**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, DC  20549**

** **

**FORM 10-Q**

** **

**[Mark One]                                                                                                                                                                    **

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

**SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period endedOctober 31, 2006**

**OR**

 

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

**SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from                     to                     **

**Commission File Number:  000-24996**

 

**INTERNETCOMMERCE CORPORATION**

(Exact Name of Registrant as Specified in Its Charter)

| **Delaware**                                                    |   | **13-3645702**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **6025  The Corners Parkway, Suite 100**                        |   | **30092**                             |
| **Norcross,  Georgia**                                          |   | (Zip Code)                            |
| (Address of  Principal Executive Offices)                       |   |                                  |

 

Registrant’s TelephoneNumber, Including Area Code:**  (678) 533-8000**

 

Indicate by check markwhether the Registrant:  (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports) and (2) has been subjectto such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):

| Large accelerated filer  o | Accelerated  Filer  o | Non-accelerated  filer  x |
|--------------------------------------|---------------------------------|-------------------------------------|

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o  No x  

 

As of December 13, 2006, the Registrant had outstanding 22,820,810shares of class A common stock.

 

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**INDEX TO FORM 10-Q**
|                                   | ** ** | ** **                                                                                                                                 | ** ** | ** ** |
|-----------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **PART I. FINANCIAL INFORMATION** | ** ** | ** **                                                                                                                                 |
| ** **                        | ** ** | ** **                                                                                                                                 |
| Item 1.                           |       | Financial Statements                                                                                                                       |       | 3          |
|                              |       |                                                                                                                                       |       |       |
|                              |       | Condensed Consolidated  Balance Sheets as of October 31, 2006 (unaudited) and July 31, 2006                                                |       | 3          |
|                              |       |                                                                                                                                       |       |       |
|                              |       | Condensed  Consolidated Statements of Operations for the three months ended October 31,  2006 (unaudited) and October 31, 2005 (unaudited) |       | 4          |
|                              |       |                                                                                                                                       |       |       |
|                              |       | Condensed  Consolidated Statements of Cash Flows for the three months ended October 31,  2006 (unaudited) and October 31, 2005 (unaudited) |       | 5          |
|                              |       |                                                                                                                                       |       |       |
|                              |       | Notes to Condensed  Consolidated Financial Statements (unaudited)                                                                          |       | 6          |
|                              |       |                                                                                                                                       |       |       |
| Item  2.                          |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                                |       | 10         |
|                              |       |                                                                                                                                       |       |       |
| Item  3.                          |       | Quantitative and Qualitative  Disclosures About Market Risk                                                                                |       | 16         |
| ** **                        | ** ** | ** **                                                                                                                                 | ** ** | ** ** |
| Item 4.                           |       | Controls and  Procedures                                                                                                                   |       | 16         |
| ** **                        | ** ** | ** **                                                                                                                                 | ** ** | ** ** |
| **PART II. OTHER INFORMATION**    | ** ** |                                                                                                                                       |
|                              |       |                                                                                                                                       |       |       |
| Item 1.                           |       | Legal Proceedings                                                                                                                          |       | 17         |
|                              |       |                                                                                                                                       |       |       |
| Item 1A.                          |       | Risk Factors                                                                                                                               |       | 17         |
|                              |       |                                                                                                                                       |       |       |
| Item  2.                          |       | Unregistered Sales of Equity  Securities and Use of Proceeds                                                                               |       | 22         |
|                              |       |                                                                                                                                       |       |       |
| Item  3.                          |       | Defaults Upon Senior  Securities                                                                                                           |       | 22         |
|                              |       |                                                                                                                                       |       |       |
| Item  4.                          |       | Submission of Matters to a  Vote of Security Holders                                                                                       |       | 22         |
|                              |       |                                                                                                                                       |       |       |
| Item 5.                           |       | Other Information                                                                                                                          |       | 22         |
|                              |       |                                                                                                                                       |       |       |
| Item 6.                           |       | Exhibits                                                                                                                                   |       | 22         |
| ** **                        | ** ** | ** **                                                                                                                                 | ** ** | ** ** |
| **SIGNATURES**                    |       | 23                                                                                                                                         |
| ** **                        | ** ** | ** **                                                                                                                                 | ** ** | ** ** |
| **EXHIBIT INDEX**                 |       | 24                                                                                                                                         |
| ** **                        | ** ** | ** **                                                                                                                                 | ** ** | ** ** |
| **CERTIFICATIONS**                |       |                                                                                                                                       |

 

2

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**PART I.  FINANCIAL INFORMATION**

**Item1.  Financial Statements**

**Condensed Consolidated Balance Sheets**
| ** **                                                                                                                                                    | ** ** | **October 31,** | ** ** | **July 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|
| ** **                                                                                                                                                    | ** ** | **2006**             | ** ** | **2006**          | ** ** |
| ** **                                                                                                                                                    | ** ** | **(unaudited)**      | ** ** | ** **        | ** ** |
| **ASSETS**                                                                                                                                                    | ** ** | ** **           | ** ** | ** **        | ** ** |
| Current  assets:                                                                                                                                              | ** ** | ** **           | ** ** | ** **        | ** ** |
| Cash and cash equivalents                                                                                                                                     | ** ** | $                    | 7,932,846  | ** **        | $          | 6,988,753 | ** ** |
| Accounts receivable, net of allowance for doubtful accounts and allowance  for sales returns and allowances of $532,409 and $458,061, respectively            |       | 4,211,304            |       | 3,631,135         |       |
| Prepaid expenses and other current assets                                                                                                                     |       | 421,760              |       | 461,778           |       |
| Total current assets                                                                                                                                          |       | 12,565,910           |       | 11,081,666        |       |
| ** **                                                                                                                                                    | ** ** | ** **           | ** ** | ** **        | ** ** |
| Restricted  cash                                                                                                                                              |       | 432,974              |       | 432,974           |       |
| Property  and equipment, net                                                                                                                                  |       | 1,050,716            |       | 1,113,701         |       |
| Goodwill                                                                                                                                                      |       | 6,168,883            |       | 6,148,332         |       |
| Other  intangible assets, net                                                                                                                                 |       | 4,469,873            |       | 4,829,772         |       |
| Other  assets                                                                                                                                                 |       | 40,554               |       | 37,822            |       |
| Total assets                                                                                                                                                  | ** ** | $                    | 24,728,910 | ** **        | $          | 23,644,267 | ** ** |
|                                                                                                                                                          |       |                 |       |              |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                |       |                 |       |              |       |
| Current  liabilities:                                                                                                                                         |       |                 |       |              |       |
| Accounts payable                                                                                                                                              | ** ** | $                    | 425,983    |              | $          | 662,151 | ** ** |
| Accrued expenses                                                                                                                                              |       | 977,145              |       | 574,783           |       |
| Accrued dividends – preferred stock                                                                                                                      |       | 333,151              |       | 232,329           |       |
| Deferred revenue                                                                                                                                              |       | 248,876              |       | 261,214           |       |
| Lease liability from acquisition                                                                                                                              |       | 273,060              |       | 249,940           |       |
| Other current liabilities                                                                                                                                     |       | 129,976              |       | 116,280           |       |
| Total current liabilities                                                                                                                                     |       | 2,388,191            |       | 2,096,697         |       |
|                                                                                                                                                          |       |                 |       |              |       |
| Long-term  lease liability from acquisition                                                                                                                   |       | 905,864              |       | 967,442           |       |
| Total liabilities                                                                                                                                             |       | 3,294,055            |       | 3,064,139         |       |
|                                                                                                                                                          |       |                 |       |              |       |
| Stockholders’  equity:                                                                                                                                   |       |                 |       |              |       |
| Preferred  stock – 5,000,000 shares authorized, including 10,000 shares of series C and  250 shares of series D:                                         |       |                 |       |              |       |
| Series C – par value $.01 per share, 44.76 votes per share; 10,000  shares issued and outstanding (liquidation value of $10,333,151)                     |       | 100                  |       | 100               |       |
| Series D – par value $.01 per share, 769 votes per share; 250 shares  issued and outstanding (liquidation value of $250,000)                             |       | 3                    |       | 3                 |       |
| Common  stock:                                                                                                                                                |       |                 |       |              |       |
| Class A - par value $.01 per share, 40,000,000 shares authorized, one  vote per share; 22,743,277 and 22,712,944 shares issued and outstanding,  respectively |       | 227,433              |       | 227,129           |       |
| Class B - par value $.01 per share, 2,000,000 shares authorized, six  votes per share; none issued and outstanding                                            |       | —               |       | —            |       |
| Additional  paid-in capital                                                                                                                                   |       | 103,322,571          |       | 103,042,746       |       |
| Accumulated  deficit                                                                                                                                          |       | (82,115,252          | )          | (82,689,850       | )          |
| Total stockholders’ equity                                                                                                                               |       | 21,434,855           |       | 20,580,128        |       |
| Total liabilities and stockholders’ equity                                                                                                               | ** ** | $                    | 24,728,910 | ** **        | $          | 23,644,267 | ** ** |

 

**See notesto condensed consolidated financial statements.**

3

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**CondensedConsolidated Statements of Operations (Unaudited)**
| ** **                                                           | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                           | ** ** | **October 31,**             | ** ** |
| ** **                                                           | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                                                                 |       |                             |       |   |   |
| Service revenues                                                     | ** ** | $                                | 5,807,727  | ** ** | $ | 5,017,833 | ** ** |
|                                                                 |       |                             |       |   |   |
| Expenses:                                                            |       |                             |       |   |   |
| Cost of services                                                     |       | 1,859,292                        |       | 1,905,397 |   |
| Product  development and enhancement                                 |       | 716,644                          |       | 102,983 |   |
| Selling and  marketing                                               |       | 519,957                          |       | 415,357 |   |
| General and  administrative                                          |       | 2,108,816                        |       | 1,854,255 |   |
|                                                                 |       |                             |       |   |   |
|                                                                 |       | 5,204,709                        |       | 4,277,992 |   |
|                                                                 |       |                             |       |   |   |
| Operating income                                                     |       | 603,018                          |       | 739,841 |   |
|                                                                 |       |                             |       |   |   |
| Other income  (expense):                                             |       |                             |       |   |   |
| Interest and investment income                                       |       | 82,392                           |       | 25,670 |   |
| Interest expense                                                     |       | (20,586                          | )          | (35,787 | ) |
| Other income (expense)                                               |       | (22,619                          | )          | 17,087 |   |
| ** **                                                           |       | 39,187                           |       | 6,970 |   |
|                                                                 |       |                             |       |   |   |
| Income before  income taxes                                          |       | 642,205                          |       | 746,811 |   |
| ** **                                                           | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Provision for  income taxes, current                                 |       | 67,607                           |       | 24,265 |   |
| ** **                                                           | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income                                                           |       | 574,598                          |       | 722,546 |   |
| ** **                                                           | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Dividends on  preferred stock                                        |       | (100,822                         | )          | (99,822 | ) |
|                                                                 |       |                             |       |   |   |
| Income  attributable to common stockholders                          | ** ** | $                                | 473,776    |   | $ | 622,724 | ** ** |
| ** **                                                           | ** ** |                             |       |   | ** ** |
| Basic income per  common share                                       | ** ** | $                                | 0.02       |   | $ | 0.03 | ** ** |
|                                                                 |       |                             |       |   |   |
| Diluted income  per common share                                     | ** ** | $                                | 0.02       |   | $ | 0.03 | ** ** |
|                                                                 |       |                             |       |   |   |
| Anti-dilutive  stock options and warrants outstanding                |       | 1,075,498                        |       | 3,108,137 |   |
|                                                                 |       |                             |       |   |   |
| Weighted average  number of common shares outstanding – basic   |       | 22,716,466                       |       | 19,510,748 |   |
|                                                                 |       |                             |       |   |   |
| Weighted average number  of common shares outstanding – diluted |       | 24,974,611                       |       | 21,536,286 |   |

 

**Seenotes to condensed consolidated financial statements.**

4

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**CondensedConsolidated Statements of Cash Flows (Unaudited)**
| ** **                                                                         | ** ** | **Three Months Ended October 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| **Cash flows from operating activities:**                                          | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| Net income                                                                         | ** ** | $                                                      | 574,598    |   | $ | 722,546 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                                   |       |   |   |
| Depreciation and amortization                                                      |       | 493,475                                                |       | 404,238 |   |
| Bad debt expense                                                                   |       | 80,011                                                 |       | 126,571 |   |
| Non-cash interest expense                                                          |       | 20,586                                                 |       | 35,615 |   |
| Non-cash charges for equity  instruments issued for compensation and services      |       | 280,467                                                |       | 187,098 |   |
| Changes in assets and  liabilities:                                                |       |                                                   |       |   |   |
| Accounts receivable                                                                |       | (660,179                                               | )          | (370,433 | ) |
| Prepaid expenses and other  assets                                                 |       | 38,031                                                 |       | 119,215 |   |
| Accounts payable                                                                   |       | (236,168                                               | )          | 324,496 |   |
| Accrued expenses                                                                   |       | 402,362                                                |       | (478,980 | ) |
| Deferred revenue                                                                   |       | (12,338                                                | )          | (21,750 | ) |
| Other liabilities                                                                  |       | (45,349                                                | )          | (355,490 | ) |
|                                                                               |       |                                                   |       |   |   |
| Net cash provided by operating  activities                                         |       | 935,496                                                |       | 693,126 |   |
|                                                                               |       |                                                   |       |   |   |
| **Cash flows from investing activities:**                                          |       |                                                   |       |   |   |
| Additional costs of previous  acquisition                                          |       | (20,551                                                | )          | (65,000 | ) |
| Purchases of property and  equipment                                               |       | (70,591                                                | )          | (94,495 | ) |
|                                                                               |       |                                                   |       |   |   |
| Net cash used in investing  activities                                             |       | (91,142                                                | )          | (159,495 | ) |
|                                                                               |       |                                                   |       |   |   |
| **Cash flows from financing activities:**                                          |       |                                                   |       |   |   |
| Payments of capital lease  obligations                                             |       | —                                                 |       | (2,155 | ) |
| Proceeds from exercise of  warrants                                                |       | 89,500                                                 |       | — |   |
| Proceeds from exercise of  employee stock options                                  |       | 10,239                                                 |       | 166,165 |   |
|                                                                               |       |                                                   |       |   |   |
| Net cash provided by financing  activities                                         |       | 99,739                                                 |       | 164,010 |   |
|                                                                               |       |                                                   |       |   |   |
| **Net  increase in cash and cash equivalents**                                     |       | 944,093                                                |       | 697,641 |   |
|                                                                               |       |                                                   |       |   |   |
| Cash and cash equivalents, beginning of period                                     |       | 6,988,753                                              |       | 3,983,005 |   |
| ** **                                                                         | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| **Cash  and cash equivalents, end of period**                                      | ** ** | $                                                      | 7,932,846  |   | $ | 4,680,646 |   |
|                                                                               |       |                                                   |       |   |   |
| **Supplemental  disclosure of cash flow information:**                             | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| Cash paid for interest during the period                                           | ** ** | **$**                                                  | **—** |   | $ | 172 |   |
| Cash paid for income taxes during the period                                       |       | 71,791                                                 |       | 4,770 |   |
| ** **                                                                         | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| **Supplemental  disclosure of noncash financing activity:**                        | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| Issuance of  20,283 shares of class A common stock upon exercise of warrants       |       | —                                                 |       | 203 |   |

 

**See notes to condensed consolidated financial statements.**

5

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**Notes to condensedconsolidated financial statements (unaudited)**

**The accompanying unauditedcondensed consolidated financial statements of Internet Commerce Corporation(the “Company” or “ICC”) have been prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”) forinterim financial information.  In theopinion of management, such statements include all adjustments (consisting onlyof normal recurring adjustments) necessary for the fair presentation of theCompany’s financial position, results of operations and cash flows at the datesand for the periods indicated.  Pursuantto the requirements of the Securities and Exchange Commission (the “SEC”)applicable to Quarterly Reports on Form 10-Q, the accompanying financialstatements do not include all the disclosures required by GAAP for annualfinancial statements.  While the Companybelieves that the disclosures presented are adequate to make the informationnot misleading, these unaudited interim condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements and related notes included in the Company’s Annual Report on Form10-K for the year ended July 31, 2006. Operating results for the three month period ended October 31, 2006 arenot necessarily indicative of the results that may be expected for the fiscalyear ending July 31, 2007 or any future period.**

**1.**                                      Organizationand Nature of Business

ICC creates, deploys andmanages the secure and reliable electronic exchange of essential businessdocuments. With the Company’s value added network (“VAN”), desktop software andhosted applications, managed services, consulting and professional services,ICC is a trusted provider of e-commerce solutions to connect businesses,regardless of size and level of technical sophistication, with their tradingcommunities. Thousands of customers, ranging from sole proprietorships to largecorporations, in a variety of industries rely on the value delivered from ICC’sbroad line of solutions, expertise and 24x7 customer service to help meet theunique requirements for trading partner compliance, coordination andcollaboration.

**2.**                                      RecentAcquisitions

**Enable**

On May 9, 2006, theCompany acquired all of the outstanding shares of Enable Corp. (“Enable”), aprivately held corporation with offices in New York City that provides tradingcommunity portals, web based EDI trading tools, and EDI professional servicesto a variety of industries.  Under theterms of the Share Purchase Agreement, the Company paid $4.2 million in cashand issued 686,324 shares of its class A common stock valued at approximately$2.6 million.

The following table setsforth the components of the purchase price for Enable as of October 31, 2006.
| Cash on closing                       |   | $         | 4,203,000 |   |
|---------------------------------------|--------|-----------|-----------|--------|
| ICC class A common  stock issued      |   | 2,632,739 |      |
| Transaction costs                     |   | 416,208   |      |
| Additional costs since  July 31, 2006 |   | 20,551    |      |
| Total purchase  price                 |   | $         | 7,272,498 |   |

 

The following tableprovides the estimated fair value of assets acquired and liabilities assumed inthe Enable acquisition:

6

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| Cash                                             |   | $         | 991,747   |   |
|--------------------------------------------------|--------|-----------|-----------|--------|
| Accounts receivable                              |   | 705,386   |      |
| Restricted cash                                  |   | 15,000    |      |
| Other assets                                     |   | 14,975    |      |
| Fixed assets                                     |   | 246,520   |      |
| Intangible assets –  acquired technology    |   | 1,775,000 |      |
| Intangible assets –  trade names            |   | 250,000   |      |
| Intangible assets –  customer relationships |   | 1,500,000 |      |
| Liabilities                                      |   | (510,778  | )         |
| Fair value of net  assets acquired               |   | $         | 4,987,850 |   |
| Goodwill                                         |   | $         | 2,284,648 |   |
| Total purchase price                             |   | $         | 7,272,498 |   |

 

The recorded fixed and other assets are estimated tohave a life of two to three years.  Theacquired technology intangibles are estimated to have a life between one andfour years, and the customer relationship and trade names intangibles areestimated to have a life of seven years. We recorded $2,285,000 in goodwill resulting from the Enableacquisition.  Revenue from the Enableacquisition includes hosting and transaction fees, administrative fees andprofessional services, which are part of our EC Solutions segment. Goodwill andintangible assets are deductible for tax purposes. The results of operations ofEnable are consolidated with the results of operations of the Companysubsequent to the acquisition date. The acquisition of Enable was made tostrengthen the Company’s web based trading technology offering and customerbase.

**Kodiak Group, Inc.**

OnNovember 1, 2005, the Company acquired the outstanding share of the KodiakGroup, Inc. (“Kodiak”), a privately held company delivering EDI outsourcing andglobal data synchronization services to blue chip customers in a variety ofindustries.  Under the terms of the SharePurchase Agreement, the Company paid $1.0 million in cash on close andcommitted to pay up to an additional $1.5 million in cash should the Kodiakoperations generate revenue of more than $3.0 million for the twelve monthperiod ended October 31, 2006.  For thatperiod, the Kodiak operations did not achieve the revenue goal of $3.0 million.Therefore, the Company has no additional payment obligations.  The following table sets forth the purchaseprice for Kodiak as of October 31, 2006.
| Cash on closing      |   | $      | 1,000,000 |   |
|----------------------|--------|--------|-----------|--------|
| Transaction costs    |   | 53,942 |      |
| Total purchase price |   | $      | 1,053,942 |   |

 

The following table setsforth the components of the purchase price for Kodiak as of October 31, 2006.
| Cash                                             |   | $       | 167,323   |   |
|--------------------------------------------------|--------|---------|-----------|--------|
| Accounts receivable                              |   | 358,168 |      |
| Other assets                                     |   | 61,252  |      |
| Fixed assets                                     |   | 109,597 |      |
| Intangible assets –  customer relationships |   | 425,947 |      |
| Liabilities                                      |   | (68,345 | )         |
| Total purchase price                             |   | $       | 1,053,942 |   |

 

7

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The recorded fixed and other assets are estimated tohave a life of two years and the customer relationship intangible is estimatedto have a life of five years.  Revenuefrom the Kodiak acquisition includes professional services and mapping revenue,which was included as part of our ICC.NET segment for fiscal year 2006, and ECoutsourcing, which is a part of our EC Services segment.  Due to the realignment of our product linesfor fiscal year ended 2007, Kodiak’s professional services, mapping revenue andEC outsourcing are included in the EC Services segment. There was no goodwillrecorded as a result of this acquisition. The results of operations of Kodiak are consolidated with the results ofoperations of the Company subsequent to the acquisition date.  The acquisition of Kodiak was made to enhancethe Company’s professional services offerings as well as expand the Company’scustomer base.  Acquired intangibleassets are deductible for tax purposes.

**3.             Business Segment Information**

The Company’s tworeportable segments are:

·                  ElectronicCommerce Solutions (“EC Solutions”) segment, which includes ICC.NET VANservices, browser-based and hosted applications, and desktop software; and

·                  ElectronicCommerce Services (“EC Services”) segment, which is comprised of the EC Servicecenter, EC outsourcing, mapping and professional services.

The Companychanged its reportable segments as of August 1, 2006 to coincide withmanagement’s realignment of the business operations to follow our service andproduct lines. The EC Solutions segment was formed to consolidate the servicesand products offered with direct or indirect connections to our VAN. The ECServices segment was formed and consolidates all of our professional, managedand outsourcing services. Specifically, professional service revenue andmapping revenue were moved from the old ICC.NET segment to the EC Servicessegment. Hosted applications and desktop software were moved to the ECSolutions segment from the old EC Service Bureau segment. The browser-based andhosted applications acquired from Enable were also added to the EC Solutionssegment. In addition, the Company will no longer allocate 100% of its operatingexpenses to the reporting segments. Only those expenses that are directlyrelated to the development and delivery of a reporting segment’s products andservices will be allocated. The Company has restated the previous period’sreporting segments for comparability purposes between the periods.

The tables belowsummarize information about operations as of and for the three month periodsended October 31, 2006 and 2005.
|                                          | ** ** | **EC Solutions** | ** ** | **EC Services** | ** ** | **Total**  | ** ** |
|------------------------------------------|------------|-----------------------|------------|----------------------|------------|------------|------------|
| **Three Months – October 31, 2006** | ** ** | ** **            | ** ** | ** **           | ** ** | ** ** | ** ** |
| Revenues from external  customers        |       | $                     | 3,936,640  |                 | $          | 1,871,087  |       | $ | 5,807,727 |   |
| Segment operating income                 |       | $                     | 2,371,602  |                 | $          | 789,310    |       | $ | 3,160,912 |   |

 
| The following is a reconciliation of operating segment  income to net income for the period  ending October 31, 2006: |
|--------------------------------------------------------------------------------------------------------------------------------------|

 
| Segment operating income    |   |   |   |   |   | $          | 3,160,912 |   |
|-----------------------------|--------|--------|--------|--------|--------|------------|-----------|--------|
| Corporate expenses          |   |   |   |   |   | (2,557,894 | )         |
| Operating income            |   |   |   |   |   | 603,018    |      |
| Other income (expense), net |   |   |   |   |   | 39,187     |      |
| Income before income taxes  |   |   |   |   |   | 642,205    |      |
| Income tax expense          |   |   |   |   |   | 67,607     |      |
| **Net income**              |   |   |   |   |   | $          | 574,598   |   |

 

8

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|                                          | ** ** | **EC Solutions** | ** ** | **EC Services** | ** ** | **Total**  | ** ** |
|------------------------------------------|------------|-----------------------|------------|----------------------|------------|------------|------------|
| **Three Months – October 31, 2005** | ** ** | ** **            | ** ** | ** **           | ** ** | ** ** | ** ** |
| Revenues from external  customers        |       | $                     | 3,213,963  |                 | $          | 1,803,870  |       | $ | 5,017,833 |   |
| Segment operating income                 |       | $                     | 2,131,633  |                 | $          | 829,290    |       | $ | 2,960,923 |   |

 
| The following is a reconciliation of operating segments  income to net income for the period  ending October 31, 2005: |
|----------------------------------------------------------------------------------------------------------------------------------|

 
| Reportable segment income   |   |   |   |   |   | $          | 2,960,923 |   |
|-----------------------------|--------|--------|--------|--------|--------|------------|-----------|--------|
| Corporate expenses          |   |   |   |   |   | (2,221,082 | )         |
| Operating income            |   |   |   |   |   | 739,841    |      |
| Other income (expense), net |   |   |   |   |   | 6,970      |      |
| Income before income taxes  |   |   |   |   |   | 746,811    |      |
| Income tax expense          |   |   |   |   |   | 24,265     |      |
| **Net income**              |   |   |   |   |   | $          | 722,546   |   |

 

**4.                 RECENT ACCOUNTINGPROCOUNCEMENTS**

InJuly 2006, the Financial Accounting Standards Board issued FASB InterpretationNo. 48, *Accounting for Uncertainty in Income Taxes,an interpretation of FASB Statement No. 109*  (“FIN 48”).FIN 48 clarifies the accounting for uncertainty in income taxes recognized inan enterprise’s financial statements in accordance with FASB StatementNo. 109,  *Accounting for IncomeTaxes*.  FIN 48 describes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return and alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition. FIN 48 is effectivefor fiscal years beginning after December 15, 2006 and will be effective forthe Company in fiscal 2008.  The Company does not believe the impact ofthis new accounting interpretation will be material on its financialstatements.

**5.                 INCOME TAXES**

Aprovision for income taxes has been provided for the three months ended October31, 2006 and 2005 for estimated federal alternative minimum taxes and certainstate income taxes, as the Company has sufficient net operating losscarryforwards to offset regular taxable income. As of October 31, 2006, theCompany continues to maintain a valuation allowance against the total netdeferred tax balance. The Company will continue to evaluate its prospects goingforward. If the Company’s operations continue at current levels and futurebusiness projections indicate continued profitability, the Company will reviewthe valuation allowance and may reverse, in the near future, a portion of thedeferred tax asset valuation reserve.

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**Item 2.**           Management’s Discussionand Analysis of Financial Condition and Results of Operations

This QuarterlyReport on Form 10-Q contains a number of “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended (the “Securities Act”), and Section 21E of the Securities Exchange Actof 1934, as amended (the “Exchange Act”). Specifically, all statements other than statements of historical factsincluded in this Quarterly Report regarding our financial position, businessstrategy and plans and objectives of management for future operations areforward-looking statements.  Theseforward-looking statements are based on the beliefs of management, aswell as assumptions made by and information currently available tomanagement.  When used in this Report,the words “anticipate,” “believe,” “estimate,” “expect,” “may,” “will,” “hope,”“continue” and “intend,” and words or phrases of similar import, as they relateto our financial position, business strategy and plans, or objectives ofmanagement, are intended to identify forward-looking statements.  These statements reflect our current viewwith respect to future events and are subject to risks, uncertainties andassumptions related to various factors including, without limitation, thosefactors discussed in Item 1 (Business) of Part I and Item 7 (Management’sDiscussion and Analysis of Financial Condition and Results of Operations) ofPart II of our Annual Report on Form 10-K filed on October 30, 2006, Item 2 andItem 1A of Part II of our Quarterly Reports. You should carefully review thoserisks, as well as additional risks described in other documents we file fromtime to time with the Securities and Exchange Commission.

Although we believe thatour expectations are reasonable, we cannot assure you that our expectationswill prove to be correct.  Should any oneor more of these risks or uncertainties materialize, or should any underlyingassumptions prove incorrect, actual results may vary materially from thosedescribed in this Quarterly Report as anticipated, believed, estimated, expectedor intended.

**Overview**

Internet Commerce Corporation creates, deploys andmanages the secure and reliable electronic exchange of essential businessdocuments. With our value added network (“VAN”), desktop software and hostedapplications, managed services, consulting and professional services, we are atrusted provider of e-commerce solutions to connect businesses, regardless oftheir size and level of technical sophistication, with their tradingcommunities. Thousands of customers, ranging from sole proprietorships to largecorporations, in a variety of industries rely on the value delivered from ICC’sbroad line of solutions, expertise and 24x7 customer service to help meet theunique requirements for trading partner compliance, coordination and collaboration.

We pioneered the use ofthe Internet for electronic data interchange (“EDI”) business-to-business (B2B)solutions and continue to lead as new technologies and requirements emerge formore efficient business communication. Organizationally, our two segments ofbusiness are known as the:

·                       ECSolutions segment, which includes ICC.NET VAN services, browser-based andhosted applications, and desktop software; and

·                       EC Servicessegment, whose operations primarily focus on facilitating the EDI communicationsof small and mid-sized businesses with their trading partners. The EC Servicessegment includes the EC Service center, EC Outsourcing, mapping andprofessional services.

These segments complimentone another and give us the ability to provide solutions to many differentkinds of enterprises, from sole proprietorships to large corporations,operating in a variety of industries.

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**Critical Accounting Policies andEstimates**

The discussion andanalysis of our financial condition and results of operations are based uponour condensed consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America.  The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amount of assets, liabilities, revenues and expenses.  We consider certain accounting policiesrelated to revenue recognition, valuation of acquired intangibles andimpairment of long-lived assets including goodwill, and valuation ofinvestments to be critical policies due to the estimation process involved ineach.  Management discusses its estimatesand judgments with the Audit Committee of our Board of Directors.

For a more detaileddescription on the application of these and other accounting policies, see Note2 of the Consolidated Financial Statements included in our Annual Report onForm 10-K for the fiscal year ended July 31, 2006.  Reference is also made to the discussion ofthe application of these critical accounting policies and estimates containedin Management’s Discussion and Analysis in our Annual Report on Form 10-K forfiscal 2006.  During the three monthsended October 31, 2006, there were no significant or material changes in theapplication of critical accounting policies that would require an update to theinformation provided in the Form 10-K for fiscal 2006.

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***Three Months Ended October 31, 2006 Compared with Three Months EndedOctober 31, 2005.***

**Results ofOperations – EC Solutions**

Our EC Solutionssegment uses the Internet and our proprietary technology to deliver ourcustomers’ documents and data files to members of their tradingcommunities.  The following tablesummarizes operating results for our EC Solutions services for the three monthsended October 31, 2006 and 2005:

|                                      | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | ** ** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------|------------|------------|------------|
| ** **                           | ** ** | **October 31,**             | ** ** | **Variance** | ** ** |
| ** **                           | ** ** | **2006**                         | ** ** | **2005**     | ** ** | **$**      | ** ** | **%** | ** ** |
| Revenues:                            |       |                             |       |         |       |       |       |   |   |
| Services                             |       | $                                | 3,936,640  |         | $          | 3,213,963  |       | 722,677 |   | 22 |   |
|                                 |       |                             |       |         |       |       |       |   |   |
| Expenses:                            |       |                             |       |         |       |       |       |   |   |
| Cost of services                     |       | 951,632                          |       | 1,007,558    |       | (55,926    | )          | (6 | ) |
| Product  development and enhancement |       | 551,897                          |       | 30,831       |       | 521,066    |       | 1,690 |   |
| General and  administrative          |       | 61,509                           |       | 43,941       |       | 17,568     |       | 40 |   |
| Total expenses                       |       | 1,565,038                        |       | 1,082,330    |       | 482,708    |       | 45 |   |
|                                 |       |                             |       |         |       |       |       |   |   |
| Segment operating  income            |       | $                                | 2,371,602  |         | $          | 2,131,633  |       | 239,969 |   | 11 |   |

*Revenues –EC Solutions –* Revenue from *EC Solutions*segment was 68% of consolidated revenues for the quarter ended October 31, 2006(“2007 Quarter”) compared to 64% for the quarter ended October 31, 2005 (“2006Quarter”). *EC Solutions* revenues increased$723,000 for the 2007 Quarter compared to the 2006 Quarter, principally fromthe browser-based and hosted services revenue acquired from Enable.

Cost of services *–**EC Solutions**–* Cost of services relating to our *EC Solutions*segment was 24% of revenue from the *EC Solutions*services for the 2007 Quarter, compared to 31% for the 2006 Quarter.  Total cost of services decreased $56,000 forthe 2007 Quarter compared to the 2006 Quarter. Cost of services consists primarily of salaries and employee benefits,connectivity fees, amortization, allocation of product and development expensesand rent.  This decrease was primarilythe result of lower salary and benefit expenses of $35,000, a reduction in the costof our telephone and connectivity fees of $74,000 offset by the royalty expenseof $32,000 related to the hosting and browser-based revenue from the Enableacquisition.

*Productdevelopment and enhancement -**EC Solutions* - Productdevelopment and enhancement costs relating to our *EC Solutions*segment consist primarily of salaries and employee benefits.  Product development and enhancement costsincreased $521,000 in the 2007 Quarter compared with the 2006 Quarter.  This increase is related to the additionalstaff, consulting and rent expenses from the Enable operations.

*Generaland administrative* - *EC Solutions* - General andadministrative expenses supporting our *EC Solutions*segment consist primarily of depreciation, telephone, and computer maintenanceexpenses.  General and administrative costsincreased $18,000 in the 2007 Quarter compared to the 2006 Quarter.  The increase wasmainly due to higher telephone expenses and computer maintenance costs.

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**Resultsof Operations – EC Services**

Our EC Servicesoperations primarily focus on facilitating the EDI communications of small andmid-sized businesses with their trading partners through our EC Service center,E-Commerce outsourcing and professional services.   The following table summarizes operatingresults for our EC Services segment for the three months ended October 31, 2006and 2005:
|                                      | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | ** ** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------|------------|------------|------------|
| ** **                           | ** ** | **October 31,**             | ** ** | **Variance** | ** ** |
| ** **                           | ** ** | **2006**                         | ** ** | **2005**     | ** ** | **$**      | ** ** | **%** | ** ** |
| Revenues:                            |       |                             |       |         |       |       |       |   |   |
| Services                             |       | $                                | 1,871,087  |         | $          | 1,803,870  |       | 67,217 |   | 4 |   |
|                                 |       |                             |       |         |       |       |       |   |   |
| Expenses:                            |       |                             |       |         |       |       |       |   |   |
| Cost of services                     |       | 907,660                          |       | 897,839      |       | 9,821      |       | 1 |   |
| Product  development and enhancement |       | 119,271                          |       | 72,152       |       | 47,119     |       | 65 |   |
| General and  administrative          |       | 54,846                           |       | 4,589        |       | 50,257     |       | 1,095 |   |
| Total expenses                       |       | 1,081,777                        |       | 974,580      |       | 107,197    |       | 11 |   |
|                                 |       |                             |       |         |       |       |       |   |   |
| Segment operating  income            |       | $                                | 789,310    |         | $          | 829,290    |       | (39,980 | ) | (5 | ) |

 

*Revenue –EC Services* *–* Revenue from our EC Services was 32% of consolidatedrevenues for the 2007 Quarter compared to 36% for the 2006 Quarter.  The revenue increased $67,000 for the 2007Quarter compared to the 2006 Quarter. This increase was a result of our recentacquisitions, including approximately $302,000 from our E-Commerce outsourcingand $198,000 from our professional services, offset by a reduction in revenuefrom our EC Service Center of approximately $434,000 primarily due to year overyear customer attrition.

*Costof services**– EC Services* - Cost of servicesrelating to our EC Services segment was 49% of revenue in the 2007 Quarter,compared to 50% in the 2006 Quarter. Cost of services consist primarily of salaries and employee benefits,amortization, connectivity fees and rent. As a result of an increase in amortization and rent expense at our ECService center, cost of services increased $10,000 in the 2007 Quarter comparedto the 2006 Quarter.

*Productdevelopment and enhancement**– EC Services* - Productdevelopment and enhancement costs consist primarily of salaries and employeebenefits.  Product development andenhancement costs incurred by our EC Services segment increased $47,000 in the2007 Quarter compared to the 2006 Quarter primarily as a result of increased headcount.

*Generaland administrative**– EC Services* -General and administrative expenses relating to our EC Services segment consistprimarily of office expenses, depreciation, computer maintenance expense,telephone and rent.  General andadministrative expenses incurred by our EC Services segment increased $50,000in the 2007 Quarter compared to the 2006 Quarter.  The increase was mainly related to higherdepreciation and computer maintenance expenses related to recentinvestments in capital expenditures.

**CorporateExpenses**

Our Corporateexpenses represent the general, administrative, corporate and executiveexpenses not directly related to our EC Solutions or EC Services segments.  The following table summarizes operatingexpenses for our corporate expenses for the three months ended October 31, 2006and 2005:
|                                      | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | ** ** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------|------------|------------|------------|
| ** **                           | ** ** | **October 31,**             | ** ** | **Variance** | ** ** |
| ** **                           | ** ** | **2006**                         | ** ** | **2005**     | ** ** | **$**      | ** ** | **%** | ** ** |
| Expenses:                            |       |                             |       |         |       |       |       |   |   |
| Product  development and enhancement |       | $                                | 45,476     |         | $          | —     |       | 45,476 |   | — |   |
| Selling and  marketing               |       | 519,957                          |       | 415,357      |       | 104,600    |       | 25 |   |
| General and  administrative          |       | 1,992,461                        |       | 1,805,725    |       | 186,736    |       | 10 |   |
| Total expenses                       |       | $                                | 2,557,894  |         | $          | 2,221,082  |       | 336,812 |   | 15 |   |

 

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*Productdevelopment and enhancement – Corporate**–* Product development and enhancementcosts included in our Corporate expenses consist primarily of salaries andemployee benefits.  Product developmentand enhancement costs increased $45,000 in the 2007 Quarter compared to the2006 Quarter. The increase is primarily a result of unallocable salary andbenefit costs not directly related to the EC Solutions or EC Services segments.

*Sellingand marketing**–**Corporate* - Selling and marketing costs included in ourCorporate expenses consist primarily of salaries and employee benefits andamortization.  Selling and marketingexpenses increased $105,000 in the 2007 Quarter compared to the 2006 Quarterprimarily due to the planned increase in our sales force headcount, commissionsexpense and a one-time training expense.

*Generaland administrative**–**Corporate**–*General and administrative costs included in our Corporate expenses consistprimarily of salaries and employee benefits, office expenses, legal and accountingexpenses, depreciation, computer maintenance expenses, telephone and rent.  General and administrative expenses increased$187,000 in the 2007 Quarter compared to the 2006 Quarter.  The increase is primarily a result of higherlegal and accounting fees of $85,000, an increase in non-cash compensation of$102,000 related to option expense, and an increase in depreciation andcomputer maintenance expense of $74,000, offset by a reduction of rent expenseof $77,000.

**Liquidity andCapital Resources**

Our principalsources of liquidity, which consist of unrestricted cash and cash equivalents,increased to $7,933,000 as of October 31, 2006 from $6,989,000 as of July 31,2006.  We believe these resources willprovide us with sufficient liquidity to continue in operation through October31, 2007.

During the quarterending October 31, 2006, 5,333 stock options were exercised resulting in theissuance of an equal number of shares of class A common stock for which wereceived $10,239.

During the quarterending October 31, 2006, the holders of 25,000 warrants exercisable into thesame number of shares of our class A common stock at $3.58 per share that wereoriginally issued in a private placement that closed in October of 2001voluntarily exercised their warrants, resulting in our receiving $89,500 incash.

The Company has net operating loss carryforwards fortax purposes of approximately $71.9 million as of October 31, 2006. Thesecarryforwards expire from 2011 to 2024.

The InternalRevenue Code and Income Tax Regulations contain provisions which limit the useof available net operating loss carryforwards in any given year shouldsignificant changes (greater than 50%) in ownership interests occur. Due to theprivate placement of series A preferred stock in April 1999, the netoperating loss carryover of approximately $19.6 million incurred prior to theprivate placement is subject to an annual limitation of approximately $1.4million until that portion of the net operating loss is utilized or expires.Due to a 100% ownership change of an acquired company in November 2000,the purchased net operating loss of approximately $6.5 million incurred priorto the ownership change is subject to an annual limitation of approximately$1.1 million until that portion of the net operating loss is utilized orexpires. Additionally, this transaction created an ownership change for theCompany as defined by IRC Section 382. As such, its net operating loss ofapproximately $49.4 million incurred prior to the ownership change is subjectto an annual limitation of approximately $2.8 million until that portion of thenet operating loss is utilized or expires. Finally, due to a 100% ownershipchange of an acquired company in June 2004, the purchased net operatingloss of approximately $1.2 million incurred prior to the ownership change issubject to an annual limitation of approximately $128,000 until that portion ofthe net operating loss is utilized or expires.

**ConsolidatedWorking Capital**

Consolidatedworking capital increased to $10,178,000 at October 31, 2006 from $8,985,000 atJuly 31, 2006.  This increase wasprimarily due to an increase in cash of $944,000, an increase in accountsreceivable of approximately $580,000 principally from the Enable acquisition,offset by an increase in accrued expenses of $402,000.

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**Analysis of CashFlows**

** **

Cash provided by operatingactivities was $935,000 in the three months ended October 31, 2006 compared tocash provided by operating activities of $693,000 in the three months endedOctober 31, 2005.  Cash provided byoperating activities in the three months ended October 31, 2006 resultedprimarily from net income of $575,000, non-cash charges for depreciation andamortization of $493,000, non-cash charges for equity instruments issued forcompensation and services of $280,000, and an increase in accrued expenses of$402,000, offset by an increase in accounts receivable of $660,000 and adecrease in accounts payable of $236,000. Cash provided by operating activities in the three months ended October31, 2005 resulted primarily from net income of $723,000, non-cash charges for depreciationand amortization of $404,000, non-cash charges for equity instruments issuedfor compensation and services of $187,000, and an increase in accounts payableof $324,000, offset by an increase in accounts receivable of $370,000 and adecrease in accrued expenses of $479,000.

Cash used in investingactivities decreased to $91,000 in the three months ended October 31, 2006 from$159,000 in the three months ended October 31, 2005.  Cash used in investing activities in thethree months ended October 31, 2006 resulted from the purchase of property andequipment of $71,000 and additional costs relating to acquisitions of$20,000.  Cash used in investingactivities in the three months ended October 31, 2005 resulted from thepurchase of property and equipment of $94,000 and additional costs relating toacquisitions of $65,000.

Cash provided by financing activities was $100,000 in the three monthsended October 31, 2006 compared to cash provided by financing activities of$164,000 in the three months ended October 31, 2005.  Cash provided by financing activities in thethree months ended October 31, 2006 was the result of proceeds from theexercise of employee stock options of $10,000 and proceeds from the exercise ofwarrants of $90,000.  Cash provided byfinancing activities in the three months ended October 31, 2005 was the resultof proceeds from the exercise of employee stock options of $164,000 offset bycapital lease payments of $2,000.

 

**Off Balance Sheet Arrangements**

** **

We provide indemnifications of varying scope and amount to certaincustomers against claims of intellectual property infringement made by thirdparties arising from the use of our products and services.  We evaluate estimated losses for such indemnificationunder Statement of Financial Accounting Standards No. 5, *Accountingfor Contingencies*, as interpreted by Financial Accounting StandardsBoard Interpretation No. 45, *Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others*.  Weconsider factors such as the degree of probability of an unfavorable outcomeand the ability to make a reasonable estimate of the amount of loss.  To date, we have not encountered materialcosts as a result of such obligations and have not accrued any materialliabilities related to such indemnifications in our financial statements.

 

**Contractual Obligations**

 

Our contractual obligations are comprised of future minimum rentalpayments due under non-cancelable operating leases.  The following table is a summary of ourcontractual obligations as of October 31, 2006:

| Fiscal  Year | ** ** | ** ** | ** ** | **Amount** | ** ** |
|--------------|------------|------------|------------|------------|------------|
| 2007         |       | $          | 1,188,056  |       |
| 2008         |       | $          | 1,524,649  |       |
| 2009         |       | $          | 1,429,073  |       |
| 2010         |       | $          | 1,188,485  |       |
| 2011         |       | $          | 335,924    |       |

 

The minimum future rentalpayments have not been reduced by $2,900,291 of sublease rentals to be receivedin the future under non-cancelable subleases.

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**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

** **

**InterestRate Risk**

 

We may invest our cash ina variety of financial instruments.  Ifinvested, we account for our investment instruments in accordance withStatement of Financial Accounting Standards No. 115, “Accounting for CertainInvestments in Debt and Equity Securities” (“SFAS No. 115”).  All of the cash equivalents and investmentsare treated as available-for-sale under SFAS No. 115.  Investments that are classified as cash andcash equivalents have original maturities of three months or less.  Investments in both fixed rate and floatingrate interest earning instruments carry a degree of interest rate risk.  Fixed rate securities may have their fairmarket value adversely impacted due to a rise in interest rates, while floatingrate securities may produce less income than expected if interest ratesfall.  Due in part to these factors, ourfuture investment income may vary widely due to changes in interest rates, orwe may suffer losses in principal if forced to sell securities that have seen adecline in market value due to changes in interest rates.  For the quarter ended October 31, 2006, ourcash investments consisted entirely of overnight cash sweep accounts investedin a fund composed primarily of triple A rated commercial paper and governmentagency bonds.  As of October 31, 2006,the interest rate for this investment was 4.62%. 

 

**Item 4.  Controls and Procedures**

Our management, including our chief executive officerand chief financial officer, has carried out an evaluation of the effectivenessof our disclosure controls and procedures as of October 31, 2006, as requiredby paragraph (b) of Exchange Act Rules 13(a)-15 and 15(d)-15.  Based upon that evaluation, our chiefexecutive officer and chief financial officer have concluded that as of suchdate, our disclosure controls and procedures are effective.  There was no change in our internal controlover financial reporting during the quarter ended October 31, 2006 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting. 

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**PART II.  OTHERINFORMATION**

**Item 1.  Legal Proceedings**

** **

On January 6, 2006we filed a complaint for declaratory judgment in the United States BankruptcyCourt (the “Court”) naming Omega Liquidating Trust (“Omega”), the liquidatingtrust for the bankrupt Cable & Wireless USA (C&W USA), andCable & Wireless PLC (C&W) as defendants (together the“Defendants”). We seek to have Omega declared the rightful owner of our seriesC preferred stock and of any of our shares of class A common stock that havebeen issued but not distributed as dividends of the series C preferredstock. On March 10, 2006, defendant C&W entered a motion in thecourt to dismiss the complaint for declaratory judgment for lack of subjectmatter jurisdiction, or in the alternative, abstention by the Court. A hearingwas scheduled by the Court for oral arguments on the motion for July 13,2006. On October 19, 2006, the Defendants filed a motion to have the suitdismissed as the result of a compromise settlement having been reached betweenthe Defendants.  The compromise namesdefendant Omega as owner of the disputed shares, but splits the proceeds fromany sale of our stock fifty-fifty between the Defendants. An order approvingthe settlement was signed by the Court on November 7, 2006.

In May 2006, Internet Commerce Corporation, aGeorgia corporation with the identical name as the Company (the “Plaintiff”),filed a lawsuit against the Company alleging claims for federal and stateservice mark infringement, federal unfair competition, dilution of servicemark, unfair competition and deceptive trade practices and claims under theGeorgia Deceptive Trade Practices Act based upon the Plaintiff’s claim that ithas priority of the use of the services marks “Internet Commerce Corporation”and “ICC.” The Company settled all claims on August 4, 2006 by agreeing tochange the Company’s name within twelve months of the settlement date andpaying Plaintiff an immaterial amount to cover costs.

We are party to various legal proceedings and claims,either asserted or unasserted, which arise in the ordinary course of business.  While the outcome of these matters cannot bepredicted with certainty, we do not believe that the outcome of any of theseclaims or any of the above mentioned legal matters will have a material adverseeffect on our consolidated financial position, results of operations or cashflow.

 

**Item 1A.  RiskFactors**

 

The followingRisk Factor disclosure updates the risk factors as disclosed in our 2006 AnnualReport on Form 10-K previously filed with the Securities and ExchangeCommission. 

 

**RisksRelating to Our Company**

 

***We may not remainprofitable in the future.  ***We have incurred significant losses since the Companywas founded in 1991, and, as of October 31, 2006, we had an accumulated deficitof approximately $82.1 million. We realized profitability for the first time inthe fiscal year ending July 31, 2005 and have remained so since. However,there can be no assurances that we may not incur losses again in the future.

***We must continue togrow our business in order to remain competitive.  ***Over the past year, the VAN business hasremained significantly price competitive. Our major competitors appear to berestructuring their VAN operations to reduce their overhead and other costs tobetter compete against Internet-based networks such as our ICC.NET service.While we have been successful in maintaining our margins and we have increasedthe volume of data transmitted through our VAN, we have experienced priceerosion in competing for larger customers. Although we expect to continue toadd new customers and increase the volume of data transmitted through ourservice, we do not expect our revenue from VAN services to continue to grow asrapidly as in the past. If our revenues grow at a slower rate than weanticipate, or decrease and we are unable to adjust spending in a timely manneror if our expenses increase without commensurate increases in revenues, ouroperating results will suffer and we may again report losses.

***If we are notsuccessful in selling our products and services, our results of operations willsuffer.***  While our primary focus in the past has been on growing our ICC.NET VANservice, we have attempted to diversify by acquiring Electronic CommerceSystems in June 2004, the MEC operations of InovisInternational, Inc. in March 2005 and Enable Corp. in May 2006.However, the success of our services depends to a large extent on the future ofbusiness-to-business electronic commerce and our ability to effectively competein the marketplace. In 

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particular, our success depends on the number of customers thatsubscribe to our services, the volume of the data, documents or otherinformation they send or retrieve and the price we are able to charge for theseservices in light of competitive pressures. In connection with the assimilationof our new customers acquired from the MEC operation and the Enableacquisition, we expect to see attrition to these newly acquired customer basesdue to the seasonal trends, integration difficulties, and customer defectionsto alternative EDI solutions. As a result, a portion of our revenues may beadversely affected. While we are learning to manage these new customers, thereis no assurance that we will accurately assess the trends of these newcustomers. Accordingly, the value of these new customers, the volume of ourservices subscribed by them and the possibility of payment collection maydiffer materially from our current expectation. Further, since our operatingexpense levels are based significantly on our expectations of future revenue,our inability to assess the trends may render us vulnerable in the case of asignificant shortfall in revenues or orders from these new customers, in whichcase we may not be able to reduce our operating expenses quickly in response.Therefore, any significant shortfall in revenue or orders could have animmediate adverse effect on our operating results.

***We may not besuccessful in competing against our competitors.  ***We face a significant number ofcompetitors, ranging from very large enterprises or divisions of very largecompanies to a number of relatively small organizations. These competitors arediverse in terms of their histories, business models, corporate strategies,financial strength, name recognition, company reputation, customer base andbreadth of offerings. Many of our large competitors have more history,significantly greater financial resources, larger customer bases and moreeasily recognized names than we do. As a result, our competitors may be able torespond more quickly to changing technology and changes in customerrequirements or be able to undertake more extensive marketing campaigns, adoptmore aggressive pricing policies and make more attractive offers to potentialcustomers and employees, or be able to devote greater resources to thedevelopment, promotion and sale of their services than we can. New competitionis emerging in the form of web services networks, collaborative applications,application service providers, e-marketplaces and integration broker suites. Wehave enhanced our technologies to communicate with these web-basedtechnologies. However, there can be no assurance that our product and serviceofferings will compete effectively and generate any significant revenues. Webelieve that the high cost of implementation and the ongoing costs ofsupporting a company’s trading partners may be a barrier to the wideracceptance of our new product offerings in the marketplace. As a result, we maynot be successful in competing against our competitors.

***If we are unable tomaintain or replace our existing interconnect arrangements, our results ofoperations would suffer.  ***We rely on many of our competitors to interconnectwith our service to promote an “open community” so all businesses can take advantageof the efficiencies of EDI, no matter what network they choose as theirprovider. Although we have interconnect agreements with the major VANproviders, there can be no assurances that these agreements will not beterminated or will continue with acceptable terms. If terminated, we would haveto find an acceptable alternative. If available, such an alternative could addsignificant operating costs to our business.

***We must continue todevelop new products and services.  ***If we do not keep pace with rapidtechnological changes, customer demands and intense competition, we will not besuccessful. Our market is characterized by rapidly changing technology,customer demands and intense competition. The satisfactory performance,reliability and availability of our network infrastructure, customer supportand document delivery systems and our web site are critical to our reputationand our ability to attract customers and maintain adequate customer servicelevels. If we cannot keep pace with these changes and maintain the performanceand reliability of our network and customer service levels, our business willsuffer. The intense competition in our industry requires us to continue todevelop strategic business and Internet solutions that enhance and improve thecustomer service features, functions and responsiveness of our products andservices and we must constantly keep pace with continuing changes ininformation technology and customer requirements. While we actively search forways to expand our business and our products and services to keep pace with therapidly changing technology, customer demands and intense competition, therecan be no assurance that we will be able to keep pace with these changes. If weare not successful in developing and marketing enhancements to our products andservices that respond to technological change or customer demands, our businesswill suffer.

***We may need toobtain additional financing on satisfactory terms to continue to competesuccessfully. If we are unable to obtain necessary future capital, our businesswill suffer.***  We may need to raise additional funds if competitive pressures or technologicalchanges are greater than anticipated, if we are unable to increase revenue atanticipated rates, if our expenses increase significantly or if our customersdelay payment of our receivables or if we identify a suitable acquisitioncandidate that requires a cash outlay in order to complete the transaction. Wecannot assure you that any additional financing will be available on reasonableterms or at all. Raising additional funds in 

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the future by issuing securities could adversely affect ourstockholders and negatively impact our publicly traded share price. If we raiseadditional funds through the issuance of debt securities, the holders of thedebt securities will have a claim to our assets that will have priority overany claim of our stockholders. The interest on these debt securities wouldincrease our costs and negatively impact our operating results. If we raiseadditional funds through the issuance of common stock or securities convertibleinto or exchangeable for common stock, the percentage ownership of ourthen-existing stockholders will decrease and they may experience additionaldilution. In addition, any convertible or exchangeable securities may haverights, preferences and privileges more favorable to the holders than those ofthe common stock.

***Failure of ourthird-party providers to provide adequate Internet and telecommunicationsservice could result in significant losses of revenue.***   Our operations depend uponthird parties for Internet access and telecommunications service. Frequent orprolonged interruptions of these services could result in significant losses ofrevenues. We have experienced outages in the past and could experience outages,delays and other difficulties due to system failures unrelated to our internalactivities in the future. These types of occurrences could also cause users toperceive our services as not functioning properly and therefore cause them touse other methods to deliver and receive information. We have limited controlover these third parties and cannot assure you that we will be able to maintainsatisfactory relationships with any of them on acceptable commercial terms orthat the quality of services that they provide will remain at the levels neededto enable us to conduct our business effectively.

***We may suffersystems failures and business interruptions that would harm our business.***   Our success depends in parton the efficient and uninterrupted operation of our VAN service and Enable’sweb hosting sites. Almost all of our network operating systems are located inthird party co-location facilities. Although these facilities are designed toprevent operational interrupts, our systems are vulnerable to events such asdamage from fire, power loss, telecommunications failures, break-ins andearthquakes. This could lead to interruptions or delays in our service, loss ofdata or the inability to accept, transmit and confirm customer documents anddata. Although we have implemented network security measures, our servers maybe vulnerable to computer viruses, electronic break-ins, attempts by thirdparties deliberately to exceed the capacity of our systems and similardisruptions.

***If we are unable tosuccessfully integrate acquisitions, our financial results will suffer.***   Our ability to implement ourbusiness plan successfully requires effective planning and strong executionskills. If we cannot manage the integration of anticipated acquisitions, ourbusiness and financial results will suffer. We expect that we will need tocontinue to manage and to expand multiple relationships with customers,Internet service providers and other third parties. We also expect that we willneed to continually improve our financial systems, procedures and controls andwill need to expand, train and manage our workforce, particularly ourinformation technology and sales and marketing staffs.

***If we lose our netoperating loss carryforward of approximately $71.9 million, our financialresults will suffer.***   Section 382 of the Internal Revenue Code containsrules designed to discourage persons from buying and selling the netoperating losses of companies. These rules generally operate by focusingon ownership changes among stockholders owning directly or indirectly 5% ormore of the common stock of a company or any change in ownership arising from anew issuance of stock by a company. In general, the rules limit theability of a company to utilize net operating losses after a change ofownership of more than 50% of its common stock over a three-year period.Purchases of our class A common stock in amounts greater than specified levelscould create a limitation on our ability to utilize our net operating lossesfor tax purposes in the future. We are currently subject to certain limitationson the utilization of portions of our net operating loss carryforward.

***If we cannot hireand retain highly qualified employees, our business and financial results willsuffer.***  We are substantially dependent on the continued services and performance of ourexecutive officers and other key employees. If we are unable to attract,assimilate and retain highly qualified employees, our management may not beable to effectively manage our business, exploit opportunities and respond tocompetitive challenges and our business and financial results will suffer. Manyof our competitors may be able to offer more lucrative compensation packagesand higher-profile employment opportunities than we can.

***We depend on ourintellectual property, which may be difficult and costly to protect.***   If we fail to adequatelyprotect our proprietary rights, competitors could offer similar productsrelying on technologies we developed, potentially harming our competitiveposition and decreasing our revenues. We attempt to protect our intellectualproperty rights by limiting access to the distribution of our software,documentation and other proprietary information and by relying on a combinationof copyright, trademark and trade secret laws. In addition, we enter intoconfidentiality agreements with our employees and certain customers, vendorsand strategic partners. In some circumstances, however, we may, if required bya business relationship, provide our licensees with access to 

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our data model and other proprietary information underlying ourlicensed applications. Despite the precautions we take, it may be possible forunauthorized third parties to copy aspects of our current or future products orto obtain and use information that we regard as proprietary. Policingunauthorized use of software is difficult, and some foreign laws do not protectproprietary rights to the same extent as United States laws. Litigation may benecessary in the future to enforce our intellectual property rights, to protectour trade secrets or to determine the validity and scope of the proprietaryrights of others, any of which could be costly and adversely affect ouroperating results.

***Intellectualproperty infringement claims against us could harm our business.  ***It is possible our products and servicemay infringe upon the proprietary rights of others and other parties may assertinfringement claims against us. Any such claims and any resulting litigationcould subject us to significant liability for damages and could invalidate ourproprietary rights. We could be required to enter into royalty and licensingagreements, which may be costly or otherwise burdensome or which may not beavailable on terms acceptable to us.

***We must comply in the future with new and costly reportingrequirements.  ***Under current Securities and Exchange Commission(“SEC”) regulations, we are considered a non-accelerated filer as our marketcapitalization as of January 31, 2006 was under $75 million. Under currentSEC regulations, we will have to be compliant with Section 404 of theSarbanes-Oxley Act of 2002 (“SOX”) by July 31, 2007, although proposedrule changes would extend that date to July 31, 2008. The costs ofimplementing the requirements of the SOX have ranged from approximately$500,000 to over $1 million for smaller companies. Although we began our SOXcompliance efforts, there can be no assurance that we can be in full compliancewhen required for reasonable costs.

**RisksRelating to the Internet and Online Commerce Aspects of Our Business**

***If Internet usagedoes not continue to grow or if its infrastructure fails, our business willsuffer.***  We cannot be certain that the infrastructure or complementary servicesnecessary to maintain the Internet as a useful and easy means of transferringdocuments and data will continue to develop. The Internet infrastructure maynot support the demands that growth may place on it and the performance andreliability of the Internet may decline.

***Privacy concernsmay prevent customers from using our services.***   Concerns about the securityof online transactions and the privacy of users may inhibit the growth of theInternet as a means of delivering business documents and data. We may need toincur significant expenses to protect against the threat of security breachesor to alleviate problems caused by security breaches. We rely upon encryptionand authentication technology to provide secure transmission of confidentialinformation. If our security measures do not prevent security breaches, wecould suffer operating losses, damage to our reputation, litigation andpossible liability. Advances in computer capabilities, new discoveries in thefield of cryptography or other developments that render current encryptiontechnology outdated may result in a breach of our encryption and authenticationtechnology and could enable an outside party to steal proprietary informationor interrupt our operations.

***Governmentregulation and legal uncertainties relating to the Internet could harm ourbusiness.***  Changes in the regulatory environment in the United States and other countriescould decrease our revenues and increase our costs. The Internet is largelyunregulated and the laws governing the Internet remain unsettled. It may takeyears to determine whether and how existing laws such as those governingintellectual property, privacy and taxation apply to the Internet. In addition,because of increasing popularity and use of the Internet, any number of lawsand regulations may be adopted in the United States and other countriesrelating to the Internet or other online services covering issues such as userprivacy, security, pricing and taxation, contents and distribution.

***The cost oftransmitting documents and data over the Internet could increase.***   We may not be able toincrease our prices to cover these rising costs. Also, foreign and state lawsand regulations relating to the provision of services over the Internet arestill developing. If individual states or foreign countries impose taxes orlaws that negatively impact services provided over the Internet, our cost ofproviding our ICC.NET and other services may increase.

**RisksRelating to Our Class A Common Stock**

***The market price ofour class A common stock is likely to be highly volatile.  ***The market price of our class A commonstock has been very volatile in the past, ranging from a low of $1.82 to a highof $4.66 during fiscal 2006 and is likely to fluctuate substantially in thefuture. If our class A common stock falls under $1.00 per share and fails tomaintain a minimum bid price of $1.00 for 30 consecutive trading days, it mayno longer be eligible for trading in the Nasdaq Capital Market, which wouldadversely affect the ability of investors to sell their shares of our class A commonstock.

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***Shares eligible forfuture sale by our existing stockholders may adversely affect our stock pricemaking it difficult to sell class A common stock.***   Between January 1, 2003and May 2006, we registered the resale under the Securities Act of 1933 ofan aggregate of 10,676,141 shares of our class A common stock, which includes3,016,917 shares of class A common stock issuable upon the exercise of warrantsto purchase shares of class A common stock and 192,307 shares of class A commonstock issuable upon conversion of our series D preferred. The market price ofour class A common stock could be materially and adversely affected by sales ofeven a small percentage of these shares or the perception that these salescould occur.

***The market for ourclass A common stock on the Nasdaq Capital Market may be illiquid, which wouldrestrict the ability to sell shares of class A common stock and could result inincreased volatility in the trading prices for our class A common stock.***   The price at which our classA common stock will trade in the future cannot be predicted and will bedetermined by the market. The price may be influenced by many factors,including investors’ perceptions of our business, our financial condition,operating results and prospects, the use of the Internet for business purposesand general economic and market conditions.

***Our Board ofDirectors can issue preferred stock with rights adverse to the holders of classA common stock.  ***Our Board of Directors is authorized, without further stockholderapproval, to determine the provisions of and to issue up to 4,989,750 shares ofpreferred stock. Issuance of preferred shares with rights to dividends andother distributions, voting rights or other rights superior to the class Acommon stock could be adverse to the holders of class A common stock. Inaddition, issuance of preferred shares could have the effect of delaying,deterring or preventing an unsolicited change in control of our company, orcould impose various procedural and other requirements that could make it moredifficult for holders of our class A common stock to effect certain corporateactions, including the replacement of incumbent directors and the completion oftransactions opposed by the incumbent Board of Directors. The rights of theholders of our class A common stock would be subject to, and may be adverselyaffected by, the rights of the holders of any preferred stock that may beissued in the future.

***We may have to usesignificant resources indemnifying our officers and directors or paying fordamages caused by their conduct.***   The Delaware General Corporation Lawprovides for broad indemnification by corporations of their officers anddirectors and permits a corporation to exculpate its directors from liabilityfor their actions. Our bylaws and certificate of incorporation implement thisindemnification and exculpation to the fullest extent permitted under this lawas it currently exists or as it may be amended in the future. Consequently,subject to this law and to some limited exceptions in our certificate ofincorporation, none of our directors will be liable to us or to ourstockholders for monetary damages resulting from conduct as a director.

***We might not be able to retire the series C preferred stock,the existence of which may pose an impediment to our future fund raisingefforts.***  We believe the 4% annual dividend and the $10,000,000 liquidating preference ofour series C preferred stock may inhibit our ability to raise capital. In 2005,we began discussions with Cable & Wireless, PLC (“C&W”), thepurported owner of the series C preferred stock, about buying back the series Cpreferred stock. As these discussions progressed, we realized that there wassubstantial evidence that the series C preferred stock was originally issued toCable & Wireless USA (“C&W USA”), a formerly wholly-ownedsubsidiary of C&W that filed Chapter 11 bankruptcy in the United States onDecember 8, 2003. On January 6, 2006 we filed a complaint fordeclaratory judgment in the United States Bankruptcy Court (the” Court”) namingOmega Liquidating Trust (“Omega”) and C&W as defendants. We sought to haveOmega, as the liquidating trust for the bankrupt C&W USA, declared therightful owner of our series C preferred stock and of any of our shares of classA common stock that have been issued but not distributed as dividends of theseries C preferred stock. Omega and C&W reached a settlement agreement onOctober 19, 2006. An order approving the settlement was signed by the Court onNovember 7, 2006.  The compromise namesdefendant Omega as owner of the disputed shares, but splits the proceeds fromthe potential sale of our series C preferred stock or class A common stockissued as dividends fifty-fifty between the Defendants.  Even though ownership has been established,we cannot be assured that we will be able to reach acceptable terms with Omegafor the repurchase of our series C preferred stock or that some other entitymay purchase the series C preferred stock.

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**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds**

** **

On October 27, 2006, we issued a total of 25,000shares of class A common stock in consideration for an aggregate price of$89,500 or $3.58 per share, in a private placement transaction.  These shares were issued upon the exercise ofoutstanding warrants issued in 2001 in connection with a private placement ofthe class A common stock.

The Company intends to use the proceeds for generalcorporate purposes.  The Company reliedon the exemptions from registration requirements provided by Section 4(2)and Rule 506 of Regulation D promulgated under the Securities Act of1933, as amended, for the issuance and sale of the shares of class A commonstock upon the exercise of the warrants.

**Item3.  Defaults Upon Senior Securities**

 

None.  As the result of the settlement described inPart II, Item 1. Legal Proceedings on page 17 the certificate for all pastdeclared dividends has been issued.

 

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

None.

 

**Item 5.  Other Information**

** **

**               **None.

** **

**Item 6.  Exhibits**

 
| 31.1   | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                               |
|--------|----------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                   |
| 31.2   | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                               |
|   |                                                                                                                                   |
| 32.1   | Certification of the Chief Executive Officer and  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.* |

 

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* In accordance with ReleaseNo. 34-47986, this Exhibit is hereby furnished to the SEC as an accompanyingdocument and is not deemed “filed” for purposes of Section 18 of the SecuritiesExchange Act of 1934 or otherwise subject to the liabilities of that Section,nor shall it be deemed incorporated by reference into any filing under theSecurities Act of 1933. 

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### **SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
| Date: December 14, 2006 |                              |
|-------------------------|-----------------------------------|
| ** **              | ** **                        |
| ** **              | **INTERNET COMMERCE CORPORATION** |
| ** **              | ** **                        |
| ** **              | ** **                        |
|                    | By:                               | /s/ Thomas J. Stallings |
|                    |                              | Thomas J. Stallings |
|                    |                              | Chief Executive Officer |
|                    |                              |
|                    |                              |
|                    | By:                               | /s/ Glen E. Shipley |
|                    |                              | Glen E. Shipley |
|                    |                              | Chief Financial Officer |

 

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**EXHIBIT INDEX**

 
| Exhibit No.  | ** ** | **Document**                                                                                                                          |
|--------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 31.1 |       | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                               |
|         |       |                                                                                                                                  |
| Exhibit 31.2 |       | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                               |
|         |       |                                                                                                                                  |
| Exhibit 32.1 |       | Certification of the Chief Executive Officer and  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002* |

 

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*In accordance withRelease No. 34-47986, this Exhibit is hereby furnished to the SEC as anaccompanying document and is not deemed “filed” for purposes of Section 18 ofthe Securities Exchange Act of 1934 or otherwise subject to the liabilities ofthat Section, nor shall it be deemed incorporated by reference into any filingunder the Securities Act of 1933.

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