defined Contribution Plan

         The Company  has a 401(k)  profit  sharing  plan for the benefit of all
         eligible  employees,  as  defined.  The  plan  provides  for  voluntary
         contributions  not to exceed the statutory  limitation  provided by the
         Internal   Revenue   Code.   The   Company   may   make   discretionary
         contributions.  There were no  contributions  made for the years  ended
         November 30, 2006, 2005 and 2004.

12.      Commitments and Contingencies
         -----------------------------

         Operating Leases

         The Company  leases  facilities  under  noncancelable  operating  lease
         agreements which expire through 2008.

         Rent expense was approximately $140,000, $130,000 and $82,000 in fiscal
         2006, 2005 and 2004, respectively.  In addition to the annual rent, the
         Company pays real estate taxes,  insurance and other occupancy costs on
         its leased facilities.

         The minimum  annual  commitments  under all operating  leases that have
         remaining  noncancelable  terms in excess of one year are approximately
         as follows:

                Year ended November 30
                ----------------------

                        2007                      $ 133,000
                        2008                         90,000
                        2009                             --
                                                  ---------

                                                  $ 223,000
                                                  ---------

         Capital Lease Obligations

         The Company leases certain machinery and equipment under capital leases
         with lease terms through 2011.  Obligations  under capital  leases have
         been recorded in the accompanying  financial  statements at the present
         value of future  minimum lease  payments,  discounted at interest rates
         ranging  from  11.7% to 16.6%.  The  capitalized  cost and  accumulated
         depreciation included in property and equipment was as follows:

                                            2006       2005
                                          --------   --------

         Cost                             $347,627   $134,563
         Accumulated depreciation           90,985     72,868
                                          --------   --------

                                          $256,642   $ 61,695
                                          --------   --------



                                      F-31
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

12.      Commitments and Contingencies (Continued)
         -----------------------------------------

         The future  minimum  lease  payments  under the  capital  lease and net
         present value of future  minimum  lease  payments for the ensuing years
         are summarized as follows:

         Year ended November 30
         ----------------------

                  2007                                 $120,702
                  2008                                   80,013
                  2009                                   77,808
                  2010                                   66,198
                  2011                                   51,187
                                                       --------

                                                       $395,908

         Less amount representing interest              103,119
                                                       --------

         Present value of future minimum
          lease payments                               $292,789
                                                       --------

         Purchase commitments

         New Rochelle Telephone Company ("NRTC"),  a wholly-owned  subsidiary of
         the Company,  completed its  negotiations  with Verizon  Services Corp.
         ("Verizon") and signed a Wholesale  Advantage  Services  Agreement (the
         "Agreement")  effective  January 1, 2005.  The Agreement is a long-term
         commercial  alternative  to the  unbundled  network  elements  platform
         ("UNE-P") and allows NRTC to purchase from Verizon  wholesale dial tone
         services  on  terms  that  preserve,  in  all  material  respects,  the
         features,  functionality and ordering processes previously available to
         NRTC under Verizon's UNE-P service offering.  The rates and charges for
         such  services  are fixed at agreed upon price levels that should allow
         NRTC  to  continue  to  offer  its  existing   telephone   services  at
         competitive prices. Pursuant to the Agreement, NRTC and the Company are
         required to keep  confidential  all additional  terms and provisions of
         the Agreement.  The Company has minimum line  commitments in connection
         with the Agreement.

         Other commitments

         During the year ended  November  30,  2005,  the Company  entered  into
         minimum  purchase   agreements  with  certain  wholesale  providers  of
         services needed for the VoIP business.  The agreements  require minimum
         fees as follows:

                    Year ended November 30
                    ----------------------

                             2007                     $ 34,000
                             2008                       13,000
                             2009                           --
                                                      --------

                                                      $ 47,000
                                                      --------

         Litigation

         The  Company is subject to legal  proceedings  and claims that arise in
         the ordinary course of its business. In the opinion of management,  the
         amount of ultimate liability,  if any, is not likely to have a material
         effect on the financial  condition,  results of operations or liquidity
         of the Company.  However,  as the outcome of litigation or legal claims
         is difficult to predict, significant changes in the estimated exposures
         could occur.

                                      F-32
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

13.      Stockholders' Equity
         --------------------

         The Company is authorized to issue 1,000,000 shares of preferred stock,
         par value $.10 per share,  with rights and  privileges to be determined
         by the Board of Directors.

         In  November  2006,  the  company  completed  a  private  placement  of
         5,180,000  shares  of its  common  stock,  par  value  $0.10  per share
         ("Common Stock"), to accredited investors at a price of $.10 per share.
         The placement of shares was assisted by a broker dealer that acted as a
         finder (the  "Finder") in the  transaction  and received a finder's fee
         consisting of 8% cash and 8% warrant  coverage of the monies it raised.
         Of the gross proceeds of $518,000  received by the Company,  the Finder
         raised  $353,000 and the  Company's  management  raised  $165,000.  The
         Finder received a cash fee of $28,240 and warrants to purchase  282,400
         shares of Common Stock at a price of $0.12 per share.  The value of the
         warrants  received  by  the  Finder  amounted  to  $42,742,  using  the
         Black-Sholes method with an interest rate of 4.87%, volatility of 106%,
         zero dividends and expected term of four years.

         The following is a summary of outstanding options:
<table>
<caption>
                                                                           Weighted-
                                                                            Average
                                            Number of    Exercise Price    Exercise
                                             Shares         Per Share        Price
                                          ------------    ------------   ------------

                                        <c>           <c>             <c>
         Outstanding December 1, 2003        1,723,334    $.10 - $2.50   $       0.84
         Granted during year ended
              November 30, 2004              2,185,000    $.16 - $0.28   $       0.23
         Canceled during year ended
              November 30, 2004               (435,834)   $.10 - $2.25   $       1.35
                                          ------------
         Outstanding November 30, 2004       3,472,500    $.10 - $2.50   $       0.40
         Granted during year ended
              November 30, 2005              1,625,500    $.36 - $0.59   $       0.43
         Exercised/canceled during year
              ended November 30, 2005         (909,000)   $.10 - $2.50   $       0.80
                                          ------------
         Outstanding November 30, 2005       4,189,000    $.10 - $1.44   $       0.32
         Granted during year ended
              November 30, 2006                 10,000    $       0.35   $       0.35
         Exercised/canceled during year
               ended November 30, 2006        (780,500)   $.10 - $1.44   $       0.80
                                          ------------
         Outstanding November 30, 2006       3,418,500    $.10 - $0.58   $       0.28
         Options exercisable,
              November 30, 2006              2,207,833    $.10 - $0.58   $       0.26
                                          ------------
         Options exercisable,
              November 30, 2005                926,500    $.10 - $1.44   $       0.40
                                          ------------
         Options exercisable,
              November 30, 2004                937,500    $.10 - $2.50   $       0.40
                                          ------------
</table>

                                      F-33
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

13.      Stockholders' Equity (Continued)
         --------------------------------

         The  following   table   summarizes   information   about  the  options
         outstanding at November 30, 2006:

<table>
<caption>
                                     Options Outstanding                Options Exercisable
                           ----------------------------------------   -----------------------
                                           Weighted-
                                           Average        Weighted-                 Weighted-
            Range of                      Remaining        Average                   Average
            Exercise          Number      Contractual     Exercise       Number     Exercise
             Prices        Outstanding    Life (Years)      Price     Outstanding     Price
        ---------------    -----------    ------------    ---------   -----------     -----

     <c>                  <c>             <c>           <c>         <c>           <c>
        $  .10 - $  .58      3,418,500       2.92          $  .28      2,207,833     $   .26
</table>

         On October 24, 1996, the  shareholders  of the Company adopted the eLEC
         Communications  Corp. 1996 Restricted Stock Award Plan (the "Restricted
         Stock Award Plan").  An aggregate of 400,000  shares of common stock of
         the Company have been reserved for issuance in connections  with awards
         granted  under the  Restricted  Stock  Award  Plan.  Such shares may be
         awarded from either  authorized and unissued shares or treasury shares.
         The maximum  number of shares that may be awarded under the  Restricted
         Stock Award Plan to any individual  officer or key employee is 100,000.
         No shares were awarded during fiscal 2006, 2005 and 2004.

         As of November 30, 2006 and 2005, warrants were outstanding to purchase
         up to 7,434,668 and 3,393,841  shares of the Company's  common stock at
         prices ranging from $.10 to $.95 and $.10 to $1.63,  respectively.  The
         warrants expire through November 2020.

14.      Earnings (Loss) Per Common Share
         --------------------------------

         Earnings (loss) per common share data was computed as follows:

<table>
<caption>
                                                    2006            2005            2004
                                                ------------    ------------    ------------

                                             <c>             <c>             <c>
         Net income (loss)                      $ (2,345,055)   $ (2,265,795)   $    170,253
                                                ------------    ------------    ------------

         Weighted average common
              shares outstanding                  17,338,268      16,770,789      16,254,282
         Effect of dilutive securities, stock
              options and preferred stock                 --              --         461,526
                                                ------------    ------------    ------------
         Weighted average dilutive
             common shares outstanding            17,338,268      16,770,789      16,715,808
                                                ------------    ------------    ------------

         Earnings (loss)
              per common share - basic          $       (.14)   $       (.14)   $        .01
                                                ------------    ------------    ------------
         Earnings (loss)
              per common share - diluted        $       (.14)   $       (.14)   $        .01
                                                ------------    ------------    ------------
</table>

                                      F-34
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

15.      Risks and Uncertainties
         -----------------------

         The Company buys substantially all of the  telecommunications  services
         that it resells from Regional Bell Operating Companies ("RBOC's"),  and
         long distance carriers and is,  therefore,  highly dependent upon them.
         The Company believes that its  relationship  with them is satisfactory.
         The  Company  believes  that  there  are less  desirable  suppliers  of
         telecommunication  services in the  geographical  location in which the
         Company  conducts  business.  In  addition,  the  Company is at risk to
         regulatory  agreements  that  govern  the  rates to be  charged  to the
         Company. In light of the foregoing,  it is reasonably possible that the
         loss of the Company's  relationship  with such vendors or a significant
         unfavorable change in the regulatory  agreements structure would have a
         severe near-term impact on the Company's  ability to conduct its resale
         business.

         Future   results   of   operations   involve  a  number  of  risks  and
         uncertainties.  Factors that could affect future operating  results and
         cash flows and cause actual results to vary  materially from historical
         results include, but are not limited to:

            o  The Company's business strategy with respect to bundled local and
               long distance services may not succeed.

            o  Failure to manage,  or  difficulties  in managing,  the Company's
               growth  operations or  restructurings  including  attracting  and
               retaining  qualified personnel and opening up new territories for
               its service with favorable gross margins.

            o  Dependence  on the  availability  or  functionality  of incumbent
               local  telephone  companies'  networks  and  the  resale  of such
               services.

            o  Increased price competition in local and long distance service.

            o  Failure or interruption in the Company's  network and information
               systems.

            o  Changes in government policy, regulation and enforcement.

            o  Failure of the Company's collection  management system and credit
               controls efforts for customers.

            o  Inability to adapt to technological change.

            o  Competition in the telecommunications industry.

            o  Inability to manage customer attrition and bad debt expense.

            o  Adverse  change  in  Company's   relationship   with  third-party
               carriers.

            o  Failure or bankruptcy of other telecommunications  companies whom
               the Company relies upon for services and revenues.

            o  Lack of capital,  borrowing  capacity,  and inability to generate
               cash flow.

            o  The  Company is in default of its  financing  agreement  with its
               principal lender, and such loans may be called at any time.

            o  The  Company  relies  on  the  services  of  one  small  software
               developer for its IP telecommunication services.

                                      F-35
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

16.      Selected Quarterly Financial Information (Unaudited)
         ----------------------------------------------------

         For the first three  quarters of the year ended  November 30, 2005, the
         Company  accreted  the  interest  related to the debt  discounts of the
         February  2005  Financing  and  amortized  the debt issue costs related
         thereto over a one year period.  During the fourth  quarter of the year
         ended November 30, 2005, the Company reevaluated the appropriateness of
         the one year  amortization  period,  and  determined  that the  related
         indebtedness  had an initial  three year maturity  date,  and that such
         three-year period was the appropriate  period for the related accretion
         and amortization. The Company initially used a one year period based on
         a clause in the documents  relating to the February 2005 Financing that
         required the Company to enter into a service provider  agreement with a
         wholesale  telephone service provider in order for the maturity date of
         the loan to be  extended  from  February  8, 2006 to  February 8, 2008.
         However,  the Company,  as of the financing date, had already agreed to
         the terms of the  service  provider  agreement  with  Verizon,  and had
         effectively  entered into such service  provider  agreement,  which was
         effective as of January 1, 2005. The Company had also  miscalculated  a
         component  of the  accretion  for the first three  quarters of the year
         ended  November  30,  2005  related  to the  warrant  component  of the
         discount.  Accordingly,  as a result  of these  errors,  in the  fourth
         quarter of the year ended  November  30, 2005,  the Company  determined
         that previously  recorded interest expense and amortization of deferred
         financing  costs  had been  overstated  cumulatively  by  approximately
         $245,000 through the third quarter of the year ended November 30, 2005,
         and accordingly,  reduced interest expense in the fourth quarter of the
         year ended  November  30, 2005 by such amount,  of which  approximately
         $21,000  related to the  quarter  ended  February  28,  2005,  $106,000
         related to the quarter ended May 31, 2005, and $118,000  related to the
         quarter ended August 31, 2005.

         The quarterly  information  for the fiscal year ended November 30, 2005
         presented below has been restated from that originally included in Form
         10-QSB filed for the  respective  quarters,  however  during the fiscal
         year  ended  November  30,  2006,   the  Company   restated  such  2005
         information in its 2006 quarterly filings on form 10-Q.


                                      F-36
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

16.      Selected Quarterly Financial Information (Unaudited) (Continued)
         ----------------------------------------------------------------

         During the fourth  quarter of the year ended  November  30,  2005,  the
         Company reversed a liability in the amount of $198,059 that was related
         to the discontinuance of the luggage business of the Company. There has
         not been any demand for payment of the  liabilities and the Company has
         determined that the statute of limitations  has expired.  The liability
         had been on the  Company's  balance  sheet under the  caption  accounts
         payable and accrued expenses at November 30, 2004.

<table>
<caption>
                                  First         Second          Third          Fourth
        November 30, 2006        Quarter        Quarter        Quarter        Quarter
                               -----------    -----------    -----------    -----------

                            <c>            <c>            <c>            <c>
         Revenue               $ 2,496,854    $ 2,155,557    $ 1,949,040    $ 1,755,144
                               -----------    -----------    -----------    -----------
         Operating loss        $  (373,964)   $  (584,075)   $  (619,800)   $  (708,703)
                               -----------    -----------    -----------    -----------
         Net loss              $  (663,479)   $  (647,941)   $  (437,513)   $  (596,122)
                               -----------    -----------    -----------    -----------
         Net loss per share-
            basic              $      (.04)   $      (.04)   $      (.03)   $      (.03)
                               -----------    -----------    -----------    -----------
         Net loss per share-
            diluted            $      (.04)   $      (.04)   $      (.03)   $      (.03)
                               -----------    -----------    -----------    -----------

<caption>
                                  First         Second          Third          Fourth
        November 30, 2005        Quarter        Quarter        Quarter        Quarter
                               -----------    -----------    -----------    -----------

                            <c>            <c>            <c>            <c>

         Revenue               $ 3,863,479    $ 4,815,376    $ 4,146,759    $ 3,055,189
                               -----------    -----------    -----------    -----------
         Operating loss        $  (395,729)   $(1,138,964)   $  (424,088)   $  (443,171)
                               -----------    -----------    -----------    -----------
         Net loss              $  (380,589)   $(1,235,060)   $  (257,140)   $  (393,006)
                               -----------    -----------    -----------    -----------
         Net loss per share-
            basic              $      (.02)   $      (.07)   $      (.02)   $      (.02)
                               -----------    -----------    -----------    -----------
         Net loss per share-
            diluted            $      (.02)   $      (.07)   $      (.02)   $      (.02)
                               -----------    -----------    -----------    -----------
</table>

         For the year ended  November 30, 2005,  the sum of the four  individual
         quarters'  earnings  (loss)  per  share  does  not  equal  the  amounts
         presented on the Consolidated Statements of Operations due to rounding.

17.      Accounts Payable and Accrued Expenses
         -------------------------------------
<table>
<caption>
                                                                         November 30,
                                                                   -----------------------
                                                                      2006         2005
                                                                   ----------   ----------

                                                                <c>          <c>
         Trade payables                                            $1,982,888   $1,963,162
         Accrued pension liability                                    255,398      326,793
         Other, individually less than 5% of current liabilities      611,225      453,668
                                                                   ----------   ----------
                                                                   $2,849,511   $2,743,623
                                                                   ----------   ----------
</table>

                                      F-37
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

17.      Accounts Payable and Accrued Expenses (Continued)
         -------------------------------------------------

         At November 30, 2006, the Company is disputing payment on invoices from
         Verizon amounting to approximately $400,000 because it believes Verizon
         overcharged  the  Company  for  certain  calls  made  by the  Company's
         customers.  Although the Company is not  currently  required to pay the
         disputed amount,  Verizon has initially rejected the claim. The Company
         has  escalated  the  claim and has  hired a firm  that  specializes  in
         telecom disputes to analyze past call records,  resubmit and pursue the
         claim.  The Company  cannot be certain  how much,  if any, of the claim
         will be honored.  Consequently, the full amount of the disputed charges
         has been recorded as a liability.

18.      Business Segment Information
         ----------------------------

         The   Company   has  two   reportable   business   segments:   Wireline
         Telecommunications  Services and IP  Telecommunications  Services.  The
         operating  results of these business segments are  distinguishable  and
         are regularly reviewed by the Company's chief operating decision maker.

         The  Wireline   Telecommunication  Services  business  segment  resells
         telephone  services  that run over a  wireline  network  and  switching
         equipment  provided by Verizon and Qwest  Communications  International
         Inc. The IP  Telecommunications  business  segment  provides a range of
         voice  telephony  service  that  run  over the  Internet  on  switching
         equipment that the Company owns and manages.

<table>
<caption>
                                       Wireline               IP
                                   Telecommunication   Telecommunication
                                       Services            Services            Corporate            Total
                                     ------------------------------------------------------------------------

                                           <c>             <c>                 <c>                 <c>

Year ended November 30, 2006:
Revenues                             $  8,153,328        $    203,267                            $  8,356,595
Operating income (loss)                   913,791          (2,021,171)       $ (1,179,162)         (2,286,542)
Depreciation and amortization              11,384             147,778             387,816             546,978
Other income and (expense)                    817             (12,102)            (47,228)            (58,513)
Expenditures for long-lived assets         34,017             437,734             854,747           1,326,498
Total assets at November 30, 2006         839,769           1,099,642           2,248,807           4,188,218

Year ended November 30, 2005:
Revenues                             $ 15,849,561        $     31,242                            $ 15,880,803
Operating loss                           (660,794)           (876,262)       $   (864,896)         (2,401,952)
Depreciation and amortization               4,694              45,539             146,144             196,377
Other income and (expense)                   (820)             (1,181)            138,158             136,157
Expenditures for long-lived assets         17,617             437,135             676,342           1,131,094
Total assets at November 30, 2005       2,963,765             689,686             731,640           4,385,091

Year ended November 30, 2004:
Revenues                             $  9,557,600                                                $  9,557,600
Operating loss                           (362,426)       $    (41,686)       $   (238,038)           (642,150)
Depreciation and amortization                 991                                  13,489              14,480
Other income and (expense)                 (4,975)                                 48,414              43,439
Expenditures for long-lived assets         11,502             170,000                  --             181,502
Total assets at November 30, 2004       2,028,291             128,614            (253,103)          1,903,802

</table>

                                      F-38
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004

19.      Subsequent Events
         -----------------

         On December 14, 2006, the Company entered into two separate  definitive
         purchase  agreements   ("Agreements")  to  sell  the  two  wholly-owned
         subsidiaries  that constitute  Wireline  Telecommunications  Segment to
         Cyber Digital, Inc. ("Purchaser"), a publicly-traded shell company. The
         planned  sales  are  subject  to the  receipt  of  required  regulatory
         approvals and other closing conditions.

         Purchaser  shall  acquire  all  the  outstanding  shares  of  the  CLEC
         subsidiaries  and either pay or assume $1.3 million of outstanding debt
         to the Company's lender.  The Company has guaranteed levels of negative
         working capital of the CLEC  subsidiaries and indemnified the Purchaser
         against  liabilities that would reduce working  capital,  as defined in
         the  Agreements,  below the agreed-upon  levels.  In accordance with an
         amendment to the Agreements,  if the closing of the transaction has not
         occurred by April 12, 2007,  the Company or the Purchaser may terminate
         the Agreements  with no penalty to the  terminating  party,  so long as
         such delay in closing the  transaction is not the result of willful and
         material  breach  by the  terminating  party of any of its  obligations
         under the Agreement.

         Since  management  did not have the  authority to approve the action or
         commit to a plan to sell until December 14, 2006,  among other reasons,
         discontinued  operation  presentation  is precluded  for the year ended
         November 30, 2006.  This  transaction  will require the approval of the
         principal lender.


                                      F-39
<page>

                   eLEC COMMUNICATIONS CORP. AND SUBSIDIARIES

                                   SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS

                  YEARS ENDED NOVEMBER 30, 2006, 2005 AND 2004
<table>
<caption>

            Column A                     Column B           Column C          Column D         Column E
------------------------------------  ---------------   ---------------   ---------------   ---------------
                                                           Additions
                                         Balance at        Charged to         Accounts        Balance at
                                         Beginning         Costs and          Written           End of
           Description                   of Period          Expenses            Off             Period
------------------------------------  ---------------   ---------------   ---------------   ---------------

                                   <c>               <c>               <c>               <c>
Year ended November 30, 2006:
   Allowance for doubtful accounts    $       258,000   $   172,000 (a)   $       200,000   $       230,000
   Valuation allowance for deferred
     tax asset                        $     7,900,000   $   956,000 (b)   $            --   $     8,856,000

Year ended November 30, 2005:
   Allowance for doubtful accounts    $       548,000   $ 3,612,000 (a)   $     3,902,000   $       258,000
   Valuation allowance for deferred
     tax asset                        $     7,280,000   $   620,000 (b)   $            --   $     7,900,000

Year ended November 30, 2004:
   Allowance for doubtful accounts    $       170,000   $ 1,049,000 (a)   $       671,000   $       548,000
   Valuation allowance for deferred
     tax asset                        $     6,700,000   $   580,000 (b)   $            --   $     7,280,000

</table>

(a)Net of recoveries

(b)There  were no  charges  to cost  and  expenses  as there  was an  equivalent
increase in deferred tax assets.


                                       S-1