UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549




FORM
10-Q





(Mark
One)


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


For the quarterly
period ended August 31, 2009.





[      ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.


For the transition
period from __________to__________.





Commission
file number 0-4465





Pervasip
Corp.


(Exact
name of registrant as specified in its charter)
  New
      York
                      13-2511270(State
      or other jurisdictionof
                        incorporation
      or organization)
                      (I.R.S.
      Employer
                        Identification
      No.)75
      South Broadway, Suite 400, White Plains, New York
                      10601(Address
      of principal executive offices)
                      (Zip
      Code)


Registrant’s
telephone number, including area code: 914-620-1500


Indicate by check whether the
registrant (1) filed all reports required to be filed by Section 13 or 15(d) of
the Securities and 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 o





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




Large Accelerated
      Filero
            Non-Accelerated FileroAccelerated
      Filero
            Smaller Reporting Companyx





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




State the number of shares outstanding
of each of the issuer’s classes of common equity as of the latest practicable
date: 27,888,379
shares of common stock, par value $.10 per share, as of September 30,
2009.




1




PART 1. FINANCIAL
INFORMATION




Item
1.                      Financial
Statements




Pervasip
Corp. and Subsidiaries
 Condensed
Consolidated Balance Sheets
  Aug.
      31, 2009
                                            
                                            
                                            Nov.
      30, 2008(Unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents
                                            
                                            $
                                            128,878
                                            
                                            
                                            $
                                            130,338Restricted
      cash
                                            
                                            
                                            963
                                            
                                            
                                            
                                            7,085Accounts
      receivable, net
                                            
                                            
                                            317,922
                                            
                                            
                                            
                                            205,294Prepaid
      expenses and other current assets
                                            
                                            
                                            33,953
                                            
                                            
                                            
                                            459,511Total
      current assets
                                            
                                            
                                            481,716
                                            
                                            
                                            
                                            802,228Property,
      plant and equipment, net
                                            
                                            
                                            542,734
                                            
                                            
                                            
                                            610,606Deferred
      finance costs, net
                                            
                                            
                                            323,522
                                            
                                            
                                            
                                            547,940Other
      assets
                                            
                                            
                                            189,915
                                            
                                            
                                            
                                            192,659Total
      assets
                                            
                                            $
                                            1,537,887
                                            
                                            
                                            $
                                            2,153,433Liabilities
      and Stockholders’ Equity DeficiencyCurrent
      liabilities:Current
      maturities of long-term debt and capital lease obligations
                                            
                                            $
                                            90,257
                                            
                                            
                                            $
                                            93,549Accounts
      payable and accrued expenses
                                            
                                            
                                            2,587,057
                                            
                                            
                                            
                                            2,083,182Total
      current liabilities
                                            
                                            
                                            2,677,314
                                            
                                            
                                            
                                            2,176,731Long-term
      debt and capital lease obligations, less current
maturities
                                            
                                            
                                            6,557,002
                                            
                                            
                                            
                                            4,341,369Accrued
      pension obligation
                                            
                                            
                                            886,332
                                            
                                            
                                            
                                            882,332Warrant
      liabilities
                                            
                                            
                                            4,395,558
                                            
                                            
                                            
                                            5,621,070Total
      liabilities
                                            
                                            
                                            14,516,206
                                            
                                            
                                            
                                            13,021,502Stockholders’
      equity deficiency:Preferred
      stock, $.10 par value; 1,000,000 shares authorized, none issued and
      outstanding
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Common
      stock, $. 10 par value; 250,000,000 shares authorized, 27,488,379 and
      26,026,172 shares issued and outstanding in 2009 and 2008
                                            
                                            
                                            2,748,838
                                            
                                            
                                            
                                            2,602,617Capital
      in excess of par value
                                            
                                            
                                            28,564,501
                                            
                                            
                                            
                                            28,461,538Deficit
                                            
                                            
                                            (44,293,648
                                            )
                                            
                                            
                                            (41,929,608
                                            )Accumulated
      other comprehensive income and (loss)
                                            
                                            
                                            1,990
                                            
                                            
                                            
                                            (2,616
                                            )Total
      stockholders’ equity deficiency
                                            
                                            
                                            (12,978,319
                                            )
                                            
                                            
                                            (10,868,069
                                            )Total
      liabilities and stockholders’ equity deficiency
                                            
                                            $
                                            1,537,887
                                            
                                            
                                            $
                                            2,153,433
  See notes
to the condensed consolidated financial statements.
  2
  Pervasip
Corp. and Subsidiaries
 Condensed
Consolidated Statements of Operations and Comprehensive Income
(Loss)
 (Unaudited)
  For
      the Nine Months Ended
                                                                                
                                                                                
                                                                                For
      the Three Months EndedAug.
      31, 2009
                                                                                
                                                                                
                                                                                Aug.
      31, 2008
                                                                                
                                                                                
                                                                                Aug.
      31, 2009
                                                                                
                                                                                
                                                                                Aug.
      31, 2008Revenues
                                                                                
                                                                                $
                                                                                1,697,991
                                                                                
                                                                                
                                                                                $
                                                                                1,522,056
                                                                                
                                                                                
                                                                                $
                                                                                539,081
                                                                                
                                                                                
                                                                                $
                                                                                456,704Costs
      and expenses:Costs
      of services
                                                                                
                                                                                
                                                                                1,352,026
                                                                                
                                                                                
                                                                                
                                                                                1,467,756
                                                                                
                                                                                
                                                                                
                                                                                420,182
                                                                                
                                                                                
                                                                                
                                                                                399,320Selling,
      general and administrative
                                                                                
                                                                                
                                                                                1,560,234
                                                                                
                                                                                
                                                                                
                                                                                2,259,771
                                                                                
                                                                                
                                                                                
                                                                                418,543
                                                                                
                                                                                
                                                                                
                                                                                837,377Stock-based
      compensation expense
                                                                                
                                                                                
                                                                                401,168
                                                                                
                                                                                
                                                                                
                                                                                208,867
                                                                                
                                                                                
                                                                                
                                                                                144,699
                                                                                
                                                                                
                                                                                
                                                                                145,150Depreciation
      and amortization
                                                                                
                                                                                
                                                                                415,177
                                                                                
                                                                                
                                                                                
                                                                                382,819
                                                                                
                                                                                
                                                                                
                                                                                139,208
                                                                                
                                                                                
                                                                                
                                                                                136,101Total
      costs and expenses
                                                                                
                                                                                
                                                                                3,728,605
                                                                                
                                                                                
                                                                                
                                                                                4,319,213
                                                                                
                                                                                
                                                                                
                                                                                1,122,632
                                                                                
                                                                                
                                                                                
                                                                                1,517,948Loss
      from operations
                                                                                
                                                                                
                                                                                (2,030,614
                                                                                )
                                                                                
                                                                                
                                                                                (2,797,157
                                                                                )
                                                                                
                                                                                
                                                                                (583,551
                                                                                )
                                                                                
                                                                                
                                                                                (1,061,244
                                                                                )Other
      income (expense):Interest
      expense
                                                                                
                                                                                
                                                                                (1,970,263
                                                                                )
                                                                                
                                                                                
                                                                                (661,878
                                                                                )
                                                                                
                                                                                
                                                                                (857,546
                                                                                )
                                                                                
                                                                                
                                                                                (197,315
                                                                                )Interest
      and other income
                                                                                
                                                                                
                                                                                2,374
                                                                                
                                                                                
                                                                                
                                                                                14,705
                                                                                
                                                                                
                                                                                
                                                                                268
                                                                                
                                                                                
                                                                                
                                                                                2,304Change
      in warrant valuation
                                                                                
                                                                                
                                                                                1,634,463
                                                                                
                                                                                
                                                                                
                                                                                (1,311,341
                                                                                )
                                                                                
                                                                                
                                                                                2,272,201
                                                                                
                                                                                
                                                                                
                                                                                780,776Total
      other income (expense)
                                                                                
                                                                                
                                                                                (333,426
                                                                                )
                                                                                
                                                                                
                                                                                (1,958,514
                                                                                )
                                                                                
                                                                                
                                                                                1,414,923
                                                                                
                                                                                
                                                                                
                                                                                585,765Net
      income (loss)
                                                                                
                                                                                
                                                                                (2,364,040
                                                                                )
                                                                                
                                                                                
                                                                                (4,755,671
                                                                                )
                                                                                
                                                                                
                                                                                831,372
                                                                                
                                                                                
                                                                                
                                                                                (475,479
                                                                                )Other
      comprehensive income (loss) –Foreign
      currency translation adjustment
                                                                                
                                                                                
                                                                                4,606
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (563
                                                                                )
                                                                                
                                                                                
                                                                                -Unrealized
      loss on marketable securities
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (24,500
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (500
                                                                                )Comprehensive
      income (loss)
                                                                                
                                                                                $
                                                                                (2,359,434
                                                                                )
                                                                                
                                                                                $
                                                                                (4,780,171
                                                                                )
                                                                                
                                                                                $
                                                                                830,809
                                                                                
                                                                                
                                                                                $
                                                                                (475,979
                                                                                )Basic earnings
      (loss) per share:
                                                                                
                                                                                $
                                                                                (0.09
                                                                                )
                                                                                
                                                                                $
                                                                                (0.18
                                                                                )
                                                                                
                                                                                $
                                                                                0.03
                                                                                
                                                                                
                                                                                $
                                                                                (0.02
                                                                                )Diluted earnings
      (loss) per share:
                                                                                
                                                                                $
                                                                                (0.09
                                                                                )
                                                                                
                                                                                $
                                                                                (0.18
                                                                                )
                                                                                
                                                                                $
                                                                                0.01
                                                                                
                                                                                
                                                                                $
                                                                                (0.02
                                                                                )Shares
      used in per share computationBasic
                                                                                
                                                                                
                                                                                26,468,224
                                                                                
                                                                                
                                                                                
                                                                                25,881,385
                                                                                
                                                                                
                                                                                
                                                                                26,821,575
                                                                                
                                                                                
                                                                                
                                                                                25,972,740Diluted
                                                                                
                                                                                
                                                                                26,468,224
                                                                                
                                                                                
                                                                                
                                                                                25,881,385
                                                                                
                                                                                
                                                                                
                                                                                122,061,047
                                                                                
                                                                                
                                                                                
                                                                                25,972,740
  See notes
to the condensed consolidated financial statements.
  3
  Pervasip
Corp. and Subsidiaries
 Condensed
Consolidated Statements of Cash Flows
 (Unaudited)
  For
      the Nine Months EndedAug.
      31, 2009
                                          
                                          Aug.
      31, 2008Net
      cash used in operating activities:
                                          
                                          $
                                          (1,063,793
                                          )
                                          
                                          $
                                          (2,518,502
                                          )Cash
      flows from investing activities:Purchase
      of property and equipment
                                          
                                          
                                          (122,747
                                          )
                                          
                                          
                                          (89,292
                                          )Cash
      flows from financing activities:Repayment
      of long-term debt
                                          
                                          
                                          (6,428
                                          )
                                          
                                          
                                          (28,961
                                          )Debt
      issue costs paid
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (71,500
                                          )Proceeds
      from exercise of options
                                          
                                          
                                          129,910
                                          
                                          
                                          
                                          3,000Inflow
      from restricted cash
                                          
                                          
                                          1,061,598
                                          
                                          
                                          
                                          2,628,460Net
      cash provided by financing activities
                                          
                                          
                                          1,185,080
                                          
                                          
                                          
                                          2,530,999Decrease
      in cash and cash equivalents
                                          
                                          
                                          (1,460
                                          )
                                          
                                          
                                          (76,795
                                          )Cash
      and cash equivalents at beginning of period
                                          
                                          
                                          130,338
                                          
                                          
                                          
                                          132,078Cash
      and cash equivalents at the end of period
                                          
                                          $
                                          128,878
                                          
                                          
                                          $
                                          55,283
  See notes
to the condensed consolidated financial statements.
  4




PERVASIP
CORP.


Notes To Condensed
Consolidated Financial Statements (Unaudited)





Note 1-Basis of
Presentation





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the rules and regulations of the
Securities and Exchange Commission for Form 10-Q.  Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been
included.  Operating results for the nine-month or three-month periods
ended August 31, 2009 are not necessarily indicative of the results that may be
expected for the year ended November 30, 2009.  For further
information, refer to the consolidated financial statements and footnotes
thereto included in our Annual Report on Form 10-KSB for the year ended November
30, 2008.





Note 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, we have sustained
substantial losses from continuing operations in recent years and we have
negative working capital and a stockholders’ equity deficiency.  In
addition, we are experiencing difficulty in generating sufficient cash flow to
meet our obligations and sustain our operations.  We expect our
operating losses and cash deficits to continue through fiscal 2009 and for at
least the first two quarters of fiscal 2010.





Based on
our current business plans, we are seeking additional financing from our
principal lender to fund our operating losses, capital expenditures, lease and
debt payments and working capital requirements for the next several
months.  We need to raise additional cash through some combination of
borrowings, sales of equity or debt securities or sales of assets to enable us
to meet our cash requirements.





We may
not be able to raise sufficient additional debt, equity or other cash on
acceptable terms, if at all.  We have been trying to raise equity or
borrow funds from sources other than our principal lender with limited success
to date.  Failure to generate sufficient revenues, achieve certain
other business plan objectives or raise additional funds could have a material
adverse effect on our results of operations, cash flows and financial position,
including our ability to continue as a going concern, and may require us to
significantly reduce, reorganize, discontinue or shut down our
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 our company which, in turn, is dependent upon our
ability to meet our financing requirements on a continuing basis, and to succeed
in our 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 we be unable to continue operating.




5





Our plans
include (1) seeking additional financing to cover our operating deficit, (2)
continuing to grow our operations as a voice-over Internet Protocol (“VoIP”)
carrier and (3) increasing our sales to existing wholesale customers, especially
for running our VoIP service on a mobile phone, where we have one customer who
is projecting significant revenue growth for us.





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





Note 3 – Recent Accounting
Pronouncements





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events”
(“SFAS No. 165”) which establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date but before
financial statements are issued or available to be issued.
SFAS No. 165 establishes (i) the period after the balance sheet
date during which a reporting entity’s management should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements (ii) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements, and (iii) disclosures an entity should make about
events or transactions that occurred after the balance sheet date.
SFAS No. 165 became effective for the Company’s financial statements
for periods ending after June 15, 2009 and did not have a significant
impact on the Company’s financial statements. The Company evaluated subsequent
events through October 20, 2009, the date that the financial statements were
issued.





In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles, a replacement of
FASB Statement No. 162” (“SFAS No. 168”). Under SFAS No. 168 the “FASB
Accounting Standards Codification” (“Codification”) will become the source of
authoritative U. S. GAAP to be applied by nongovernmental
entities.  Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. SFAS No. 168 is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009.  On the effective date, the Codification will
supersede all then-existing non-SEC accounting and reporting standards. All
other non-grandfathered non-SEC accounting literature not included in the
Codification will become non-authoritative.  The Company does not
expect the adoption of SFAS No. 168 to have an impact on the financial
statements.





Note 4-Major
Customers





During
the nine-month and three-month periods ended August 31, 2009, one customer
accounted for approximately 36% and 37%, respectively, of our
revenues.  During the nine-month and three-month periods ended August
31, 2008, one customer accounted for approximately 30% and 39%, respectively, of
our revenues and a second customer accounted for approximately 19% and 0%,
respectively, of our revenues.  At August 31, 2009 and November 30,
2008, monies owed to us from our major customer accounted for 21% and 32%,
respectively, of our total accounts receivable balances.




6





Note
5-Net Earnings (Loss) Per Common
Share




Basic earnings
(loss) per common share is calculated by dividing net earnings (loss) by
the weighted average number of common shares outstanding during the
period.




Approximately
176,447,000 and 142,130,000 shares of common stock issuable upon the exercise of
our outstanding stock options or warrants were excluded from the calculation of
diluted net earnings (loss) per share for the nine-month periods ended
August 31, 2009 and 2008, respectively, because the effect would be
anti-dilutive.  Approximately 15,216,000 and 142,130,000 shares of
common stock issuable upon the exercise of our outstanding stock options or
warrants were excluded from the calculation of diluted net earnings (loss)
per share for the three-month periods ended August 31, 2009 and 2008,
respectively, because the effect would be anti-dilutive.





Note 6-Risks and
Uncertainties





We have
created a proprietary Internet Protocol (“IP”) telephony network to take
advantage of the network cost savings that are inherent in an IP network, in
comparison to the traditional circuit-switched telephone
networks.  While the IP telephony business continues to grow, we face
strong competition.  We have built our IP telephony business with
significantly less financial resources than many of our
competitors.  The survival of our business currently is dependent upon
the success of our IP operations.  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:





·
            The
      availability of additional funds to successfully pursue our business
      plan;


·
            The
      performance of Unified Technologies Group Inc. under its wholesale master
      service agreement with us, including its performance of its minimum number
      of customer lines commitment and the payment of any required shortfall
      penalties;


·
            The
      cooperation of industry service partners that have signed agreements with
      us;


·
            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;


·
            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;


·
            The
      ability to comply with provisions of our financing
    agreements;


·
            The
      highly competitive nature of our
industry;


·
            The
      acceptance of telephone calls over the Internet by mainstream
      consumers;


·
            Our
      ability to retain key personnel;


·
            Our
      ability to maintain adequate customer care and manage our churn
      rate;


·
            Our
      ability to maintain, attract and integrate internal management, technical
      information and management information
systems;


·
            Our
      ability to manage rapid growth while maintaining adequate controls and
      procedures;


·
            The
      availability and maintenance of suitable vendor relationships, in a timely
      manner, at reasonable cost;


·
            The
      decrease in telecommunications prices to consumers;
  and


·
            General
      economic conditions.





7





Note 7-Stock-Based
Compensation Plans





We issue
stock options to our employees, consultants and outside directors pursuant to
stockholder-approved and non-approved stock option programs and record the
applicable expense in accordance with the Financial Accounting Standards Board
SFAS No. 123R, “Share-Based Payment”.  This expense is a non-cash
expense and it derives from the issuance of stock options, stock purchase
warrants and restricted stock. (See Note 13).  For the nine-month
periods ended August 31, 2009 and 2008, we recorded approximately $401,000 and
$209,000, respectively, in stock-based compensation expense.  For the
three-month periods ended August 31, 2009 and 2008, we recorded approximately
$145,000 in stock-based compensation expense.  For the nine-month
periods ended August 31, 2009 and 2008, approximately $263,000 and $128,000 of
the expense related to grants made to consultants.  For the
three-month periods ended August 31, 2009 and 2008, approximately $58,000 and
$113,000 of the stock option expense related to grants to
consultants.   As of August 31, 2009, there was approximately
$33,000 of unrecognized stock-compensation expense for previously-granted
options and restricted stock that will be expensed in the fourth quarter of
fiscal 2009.  As of August 31, 2009, there was approximately $144,000
of unrecognized employee stock-compensation expense for previously-granted
unvested options that will be recognized over a three-year period.




Note 8-Accounts Payable and
Accrued Expenses





At August
31, 2009 and November 30, 2008, included in the caption accounts payable and
accrued expenses, are liabilities of approximately $796,000 for items in
conjunction with transactions related to the sale of former
subsidiaries.  We believe the total remaining liability is
significantly less, based upon public disclosures made by the entity that
purchased our former subsidiaries. However, the purchaser has not confirmed the
reduction to us directly and, accordingly, we have not reduced the amount of the
liability.  One of our former subsidiaries filed for bankruptcy
protection on September 23, 2008, and is now in a Chapter 7
liquidation.  We believe the bankruptcy filing further decreases our
potential liability to the purchaser.  However, there can be no
assurance that we will be successful in reducing such potential liabilities and,
ultimately, we may have to pay such amounts.




Note 9-Defined Benefit
Plan





We
sponsor a defined benefit plan covering a number of former
employees.  Our funding policy with respect to the defined benefit
plan is to contribute annually not less than the minimum required by applicable
law and regulations 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 attributable to service to date,
but also for those expected in the future.





For the
nine-month periods ended August 31, 2009 and 2008, we recorded pension expense
of $36,000 and $161,000, respectively.  For the three-month periods
ended August 31, 2009 and 2008, we recorded pension expense of $12,000 and
$62,000, respectively. In the third quarters of fiscal 2009 and 2008, we
contributed approximately $6,000 and $20,000, respectively, to our defined
benefit plan.  The expected long-term rate on plan assets is
8%.




8





We also
sponsor a 401(k) profit sharing plan for the benefit of all eligible employees,
as defined.  The plan provides for the employees to make voluntary
contributions not to exceed the statutory limitation provided by the Internal
Revenue Code.  No contribution was made for the nine and three-month
periods ended August 31, 2009 and 2008.




Note 10 – Principal
Financing Arrangements





We have
executed seven material financing agreements with our principal lender and its
affiliates.  The first financing was repaid in full in connection with
the sale of two subsidiaries, and the second, third and fourth financings were
amended upon the signing of the fifth financing on May 28, 2008. The fourth
financing, in the amount of $4,000,000, requires that we make principal payments
of $100,000 each month, beginning in October 2009, and a balloon payment of the
remaining principal and interest when the note is due on September 30,
2010.  We have not made the principal payment due on October 1, 2009
but our lender has notified us on October 20, 2009 that they do not consider us
in default. The Company is in jeopardy of being in default at any time in the
future, at our lender’s discretion.  The second, third and fifth
financings are also due on September 30, 2010, and there are no principal
payments required to be made until the notes mature.  Interest on the
fifth financing is set at 20%. The interest rate on our fourth financing is set
at prime plus 2%, subject to a minimum of 9.75% per annum, and was 9.75% per
annum at August 31, 2009.  Interest on the second and third notes is
set at prime plus 2% per annum, or 5.25% per annum at August 31,
2009.  In conjunction with the fifth financing, all interest payments
for the next twelve months are accrued and added to the principal balances of
the notes.  Cash interest payments were to begin again on a monthly
basis commencing in June 2009, but have been deferred on a month-to-month
basis.  We remain dependent on our principal lender and its affiliates
to fund our cash needs and we have no assurances that they will continue to fund
such needs.





On
October 15, 2008, we entered into a sixth financing arrangement with our
principal lender and an affiliate of the lender (the “October 2008 Financing”).
This financing consisted of a note totaling $500,000 that matures on September
28, 2010.   Interest is calculated on the basis of a 360- day
year, and is payable monthly, in arrears, on the first business day of each
month through and including the maturity date.  Interest accrues at a
rate of 15% per annum.  There are no prepayment penalties on the
note.





On
December 12, 2008, we amended the October 2008 Financing and borrowed an
additional $600,000 from our lender.  This financing consisted of
amending the $500,000 note to a $1,100,000 note that matures on September 28,
2010.  Interest is calculated on the basis of a 360-day year, and is
payable monthly, in arrears, on the first business day of each month through and
including the maturity date.  Interest accrues at a rate of 15% per
annum.  There are no prepayment penalties on the note.





On
February 18, 2009, we consummated a private placement (the “February 2009
Financing”) pursuant to which we issued to two affiliates of our lender secured
term notes in the aggregate principal amount of $600,000 and common stock
purchase warrants that entitle the affiliates to purchase in the aggregate up to
26,500,000 shares of our common stock.





Proceeds
of the February 2009 Financing were deposited in a restricted cash account and
were released to us to pay operating expenses upon our request and in the sole
discretion of our principal lender, similar to the arrangement we have had with
our lender with prior financings.  Absent earlier prepayment with no
prepayment premium payable by us, the loan matures on September 28,
2010.  Interest will accrue on the unpaid principal on the notes
issued in the February 2009 Financing at a rate equal to twenty percent (20%)
per annum calculated on the basis of a 360-day year.  Interest
accruing at the rate of fifteen percent (15%) per annum will be payable monthly
in arrears, on the first business day of each calendar month through and
including the maturity date.  Interest accruing at the rate of five
percent (5%) per annum will be accrued and added to the principal balances of
the notes issued in the February 2009 Financing.  Principal payments
are due and payable on the maturity date.  Beginning in May 2009, we
have not made cash interest payments on any of the loans, as our primary lender
has instead increased our loan payable balances by the interest expense that was
not paid in cash.




9





To secure
the payment of all obligations to our lenders, including under any warrants, we
entered into a master security agreement that assigns and grants to an agent for
the lenders a continuing security interest and first lien on all of our assets,
including the assets of our subsidiaries.





Note 11-Income
Taxes





At
November 30, 2008, we had net operating loss carryforwards for Federal income
tax purposes of approximately $30,000,000 that expire in the years 2009 through
2028.  We have provided an allowance for the full value of the related
deferred tax asset since in our judgment it is more likely than not that any
such benefit will not be realized.





Note 12 – Related Party
Transactions





In
connection with our internal software development costs, we paid fees to a
third-party intellectual property development firm (the “Consultant”) for the
nine-month periods ended August 31, 2009 and 2008, of $189,000 and $247,500,
respectively.  For the three-month periods ended August 31, 2009 and
2008, we paid fees of $63,000 and $66,000, respectively.  One of our
officers has performed work for the Consultant, including the function of
distributing such funds to appropriate vendors. Our officer received fees from
the Consultant of $45,000 during the nine-month period ended August 31, 2009,
including $15,000 for the three-month period ended August 31, 2009. The funds
paid to the Consultant resulted in the capitalization of internal use software
costs and equipment of $60,000 in the nine-month and $30,000 for the three-month
periods ended August 31, 2009,  $55,000 in the nine-month period ended
August 31, 2008 and no capitalization in the three-month period ended August 31,
2008.  The remaining fees for the nine-month periods ended August 31,
2009 and 2008 of $129,000 and $192,500, respectively, were deemed to be
operating costs.  The amount of operating costs for the three-month
periods ended August 31, 2009 and 2008 was $33,000 and $66,000,
respectively.





Included
in our accounts payable and accrued expenses at August 31, 2009 is a liability
to our Chief Executive Officer of $132,031 for unpaid salary and
expenses.




Note 13 –
Equity





On June
15, 2008 we contracted with Nationwide Solutions, Inc. (“Nationwide”) to perform
consulting, financing and acquisition services.  In addition to a
monthly cash fee, Nationwide was granted warrants to purchase up to 2 million
shares of our common stock. The warrants were exercisable through April 30, 2012
at a price of $0.25 per share.  At the date of issuance, we valued the
warrants at $243,000 using the Black-Scholes method with an interest rate of
2.29%, volatility of 165%, zero dividends and expected term of 3.8
years.  We were amortizing the consulting expense over the life of the
contact, and recorded an expense of $28,699 in fiscal 2008.  The
remaining value of $214,301 was recorded as a prepaid expense at November 30,
2008.  Effective February 20, 2009, by mutual agreement, the
consulting agreement with Nationwide was terminated and Nationwide surrendered
the warrants to us, resulting in a reduction in prepaid expenses and equity of
the remaining book balance of the warrants at such date of
$200,209.




10





In
December 2008, we issued 300,000 shares of common stock to a company in
conjunction with a contractual obligation for investor relation
services.  The stock was valued at its fair market value of $0.27 a
share, or $81,000, on the date a one-year services contract was signed, which
was amortized over the one-year period.





On May
27, 2009, we issued 40,000 shares of restricted common stock to a company in
conjunction with a contractual obligation for investor relation
services.  The stock was valued at its fair market value of $0.235 a
share, or $9,400, on the date that services began and was amortized over a
one-month period.





During
the second quarter of fiscal 2009, a board member exercised options to purchase
25,000 shares of stock by surrendering free-trading shares of our common stock
to pay for the exercise price of such options, resulting in a net issuance of
11,207 shares of common stock. During the third quarter of fiscal 2009, option
and warrant exercises resulted in the issuance of 1,111,000 shares of common
stock.




11
 
  Item
2.                      Management’s
Analysis and Discussion of Financial Condition and Results of
Operations





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 those factors set forth under Note 6 –
Risks and Uncertainties.





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.  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 to any forward-looking statements
to reflect events or circumstances after the date of this Report or to reflect
the occurrence of unanticipated events.  Further, the information
about our intentions contained in this Report are statements of our intentions
as of the date of this Report and are 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.





Overview





We are a
provider of local, long distance and international voice telephone
services.  We provide these services using a proprietary Linux-based
open-source softswitch that utilizes an 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 provide our IP telephone services
primarily on a wholesale basis 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.




12





We are
currently enhancing the reach of our IP telephony services by using the data
side of the cell phone network to run our telephone calls.  Cell phone
networks provide both voice and data services.  In a traditional cell
phone service, the users speak over the voice side of the network and receive
email messages and obtain Internet access over the data side of the
network.  With our service, the voice transmission runs over the data
side of the cell phone network, and the voice side is not used.  The
data side of the cell phone network is simply another avenue upon which we can
run our IP telephony services.  However, it is a low-cost method of
delivering telephone service and we believe it will attract a significant number
of subscribers to our service from the larger and more expensive cell phone
carriers.  We refer to our use of the data side of the cell phone
networks as voice-over-IP-enabled mobile phone service (“Mobile
VoIP”).





We
believe the U.S. is in the early stages of a smartphone revolution.  A
smartphone is a mobile telephone offering advanced capabilities, including
PC-like functionality.  The growth in demand for smartphones with
powerful processors, plentiful memory, open operating systems, sizeable video
screens, and the ability to tether the smartphone to an even larger PC or
television screen, has outpaced the sales growth of mobile
phones.  The smartphone revolution is a significant component of an
even larger mobile Internet revolution.  We believe we can participate
and benefit from the mobile Internet revolution by providing our Mobile VoIP
service to smartphone users.





Our
Mobile VoIP telephone service runs over a high-speed wireless Internet service
that is provided by a subsidiary of Unified Technologies Group, Inc. (“UTGI”), a
diversified technology company. UTGI utilizes the Global System for Mobile
(“GSM”) communications standard for the transmission of Mobile VoIP
calls.  GSM is the most popular standard for mobile phones in the
world, with more than 3 billion users in more than 200 countries and
territories.  According to UTGI, it will have access to the data side
of the GSM network in approximately 130 countries, and usage of the product will
not generate roaming charges to end-users who travel to any of those countries,
as the entire call stays on the UTGI data network.   UTGI
believes it will be able to provide a high-quality call to hundreds of thousands
of customers because it uses its own virtual private network over the GSM
network to provide the high-speed Internet access to a smartphone.  By
placing software on a smartphone to create a dynamic virtual stabilized network,
UTGI intends to ensure the highest level of quality by enhancing the call with
services such as bandwidth limitation correction, compression, sampling, jitter
correction, echo cancellation and buffering.  When the consumer uses a
smartphone to make a Mobile VoIP telephone call, the entire operation is
intended to be seamless to the smartphone user, who receives no indication that
the call is a VoIP call.





Initially,
UTGI is supporting certain Windows Mobile smartphones, such as the HTC Touch Pro
2 smartphone.  UTGI has announced that its distributors and sales
agents will offer to consumers a monthly prepaid smartphone service that
includes unlimited voice, data and text messaging service for a price of
approximately $80 a month, including taxes.  UTGI can offer pricing
that is significantly lower than unlimited plans offered by incumbent cell phone
carriers because UTGI currently has lower variable and fixed costs than the
incumbent carriers.  When a UTGI customer uses a smartphone, such as
the Touch Pro 2, to make a phone call, an underlying incumbent carrier still
carries the Mobile VoIP call from the smartphone to the cell tower, but the
remainder of the call is carried over the Internet by UTGI to our VoIP switch,
and we complete the call.  All the traffic is carried through data
packets instead of voice traffic on the expensive circuit-based GSM voice
network and, consequently, UTGI has low variable costs with each call
made.  UTGI also has low fixed costs because it has not had to invest
billions of dollars in a wireless telephone network as was done by each of the
four largest mobile phone carriers.  Instead, UTGI uses the World Wide
Web to carry its data services, which include telephone calls, video downloads,
email, text messages and Internet access.  UTGI was not required to
spend billions of dollars in building its plant, equipment and transport
facilities because the World Wide Web already exists.  We believe this
transition of mobile telephone calls to the World Wide Web will be a significant
change in the cost structure of mobile telephony and will drive down monthly
service fees for the consumer.




13





UTGI has
made public statements regarding its proposed launch and the availability of its
product, which utilizes our VoIP services, but it has not yet made its product
available for sale to the general public.  We do not control the
timing of the marketing, the marketing dollars or any of the decisions regarding
the marketing and sale of the UTGI service.  Furthermore, UTGI has
announced it has adopted a strategy of letting other entities sell its mobile
phone services to the end-user. Consequently, UTGI’s customers will be the
entities that plan and control the sales and marketing activities of the UTGI
product. UTGI has advised us that is has signed distributor agreements with
several entities and that each entity is entitled to market the UTGI services as
it sees fit in its given territory.  As a result, it is contemplated
that the distributor will make the sale of the smartphone and the service plan,
the broadband service will be provided by UTGI and we will provide the
voice-over-Internet service.  For each subscriber that is signed up by
a UTGI distributor, we will receive revenue for the monthly voice-over-Internet
service.  UTGI also has contracted with us to provide the VoIP billing
and customer service at a price of $2 per month per line.





UTGI has
in the past made announcements regarding the timing of the public launch of its
product and services that UTGI has failed to meet.  There can be no
assurance that UTGI will be successful in the launch of its products or
services, of the timing of such launch, that UTGI’s products and services will
provide the high-quality telephony experience that consumers expect and demand
or that consumers will ultimately accept and acquire such products and services
in the marketplace.




Plan
of Operation





Our
objective is to build a profitable IP 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 companies that sell broadband services, such as UTGI,
which sells a broadband service over GSM cell phone networks.  Many of
our targeted wholesale customers and some of our existing wholesale customers
have significant financial resources to market a private-labeled IP telephone
services to their existing customer base or to new customers.  We
believe our strength is our technology-based platform.  In providing
our technology on a wholesale basis, our goal is to obtain and manage 500,000
individual end-users, or lines in service, by leveraging the sales, marketing,
financial and other resources of our wholesale customers.  Our
strategy is to focus on the Mobile VoIP product as a driving force to accelerate
our efforts to reach the level of 500,000 lines in service. We believe UTGI will
become our largest wholesale customer over the next 12 months, as UTGI has
represented to us that it has commitments from cell phone distributors to
purchase several hundred thousand Mobile VoIP lines within 12 months after the
distributors are allowed to sell the Mobile VoIP product.




14


Nine  Months Ended
August 31, 2009 vs. Nine Months Ended August 31, 2008





Our
revenue for the nine-month period ended August 31, 2009 increased by
approximately $176,000, or approximately 12%, to approximately $1,698,000 as
compared to approximately $1,522,000 reported for the nine-month period ended
August 31, 2008.  The increase in our revenues was primarily due to an
increase in the number of our wholesale VoIP customers.  We billed 100
wholesale customers in the nine-month period ended August 31, 2009 as compared
to 79 wholesale customers in the nine-month period ended August 31,
2008.  We stopped all advertising in fiscal 2009 and we have been
working without any sales and marketing staff since February 2009. However, even
with the limited resources we have to attract new customers, broadband carriers
that are searching for a VoIP product to resell have been finding us via
Internet searches, word-of-mouth or other methods.  We continue to
receive a significant amount of interest from our existing customers and from
other carriers who are eager to sell our Mobile VoIP product that runs on the
UTGI network.





For the
nine-month period ended August 31, 2009, our gross profit amounted to
approximately $346,000, which was an improvement of approximately $292,000 over
the gross profit of approximately $54,000 reported in the nine-month period
ended August 31, 2008.  Our IP telephony facilities have significant
unused capacity and we have therefore only recently been able to generate a
positive gross profit on a quarterly basis.  We anticipate we can
continue to achieve higher sales volumes to cover fixed costs and to negotiate
lower variable costs with vendors, so we believe our gross profit and gross
profit percentage should continue to increase.





Selling,
general and administrative expenses decreased by approximately $700,000, or
approximately 31%, to approximately $1,560,000 for the nine-month period ended
August 31, 2009 from approximately $2,260,000 reported in the same prior-year
fiscal period.  We made significant reductions to our salary and
consulting expense, which accounted for approximately $424,000 of the
decrease.  We also decreased marketing expense in the nine-month
period ended August 31, 2009 by approximately $209,000, as compared to the
nine-month period ended August 31, 2008.    We anticipate
that we will be able to hold down our salary expense until we need to hire more
personnel in conjunction with the growth of our Mobile VoIP
product.  We have no short-term plans to increase our marketing
expense.





Stock-based
compensation expense, which is a non-cash item, increased by approximately
$192,000, or approximately 92%, to approximately $401,000 for the nine-month
period ended August 31, 2009 from approximately $209,000 reported in the same
prior-year fiscal period.  This expense varies from period-to-period
depending upon the number of option grants, the vesting period of such grants
and the valuation of the grants.




15




Depreciation
and amortization expense increased by approximately $32,000 for the nine- months
ended August 31, 2009 to approximately $415,000 as compared to approximately
$383,000 for the same period in fiscal 2008.  The increase was a
result of slightly higher depreciation expense due to software and equipment
additions and slightly higher amortization due to additions to deferred finance
costs associated with recent financings.





Interest expense increased by
approximately $1,308,000, or approximately 198%, to approximately $1,970,000 for
the nine-months ended August 31, 2009 as compared to approximately $662,000 for
the nine-months ended August 31, 2008.  The increase was due to
additional borrowings in the aggregate amount of $3.1 million in May, October
and December 2008, and in February 2009, and higher interest expense and
accretion of debt discounts associated with such borrowings.




The
mark-to-market adjustment to our warrant liability resulted in warrant income
for the nine-month period ended August 31, 2009 of approximately $1,634,000,
which was due to the decrease in the market value of our common stock from
November 30, 2008 to August 31, 2009. During the comparable period of fiscal
2008, we recorded warrant expense of approximately $1,311,000, which resulted
from an increase in the price of our common stock at August 31, 2008, as
compared to the value at November 30, 2007.  We anticipate that our
warrant income or expense will continue to fluctuate in future fiscal periods as
the price of our common stock in the market continues to fluctuate.





Three Months Ended August
31, 2009 vs. Three Months Ended August 31, 2008





Our revenue for the three-month period
ended August 31, 2009 increased by approximately $82,000, or approximately 18%,
to approximately $539,000 as compared to approximately $457,000 reported for the
three-month period ended August 31, 2008.  The increase in our
revenues was primarily due to an increase in the number of wholesale VoIP
customers.    We billed 88 wholesale customers during the
three-months ended August 31, 2009 as compared to 74 customers during the
three-months ended August 31, 2008.





For the
three-month period ended August 31, 2009, our gross profit amounted to
approximately $119,000, which was an improvement of approximately $62,000 over
the gross profit of approximately $57,000 reported in the three-month period
ended August 31, 2008.  Our IP telephony facilities have significant
unused capacity and we have only recently been able to generate a positive gross
profit on a quarterly basis.  As discussed above, we anticipate we can
continue to achieve higher sales volumes to cover fixed costs, and to negotiate
lower variable costs with vendors, to improve our gross profit and gross profit
percentage.  We have identified new carriers and routes and we are
beginning to incur lower domestic termination costs.





Selling,
general and administrative expenses decreased by approximately $418,000, or
approximately 50%, to approximately $419,000 for the three-month period ended
August 31, 2009 from approximately $837,000 reported in the same prior-year
fiscal period. Reduction in personnel and consulting costs accounted for the
majority of the decrease.  We made significant reductions to our
salary and consulting expense during February 2009 by eliminating two consulting
firms and our sales and marketing personnel and reducing the amount of office
space we rent.  Consequently, beginning in March 2009, our costs were
substantially lower.  The reduction in the quarter ended August 31,
2009 for salary and consulting expense, as compared to the quarter ended August
31, 2008, was approximately $283,000.  We also decreased our marketing
and travel expense by approximately $64,000 in the quarter ended August 31,
2009, as compared to the quarter ended August 31, 2008.




16





Stock-based
compensation expense, which is a non-cash item, amounted to approximately
$145,000 for the three-month periods ended August 31, 2009 and
2008.




Depreciation
and amortization expense increased by approximately $3,000 for the three- months
ended August 31, 2009 to approximately $139,000 as compared to approximately
$136,000 for the same period in fiscal 2008.  The increase was a
result of slightly higher depreciation expense due to software and equipment
additions and slightly higher amortization due to additions to deferred finance
costs associated with recent financings.





Interest expense increased by
approximately $660,000 to approximately $858,000 for the three-months ended
August 31, 2009 as compared to approximately $197,000 for the three-months ended
May 31, 2008.  The increase was due to the additional borrowings
discussedabove
and accretion of debt discounts.




The mark-to-market adjustment to our
warrant liability resulted in warrant income for the three-month period ended
August 31, 2009 of approximately $2,272,000, which was due to the decrease in
the market value of our common stock from June 1, 2009 to August 31, 2009.
During the comparable period of fiscal 2008, we recorded warrant income of
approximately $781,000, which resulted from a decrease in the price of our
common stock from June 1, 2008 to August 31, 2008.  We anticipate that
our warrant income or expense will continue to fluctuate in future fiscal
periods as the price of our common stock in the market continues to
fluctuate.




Liquidity and Capital
Resources





At August 31, 2009, we had cash and
cash equivalents of approximately $129,000 and negative working capital of
approximately $2,196,000.





Net cash
used in operating activities aggregated approximately $1,064,000 and $2,519,000
in the nine-month periods ended August 31, 2009 and August 31, 2008,
respectively.  The principal use of cash in the fiscal 2009 was a net
loss of approximately $2,364,000, which included mark-to-market warrant income
of approximately $1,634,000 and amortization of debt discount of approximately
$1,510,000.  The principal uses of cash in the fiscal year ended
August 31, 2008 was a net loss of approximately $4,756,000, which included a
non-cash mark-to-market warrant adjustment charge of approximately
$1,311,000.





Net cash
used in investing activities in the nine-month periods ended August 31, 2009 and
2008 aggregated approximately $123,000 and $89,000, respectively, resulting
primarily from expenditures related to enhancements to our IP telephony
software.





Net cash
provided by financing activities aggregated approximately $1,185,000 and
$2,531,000 in the nine-month periods ended August 31, 2009 and August 31, 2008,
respectively. In fiscal year 2009, cash provided by financing activities
resulted from cash received from a restricted bank account that was funded in
connection with financings on October 15, 2008 and February 18, 2009. In the
2008 period, cash provided by financing activities resulted from cash received
from a restricted bank account that was funded in connection with financings on
September 28, 2007 and May 28, 2008.




17




For the
nine-month period ended August 31, 2009, we had capital expenditures of
approximately $123,000. We expect to make additional capital expenditures of
approximately $50,000 to $100,000 in the last quarter of fiscal year 2009;
however such purchases will be dependent on our growth and the availability of
cash or equipment financing.  We expect that other capital
expenditures over the next 12 months will relate primarily to a continued
roll-out of our IP telephony network that will be required to support our Mobile
VoIP customer.





The
accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of our
company as a going concern.  However, we have sustained net losses
from operations during the past three years, and we have limited
liquidity.  Management anticipates that we will be dependent, for the
near future, on additional capital to fund our operating expenses and
anticipated growth.  The audit report of our independent registered
public accounting firm on our financial statements for the year ended November
30, 2008 contained a paragraph expressing doubt about our ability to continue as
a going concern.  Our operating losses have been funded through the
sale of non-operating assets, the issuance of equity securities and borrowings,
including borrowings from our primary lender on nine separate occasions over the
past four years.  We continually evaluate our cash needs and growth
opportunities and we believe we will require additional equity or debt financing
immediately in order to achieve our overall business objectives. We believe we
will be generating positive cash flow from operations when we add 10,000 Mobile
VoIP lines to our current customer base.  Although we are not yet
profitable and we are not generating cash from operations, our lender has been
very cooperative with us in deferring all monthly interest payments as they come
due, and has lent us a small amount of funds in October 2009 to cover a portion
of our negative cash flow from operations.  Our lender has been
strongly encouraging us to find other sources of capital to fund our negative
cash flow and our growth, and we have been successful in obtaining small amounts
of equity to cover the monthly cash shortfall needed to pay our carriers and
employees.  Furthermore, we have not made any cash payments to our
Chief Executive Officer for salary expense since February 2009 and beginning in
September 2009 our Chief Information Officer is taking only 33% of his salary in
cash payments.  While we continually look for additional financing
sources, in the current economic environment, the procurement of outside funding
is extremely difficult and 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.  Our 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.  See Note 2 to our condensed consolidated financial
statements for additional discussion of our ability to meet our financial
obligations and to continue as a going concern.




18





Item
4.                      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.




(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 quarter ended August
31, 2009.  As previously noted, due to lack of financial resources, in
fiscal 2009, we have no full-time bookkeeping or financial reporting personnel
and our Chief Executive Officer, who also serves as our principal accounting and
financial officer is performing all of our bookkeeping and financial reporting
duties with the assistance of temporary consultants.  As initially
reported in fiscal 2005, we have had 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 2009 and, as of the date of this Report, we have no full-time
employees in our accounting department, resulting in a further decrease in our
ability to segregate duties among our employees.  Management believes
the lack of qualified, accounting and financial personnel amounts to a material
weakness in our internal control over financial reporting and, as a result, at
November 30, 2008 and on the date of this Report, our internal control over
financial reporting is not effective. We will continue to address our need to
hire full-time dedicated financial accounting and reporting employees and to
engage outside consultants with technical and accounting-related expertise to
assist us in accounting for complex financial transactions.  However,
we will be unable to remedy this material weakness in our internal controls
until we have the financial resources that allow us to hire additional qualified
employees.




Our
management, including our chief executive officer/chief financial officer, does
not expect that our disclosure controls and procedures or our internal control
over financial reporting are or will be capable of preventing or detecting all
errors or all fraud.  Any control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control system’s objectives will be met. The design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further, because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any, within the
company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns may occur
because of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of controls. The design of any system of controls is based
in part on certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Projections of any evaluation of controls
effectiveness to future periods are subject to risk.




19




PERVASIP
CORP.


PART II-OTHER
INFORMATION




Item
6.                       Exhibits





Exhibit
                  Number
                
                Description31.1
                
                Certification
      of our Chief Executive Officer and Chief Financial Officer, Paul H. Riss,
      Pursuant to 18 U.S.C. 1350 (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 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of
      2002)




20




SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.




Pervasip
      Corp.Date:
      October 20, 2009
                        By:
                        /s/ Paul
      H. RissPaul
      H. Riss
                          Chief
      Executive Officer
                          (Principal
      Financial and
                          Accounting
      Officer)




21





EXHIBIT
INDEX
  Exhibit
                    Number
                  
                  Description31.1
                  
                  Certification
      of our Chief Executive Officer and Chief Financial Officer, Paul H. Riss,
      Pursuant to 18 U.S.C. 1350 (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 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of
      2002)
   22