**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,DC  20549**

**FORM 10-Q**
| **[Mark One]**                                                                                                                                                                                                                                                                                                                            | ** **                                                                                    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| **x**                                                                                                                                                                                                                                                                                                                                     | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| ** **                                                                                                                                                                                                                                                                                                                                | ** **                                                                                    |
| **For the  quarterly period ended April 30, 2007**                                                                                                                                                                                                                                                                                        |
| ** **                                                                                                                                                                                                                                                                                                                                |
| **OR**                                                                                                                                                                                                                                                                                                                                    |
| ** **                                                                                                                                                                                                                                                                                                                                |
| **o**                                                                                                                                                                                                                                                                                                                                     | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                                                                                | ** **                                                                                    |
| **For the  transition period from                           to                         ** |

 

**Commission File Number:  000-24996**

**INTERNETCOMMERCE CORPORATION**

(Exact Name ofRegistrant 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**                                                          |   | ** **                            |
| **Norcross,  Georgia**                                                                            |   | **30092**                             |
| (Address of  Principal Executive Offices)                                                         |   | (Zip Code)                            |

 

**Registrant’sTelephone Number, 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 June 4, 2007, the Registrant had outstanding 23,113,056shares of class A common stock.

 

----

**INDEX TOFORM 10-Q**
|                                    | ** **                                                                                                                                      | **PAGE** |
|------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| ** **                         | ** **                                                                                                                                      |     |
| **PART I. FINANCIAL  INFORMATION** |                                                                                                                                            |
| ** **                         | ** **                                                                                                                                      |     |
| Item 1.                            | Financial  Statements                                                                                                                           |     |
|                               |                                                                                                                                            |     |
|                               | Condensed  Consolidated Balance Sheets as of April 30, 2007 (unaudited) and July 31, 2006                                                       | 3        |
|                               |                                                                                                                                            |     |
|                               | Condensed  Consolidated Statements of Operations for the three and nine months ended  April 30, 2007 (unaudited) and April 30, 2006 (unaudited) | 4        |
|                               |                                                                                                                                            |     |
|                               | Condensed  Consolidated Statements of Cash Flows for the nine months ended  April 30, 2007 (unaudited) and April 30, 2006 (unaudited)           | 5        |
|                               |                                                                                                                                            |     |
|                               | Notes to  Condensed Consolidated Financial Statements (unaudited)                                                                               | 6        |
|                               |                                                                                                                                            |     |
| Item 2.                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                     | 12       |
|                               |                                                                                                                                            |     |
| Item 3.                            | Quantitative  and Qualitative Disclosures About Market Risk                                                                                     | 20       |
|                               |                                                                                                                                            |     |
| Item 4.                            | Controls and  Procedures                                                                                                                        | 20       |
|                               |                                                                                                                                            |     |
| **PART II. OTHER  INFORMATION**    |                                                                                                                                            |
| ** **                         | ** **                                                                                                                                      |     |
| Item 1.                            | Legal Proceedings                                                                                                                               | 21       |
|                               |                                                                                                                                            |     |
| Item  1A.                          | Risk  Factors                                                                                                                                   | 21       |
|                               |                                                                                                                                            |     |
| Item 2.                            | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                    | 26       |
|                               |                                                                                                                                            |     |
| Item 3.                            | Defaults  Upon Senior Securities                                                                                                                | 26       |
|                               |                                                                                                                                            |     |
| Item 4.                            | Submission  of Matters to a Vote of Security Holders                                                                                            | 26       |
|                               |                                                                                                                                            |     |
| Item 5.                            | Other Information                                                                                                                               | 26       |
|                               |                                                                                                                                            |     |
| Item  6.                           | Exhibits                                                                                                                                        | 26       |
|                               |                                                                                                                                            |     |
| **SIGNATURES**                     | 27                                                                                                                                              |
| ** **                         | ** **                                                                                                                                      |     |
| **EXHIBIT  INDEX**                 | 28                                                                                                                                              |
| ** **                         | ** **                                                                                                                                      |     |
| **CERTIFICATIONS**                 |                                                                                                                                            |

 

2

----

**PARTI.  FINANCIAL INFORMATION**

**Item1.  Financial Statements**

**CondensedConsolidated Balance Sheets**
| ** **                                                                                                                                                                                                                          | ** ** | **April 30,** | ** ** | **July 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                                                          | ** ** | **2007**           | ** ** | **2006**          | ** ** |
| ** **                                                                                                                                                                                                                          | ** ** | **(unaudited)**    | ** ** | ** **        | ** ** |
| **ASSETS**                                                                                                                                                                                                                          |       |               |       |              |       |
| Current  assets:                                                                                                                                                                                                                    |       |               |       |              |       |
| Cash and cash equivalents                                                                                                                                                                                                           | ** ** | $                  | 7,046,612  |              | $          | 6,988,753 | ** ** |
| Accounts receivable, net of allowance for doubtful accounts and allowance  for sales returns and allowances of $447,635 and  $458,061, respectively                                                                                 |       | 4,106,314          |       | 3,631,135         |       |
| Prepaid expenses and other current assets                                                                                                                                                                                           |       | 684,422            |       | 461,778           |       |
| Total current assets                                                                                                                                                                                                                |       | 11,837,348         |       | 11,081,666        |       |
| ** **                                                                                                                                                                                                                          |       |               |       |              |       |
| Restricted  cash                                                                                                                                                                                                                    |       | 433,478            |       | 432,974           |       |
| Property  and equipment, net                                                                                                                                                                                                        |       | 1,058,023          |       | 1,113,701         |       |
| Goodwill                                                                                                                                                                                                                            |       | 6,168,883          |       | 6,148,332         |       |
| Other  intangible assets, net                                                                                                                                                                                                       |       | 4,000,474          |       | 4,829,772         |       |
| Other  assets                                                                                                                                                                                                                       |       | 40,554             |       | 37,822            |       |
| Total assets                                                                                                                                                                                                                        | ** ** | $                  | 23,538,760 |              | $          | 23,644,267 |   |
|                                                                                                                                                                                                                                |       |               |       |              |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                      |       |               |       |              |       |
| Current  liabilities:                                                                                                                                                                                                               |       |               |       |              |       |
| Accounts payable                                                                                                                                                                                                                    | ** ** | $                  | 397,927    |              | $          | 662,151 | ** ** |
| Accrued expenses                                                                                                                                                                                                                    |       | 888,717            |       | 574,783           |       |
| Accrued dividends – preferred stock                                                                                                                                                                                            |       | 65,753             |       | 232,329           |       |
| Deferred revenue                                                                                                                                                                                                                    |       | 237,237            |       | 261,214           |       |
| Lease liability from acquisition                                                                                                                                                                                                    |       | 266,448            |       | 249,940           |       |
| Other current liabilities                                                                                                                                                                                                           |       | 134,950            |       | 116,280           |       |
| Total current liabilities                                                                                                                                                                                                           |       | 1,991,032          |       | 2,096,697         |       |
|                                                                                                                                                                                                                                |       |               |       |              |       |
| Long-term  lease liability from acquisition                                                                                                                                                                                         |       | 776,102            |       | 967,442           |       |
| Total liabilities                                                                                                                                                                                                                   |       | 2,767,134          |       | 3,064,139         |       |
|                                                                                                                                                                                                                                |       |               |       |              |       |
| Stockholders’  equity:                                                                                                                                                                                                         |       |               |       |              |       |
| Preferred  stock – 5,000,000 shares authorized, 5,000 and 10,000 shares of series C, respectively,  and 250 shares of series D:                                                                                                |       |               |       |              |       |
| Series C – par value $.01 per share, 44.76 votes per share; 5,000  shares issued and outstanding (liquidation value of $5,065,753) and 10,000  shares issued and outstanding (liquidation value of $10,232,329),  respectively |       | 50                 |       | 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; 22,958,674 and 22,712,944 shares issued and outstanding,  respectively                                                                       |       | 229,587            |       | 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                                                                                                                                                                                                         |       | 101,402,629        |       | 103,042,746       |       |
| Accumulated  deficit                                                                                                                                                                                                                |       | (80,860,643        | )          | (82,689,850       | )          |
| Total stockholders’ equity                                                                                                                                                                                                     |       | 20,771,626         |       | 20,580,128        |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                    | ** ** | $                  | 23,538,760 |              | $          | 23,644,267 |   |

 

**See notes to condensedconsolidated financial statements.**

3

----

**CondensedConsolidated Statements of Operations (Unaudited)**
| ** **                                                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                       | ** ** | **April 30,**               | ** ** | **April 30,**              | ** ** |
| ** **                                                                       | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                             | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service revenues                                                                 |       | $                                | 5,390,270  |                            | $          | 4,535,316 |   | $ | 16,500,465 |   | $ | 14,565,388 |   |
|                                                                             |       |                             |       |                            |       |   | ** ** | ** ** | ** ** |
| Expenses:                                                                        |       |                             |       |                            |       |   | ** ** | ** ** | ** ** |
| Cost of services                                                                 |       | 1,999,118                        |       | 1,578,825                       |       | 5,828,093 |   | 5,234,404 |   |
| Product development and enhancement                                              |       | 595,836                          |       | 192,090                         |       | 1,898,177 |   | 502,001 |   |
| Selling and marketing                                                            |       | 379,589                          |       | 566,795                         |       | 1,268,905 |   | 1,559,452 |   |
| General and administrative                                                       |       | 1,780,780                        |       | 1,715,360                       |       | 5,609,905 |   | 5,650,155 |   |
|                                                                             |       |                             |       |                            |       |   |   |   |   |
|                                                                             |       | 4,755,323                        |       | 4,053,070                       |       | 14,605,080 |   | 12,946,012 |   |
|                                                                             |       |                             |       |                            |       |   |   |   |   |
| Operating income                                                                 |       | 634,947                          |       | 482,246                         |       | 1,895,385 |   | 1,619,376 |   |
|                                                                             |       |                             |       |                            |       |   | ** ** | ** ** | ** ** |
| Other income  (expense):                                                         |       |                             |       |                            |       |   | ** ** | ** ** | ** ** |
| Interest and investment income                                                   |       | 69,856                           |       | 74,634                          |       | 233,542 |   | 134,867 |   |
| Interest expense                                                                 |       | (18,791                          | )          | (23,044                         | )          | (59,065 | ) | (136,338 | ) |
| Other income (expense)                                                           |       | 288                              |       | 27,043                          |       | (21,288 | ) | 54,594 |   |
| ** **                                                                       |       | 51,353                           |       | 78,633                          |       | 153,189 |   | 53,123 |   |
|                                                                             |       |                             |       |                            |       |   |   |   |   |
| Income before  income taxes                                                      |       | 686,300                          |       | 560,879                         |       | 2,048,574 |   | 1,672,499 |   |
| ** **                                                                       |       |                             |       |                            |       |   | ** ** | ** ** | ** ** |
| Provision for  income taxes, current                                             |       | 135,097                          |       | 10,723                          |       | 219,367 |   | 27,895 |   |
| ** **                                                                       |       |                             |       |                            |       |   | ** ** | ** ** | ** ** |
| Net income                                                                       |       | 551,203                          |       | 550,156                         |       | 1,829,207 |   | 1,644,604 |   |
| ** **                                                                       |       |                             |       |                            |       |   | ** ** | ** ** | ** ** |
| Dividends on  preferred stock                                                    |       | (48,767                          | )          | (97,534                         | )          | (233,425 | ) | (299,178 | ) |
| Extinguishment  of dividends on retired preferred stock                          |       | —                           |       | —                          |       | 200,000 |   | — |   |
|                                                                             |       |                             |       |                            |       |   | ** ** | ** ** | ** ** |
| Income  attributable to common stockholders                                      | ** ** | $                                | 502,436    |                            | $          | 452,622 |   | $ | 1,795,782 |   | $ | 1,345,426 | ** ** |
| ** **                                                                       |       |                             |       |                            |       |   |   |   | ** ** |
| Basic income per  common share                                                   | ** ** | $                                | 0.02       |                            | $          | 0.02 |   | $ | 0.08 |   | $ | 0.07 | ** ** |
|                                                                             |       |                             |       |                            |       |   |   |   | ** ** |
| Diluted income  per common share                                                 | ** ** | $                                | 0.02       |                            | $          | 0.02 |   | $ | 0.07 |   | $ | 0.07 | ** ** |
|                                                                             |       |                             |       |                            |       |   | ** ** | ** ** | ** ** |
| Anti-dilutive  stock options, warrants, and series C preferred stock outstanding |       | 2,371,473                        |       | 1,075,057                       |       | 1,482,592 |   | 1,600,841 |   |
|                                                                             |       |                             |       |                            |       |   | ** ** | ** ** | ** ** |
| Weighted average  number of common shares outstanding – basic               |       | 22,823,776                       |       | 20,370,591                      |       | 22,759,581 |   | 19,982,232 |   |
|                                                                             |       |                             |       |                            |       |   | ** ** | ** ** | ** ** |
| Weighted average number  of common shares outstanding –diluted              |       | 24,234,565                       |       | 22,943,061                      |       | 24,674,040 |   | 21,900,688 |   |

 

**See notes to condensedconsolidated financial statements.**

4

----

**CondensedConsolidated Statements of Cash Flows (Unaudited)**
| ** **                                                                                | ** ** | **Nine Months Ended April 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| **Cash flows from operating activities:**                                                 |       |                                                |       |   |   |
| Net income                                                                                | ** ** | $                                                   | 1,829,207  |   | $ | 1,644,604 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:        |       |                                                |       |   |   |
| Depreciation and amortization                                                             |       | 1,517,310                                           |       | 822,026 |   |
| Bad debt expense                                                                          |       | 364,610                                             |       | 597,023 |   |
| Non-cash interest expense                                                                 |       | 58,958                                              |       | 136,900 |   |
| Loss on disposal of fixed  assets                                                         |       | 52                                                  |       | — |   |
| Non-cash charges for equity  instruments issued for compensation and services             |       | 694,889                                             |       | 554,283 |   |
| Changes in assets and  liabilities, net of effects from acquisitions:                     |       |                                                |       |   |   |
| Accounts receivable                                                                       |       | (798,873                                            | )          | (71,885 | ) |
| Prepaid expenses and other  assets                                                        |       | (222,096                                            | )          | (1,585 | ) |
| Accounts payable                                                                          |       | (264,224                                            | )          | 125,959 |   |
| Accrued expenses                                                                          |       | 298,933                                             |       | (848,878 | ) |
| Deferred revenue                                                                          |       | (23,977                                             | )          | (16,220 | ) |
| Other liabilities                                                                         |       | (215,119                                            | )          | (819,150 | ) |
|                                                                                      |       |                                                |       |   |   |
| Net cash provided by operating  activities                                                |       | 3,239,670                                           |       | 2,123,077 |   |
|                                                                                      |       |                                                |       |   |   |
| **Cash flows from investing activities:**                                                 |       |                                                |       |   |   |
| Payment for purchase of  acquisitions, net of cash acquired                               |       | (300,000                                            | )          | (886,619 | ) |
| Additional costs of previous  acquisition                                                 |       | (20,551                                             | )          | (65,000 | ) |
| Purchases of property and equipment                                                       |       | (361,341                                            | )          | (410,823 | ) |
|                                                                                      |       |                                                |       |   |   |
| Net cash used in investing  activities                                                    |       | (681,892                                            | )          | (1,362,442 | ) |
|                                                                                      |       |                                                |       |   |   |
| **Cash flows from financing activities:**                                                 |       |                                                |       |   |   |
| Payments of capital lease  obligations                                                    |       | —                                              |       | (3,645 | ) |
| Payment to reacquire class A  common stock                                                |       | (613,587                                            | )          | — |   |
| Payment to reacquire series C  preferred stock                                            |       | (2,261,413                                          | )          | — |   |
| Proceeds from exercise of  warrants                                                       |       | 247,564                                             |       | 3,002,701 |   |
| Proceeds from exercise of  employee stock options                                         |       | 127,517                                             |       | 646,876 |   |
|                                                                                      |       |                                                |       |   |   |
| Net cash provided by (used in)  financing activities                                      |       | (2,499,919                                          | )          | 3,645,932 |   |
|                                                                                      |       |                                                |       |   |   |
| **Net  increase in cash and cash equivalents**                                            |       | 57,859                                              |       | 4,406,567 |   |
|                                                                                      |       |                                                |       |   |   |
| Cash and cash equivalents, beginning of period                                            |       | 6,988,753                                           |       | 3,983,005 |   |
| ** **                                                                                |       |                                                |       |   |   |
| **Cash  and cash equivalents, end of period**                                             | ** ** | $                                                   | 7,046,612  |   | $ | 8,389,572 |   |
| ** **                                                                                |       |                                                |       |   |   |
| **Supplemental  disclosure of cash flow information:**                                    |       |                                                |       |   |   |
| Cash paid for interest during the period                                                  | ** ** | **$**                                               | **—** |   | $ | 216 |   |
| Cash paid for income taxes during the period                                              |       | 251,158                                             |       | 113,184 |   |
| ** **                                                                                |       |                                                |       |   |   |
| **Supplemental  disclosure of noncash investing activity:**                               |       |                                                |       |   |   |
| Payment for purchase of acquisition                                                       |       | —                                              |       | 23,300 |   |
| ** **                                                                                |       |                                                |       |   |   |
| **Supplemental  disclosure of noncash financing activity:**                               |       |                                                |       |   |   |
| Issuance of 20,283 shares of class A common stock  upon exercise of Warrants              |       | —                                              |       | 203 |   |
| Issuance of 50,117 shares of class A common stock  upon exercise of 355,713 stock options |       | —                                              |       | 501 |   |
| Issuance of  common stock for dividends on preferred stock                                |       | 200,000                                             |       | 400,000 |   |

 

**See notesto condensed consolidated financial statements.**

5

----

**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 nine month period ended April 30, 2007 are notnecessarily indicative of the results that may be expected for the fiscal yearending July 31, 2007 or any future period.**

**1.**                                      ORGANIZATION AND 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 customer service to help meet the uniquerequirements for trading partner compliance, coordination and collaboration.

**2.**             RECENT ACQUISITIONS

**STEWARTTECHNICAL SERVICES**

On January 31, 2007, theCompany completed the acquisition of certain assets of Stewart TechnicalServices, Inc. (“STS”).  STS provides EDIservices and software and will be included in our EC Solutions segment.  In accordance with the Asset PurchaseAgreement (“Agreement”), the Company paid $300,000 upon close and has acontingent payment of up to an additional one times revenue for the first year’srevenue less the $300,000 payment made at closing.  Additionally, if the first year’s revenuesare less than $400,000, then no additional earn-out will be paid.   The Company received tangible assets ofapproximately $49,000, which included accounts receivable of $44,000 and fixedassets of $5,000, and intangible assets of approximately $266,000, which arecomprised of internally developed software of $166,000 and customerrelationships of $100,000.  Under theAgreement, the Company also recorded a liability of $15,000 for transitioncosts.  The fixed assets are estimated tohave a useful life of three years and customer relationships and internallydeveloped software are estimated to have useful lives of five and four years,respectively.

**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.  On May 4, 2007, theCompany issued 12,488 additional shares of its class A common stock as per theterms of the Share Purchase Agreement.

The following table setsforth the components of the purchase price for Enable as of April 30, 2007.
| 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 |   |

 

6

----

The following tableprovides the estimated fair value of assets acquired and liabilities assumed inthe Enable acquisition:
| 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 andother assets are estimated to have a life of two to three years.  The acquired technology intangibles areestimated to have a life between one and four years, and the customerrelationship and trade names intangibles are estimated to have a life of sevenyears.  We recorded $2,285,000 ingoodwill resulting from the Enable acquisition. Revenue from the Enable acquisition includes hosting and transactionfees, administrative fees and professional services.  The hosting, transaction fees andadministrative fees are included in our EC Solutions segment, while theprofessional services are include in our EC Services 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.

**3**.             **REPURCHASE OF PREFERRED ANDCOMMON STOCK**

On December14, 2006, two subsidiaries of 3V Capital LLC (3V Capital Fund Ltd. andDistressed/High Yield Trading Opportunities, Ltd. (collectively, the “3VEntities”)) acquired from Omega Liquidating Trust, the liquidating trust forthe bankrupt Cable & Wireless USA, 10,000 shares of the series C preferredstock and 381,111 shares of the class A common stock of Internet CommerceCorporation (“ICC” or the “Company”).  Thereafter, on December 20, 2006,ICC entered into a Stock Purchase Agreement with each of the 3V Entities,pursuant to which ICC reacquired a total of 5,000 shares of its series Cpreferred stock and 190,555 shares of its class A common stock for an aggregatepurchase price of $2,875,000.  Following this reacquisition of shares byICC, the 3V Entities together continue to own the remaining 5,000 shares of ICC’sseries C preferred stock and 190,556 shares of ICC’s class A commonstock.  The repurchased shares were retired during the second quarter offiscal year 2007.

7

----

**4.**             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 below summarize information aboutoperations for the three and nine month periods ended April 30, 2007 and2006.
|                                         | ** ** | **EC Solutions** | ** ** | **EC Services** | ** ** | **Total**  | ** ** |
|-----------------------------------------|------------|-----------------------|------------|----------------------|------------|------------|------------|
| **Three  Months – April 30, 2007** | ** ** | ** **            | ** ** | ** **           | ** ** | ** ** | ** ** |
| Revenues from  external customers       |       | $                     | 4,105,042  |                 | $          | 1,285,228  |       | $ | 5,390,270 |   |
| Segment  operating income               |       | $                     | 2,500,988  |                 | $          | 196,210    |       | $ | 2,697,198 |   |

 

The following is areconciliation of operating segment income to net income for the three monthperiod ending April 30, 2007:
| Segment operating income    |   |   |   |   |   | $          | 2,697,198 |   |
|-----------------------------|--------|--------|--------|--------|--------|------------|-----------|--------|
| Corporate expenses          |   |   |   |   |   | (2,062,251 | )         |
| Operating income            |   |   |   |   |   | 634,947    |      |
| Other income (expense), net |   |   |   |   |   | 51,353     |      |
| Income before income taxes  |   |   |   |   |   | 686,300    |      |
| Income tax expense          |   |   |   |   |   | 135,097    |      |
| **Net income**              |   |   |   |   |   | $          | 551,203   |   |

 

8

----

 
|                                        | ** ** | **EC Solutions** | ** ** | **EC Services** | ** ** | **Total**  | ** ** |
|----------------------------------------|------------|-----------------------|------------|----------------------|------------|------------|------------|
| **Nine  Months – April 30, 2007** | ** ** | ** **            | ** ** | ** **           | ** ** | ** ** | ** ** |
| Revenues from  external customers      |       | $                     | 11,921,704 |                 | $          | 4,578,761  |       | $ | 16,500,465 |   |
| Segment operating  income              |       | $                     | 7,132,291  |                 | $          | 1,370,740  |       | $ | 8,503,031 |   |

 

The following is areconciliation of operating segment income to net income for the nine monthperiod ending April 30, 2007:
| Segment operating income    |   |   |   |   |   | $          | 8,503,031 |   |
|-----------------------------|--------|--------|--------|--------|--------|------------|-----------|--------|
| Corporate expenses          |   |   |   |   |   | (6,607,646 | )         |
| Operating income            |   |   |   |   |   | 1,895,385  |      |
| Other income (expense), net |   |   |   |   |   | 153,189    |      |
| Income before income taxes  |   |   |   |   |   | 2,048,574  |      |
| Income tax expense          |   |   |   |   |   | 219,367    |      |
| **Net income**              |   |   |   |   |   | $          | 1,829,207 |   |

 
|                                         | ** ** | **EC Solutions** | ** ** | **EC Services** | ** ** | **Total**  | ** ** |
|-----------------------------------------|------------|-----------------------|------------|----------------------|------------|------------|------------|
| **Three  Months – April 30, 2006** | ** ** | ** **            | ** ** | ** **           | ** ** | ** ** | ** ** |
| Revenues from  external customers       |       | $                     | 3,209,472  |                 | $          | 1,325,844  |       | $ | 4,535,316 |   |
| Segment operating  income               |       | $                     | 2,283,066  |                 | $          | 443,406    |       | $ | 2,726,472 |   |

 

The following is areconciliation of operating segments income to net income for the three monthperiod ending April 30, 2006:
| Segment operating income    |   |   |   |   |   | $          | 2,726,472 |   |
|-----------------------------|--------|--------|--------|--------|--------|------------|-----------|--------|
| Corporate expenses          |   |   |   |   |   | (2,244,226 | )         |
| Operating income            |   |   |   |   |   | 482,246    |      |
| Other income (expense), net |   |   |   |   |   | 78,633     |      |
| Income before income taxes  |   |   |   |   |   | 560,879    |      |
| Income tax expense          |   |   |   |   |   | 10,723     |      |
| **Net income**              |   |   |   |   |   | $          | 550,156   |   |

 
|                                        | ** ** | **EC Solutions** | ** ** | **EC Services** | ** ** | **Total**  | ** ** |
|----------------------------------------|------------|-----------------------|------------|----------------------|------------|------------|------------|
| **Nine  Months – April 30, 2006** | ** ** | ** **            | ** ** | ** **           | ** ** | ** ** | ** ** |
| Revenues from  external customers      |       | $                     | 9,580,218  |                 | $          | 4,985,170  |       | $ | 14,565,388 |   |
| Segment operating  income              |       | $                     | 6,544,843  |                 | $          | 2,146,733  |       | $ | 8,691,576 |   |

 

The following is areconciliation of operating segments income to net income for the nine monthperiod ending April 30, 2006:
| Segment operating income    |   |   |   |   |   | $          | 8,691,576 |   |
|-----------------------------|--------|--------|--------|--------|--------|------------|-----------|--------|
| Corporate expenses          |   |   |   |   |   | (7,072,200 | )         |
| Operating income            |   |   |   |   |   | 1,619,376  |      |
| Other income (expense), net |   |   |   |   |   | 53,123     |      |
| Income before income taxes  |   |   |   |   |   | 1,672,499  |      |
| Income tax expense          |   |   |   |   |   | 27,895     |      |
| **Net income**              |   |   |   |   |   | $          | 1,644,604 |   |

 

9

----

**5.****             RECENTACCOUNTING PRONOUNCEMENTS**

In July 2006, theFinancial Accounting Standards Board issued FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes, an interpretation of FASBStatement No. 109*  (“FIN 48”). FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an enterprise’sfinancial statements in accordance with FASB Statement No. 109, *Accounting for Income Taxes*.  FIN 48 describes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return and also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition. FIN 48 is effective for fiscal years beginning after December 15,2006 and will be effective for the Company in fiscal 2008.  The Company iscurrently evaluating the impact of this new accounting interpretation on itsfinancial statements.

In September 2006, theFASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “FairValue Measurements.” SFAS No. 157 clarifies the principle that fair valueshould be based on the assumptions market participants would use when pricingan asset or liability and establishes a fair value hierarchy that prioritizesthe information used to develop those assumptions. SFAS No. 157 requires fairvalue measurements to be separately disclosed by level within the fair valuehierarchy. SFAS No. 157 is effective for financial statements issued for fiscalyears beginning after November 15, 2007, and interim periods within thosefiscal years. The Company is currently evaluating the impact of adopting SFASNo. 157 on its financial statements.

In September 2006, theSecurities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No.108, “Considering the Effects of Prior Year Misstatements When QuantifyingMisstatements in Current Year Financial Statements.”  SAB No. 108 provides interpretive guidance onthe consideration of the effects of prior year misstatements in quantifyingcurrent year misstatements for the purpose of assessing materiality. SAB No.108 is effective for fiscal years ending after November 15, 2006. The Companyis currently evaluating the impact of adopting SAB No. 108 on its financialstatements.

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities*. SFAS No. 159 permits companies tomeasure financial instruments and certain other items at fair value. Theobjective of this statement is to improve financial reporting by providingcompanies with the opportunity to mitigate volatility in reported earningscaused by measuring related assets and liabilities differently without havingto apply complex hedge accounting provisions. SFAS No. 159 is expected toexpand the use of fair value measurement for accounting for financialinstruments. SFAS No. 159 is effective for fiscal years beginning afterNovember 15, 2007. The Company is currently evaluating the impact ofadopting SFAS No. 159 on its financial statements.

**6.****             INCOMETAXES**

A provision for incometaxes has been provided for the three and nine months ended April 30, 2007 and2006 for estimated federal alternative minimum taxes and certain state incometaxes, as the Company has sufficient net operating loss carryforwards to offsetregular taxable income.  As of April 30,2007, the Company released a portion of the valuation allowance to covercurrent tax liabilities, but continues to maintain a valuation allowanceagainst the total net deferred tax asset balance.  The Company will continue to evaluate its prospectsgoing forward. If the Company’s operations continue at current levels andfuture business projections indicate continued profitability, the Company willreview the valuation allowance and, in the near future, will consider releasinga portion of the deferred tax asset valuation reserve.

**7.****             SUBSEQUENTEVENTS**

On May 3, 2007, ICC andJets Acquisition Sub, Inc., a wholly-owned subsidiary of ICC (“MergerSub”),entered into an Agreement and Plan of Merger (the “Merger Agreement”) toacquire EasyLink Services Corporation (NASDAQ: EASY), a Delaware corporation (“EasyLink”).  Pursuant to the Merger Agreement, the MergerSub will merge with and into EasyLink, and EasyLink will become a wholly-ownedsubsidiary of ICC.  The transaction hasbeen approved by both the ICC Board of Directors and the EasyLink Board ofDirectors.  Under the terms of the

10

----

Merger Agreement,ICC will pay $5.80 per share in cash in exchange for each share of class Acommon stock of EasyLink, for an estimated aggregate purchase price of approximately$67 million.  The transaction is expectedto close in the third calendar quarter of 2007, subject to customary closingconditions, regulatory approvals, and stockholder approval by both companies

EasyLink has madecustomary representations and warranties in the Merger Agreement and agreed tocustomary covenants, including covenants regarding the operation of thebusiness of EasyLink and its subsidiaries prior to the closing and covenantsprohibiting EasyLink from soliciting or initiating discussions concerningproposals relating to alternative business combination transactions, except inlimited circumstances relating to unsolicited proposals that constitute, or arereasonably expected to lead to, a Superior Proposal (as defined in the Merger Agreement).  If EasyLink’s Board of Directors withdrawsits support for the Merger, or if EasyLink terminates the Merger Agreement toaccept a Superior Proposal made by a third party, EasyLink will be required to paya termination fee of $2.5 million to ICC. If ICC stockholders approval is not obtained, ICC will pay EasyLink atermination fee of $2.5 million and will be required to expense all costsincurred for the merger as of the date of the termination.

Also on May 3,2007, ICC entered into a Securities Purchase Agreement (the “Purchase Agreement”)with several purchasers (the “Purchasers”) affiliated with York CapitalManagement, LLC (“York Capital”) pursuant to which the Purchasers will purchaseSeries A Senior Secured Convertible Notes (the “Series A Notes”), Series BSenior Secured Convertible Notes (the “Series B Notes”), warrants to purchaseshares of ICC’s class A common stock (the “Warrants”) and additional investmentrights to acquire additional notes on the same terms as the Series A Notes (the“Additional Investment Rights”), all as more fully described in the PurchaseAgreement, for an aggregate purchase price of up to $60 million.  Contemporaneously with the closing of theMerger, and subject to the terms and conditions set forth in the PurchaseAgreement, the Purchasers will purchase from ICC in the aggregate not less than$20,000,000 and not more than $30,000,000 of the Series A Notes (as may bedetermined by ICC) and $30,000,000 of the Series B Notes.  The Series A Notes bear interest at the primerate plus 75 basis points (0.75%) less an interest factor based on theperformance of ICC’s class A common stock, as more fully described in theSeries A Notes, and interest is payable quarterly.  The Series A Notes have a term of four years,are repayable in 30 equal monthly installments of principal beginning 18 monthsafter issuance, and can be prepaid subject to a 25% prepayment penalty andcertain other conditions.  The Series BNotes bear interest at the prime rate plus 300 basis points (3.00%) less aninterest factor based on the performance of ICC’s class A common stock, as morefully described in the Series B Notes, and interest is payable quarterly.  The Series B Notes have a term of four years,are repayable in 30 equal monthly installments of principal beginning 18 monthsafter issuance, and can be prepaid subject to a 25% prepayment penalty andcertain other conditions, provided that ICC can prepay up to $15,000,000 of theSeries B Notes from the proceeds of sales of assets subject to a 12.5%prepayment penalty.

The Warrants willentitle the Purchasers to acquire an aggregate number of shares equal to 30% ofthe principal amount of the Series B Notes divided by the lesser of (i) thearithmetic average of the volume weighted average price (as defined in thePurchase Agreement) for the ten trading days prior to the closing of theMerger, (ii) the closing price on the trading day immediately preceding theclosing of the Merger, and (iii) $2.53. The Warrants are exercisable from the closing of the Merger until thefifth anniversary of the date a registration statement covering the resale ofthe shares issuable upon exercise of the Warrants is declared effective by theSecurities and Exchange Commission.  TheAdditional Investment Rights entitle the Purchasers to purchase an aggregate of$10,000,000 of additional notes having terms similar to the Series A Notes.

11

----

**Item 2.****        Management’sDiscussion and 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 to management.  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 relate to our financialposition, business strategy and plans, or objectives of management, areintended 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,expected or intended.

**Overview**

Internet Commerce Corporation creates, deploys andmanages the secure and reliable electronic exchange of essential businessdocuments. With our VAN, desktop software and hosted applications, managedservices, consulting and professional services, we are a trusted provider ofe-commerce solutions to connect businesses, regardless of their size and levelof technical sophistication, with their trading communities. Thousands ofcustomers, ranging from sole proprietorships to large corporations, in avariety of industries rely on the value delivered from ICC’s broad line ofsolutions, expertise and customer service to help meet the unique requirementsfor 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 EDIcommunications of small and mid-sized businesses with their trading partners.The EC Services segment includes the EC service center, EC outsourcing, mappingand professional 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.

12

----

**Critical AccountingPolicies and Estimates**

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, stock-based compensation,and income taxes  to be critical policiesdue to the estimation process involved in each. Management discusses its estimates and judgments with the AuditCommittee 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 nine monthsended April 30, 2007, 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.

***Three Months Ended April 30, 2007 Compared with Three Months EndedApril 30, 2006.***

**Resultsof Operations – 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 April 30, 2007 and 2006:
|                                     | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------|------------|
| ** **                          | ** ** | **April 30,**               | ** ** | **Variance** | ** ** |
| ** **                          | ** ** | **2007**                         | ** ** | **2006**     | ** ** | **$** | ** ** | **%** | ** ** |
| Revenues:                           |       |                             |       |         |       |   |   |   |   |
| Services                            |       | $                                | 4,105,042  |         | $          | 3,209,471 |   | 895,571 |   | 28 |   |
|                                |       |                             |       |         |       |   |   |   |   |
| Expenses:                           |       |                             |       |         |       |   |   |   |   |
| Cost of services                    |       | 1,113,769                        |       | 726,814      |       | 386.955 |   | 53 |   |
| Product development and enhancement |       | 420,274                          |       | 153,652      |       | 266,622 |   | 174 |   |
| General and administrative          |       | 70,010                           |       | 45,939       |       | 24,071 |   | 52 |   |
|  Total expenses                |       | 1,604,054                        |       | 926,405      |       | 677,649 |   | 73 |   |
|                                |       |                             |       |         |       |   |   |   |   |
| Segment operating  income           |       | $                                | 2,500,988  |         | $          | 2,283,065 |   | 217,923 |   | 10 |   |

 

*Revenues – EC Solutions –*Revenue from our EC Solutions segment was 76% of consolidated revenues for thequarter ended April 30, 2007 (“2007 Quarter”) compared with 71% for the quarterended April 30, 2006 (“2006 Quarter”). Revenue for the 2007 Quarter compared with the 2006 Quarter increasedprimarily due to the browser-based and hosted services revenue acquired fromEnable.  VAN related transaction andmonthly fee revenue grew approximately 4% in the 2007 Quarter compared with the2006 Quarter.  The growth is attributableto a monthly fee increase implemented in the 2007 Quarter and highertransaction volumes.

*Cost of services*– *EC Solutions* – Costs of servicesrelating to our EC Solutions segment was 27% of EC Solutions revenue for the2007 Quarter compared with 23% for the 2006 Quarter.  Cost of services consists primarily ofsalaries and employee benefits, connectivity fees, amortization, allocation ofproduct and development expenses and rent.   Costs of services increased primarily as a result of higher acquiredtechnology and customer list amortization expense of $262,000 resulting fromrecent acquisitions and higher product development allocation of $199,000,offset by a reduction in telephone and connectivity fees of $186,000.

*Product development andenhancement - EC Solutions* - Product development and enhancement costsrelating to our EC Solutions segment consist primarily of salaries and employeebenefits.  Product development and 

13

----

enhancement costsincreased $267,000 in the 2007 Quarter compared with the 2006 Quarter. Theincrease is primarily related to the additional staff, consulting and rentexpenses from the acquired Enable operations.

*Generaland administrative* - *EC Solutions* - General andadministrative expenses supporting our EC Solutions segment consist primarilyof depreciation, telephone, and computer maintenance expenses.  General and administrative costs increased$24,000 in the 2007 Quarter compared with the 2006 Quarter.  The increase wasprimarily due to higher computer maintenance expenses.

*OperatingIncome - EC Solutions* - Operating income from EC Solutionsincreased $218,000, or 10%, for the 2007 Quarter compared with the 2006Quarter, due mainly to the increased revenue from the Enable acquisition,offset by higher acquired technology and customer list amortization, andadditional staff, consulting and rent expenses from the Enable operations.

**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 April 30, 2007and 2006:
|                                     | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------|------------|
| ** **                          | ** ** | **April 30,**               | ** ** | **Variance** | ** ** |
| ** **                          | ** ** | **2007**                         | ** ** | **2006**     | ** ** | **$** | ** ** | **%** | ** ** |
| Revenues:                           |       |                             |       |         |       |   |   |   |   |
| Services                            |       | $                                | 1,285,228  |         | $          | 1,325,844 |   | (40,616 | ) | (3 | ) |
|                                |       |                             |       |         |       |   |   |   |   |
| Expenses:                           |       |                             |       |         |       |   |   |   |   |
| Cost of services                    |       | 885,348                          |       | 852,011      |       | 33,337 |   | 4 |   |
| Product development and enhancement |       | 143,123                          |       | 38,438       |       | 104,685 |   | 272 |   |
| General and administrative          |       | 60,547                           |       | (8,010       | )          | 68,557 |   | (856 | ) |
| Total expenses                      |       | 1,089,018                        |       | 882,439      |       | 206,579 |   | 23 |   |
|                                |       |                             |       |         |       |   |   |   |   |
| Segment operating income            |       | $                                | 196,210    |         | $          | 443,405 |   | (247,195 | ) | (56 | ) |

 

*Revenue – EC Services*– Revenue from our EC Services was 24% of consolidated revenues for the 2007Quarter compared with 29% for the 2006 Quarter. Revenue for the 2007 Quarter compared with the 2006 Quarter decreasedslightly due to lower revenues as a result of customer attrition from our MECand Kodiak acquisitions.  This erosionappears to have stabilized.

*Cost ofservices – EC Service**s* - Cost ofservices relating to our EC Services segment was 69% of EC Services revenue inthe 2007 Quarter, compared with 64% in the 2006 Quarter.  Cost of services consists primarily ofsalaries and employee benefits, amortization, connectivity fees and rent.  Costs of services increased $33,000 for the2007 Quarter compared to the 2006 Quarter as a result of the reclassificationof ECS, MEC and Kodiak customer list amortization of $68,000 from CorporateSales and Marketing, offset by lower salary and benefit expenses.

*Productdevelopment and enhancement – EC Services* - Product developmentand enhancement costs consist primarily of salaries and employee benefits.  Product development and enhancement costsincurred by our EC Services segment increased $105,000 in the 2007 Quartercompared with the 2006 Quarter.  Theincrease was primarily the result of increased salary and benefits expense ofapproximately $197,000 from a recent realignment of our product developmentdepartment, offset by a higher allocation of product development to otherdepartments of $101,000.

*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 $69,000in the 2007 Quarter compared with the 2006 Quarter.  The increase is primarily due tohigher depreciation and computer maintenance expenses related to recentinvestments in capital expenditures.

14

----

*OperatingIncome - EC Services* - Operating income from EC Services forthe 2007 Quarter compared with the 2006 Quarter decreased $247,000, or 56%,primarily as a result of higher expenses from the reallocation of our productdevelopment department and increased depreciation and computer maintenanceexpenses.

**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 operating andother expenses for our corporate expenses for the three months ended April 30,2007 and 2006:
|                                     | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | ** ** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------|------------|------------|------------|
| ** **                          | ** ** | **April 30,**               | ** ** | **Variance** | ** ** |
| ** **                          | ** ** | **2007**                         | ** ** | **2006**     | ** ** | **$**      | ** ** | **%** | ** ** |
| Expenses:                           |       |                             |       |         |       |       |       |   |   |
| Product development and enhancement |       | $                                | 32,439     |         | $          | —     |       | 32,439 |   | — |   |
| Selling and marketing               |       | 379,589                          |       | 566,795      |       | (187,206   | )          | (33 | ) |
| General and administrative          |       | 1,650,223                        |       | 1,677,431    |       | (27,208    | )          | (2 | ) |
| Total expenses                      |       | $                                | 2,062,251  |         | $          | 2,244,226  |       | (181,975 | ) | (8 | ) |
|                                |       |                             |       |         |       |       |       |   |   |
| Other:                              |       |                             |       |         |       |       |       |   |   |
| Other income                        |       | $                                | 51,353     |         | $          | 78,633     |       | (27,280 | ) | (35 | ) |
| Provision for  income taxes         |       | $                                | 135,097    |         | $          | 10,723     |       | 124,374 |   | 1,160 |   |

 

*Productdevelopment and enhancement – Corporate* – Product developmentand enhancement costs included in our corporate expenses consist primarily ofsalaries and employee benefits.  Productdevelopment and enhancement costs increased $32,000 in the 2007 Quartercompared with the 2006 Quarter. The increase is primarily a result ofunallocable salary and benefit costs not directly related to the EC Solutionsor EC Services segments.

*Selling and marketing**– Corporate* - Selling and marketingcosts included in our Corporate expenses consist primarily of salaries andemployee benefits and travel.  Sellingand marketing expenses decreased $187,000 in the 2007 Quarter compared with the2006 Quarter.  The decrease is primarilydue to lower salary, benefits and commission expense of approximately $103,000and the reclassification of ECS, MEC and Kodiak customer list amortization of$68,000 to cost of sales in the EC Services segment.

*Generaland administrative – Corporate*– General and administrativecosts included in our Corporate expenses consist primarily of salaries andemployee benefits, office expenses, legal and accounting expenses,depreciation, computer maintenance expenses, telephone and rent.  General and administrative expenses decreasedin the 2007 Quarter by $27,000 primarily due to lower rent due to fewer officelocations and bad debt expense as a result of increased collection activity.

*Otherincome – Corporate –*Other income costs consist primarily ofinterest income, interest expense and other non-operating expenses.  Other income decreased in the 2007 Quartercompared with the 2006 Quarter mainly due to a one-time legal settlement duringthe 2006 Quarter.

*Provisionfor income taxes – Corporate –*Provision for income taxesconsist primarily of federal and state income tax expense.  The provision for income taxes increased$124,000 in the 2007 Quarter compared with the 2006 Quarter.  The increase is due to current year stateincome taxes of $78,000 which were not covered by our existing state net losscarryforwards and a true up of past years’ state income tax timing differencesof $80,000 as a result of changing the tax year-end from December 31 to July31.

*Reductionin Force -* During the 2007 Quarter, we completed a reductionin our work force eliminating redundancy from acquisitions and streamliningoperations.  We experienced no costsavings during the 2007 Quarter due to employee severance payments, butanticipate future savings of approximately $326,000 per quarter and $1,304,000annually.

15

----

**NineMonths Ended April 30, 2007 Compared with Nine Months Ended April 30, 2006**.

**Resultsof Operations – 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 nine monthsended April 30, 2007 and 2006:
|                                     | ** ** | **Nine Months Ended** | ** ** | ** **   | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|--------------|------------|------------|------------|
| ** **                          | ** ** | **April 30,**              | ** ** | **Variance** | ** ** |
| ** **                          | ** ** | **2007**                        | ** ** | **2006**     | ** ** | **$**      | ** ** | **%** | ** ** |
| Revenues:                           |       |                            |       |         |       |       |       |   |   |
| Services                            |       | $                               | 11,921,704 |         | $          | 9,580,219  |       | 2,341,485 |   | 24 |   |
|                                |       |                            |       |         |       |       |       |   |   |
| Expenses:                           |       |                            |       |         |       |       |       |   |   |
| Cost of services                    |       | 3,169,720                       |       | 2,565,028    |       | 604,692    |       | 24 |   |
| Product development and enhancement |       | 1,411,012                       |       | 332,941      |       | 1,078,071  |       | 324 |   |
| General and administrative          |       | 208,681                         |       | 137,407      |       | 71,274     |       | 52 |   |
|  Total expenses                |       | 4,789,413                       |       | 3,035,376    |       | 1,754,037  |       | 58 |   |
|                                |       |                            |       |         |       |       |       |   |   |
| Segment  operating income           |       | $                               | 7,132,291  |         | $          | 6,544,843  |       | 587,448 |   | 9 |   |

 

*Revenues – EC Solutions –*Revenue from our EC Solutions segment was 72% of consolidated revenues for thenine months ended April 30, 2007 (“2007 Nine Months”) compared with 66% for thenine months ended April 30, 2006 (“2006 Nine Months”).  The increase in revenue is primarily relatedto the browser-based and hosted services revenue acquired from Enable.

Cost of services – *EC Solutions* – Costs of services relating to our ECSolutions segment was 27% of EC Solutions revenue for the 2007 Nine Monthscompared with 27% for the 2006 Nine Months. Cost of services consists primarilyof salaries and employee benefits, connectivity fees, amortization, allocationof product and development expenses and rent. Costs of services increased mainly as a result of higher technology and customerlist amortization expense of $518,000 from our recent acquisitions, higherproduct development allocation of $348,000, offset by the reduction intelephone and connectivity fees of $349,000.

*Product development andenhancement - EC Solutions* - Product development and enhancement costsrelating to our EC Solutions segment consist primarily of salaries and employeebenefits.  Product development andenhancement costs increased $1,078,000 in the 2007 Nine Months compared withthe 2006 Nine Months primarily due to the additional staff, consulting and rentexpenses from the Enable operations.

*Generaland administrative* - *EC Solutions* - General andadministrative expenses supporting our EC Solutions segment consist primarilyof depreciation, telephone, and computer maintenance expenses.  General and administrative costs increased$71,000 in the 2007 Nine Months compared with the 2006 Nine Months mainly due to higher computer maintenanceexpenses.

*OperatingIncome - EC Solutions* - Operating income from EC Solutionsincreased $587,000, or 9%, for the 2007 Nine Months compared with the 2006 NineMonths, due mainly to the increased revenue from the Enable acquisition, offsetprincipally by higher acquired technology and customer list amortization,additional staff, consulting and rent expenses from the Enable operations.

16

----

**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 nine months ended April 30, 2007and 2006:
|                                     | ** ** | **Nine Months Ended** | ** ** | ** **   | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|--------------|------------|------------|------------|
| ** **                          | ** ** | **April 30,**              | ** ** | **Variance** | ** ** |
| ** **                          | ** ** | **2007**                        | ** ** | **2006**     | ** ** | **$**      | ** ** | **%** | ** ** |
| Revenues:                           |       |                            |       |         |       |       |       |   |   |
| Services                            |       | $                               | 4,578,761  |         | $          | 4,985,170  |       | (406,409 | ) | (8 | ) |
|                                |       |                            |       |         |       |       |       |   |   |
| Expenses:                           |       |                            |       |         |       |       |       |   |   |
| Cost of services                    |       | 2,658,373                       |       | 2,669,376    |       | (11,003    | )          | — |   |
| Product development and enhancement |       | 374,795                         |       | 169,060      |       | 205,735    |       | 122 |   |
| General and administrative          |       | 174,853                         |       | —       |       | 174,853    |       | — |   |
| Total expenses                      |       | 3,208,021                       |       | 2,838,436    |       | 369,585    |       | 13 |   |
|                                |       |                            |       |         |       |       |       |   |   |
| Segment operating income            |       | $                               | 1,370,740  |         | $          | 2,146,734  |       | (775,994 | ) | (36 | ) |

 

*Revenue – EC Services*–Revenue from our EC Services was 28% of consolidated revenue for the 2007 NineMonths compared to 34% for the 2006 Nine Months and decreased by $406,000.  Our EC service center revenues decreasedapproximately $821,000 due to the customer attrition experienced mainly duringthe first six months of fiscal 2007, offset by increased revenues from our ECoutsourcing services of $311,000 due to a full nine months of revenue from ourKodiak acquisition included in the period and the increase in non-recurringprofessional services of $284,000 related to our browser-based applicationdevelopment.

*Cost ofservices – EC Service**s* - Costs ofservices relating to our EC Services segment was 58% for the 2007 Nine Monthscompared with 54% for the 2006 Nine Months. Cost of services consists primarily of salaries and employee benefits,connectivity fees, amortization, allocation of product and development expensesand rent. Costs of services decreased $11,000 in the 2007 Nine Months comparedwith the 2006 Nine Months.

*Productdevelopment and enhancement – EC Services* - Productdevelopment and enhancement costs relating to our EC Services segment consistprimarily of salaries and employee benefits. Product development and enhancement costs increased $206,000 in the 2007Nine Months compared with the 2006 Nine Months primarily due to increasedsalary and benefits expenses.

*Generaland Administrative – EC Services -* General and administrativeexpenses relating to our EC Services segment consist primarily of officeexpenses, depreciation, computer maintenance expense, telephone and rent.  General and administrative expenses increased$175,000 in the 2007 Nine Months compared with the 2006 Nine Months as a resultof higher depreciation and computer maintenanceexpenses related to ongoing investments in capital expenditures.

*OperatingIncome - EC Services* - Operating income from EC Services forthe 2007 Nine Months compared with the 2006 Nine Months decreased $776,000, or36%, due to the combination of decreased revenues from the MEC and Kodiakacquisition related customer attrition experienced in the first six months offiscal 2007 and higher product development salary and benefit expense anddeprecation and computer maintenance expenses.

17

----

**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 operating andother expenses for our corporate expenses for the nine months ended April 30,2007 and 2006:
|                                     | ** ** | **Nine Months Ended** | ** ** | ** **   | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|--------------|------------|------------|------------|
| ** **                          | ** ** | **April 30,**              | ** ** | **Variance** | ** ** |
| ** **                          | ** ** | **2007**                        | ** ** | **2006**     | ** ** | **$**      | ** ** | **%** | ** ** |
| Expenses:                           |       |                            |       |         |       |       |       |   |   |
| Product development and enhancement |       | $                               | 112,369    |         | $          | —     |       | 112,369 |   | — |   |
| Selling and marketing               |       | 1,268,904                       |       | 1,559,452    |       | (290,548   | )          | 19 |   |
| General and administrative          |       | 5,226,371                       |       | 5,512,748    |       | (286,377   | )          | (5 | ) |
| Total expenses                      |       | $                               | 6,607,646  |         | $          | 7,072,200  |       | (464,554 | ) | (7 | ) |
|                                |       |                            |       |         |       |       |       |   |   |
| Other:                              |       |                            |       |         |       |       |       |   |   |
| Other income                        |       | $                               | 153,189    |         | $          | 53,123     |       | 100,066 |   | 188 |   |
| Provision for  income taxes         |       | $                               | 219,367    |         | $          | 27,895     |       | 191,472 |   | 686 |   |

 

*Productdevelopment and enhancement – Corporate* – Product developmentand enhancement costs included in our corporate expenses consist primarily ofsalaries and employee benefits.  Productdevelopment and enhancement costs increased $112,000 in the 2007 Nine Monthscompared with the 2006 Nine Months. The increase is primarily a result ofunallocable salary and benefit costs not directly related to the EC Solutionsor EC Services segments.

*Selling and marketing**– Corporate* - Selling and marketingcosts included in our Corporate expenses consist primarily of salaries andemployee benefits and travel.  Sellingand marketing expenses decreased $291,000 in the 2007 Nine Months compared withthe 2006 Nine Months.  The decrease isdue to lower salary, benefits and commission expense of approximately $95,000due to fewer headcount and the reclassification of ECS, MEC and Kodiak customerlist amortization of $185,000 to cost of sales in the EC Services segment.

*General and administrative**– Corporate* – General and administrativecosts included in our Corporate expenses consist primarily of salaries andemployee benefits, office expenses, legal and accounting expenses,depreciation, computer maintenance expenses, telephone and rent.  General and administrative expenses decreasedby $286,000 for the 2007 Nine Months compared with the 2006 Nine Monthsprimarily due to lower bad debt expense of $232,000 as a result of strongercollection activity and reduced general office expenses.

*Otherincome – Corporate –*Other income costs consist primarily ofinterest income, interest expense and other non-recurring, non-operatingexpenses.  Other income increased in the2007 Nine Months compared with the 2006 Nine Months mainly due to lowerinterest expense related to the assumed lease liability from our MECacquisition and higher levels in interest income due to higher levels of cashfor the 2007 Nine Months.

*Provisionfor income taxes – Corporate –*Provision for income taxesconsists primarily of federal and state income tax expense.  The provision for income taxes increased$191,000 in the 2007 Nine Months compared with the 2006 Nine Months.  The increase is due to current year stateincome taxes of $78,000 which were not covered by our existing state net losscarryforwards, a true up of past years’ state income tax timing differences of$80,000 as a result of changing the tax year-end from December 31 to July 31,and current year federal alternative minimum tax of $61,000.

**Liquidityand Capital Resources**

Our principalsources of liquidity, which consist of unrestricted cash and cash equivalents,increased to $7,047,000 as of April 30, 2007 from $6,989,000 as of July 31,2006.  We believe these resources willprovide us with sufficient liquidity to continue in operation through April 30,2008.

The principal usesof cash for the nine month period ended April 30, 2007 were for the repurchaseof our series C preferred stock of $2,261,000 and our class A common stock of$614,000.  Additionally, we used $300,000for the acquisition of certain assets of Stewart Technical Services, Inc. and$205,000 in capital expenditures to upgrade and relocate the equipment from ourEnable data center.

18

----

The principal sources of cashduring the period were cash generated from continued operations of $3,240,000,proceeds from the exercise of 71,200 warrants that were originally issued in aprivate placement that closed in October 2004 of $248,000, and proceeds fromthe exercise of 299,687 stock options of $128,000.

The Company has netoperating loss carryforwards for tax purposes of approximately $71.1 million asof April 30, 2007.  Thesecarryforwards expire from 2011 to 2025.

The Internal Revenue Codeand Income Tax Regulations contain provisions which limit the use of availablenet operating loss carryforwards in any given year should significant changes(greater than 50%) in ownership interests occur.  Due to the private placement of series Apreferred stock in April 1999, the net operating loss carryover ofapproximately $19.6 million incurred prior to the private placement is subjectto an annual limitation of approximately $1.4 million until that portion of thenet operating loss is utilized or expires. Due to a 100% ownership change of an acquired company inNovember 2000, the purchased net operating loss of approximately $6.5million incurred prior to the ownership change is subject to an annuallimitation of approximately $1.1 million until that portion of the netoperating loss is utilized or expires. Additionally, this transaction created an ownership change for the Companyas defined by IRC Section 382.  Assuch, its net operating loss of approximately $49.4 million incurred prior tothe ownership change is subject to an annual limitation of approximately $2.8million until that portion of the net operating loss is utilized orexpires.  Finally, due to a 100%ownership change of an acquired company in June 2004, the purchased netoperating loss of approximately $1.2 million incurred prior to the ownershipchange is subject to an annual limitation of approximately $128,000 until thatportion of the net operating loss is utilized or expires.

**OffBalance Sheet Arrangements**

We provideindemnifications of varying scope and amount to certain customers againstclaims of intellectual property infringement made by third parties arising fromthe use of our products and services.  Weevaluate estimated losses for such indemnification under Statement of FinancialAccounting Standards No. 5, *Accounting forContingencies*, 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.

**ContractualObligations**

Our contractual obligations are comprised of futureminimum rental payments due under non-cancelable operating leases.  The following table is a summary of ourcontractual obligations as of April 30, 2007:

| Fiscal Year | ** ** | **Amount** | ** ** |
|------------------|------------|------------|------------|
| 2007             |       | $          | 400,022    |   |
| 2008             |       | $          | 1,524,649  |   |
| 2009             |       | $          | 1,429,073  |   |
| 2010             |       | $          | 1,188,485  |   |
| 2011             |       | $          | 335,924    |   |

 

The minimum future rental payments have not beenreduced by $2,551,636 of sublease rentals to be received in the future underour non-cancelable sublease.

19

----

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

**Interest Rate Risk**

We may invest our cash in a variety of financialinstruments.  If invested, we account forour investment instruments in accordance with Statement of Financial AccountingStandards No. 115, “Accounting for Certain Investments in Debt and EquitySecurities” (“SFAS No. 115”).  All of thecash equivalents and investments are treated as available-for-sale under SFASNo. 115.  Investments that are classifiedas cash and cash equivalents have original maturities of three months orless.  Investments in both fixed rate andfloating rate interest earning instruments carry a degree of interest raterisk.  Fixed rate securities may havetheir fair market value adversely impacted due to a rise in interest rates,while floating rate securities may produce less income than expected ifinterest rates fall.  Due in part tothese factors, our future investment income may vary widely due to changes ininterest rates, or we may suffer losses in principal if forced to sellsecurities that have seen a decline in market value due to changes in interestrates.  For the quarter ended April 30,2007, our cash investments consisted entirely of overnight cash sweep accountsinvested in a fund composed primarily of triple A rated commercial paper andgovernment agency bonds.  As of April 30,2007, the interest rate for this investment was 4.63%.

**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 April 30, 2007, as required byparagraph (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 April 30, 2007 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

20

----

**PART II. OTHER INFORMATION**

**Item 1.****   ****Legal Proceedings**

We are party to variouslegal proceedings and claims, either asserted or unasserted, which arise in theordinary course of business.  While theoutcome of these matters cannot be predicted with certainty, we do not believethat the outcome of any of these claims or any of the above mentioned legalmatters will have a material adverse effect on our consolidated financialposition, results of operations or cash flow.

**Item 1A.****    ****Risk Factors**

The following Risk Factor disclosure updates the risk factors asdisclosed in our 2006 Annual Report on Form 10-K previously filed with theSecurities and Exchange Commission.

**RisksRelating to Our Company**

***We may not remain profitable in the future.  ***Wehave incurred significant losses since the Company was founded in 1991, and, asof April 30, 2007, we had an accumulated deficit of approximately $80.9million. We realized profitability and have done so for the past 9 consecutivequarters.  However, there can be noassurances that we may not incur losses again in the future.

***We must continue to grow our business in order to remaincompetitive.  ***Over the past year, the VANbusiness has remained significantly price competitive. Our major competitorsappear to be restructuring their VAN operations to reduce their overhead andother costs to better compete against Internet-based networks such as ourICC.NET service. While we have been successful in maintaining our margins andwe have increased the volume of data transmitted through our VAN, we haveexperienced price erosion in competing for larger customers. Although we expectto continue to add new customers and increase the volume of data transmittedthrough our service, we do not expect our revenue from VAN services to continueto grow rapidly 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 not successful in selling our products andservices, our results of operations will suffer.***  Whileour primary focus in the past has been on growing our ICC.NET VAN service, wehave attempted to diversify by acquiring Electronic Commerce Systems inJune 2004, the MEC operations of Inovis International, Inc. inMarch 2005, Enable Corp. in May 2006 and certain assets of StewartTechnical Services, Inc. in January 2007. However, the success of our servicesdepends to a large extent on the future of business-to-business electroniccommerce and our ability to effectively compete in the marketplace. Inparticular, our success depends on the number of customers that subscribe toour services, the volume of the data, documents or other information they sendor retrieve and the price we are able to charge for these services in light ofcompetitive pressures. In connection with the assimilation of our new customersacquired from the MEC operation and the Enable acquisition, we expect to seeattrition to these newly acquired customer bases due to the seasonal trends,integration difficulties, and customer defections to alternative EDI solutions.As a result, a portion of our revenues may be adversely affected. While we arelearning to manage these new customers, there is no assurance that we willaccurately assess the trends of these new customers. Accordingly, the value ofthese new customers, the volume of our services subscribed by them and thepossibility of payment collection may differ materially from our currentexpectation. Further, since our operating expense levels are basedsignificantly on our expectations of future revenue, our inability to assessthe trends may render us vulnerable in the case of a significant shortfall inrevenues or orders from these new customers, in which case we may not be ableto reduce our operating expenses quickly in response. Therefore, anysignificant shortfall in revenue or orders could have an immediate adverseeffect on our operating results.

***We may not be successful in competing against ourcompetitors.  ***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, 

21

----

adopt more aggressive pricing policies and make moreattractive offers to potential customers and employees, or be able to devotegreater resources to the development, promotion and sale of their services thanwe can. New competition is emerging in the form of web services networks,collaborative applications, application service providers, e-marketplaces andintegration broker suites. We have enhanced our technologies to communicatewith these web-based technologies. However, there can be no assurance that ourproduct and service offerings will compete effectively and generate anysignificant revenues. We believe that the high cost of implementation and theongoing costs of supporting a company’s trading partners may be a barrier tothe wider acceptance of our new product offerings in the marketplace. As aresult, we may not be successful in competing against our competitors.

***If we are unable to maintain or replace our existinginterconnect arrangements, our results of operations would suffer. ***Werely on many of our competitors to interconnect with our service to promote an “opencommunity” so all businesses can take advantage of the efficiencies of EDI, nomatter what network they choose as their provider. Although we haveinterconnect agreements with the major VAN providers, there can be noassurances that these agreements will not be terminated or will continue withacceptable terms. If terminated, we would have to find an acceptablealternative. If available, such an alternative could add significant operatingcosts to our business.

***We must continue to develop new products and services. ***If we do not keep pace with rapid technological changes,customer demands and intense competition, we will not be successful. Our marketis characterized by rapidly changing technology, customer demands and intensecompetition. The satisfactory performance, reliability and availability of ournetwork infrastructure, customer support and document delivery systems and ourweb site are critical to our reputation and our ability to attract customersand maintain adequate customer service levels. If we cannot keep pace withthese changes and maintain the performance and reliability of our network andcustomer service levels, our business will suffer. The intense competition inour industry requires us to continue to develop strategic business and Internetsolutions that enhance and improve the customer service features, functions andresponsiveness of our products and services and we must constantly keep pace withcontinuing changes in information technology and customer requirements. Whilewe actively search for ways to expand our business and our products andservices to keep pace with the rapidly changing technology, customer demandsand intense competition, there can be no assurance that we will be able to keeppace with these changes. If we are not successful in developing and marketingenhancements to our products and services that respond to technological changeor customer demands, our business will suffer.

***We may need to obtain additional financing on satisfactoryterms to continue to compete successfully. If we are unable to obtain necessaryfuture capital, our business will suffer.***  We mayneed 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 the future by issuing securitiescould adversely affect our stockholders and negatively impact our publiclytraded share price. If we raise additional funds through the issuance of debtsecurities, the holders of the debt securities will have a claim to our assetsthat will have priority over any claim of our stockholders. The interest onthese debt securities would increase our costs and negatively impact ouroperating results. If we raise additional funds through the issuance of commonstock or securities convertible into or exchangeable for common stock, thepercentage ownership of our then-existing stockholders will decrease and theymay experience additional and substantial dilution. In addition, anyconvertible or exchangeable securities may have rights, preferences andprivileges more favorable to the holders than those of the common stock.

***Failure of our third-party providers to provide adequateInternet and telecommunications service could result in significant losses ofrevenue.***  Our operations depend upon third partiesfor Internet access and telecommunications service. Frequent or prolongedinterruptions of these services could result in significant losses of revenues.We have experienced outages in the past and could experience outages, delaysand other difficulties due to system failures unrelated to our internal activitiesin the future. These types of occurrences could also cause users to perceiveour services as not functioning properly and therefore cause them to use othermethods to deliver and receive information. We have limited control over thesethird 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 suffer systems failures and business interruptionsthat would harm our business.***  Our success dependsin part on the efficient and uninterrupted operation of our VAN service andEnable’s web hosting sites. 

22

----

Almost all of our network operating systems arelocated in third party co-location facilities. Although these facilities aredesigned to prevent operational interrupts, our systems are vulnerable toevents such as damage from fire, power loss, telecommunications failures,break-ins and earthquakes. This could lead to interruptions or delays in ourservice, loss of data or the inability to accept, transmit and confirm customerdocuments and data. Although we have implemented network security measures, ourservers may be vulnerable to computer viruses, electronic break-ins, attemptsby third parties deliberately to exceed the capacity of our systems and similardisruptions.

***If we are unable to successfully integrate acquisitions, ourfinancial results will suffer.***  Our ability toimplement our business plan successfully requires effective planning and strongexecution skills. If we cannot manage the integration of anticipatedacquisitions, our business and financial results will suffer. We expect that wewill need to continue to manage and to expand multiple relationships withcustomers, Internet service providers and other third parties. We also expectthat we will need to continually improve our financial systems, procedures andcontrols and will need to expand, train and manage our workforce, particularlyour information technology and sales and marketing staffs.

***If we lose our net operating loss carryforward ofapproximately $71.1 million, our financial results will suffer.*** Section 382 of the Internal Revenue Code contains rules designed todiscourage persons from buying and selling the net operating losses ofcompanies. These rules generally operate by focusing on ownership changesamong stockholders owning directly or indirectly 5% or more of the common stockof a company or any change in ownership arising from a new issuance of stock bya company. In general, the rules limit the ability of a company to utilizenet operating losses after a change of ownership of more than 50% of its commonstock over a three-year period. Purchases of our class A common stock inamounts greater than specified levels could create a limitation on our abilityto utilize our net operating losses for tax purposes in the future. We arecurrently subject to certain limitations on the utilization of portions of ournet operating loss carryforward.

***If we cannot hire and retain highly qualified employees, ourbusiness and financial results will suffer.***  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 our intellectual property, which may bedifficult and costly to protect.***  If we fail toadequately protect our proprietary rights, competitors could offer similarproducts relying on technologies we developed, potentially harming ourcompetitive position and decreasing our revenues. We attempt to protect ourintellectual property rights by limiting access to the distribution of oursoftware, documentation and other proprietary information and by relying on acombination of copyright, trademark and trade secret laws. In addition, weenter into confidentiality agreements with our employees and certain customers,vendors and strategic partners. In some circumstances, however, we may, ifrequired by a business relationship, provide our licensees with access to ourdata model and other proprietary information underlying our licensedapplications. 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 proprietary rightsof others, any of which could be costly and adversely affect our operatingresults.

***Intellectual property infringement claims against us couldharm our business. ***It is possible our products andservice may infringe upon the proprietary rights of others and other partiesmay assert infringement claims against us. Any such claims and any resultinglitigation could subject us to significant liability for damages and couldinvalidate our proprietary rights. We could be required to enter into royalty andlicensing agreements, which may be costly or otherwise burdensome or which maynot be available on terms acceptable to us.

***We must comply in the future with new and costly reportingrequirements. ***Under current Securities and ExchangeCommission (“SEC”) regulations, we are considered a non-accelerated filer asour market capitalization as of January 31, 2007 was under $75 million. Wewill have to be compliant with Section 404(a), management’s assertionportion of the Sarbanes-Oxley Act of 2002 (“SOX”) by July 31, 2008 andcompliant with Section 404(b), the independent audit requirement of SOX by July31, 2009. The costs of implementing the requirements of the SOX have rangedfrom approximately $500,000 to over $1 million for smaller companies. Althoughwe have begun our SOX compliance efforts, there can be no assurance that we canbe in full compliance when required for reasonable costs.

23

----

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

***If Internet usage does not continue to grow or if itsinfrastructure fails, our business will suffer.***  Wecannot be certain that the infrastructure or complementary services necessaryto maintain the Internet as a useful and easy means of transferring documentsand data will continue to develop. The Internet infrastructure may not supportthe demands that growth may place on it and the performance and reliability ofthe Internet may decline.

***Privacy concerns may prevent customers from using ourservices.***  Concerns about the security of onlinetransactions and the privacy of users may inhibit the growth of the Internet asa means of delivering business documents and data. We may need to incursignificant expenses to protect against the threat of security breaches or toalleviate problems caused by security breaches. We rely upon encryption andauthentication 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.

***Government regulation and legal uncertainties relating tothe Internet could harm our business.***   Changesin the regulatory environment in the United States and other countries coulddecrease 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 of transmitting documents and data over theInternet 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 of providingour ICC.NET and other services may increase.

**RisksRelating to Our Class A Common Stock**

***The market price of our class A common stock is likely to behighly volatile. ***The market price of our class Acommon stock has been very volatile in the past, ranging from a low of $2.21 toa high of $3.98 during fiscal 2007 and is likely to fluctuate substantially inthe future. If our class A common stock falls under $1.00 per share and failsto maintain a minimum bid price of $1.00 for 30 consecutive trading days, itmay no longer be eligible for trading in the Nasdaq Capital Market, which wouldadversely affect the ability of investors to sell their shares of our class Acommon stock.

***Shares eligible for future sale by our existing stockholdersmay adversely affect our stock price making it difficult to sell class A commonstock.***  Between January 1, 2003 andMay 2006, we registered the resale under the Securities Act of 1933 of anaggregate 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 our class A common stock on the NasdaqCapital Market may be illiquid, which would restrict the ability to sell sharesof class A common stock and could result in increased volatility in the tradingprices for our class A common stock.***  The price atwhich our class A common stock will trade in the future cannot be predicted andwill be determined 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 of Directors can issue preferred stock with rightsadverse to the holders of class A common stock. ***OurBoard of Directors is authorized, without further stockholder approval, todetermine the provisions of and to issue up to 4,994,750 shares of preferredstock. Issuance of preferred shares with rights to dividends and otherdistributions, voting rights or other rights superior to the class A commonstock could be adverse to the holders of class A common stock. In addition,issuance of preferred shares could have the effect of delaying, deterring orpreventing an unsolicited change in control of our company, or could imposevarious procedural and other 

24

----

requirements that could make it more difficult forholders of our class A common stock to effect certain corporate actions,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 use significant resources indemnifying ourofficers and directors or paying for damages caused by their conduct.*** The Delaware General Corporation Law provides for broad indemnification bycorporations of their officers and directors and permits a corporation toexculpate its directors from liability for their actions. Our bylaws andcertificate of incorporation implement this indemnification and exculpation tothe fullest extent permitted under this law as it currently exists or as it maybe amended in the future. Consequently, subject to this law and to some limitedexceptions in our certificate of incorporation, none of our directors will beliable to us or to our stockholders for monetary damages resulting from conductas a director.

25

----

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

On March 21, 2007, the Company announced that our Board of Directorsapproved the repurchase of up to $2 million in common shares.   No shares have been repurchased to date, andas a result of the pending purchase by the Company of EasyLink ServicesCorporation, the amount and timing of future purchases is uncertain.

**Item3.  Defaults Upon Senior Securities**

None.

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

**None.**

**Item 5. Other Information**

**None.**

**Item 6.  Exhibits**

31.1            Certificationof the Chief Executive Officer pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.

31.2            Certificationof the Chief Financial Officer pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.

32.1            Certification of the Chief Executive Officer and ChiefFinancial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

----

*       In accordance with Release No. 34-47986, this Exhibit ishereby furnished to the SEC as an accompanying document and is not deemed “filed”for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwisesubject to the liabilities of that Section, nor shall it be deemed incorporatedby reference into any filing under the Securities Act of 1933.

26

----

### **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: June 5, 2007
|            | **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 |

27

----

**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* |

 

----

*In accordancewith Release 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.

28

----