**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC  20549**

**FORM 10-Q**

**[Mark One]**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

 

**For thequarterly period ended April 30, 2006**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

** **

**For the transition period from ____________ to____________**

**CommissionFile Number:  000-24996**

 

**INTERNET COMMERCE 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 mark whether the Registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the Registrantwas required to file such reports) and (2) has been subject to such filingrequirements for the past 90 days. Yes x  No o

Indicate by check mark whether the Registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

Large accelerated filer o                           AcceleratedFiler  o                            Non-acceleratedfiler  x

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

As of June 6, 2006, the Registrant hadoutstanding 22,280,167 shares of class A common stock.

 

 

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** **

**INDEXTO FORM 10-Q**
|                                         | ** **                                                                                                                                                | **PAGE**   |
|-----------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                              | ** **                                                                                                                                                | ** ** |
| **PART I.  FINANCIAL INFORMATION** |                                                                                                                                                      |
| ** **                              |                                                                                                                                                      |
| Item  1.                                | Financial  Statements                                                                                                                                     |       |
|                                    |                                                                                                                                                      |       |
|                                    | Condensed Consolidated balance sheets as of  April 30, 2006 (unaudited) and July 31, 2005                                                       | 3          |
|                                    |                                                                                                                                                      |       |
|                                    | Condensed Consolidated statements of operations for  the three and nine months ended April 30, 2006 (unaudited) and  April 30, 2005 (unaudited) | 4          |
|                                    |                                                                                                                                                      |       |
|                                    | Condensed Consolidated statements of cash flows for  the nine months ended April 30, 2006 (unaudited) and April 30, 2005  (unaudited)           | 5          |
|                                    |                                                                                                                                                      |       |
|                                    | Notes to condensed consolidated financial statements  (unaudited)                                                                                         | 6          |
|                                    |                                                                                                                                                      |       |
| Item 2.                                 | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                                               | 10         |
|                                    |                                                                                                                                                      |       |
| Item 3.                                 | Quantitative and Qualitative Disclosures About Market  Risk                                                                                               | 19         |
|                                    |                                                                                                                                                      |       |
| Item 4.                                 | Controls and Procedures                                                                                                                                   | 19         |
|                                    |                                                                                                                                                      |       |
| **PART II.  OTHER INFORMATION**    |                                                                                                                                                      |
| ** **                              |                                                                                                                                                      |
| Item  1.                                | Legal  Proceedings                                                                                                                                        | 20         |
|                                    |                                                                                                                                                      |       |
| Item  1A.                               | Risk  Factors                                                                                                                                             | 20         |
|                                    |                                                                                                                                                      |       |
| Item 2.                                 | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                                              | 25         |
|                                    |                                                                                                                                                      |       |
| Item 3.                                 | Defaults Upon Senior Securities                                                                                                                           | 25         |
|                                    |                                                                                                                                                      |       |
| Item 4.                                 | Submission of Matters to a Vote of Security Holders                                                                                                       | 25         |
|                                    |                                                                                                                                                      |       |
| Item  5.                                | Other  Information                                                                                                                                        | 25         |
|                                    |                                                                                                                                                      |       |
| Item 6.                                 | Exhibits                                                                                                                                                  | 25         |
|                                    |                                                                                                                                                      |       |
| **SIGNATURES**                          | 26                                                                                                                                                        |
| ** **                              |                                                                                                                                                      |
| **EXHIBIT  INDEX**                      | 27                                                                                                                                                        |
| ** **                              |                                                                                                                                                      |
| **CERTIFICATIONS**                      |                                                                                                                                                      |

 

2

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**PART I.FINANCIAL INFORMATION**

**Item1. Financial Statements**

**CondensedConsolidated Balance Sheets**

** **
| ** **                                                                                                                                                               | ** ** | **April 30,  2006** | ** ** | **July 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                               | ** ** | **(unaudited)**          | ** ** | ** **              | ** ** |
| **ASSETS**                                                                                                                                                               |       |                     |       |                    |       |
| Current  assets:                                                                                                                                                         |       |                     |       |                    |       |
| Cash and cash equivalents                                                                                                                                                | ** ** | $                        | 8,389,572  |                    | $          | 3,983,005 | ** ** |
| Accounts receivable, net of  allowance for doubtful accounts and allowance for sales returns and  allowances of $670,675 and $581,907, respectively                      |       | 3,308,010                |       | 3,476,211               |       |
| Prepaid expenses and other  current assets                                                                                                                               |       | 440,462                  |       | 403,659                 |       |
| Total current assets                                                                                                                                                     |       | 12,138,044               |       | 7,862,875               |       |
| Restricted cash                                                                                                                                                          |       | 417,330                  |       | 417,330                 |       |
| Property and equipment, net                                                                                                                                              |       | 884,312                  |       | 629,919                 |       |
| Goodwill                                                                                                                                                                 |       | 3,884,235                |       | 3,842,536               |       |
| Other intangible assets, net                                                                                                                                             |       | 1,642,705                |       | 1,772,757               |       |
| Other assets                                                                                                                                                             |       | 44,638                   |       | 32,373                  |       |
| Total assets                                                                                                                                                             | ** ** | $                        | 19,011,264 |                    | $          | 14,557,790 | ** ** |
|                                                                                                                                                                     |       |                     |       |                    |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                           |       |                     |       |                    |       |
| Current  liabilities:                                                                                                                                                    |       |                     |       |                    |       |
| Accounts payable                                                                                                                                                         | ** ** | $                        | 359,735    |                    | $          | 226,097 | ** ** |
| Accrued expenses                                                                                                                                                         |       | 590,955                  |       | 1,490,604               |       |
| Accrued dividends — preferred  stock                                                                                                                                |       | 131,507                  |       | 232,329                 |       |
| Deferred revenue                                                                                                                                                         |       | 152,744                  |       | 152,434                 |       |
| Capital lease obligation                                                                                                                                                 |       | —                   |       | 3,645                   |       |
| Other current liabilities                                                                                                                                                |       | 384,882                  |       | 894,199                 |       |
| Total current liabilities                                                                                                                                                |       | 1,619,823                |       | 2,999,308               |       |
|                                                                                                                                                                     |       |                     |       |                    |       |
| Long-term lease liability from acquisition                                                                                                                               |       | 1,027,954                |       | 1,216,280               |       |
| Total liabilities                                                                                                                                                        |       | 2,647,777                |       | 4,215,588               |       |
|                                                                                                                                                                     |       |                     |       |                    |       |
| Stockholders’  Equity:                                                                                                                                              |       |                     |       |                    |       |
| Preferred  stock — 5,000,000 shares authorized, including 10,000 shares of series A,  10,000 shares of series C, 250 shares of series D and 175 shares of series S: |       |                     |       |                    |       |
| Series A — par value $.01 per share, none issued and outstanding                                                                                               |       | —                   |       | —                  |       |
| Series C — par value $.01  per share, 44.76 votes per share; 10,000 shares issued and outstanding  (liquidation value of $10,131,507)                          |       | 100                      |       | 100                     |       |
| Series D — par value $.01  per share, 769 votes per share; 250 shares issued andoutstanding (liquidation  value of $250,000)                                   |       | 3                        |       | 3                       |       |
| Series S — par value $.01  per share, none issued and outstanding                                                                                              |       | —                   |       | —                  |       |
| Common  stock:                                                                                                                                                           |       |                     |       |                    |       |
| Class A - par value $.01  per share, 40,000,000 shares authorized, one vote per share; 21,926,290 and  19,414,420 shares issued and outstanding, respectively       |       | 219,263                  |       | 194,144                 |       |
| Class B - par value $.01  per share, 2,000,000 shares authorized, six votes per share; none issued and  outstanding                                                 |       | —                   |       | —                  |       |
| Additional paid-in capital                                                                                                                                               |       | 100,165,322              |       | 95,813,761              |       |
| Accumulated deficit                                                                                                                                                      |       | (84,021,201              | )          | (85,665,806             | )          |
| Total stockholders’ equity                                                                                                                                          |       | 16,363,487               |       | 10,342,202              |       |
| Total liabilities and stockholders’ equity                                                                                                                          | ** ** | $                        | 19,011,264 |                    | $          | 14,557,790 | ** ** |

 

**See notesto condensed consolidated financial statements.**

 

3

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**CondensedConsolidated Statements of Operations (Unaudited)**
| ** **                                                          | ** ** | **Three Months Ended  April 30,** | ** ** | **Nine Months Ended  April 30,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                         | ** ** | **2005**                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                | ** ** | ** **                                       | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service revenues                                                    | ** ** | $                                                | 4,535,316  |                                            | $          | 4,388,156 |   | $ | 14,565,388 |   | $ | 11,627,840 | ** ** |
|                                                                |       |                                             |       |                                            |       |   |   |   |   |
| Expenses:                                                           |       |                                             |       |                                            |       |   |   |   |   |
| Cost of services                                                    |       | 1,578,825                                        |       | 1,340,943                                       |       | 5,234,404 |   | 4,101,713 |   |
| Product  development and enhancement                                |       | 192,090                                          |       | 204,027                                         |       | 502,001 |   | 683,139 |   |
| Selling and  marketing                                              |       | 566,795                                          |       | 596,792                                         |       | 1,559,452 |   | 2,148,193 |   |
| General and  administrative                                         |       | 1,715,360                                        |       | 1,963,862                                       |       | 5,650,155 |   | 5,112,715 |   |
|                                                                |       |                                             |       |                                            |       |   |   |   |   |
|                                                                |       | 4,053,070                                        |       | 4,105,624                                       |       | 12,946,012 |   | 12,045,760 |   |
|                                                                |       |                                             |       |                                            |       |   |   |   |   |
| Operating income  (loss)                                            |       | 482,246                                          |       | 282,532                                         |       | 1,619,376 |   | (417,920 | ) |
|                                                                |       |                                             |       |                                            |       |   |   |   |   |
| Other income (expense):                                             |       |                                             |       |                                            |       |   |   |   |   |
| Interest and investment income                                      |       | 74,634                                           |       | 14,133                                          |       | 134,867 |   | 28,332 |   |
| Interest expense                                                    |       | (23,044                                          | )          | (506                                            | )          | (136,338 | ) | (4,288 | ) |
| Other income                                                        |       | 27,043                                           |       | —                                          |       | 54,594 |   | — |   |
| ** **                                                          |       | 78,633                                           |       | 13,627                                          |       | 53,123 |   | 24,044 |   |
| ** **                                                          |       |                                             |       |                                            |       |   |   |   |   |
| Income (loss)  before income taxes                                  |       | 560,879                                          |       | 296,159                                         |       | 1,672,499 |   | (393,876 | ) |
| ** **                                                          |       |                                             |       |                                            |       |   |   |   |   |
| Provision for  income taxes, current                                |       | 10,723                                           |       | —                                          |       | 27,895 |   | — |   |
| ** **                                                          |       |                                             |       |                                            |       |   |   |   |   |
| Net income  (loss)                                                  |       | 550,156                                          |       | 296,159                                         |       | 1,644,604 |   | (393,876 | ) |
| ** **                                                          |       |                                             |       |                                            |       |   |   |   |   |
| Dividends on  preferred stock                                       |       | (97,534                                          | )          | (97,627                                         | )          | (299,178 | ) | (298,720 | ) |
|                                                                |       |                                             |       |                                            |       |   |   |   |   |
| Income (loss)  attributable to common stockholders                  | ** ** | $                                                | 452,622    |                                            | $          | 198,532 |   | $ | 1,345,426 |   | $ | (692,596 | ) |
| ** **                                                          |       |                                             |       |                                            |       |   |   |   |   |
| Basic income  (loss) per common share                               | ** ** | $                                                | 0.02       |                                            | $          | 0.01 |   | $ | 0.07 |   | $ | (0.04 | ) |
|                                                                |       |                                             |       |                                            |       |   |   |   |   |
| Diluted income  (loss) per common share                             | ** ** | $                                                | 0.02       |                                            | $          | 0.01 |   | $ | 0.07 |   | $ | (0.04 | ) |
|                                                                |       |                                             |       |                                            |       |   |   |   |   |
| Anti-dilutive  stock options and warrants outstanding               |       | 1,075,057                                        |       | 4,889,725                                       |       | 1,600,841 |   | 6,573,671 |   |
|                                                                |       |                                             |       |                                            |       |   |   |   |   |
| Weighted average  number of common shares outstanding — Basic  |       | 20,370,591                                       |       | 19,327,749                                      |       | 19,982,232 |   | 19,170,299 |   |
|                                                                |       |                                             |       |                                            |       |   |   |   |   |
| Weighted average number  of common shares outstanding —Diluted |       | 22,943,061                                       |       | 20,786,729                                      |       | 21,900,688 |   | 19,170,299 |   |

**Seenotes to condensed consolidated financial statements.**

 

4

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**Condensed Consolidated Statements of Cash Flows(Unaudited)**
| ** **                                                                                            | ** ** | **Nine Months Ended April 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                            | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| **Cash flows from operating  activities:**                                                            |       |                                                |       |   |   |
| Net income  (loss)                                                                                    |       | $                                                   | 1,644,604  |   | $ | (393,876 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in)   operating activities: |       |                                                |       |   |   |
| Depreciation and amortization                                                                         |       | 822,026                                             |       | 1,115,281 |   |
| Bad debt expense                                                                                      |       | 597,023                                             |       | 142,757 |   |
| Non-cash interest expense                                                                             |       | 136,900                                             |       | — |   |
| Non-cash charges for equity instruments issued for  compensation and services                         |       | 554,283                                             |       | 549,321 |   |
| Changes in  assets and liabilities, net of effects from acquisitions:                                 |       |                                                |       |   |   |
| Accounts receivable                                                                                   |       | (71,885                                             | )          | (978,314 | ) |
| Prepaid expenses and other assets                                                                     |       | (1,585                                              | )          | (86,531 | ) |
| Accounts payable                                                                                      |       | 125,959                                             |       | (259,580 | ) |
| Accrued expenses                                                                                      |       | (848,878                                            | )          | 1,658 |   |
| Deferred revenue                                                                                      |       | (16,220                                             | )          | 21,094 |   |
| Other liabilities                                                                                     |       | (819,150                                            | )          | (130,196 | ) |
|                                                                                                  |       |                                                |       |   |   |
| Net cash provided by (used in) operating activities                                                   |       | 2,123,077                                           |       | (18,386 | ) |
|                                                                                                  |       |                                                |       |   |   |
| **Cash flows from investing  activities:**                                                            |       |                                                |       |   |   |
| Payment for purchase of acquisition, net of cash  acquired                                            |       | (886,619                                            | )          | 231,351 |   |
| Additional costs of previous acquisition                                                              |       | (65,000                                             | )          | (121,296 | ) |
| Purchases of property and equipment                                                                   |       | (410,823                                            | )          | (271,879 | ) |
|                                                                                                  |       |                                                |       |   |   |
| Net cash used in investing activities                                                                 |       | (1,362,442                                          | )          | (161,824 | ) |
|                                                                                                  |       |                                                |       |   |   |
| **Cash flows from financing  activities:**                                                            |       |                                                |       |   |   |
| Common stock issued for services related to 2004  private placement                                   |       | —                                              |       | (23,512 | ) |
| Payments of capital lease obligations                                                                 |       | (3,645                                              | )          | (44,504 | ) |
| Proceeds from exercise of warrants                                                                    |       | 3,002,701                                           |       | — |   |
| Proceeds from exercise of employee stock options                                                      |       | 646,876                                             |       | 34,775 |   |
|                                                                                                  |       |                                                |       |   |   |
| Net cash provided by (used in) financing activities                                                   |       | 3,645,932                                           |       | (33,241 | ) |
|                                                                                                  |       |                                                |       |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                                             |       | 4,406,567                                           |       | (213,451 | ) |
|                                                                                                  |       |                                                |       |   |   |
| Cash and cash  equivalents, beginning of period                                                       |       | 3,983,005                                           |       | 3,789,643 |   |
|                                                                                                  |       |                                                |       |   |   |
| **Cash  and cash equivalents, end of period**                                                         |       | $                                                   | 8,389,572  |   | $ | 3,576,192 |   |
|                                                                                                  |       |                                                |       |   |   |
| **Supplemental disclosure of cash  flow information:**                                                |       |                                                |       |   |   |
| Cash paid for interest during the period                                                              |       | $                                                   | 216        |   | $ | 4,288 |   |
| Cash paid for income taxes during the period                                                          |       | 133,184                                             |       | — |   |
|                                                                                                  |       |                                                |       |   |   |
| **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                          |       | 1,920                                               |       | — |   |
| 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                                            |       | 400,000                                             |       | 400,000 |   |

 

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

5

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**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**The accompanying unaudited condensed consolidated financialstatements of Internet Commerce Corporation (the “Company” or “ICC”) have beenprepared in accordance with accounting principles generally accepted in theUnited States of America (“GAAP”) for interim financial information. In theopinion of management, such statements include all adjustments (consisting onlyof normal recurring adjustments) necessary for the fair presentation of the Company’sfinancial position, results of operations and cash flows at the dates and forthe periods indicated. Pursuant to the requirements of the Securities andExchange Commission (the “SEC”) applicable to Quarterly Reports on Form 10-Q,the accompanying financial statements do not include all the disclosuresrequired by GAAP for annual financial statements. While the Company believesthat the disclosures presented are adequate to make the information notmisleading, these unaudited interim condensed consolidated financial statementsshould be read in conjunction with the consolidated financial statements andrelated notes included in the Company’s Annual Report on Form 10-Kfor the year ended July 31, 2005. Operating results for the three and ninemonth periods ended April 30, 2006 are not necessarily indicative of theresults that may be expected for the fiscal year ending July 31, 2006.**

**1.**             ORGANIZATIONAND NATURE OF BUSINESS

The Company derives itsrevenue from subscriptions to its value added network (“VAN”) sold under thebrand name ICC.NETTM, which includes transaction, mailbox and fax transmissionactivities for which fees are charged. Revenue from data mapping andprofessional internet services contracts is also included in this segment. Inaddition, the Company operates a service bureau, the EC Service Bureau,deriving revenue from electronic data interchange (“EDI”) services includingdata translation and data synchronization services, purchase order and invoiceprocessing from EDI-to-print and print-to-EDI, Universal Product Code (“UPC”)number generation, UPC catalog maintenance and UPC label printing. The Companyalso sells EDI software and software maintenance, the revenue of which isimmaterial in the periods presented.

**2.             RECENT ACQUISITIONS**

**                       KODIAK GROUP, INC.**

On November 1, 2005,the Company acquired all of the outstanding shares of the Kodiak Group, Inc.(“Kodiak”), a privately held company delivering EDI outsourcing and global datasynchronization services to blue chip customers in a variety of industries. Underthe terms of the Share Purchase Agreement, the Company paid $1.0 million incash on close, will pay an additional $1.0 million in cash should the Kodiakoperations generate revenue of no less than $3.0 million over the first twelvemonths following the acquisition, and up to an additional $0.5 million on apro-rated basis should the Kodiak operations generate between $3.25 and $4.0million in revenue over the first twelve months following the acquisition. TheCompany has based its allocation of the purchase price on the assumption thatthe sellers of Kodiak will not receive any of the additional payments outlinedabove.

The followingtable sets forth the components of the purchase price for Kodiak as of April 30,2006.

| Net working capital                          |   | $       | 506,206   |   |
|----------------------------------------------|--------|---------|-----------|--------|
| Other net  tangible assets                   |   | 121,789 |      |
| Intangible  assets — customer relations |   | 372,005 |      |
| Estimated  transaction costs                 |   | 53,942  |      |
| Total purchase  price                        |   | $       | 1,053,942 |   |

The recorded other nettangible assets are estimated to have a life of two years and the customerrelationship intangible is estimated to have a life of five years.  Revenue from the Kodiak acquisition 

6

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includesprofessional services and mapping revenue, which is a part of our ICC.NETsegment and EDI outsourcing, which is a part of our EC Service Bureau segment.

**3.             BUSINESS SEGMENT INFORMATION**

The Company’s twooperating segments are:

·                  ICC.NET—ICC.NETis a complete VAN solution designed to meet electronic data interchangerequirements in a secure, reliable, available and flexible environmentregardless of file size, communication protocol or data format. We charge ourcustomers using the ICC.NET service based upon the amount of information thatcustomers transmit through our network to their trading partners. These chargesare primarily based on a set price per “kilo-character” (every thousand bytesof information through the network).

·                  ECService Bureau—The EC Service Bureau manages and translates the data of smalland mid-sized businesses that exchange EDI data with large companies andprovides various EDI and Universal Product Code (“UPC”) services. The ECService Bureau also licenses EDI software which amounts are immaterial for allperiods presented.

7

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**BUSINESS SEGMENT INFORMATION (CONTINUED)**

The tables belowsummarize information about operations and long-lived assets as of and for thethree and nine month periods ended April 30, 2006 and 2005.
| ** **                                                  | ** ** | **ICC.NET** | ** ** | **EC Service  Bureau** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------|------------|-------------|------------|-----------------------------|------------|-----------|------------|
| **Three Months — April 30,  2006**                |       |        |       |                        |       |      |       |
| Revenues from  external customers                           |       | $           | 2,959,457  |                        | $          | 1,575,859 |       | $ | 4,535,316 |   |
| Operating income  (loss) (1)                                |       | $           | 702,329    |                        | $          | (220,083  | )          | $ | 482,246 |   |
| Other income (expense), net                                 |       | 101,661     |       | (23,028                     | )          | 78,633    |       |
| Income (loss) before income taxes                           |       | 803,990     |       | (243,111                    | )          | 560,879   |       |
| Income tax expense                                          |       | 10,723      |       | —                      |       | 10,723    |       |
| Net income (loss) (1)                                       |       | $           | 793,267    |                        | $          | (243,111  | )          | $ | 550,156 |   |
|                                                        |       |        |       |                        |       |      |       |
| Supplemental segment  information:                          |       |        |       |                        |       |      |       |
| Amortization and  depreciation                              |       | $           | 100,199    |                        | $          | 107,081   |       | $ | 207,280 |   |
| Non-cash charges  for stock-based compensation and services |       | $           | 76,960     |                        | $          | 2,638     |       | $ | 79,598 |   |
|                                                        |       |        |       |                        |       |      |       |
| **Nine Months — April 30,  2006**                 |       |        |       |                        |       |      |       |
| Revenues from  external customers                           |       | $           | 9,114,089  |                        | $          | 5,451,299 |       | $ | 14,565,388 |   |
| Operating income  (1)                                       |       | $           | 1,447,866  |                        | $          | 171,510   |       | $ | 1,619,376 |   |
| Other income (expense), net                                 |       | 170,476     |       | (117,353                    | )          | 53,123    |       |
| Income before income taxes                                  |       | 1,618,342   |       | 54,157                      |       | 1,672,499 |       |
| Income tax expense                                          |       | 16,639      |       | 11,256                      |       | 27,895    |       |
| Net income (1)                                              |       | $           | 1,601,703  |                        | $          | 42,901    |       | $ | 1,644,604 |   |
|                                                        |       |        |       |                        |       |      |       |
| Supplemental segment  information:                          |       |        |       |                        |       |      |       |
| Amortization and  depreciation                              |       | $           | 498,114    |                        | $          | 323,912   |       | $ | 822,026 |   |
| Non-cash charges  for stock-based compensation and services |       | $           | 532,838    |                        | $          | 21,445    |       | $ | 554,283 |   |
|                                                        |       |        |       |                        |       |      |       |
| **As of April 30, 2006**                               |       |        |       |                        |       |      |       |
| Property and  equipment, net                                |       | $           | 723,693    |                        | $          | 160,619   |       | $ | 884,312 |   |
| Goodwill                                                    |       | 26,132      |       | 3,858,103                   |       | 3,884,235 |       |
| Acquired  identified intangibles, net                       |       | 383,376     |       | 1,259,329                   |       | 1,642,705 |       |
| Long lived  assets, net                                     |       | $           | 1,133,201  |                        | $          | 5,278,051 |       | $ | 6,411,252 |   |
| Capital expenditures                                        |       | $           | 407,136    |                        | $          | 3,687     |       | $ | 410,823 |   |

----

1)                 Certain costs for sellingand marketing functions were allocated to the EC Service Bureau fromICC.NET   based on the level of serviceperformed. ICC.NET allocated $112,000 and $260,000 of selling and marketingcosts to the EC Service Bureau during the three and nine months endedApril 30, 2006, respectively. Also, certain costs for executivemanagement, MIS, human resources and accounting and finance functions wereallocated to the EC Service Bureau from ICC.NET based on the level of serviceperformed. ICC.NET allocated $430,000 and $1,130,000 of general andadministrative costs for these services to the EC Service Bureau for the threeand nine months ended April 30, 2006, respectively.

8

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**BUSINESS SEGMENT INFORMATION (CONTINUED)**
| ** **                                                  | ** ** | **ICC.NET** | ** ** | **EC Service  Bureau** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------|------------|-------------|------------|-----------------------------|------------|-----------|------------|
| **Three Months — April 30,  2005**                |       |        |       |                        |       |      |       |
| Revenues from  external customers                           |       | $           | 2,740,435  |                        | $          | 1,647,720 |       | $ | 4,388,156 |   |
| Operating income  (loss)(2)                                 |       | $           | (294,491   | )                           | $          | 577,023   |       | $ | 282,532 |   |
| Other income (expense), net                                 |       | 13,627      |       | —                      |       | 13,627    |       |
| Net income (loss)(2)                                        |       | $           | (280,864   | )                           | $          | 577,023   |       | $ | 296,159 |   |
|                                                        |       |        |       |                        |       |      |       |
| Supplemental segment  information:                          |       |        |       |                        |       |      |       |
| Amortization and  depreciation                              |       | $           | 282,678    |                        | $          | 92,036    |       | $ | 374,714 |   |
| Non-cash charges  for stock-based compensation and services |       | $           | 145,013    |                        | $          | —    |       | $ | 145,013 |   |
|                                                        |       |        |       |                        |       |      |       |
| **Nine Months — April 30,  2005**                 |       |        |       |                        |       |      |       |
| Revenues from  external customers                           |       | $           | 8,307,092  |                        | $          | 3,320,748 |       | $ | 11,627,840 |   |
| Operating income  (loss)(2)                                 |       | $           | (936,397   | )                           | $          | 518,477   |       | $ | (417,920 | ) |
| Other income (expense), net                                 |       | 24,044      |       | —                      |       | 24,044    |       |
| Net income (loss)(2)                                        |       | $           | (912,353   | )                           | $          | 518,477   |       | $ | (393,876 | ) |
|                                                        |       |        |       |                        |       |      |       |
| Supplemental segment  information:                          |       |        |       |                        |       |      |       |
| Amortization and  depreciation                              |       | $           | 877,841    |                        | $          | 237,440   |       | $ | 1,115,281 |   |
| Non-cash charges  for stock-based compensation and services |       | $           | 549,321    |                        | $          | —    |       | $ | 549,321 |   |
|                                                        |       |        |       |                        |       |      |       |
| **As of April 30, 2005**                               |       |        |       |                        |       |      |       |
| Property and  equipment, net                                |       | $           | 536,174    |                        | $          | 41,978    |       | $ | 578,152 |   |
| Goodwill                                                    |       | 26,132      |       | 3,793,658                   |       | 3,819,790 |       |
| Acquired  identified intangibles, net                       |       | 478,000     |       | 1,625,232                   |       | 2,103,232 |       |
| Long lived  assets, net                                     |       | $           | 1,040,306  |                        | $          | 5,460,868 |       | $ | 6,501,174 |   |
| Capital expenditures                                        |       | $           | 262,498    |                        | $          | 9,381     |       | $ | 271,879 |   |

----

2)                 Certain costs for sellingand marketing functions were allocated to the EC Service Bureau from ICC.NETbased on the level of service performed. ICC.NET allocated $24,000 and $48,000of selling and marketing costs to the EC Service Bureau during the three andnine months ended April 30, 2005, respectively. Also, certain costs forexecutive management, MIS, human resources and accounting and finance functionswere allocated to the EC Service Bureau from ICC.NET based on the level of serviceperformed. ICC.NET allocated $150,000 and $420,000 of general andadministrative costs for these services to the EC Service Bureau for the threeand nine months ended April 30, 2005, respectively.

**4.             SUBSEQUENTEVENT**

On May 9,2006, the Company acquired all of the outstanding shares of Enable Corp., aprivately held corporation that provides trading community portals, web basedEDI trading tools and EDI professional services to a variety of industries. Perthe terms of the Share Purchase Agreement, the Company paid $4.203 million incash and issued 686,324 shares of its class A common stock worth approximately$2.7 million on close.  The Company madethe acquisition to expand its customer base and to strengthen the Company’s webbased trading technology offerings. The Company acquired $1 million in cash,trade receivables, fixed assets, developed technologies, customer list andother long-term intangible assets in the acquisition. The Company is having athird party appraiser complete an independent valuation of the assets.

9

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**Item 2.    Management’s Discussion and Analysis ofFinancial 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 of1933, as amended (the “Securities Act”), and Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”). Specifically, allstatements other than statements of historical facts included in this QuarterlyReport regarding our financial position, business strategy and plans andobjectives of management for future operations are forward-lookingstatements. These forward-looking statements are based on the beliefs ofmanagement, as well as assumptions made by and information currently availableto management. When used in this Report, the words “anticipate,” “believe,” “estimate,”“expect,” “may,” “will,” “continue” and “intend,” and words or phrases ofsimilar import, as they relate to our financial position, business strategy andplans, or objectives of management, are intended to identify forward-lookingstatements. These statements reflect our current view with respect to futureevents and are subject to risks, uncertainties and assumptions related tovarious factors including, without limitation, those factors discussed in Item1 (Business) of Part I and Item 7 (Management’s Discussion and Analysis ofFinancial Condition and Results of Operations) of Part II of our AnnualReport on Form 10-K filed on October 31, 2005, Item 2 and Item1A 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 one or more of these risks oruncertainties materialize, or should any underlying assumptions proveincorrect, actual results may vary materially from those described in thisQuarterly Report as anticipated, believed, estimated, expected or intended.

**Overview**

Internet CommerceCorporation is a pioneer in the use of the Internet for electronic datainterchange (“EDI”) business-to-business (B2B) e-commerce solutions andan operator of one of the largest EDI service centers in the United States. EDIis an electronic standard used to provide a more efficient exchange of businessinformation between trading partners. Intermediaries called value-addednetworks (“VAN”) are often used to facilitate EDI processes. A VAN allows eachcustomer to adopt its own communication protocol and allows multiple tradingpartners in the supply chain to communicate electronically using a VAN as anintermediary.

Our B2B Internet andservice center solutions allow thousands of customers to rely on our solutions,expertise and support to help balance the cost and function required to meetthe individual requirements for communicating with their trading partners incompliance with partner specifications.

Organizationally, our two segments of business areknown as the:

·                       ICC.NETsegment, which is composed primarily of our VAN operations, professionalservices and mapping activities, and

·                       ElectronicCommerce Service Bureau (“EC Service Bureau”) segment, whose operationsprimarily focus on facilitating the EDI communications of small and mid-sizedbusinesses with their trading partners.

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.

**Critical Accounting Policies andEstimates**

The discussion andanalysis of our financial condition and results of operations are based uponour condensed consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America. The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amount of assets, liabilities,revenues and expenses. We consider certain accounting policies related torevenue recognition, valuation of acquired intangibles and impairment

10

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of long-lived assets including goodwill, and valuationof investments to be critical policies due to the estimation process involvedin 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 on Form 10-Kfor the fiscal year ended July 31, 2005. Reference is also made to thediscussion of the application of these critical accounting policies andestimates contained in Management’s Discussion and Analysis in our AnnualReport on Form 10-K for fiscal 2005. During the nine months ended April 30,2006, there were no significant or material changes in the application ofcritical accounting policies that would require an update to the informationprovided in the Form 10-K for fiscal 2005.

**Stock-BasedCompensation**

In January 2004,we adopted the fair value method of recording stock-based compensation expensein accordance with Statement of Financial Accounting Standards No. 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”). On December 6, 2004, theFinancial Accounting Standards Board issued FASB Statement No. 123R(revised 2004), Share-Based Payment, which is a revision of SFAS 123. Statement123R supersedes APB Opinion No. 25, Accounting for Stock Issued toEmployees and amends FASB Statement No. 95, Statements of Cash Flows. Theapproach to accounting for share-based payments in Statement 123R is similar tothe approach described in Statement 123. However, Statement 123R requires thatall share-based payments to employees, including grants of employee stockoptions, be recognized in the financial statements based on their fair valuesand no longer allows pro forma disclosure as an alternative to financialstatement recognition.  We adopted thefair-value recognition provisions of SFAS 123 in January 2004 and nochanges were made to our recognition method upon adoption of Statement 123R,which became effective on August 1, 2005.

The fair value ofstock options issued under stock-based compensation plans as determined on thedate of grant using the Black-Scholes option-pricing model is being expensedover the vesting period of the related stock options. The use of this modelrequired management to make certain estimates for values of variables used bythe model. Management estimated the values for stock price volatility, theexpected life of the equity instruments and the risk free interest rate basedon information that was available to management at the time the Black-Scholesoption-pricing calculations were performed. During the three month period endedApril 30, 2006, we recorded non-cash charges for stock-option compensationof $118,598.

11

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***Three Months Ended April 30, 2006 Compared withThree Months Ended April 30, 2005.***

**Results of Operations —Consolidated**

**The following table reflects consolidated operating data byreported segments. All significant intersegment activity has been eliminated. Accordingly,the segment results below exclude the effect of transactions with oursubsidiaries.**

|                                                            | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **April 30,**               | ** ** |
| **Income (loss) before income taxes:** | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ICC.NET                                                    |       | $                                | 803,990    |   | $ | (280,864 | ) |
| EC Service Bureau                                          |       | (243,111                         | )          | 577,023 |   |
| Income (loss) before income taxes                          |       | $                                | 560,879    |   | $ | 296,159 |   |

 

**Results of Operations —ICC.NET**

Our ICC.NETservice uses the Internet and our proprietary technology to deliver ourcustomers’ documents and data files to members of their trading communities. Thefollowing table summarizes operating results for our ICC.NET service for thethree months ended April 30, 2006 and 2005:

|                                               | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------|------------|------------|------------|
| ** **                                    | ** ** | **April 30,**               | ** ** | **Variance** | ** ** |
| ** **                                    | ** ** | **2006**                         | ** ** | **2005**     | ** ** | **$**      | ** ** | **%** | ** ** |
| Revenues:                                     |       |                             |       |         |       |       |       |   |   |
| VAN services                                  |       | $                                | 2,806,374  |         | $          | 2,578,382  |       | 227,992 |   | 9 |   |
| Professional services                         |       | 121,338                          |       | 104,003      |       | 17,335     |       | 17 |   |
| Mapping services                              |       | 31,745                           |       | 58,050       |       | (26,305    | )          | (45 | ) |
|                                          |       | 2,959,457                        |       | 2,740,435    |       | 219,022    |       | 8 |   |
| Expenses:                                     |       |                             |       |         |       |       |       |   |   |
| Cost of services                              |       | 725,270                          |       | 960,088      |       | (234,818   | )          | (24 | ) |
| Product development and enhancement           |       | 148,123                          |       | 102,254      |       | 45,869     |       | 45 |   |
| Selling and marketing                         |       | 296,542                          |       | 409,563      |       | (113,021   | )          | (28 | ) |
| General and administrative                    |       | 1,010,233                        |       | 1,418,008    |       | (407,775   | )          | (29 | ) |
| Non-cash charges for stock-based compensation |       | 76,960                           |       | 145,013      |       | (68,053    | )          | (47 | ) |
| Total expenses                                |       | 2,257,128                        |       | 3,034,926    |       | (777,798   | )          | (26 | ) |
|                                          |       |                             |       |         |       |       |       |   |   |
| Operating income (loss)                       |       | 702,329                          |       | (294,491     | )          | 996,820    |       | 338 |   |
|                                          |       |                             |       |         |       |       |       |   |   |
| Other income (expense), net                   |       | 101,661                          |       | 13,627       |       | 88,034     |       | 646 |   |
|                                          |       |                             |       |         |       |       |       |   |   |
| Net Income  (loss) before income taxes        |       | $                                | 803,990    |         | $          | (280,864   | )          | 1,084,854 |   | 386 |   |

*Revenues —ICC.NET —* Revenue from ICC.NET services was 65% ofconsolidated revenues for the quarter ended April 30, 2006 (“2006 Quarter”)compared to 62% for the quarter ended April 30, 2005 (“2005 Quarter”).ICC.NET service revenues increased $219,000, or 8%, to $2,959,000 for the 2006Quarter compared to $2,740,000 for the 2005 Quarter. VAN service revenueincreased $228,000, or 9%, to $2,806,000 for the 2006 Quarter compared to$2,578,000 for the 2005 Quarter. The increase in VAN services revenue isattributable to an increase in transaction volume. Professional servicesrevenue increased $17,000, or 17%, to $121,000 for the 2006 Quarter compared to$104,000 for the 2005 Quarter due to the Kodiak acquisition. Mapping servicesrevenue decreased $26,000, or 45%, to $32,000 for the 2006 Quarter compared to$58,000 for the 2005 Quarter. The demand for these services has decreased as wehave accumulated numerous map configurations for various trading partners thatmay be shared by multiple customers.

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*Cost ofservices — ICC.NET* — Cost of services relating to our ICC.NET service was 25% of revenuefrom the ICC.NET services for the 2006 Quarter, compared to 35% for the 2005Quarter. Total cost of services decreased $235,000, or 24%, to $725,000 for the2006 Quarter compared to $960,000 for the 2005 Quarter. Cost of servicesconsists primarily of salaries and employee benefits, connectivity fees,amortization, allocation of product and development expenses and rent. Thisdecrease was primarily the result of a $239,000 reduction in amortization dueto certain mapping technology becoming fully amortized, a $37,000 reduction insalaries and benefits, and a $77,000 reduction in office space allocationoffset by a $95,000 increase in costs associated with Kodiak services.

*Productdevelopment and enhancement —**ICC.NET* — Productdevelopment and enhancement costs relating to our ICC.NET service consistprimarily of salaries and employee benefits. Product development andenhancement costs increased $46,000 to $148,000 in the 2006 Quarter from $102,000in the 2005 Quarter primarily as a result of an increase in salaries andbenefits.

*Sellingand marketing* —*ICC.NET* — Selling andmarketing expenses relating to our ICC.NET service consist primarily ofsalaries and employee benefits, rent, travel-related costs, advertising andtrade-show costs. Selling and marketing expenses relating to our ICC.NETservice decreased $113,000 to $297,000 in the 2006 Quarter from $410,000 in the2005 Quarter. This decrease was due primarily to a $66,000 increase in theICC.NET allocation of a portion of the cost of selling and marketing functionsto the EC Service Bureau and a $27,000 decrease in the office space allocation.

*Generaland administrative* — *ICC.NET* — General andadministrative expenses supporting our ICC.NET service consist primarily ofsalaries and employee benefits, legal and professional fees, facility costs,travel meals and entertainment and insurance. General and administrative costssupporting our ICC.NET service decreased $408,000 to $1,010,000 in the 2006Quarter from $1,418,000 in the 2005 Quarter. Thisdecrease was primarily due to an accrual of $450,000 for a bonus programmade in the 2005 Quarter which has not been duplicated in the 2006 Quarter.

*Non-cashcharges —**ICC.NET* — Non-cash chargesof approximately $77,000 in the 2006 Quarter consist of $116,000 for stockoptions issued to employees and directors offset by the reversal of a $39,000over-accrual for shares related to directors’ fees ranging from April 2005through October 2005. Non-cash charges of approximately $145,000 in the2005 Quarter consisted of $91,000 for stock options issued to employees anddirectors and $54,000 for shares of our class A common stock issued tonon-employee directors as compensation for 2005 directors’ fees.

**Resultsof Operations — EC Service Bureau**

Our EC ServiceBureau manages and translates supply chain information for small and mid-sizedcompanies that exchange EDI data with other companies and provides various EDIand UPC services. Our EC Service Bureau also licenses EDI software, whichamounts are immaterial to the periods presented. The following table summarizesoperating results for our EC Service Bureau for the three months ended April 30,2006 and 2005:

|                                               | ** ** | **Three Months Ended** | ** ** | ** **   | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------|------------|------------|------------|
| ** **                                    | ** ** | **April 30,**               | ** ** | **Variance** | ** ** |
| ** **                                    | ** ** | **2006**                         | ** ** | **2005**     | ** ** | **$**      | ** ** | **%** | ** ** |
| Revenues:                                     |       |                             |       |         |       |       |       |   |   |
| Services                                      |       | $                                | 1,575,859  |         | $          | 1,647,720  |       | (71,861 | ) | (4 | ) |
|                                          |       |                             |       |         |       |       |       |   |   |
| Expenses:                                     |       |                             |       |         |       |       |       |   |   |
| Cost of services                              |       | 849,373                          |       | 379,094      |       | 470,279    |       | 124 |   |
| Product development and enhancement           |       | 38,438                           |       | 95,143       |       | (56,705    | )          | (60 | ) |
| Selling and marketing                         |       | 239,616                          |       | 183,933      |       | 55,683     |       | 30 |   |
| General and administrative                    |       | 665,877                          |       | 412,527      |       | 253,350    |       | 61 |   |
| Non-cash charges for stock-based compensation |       | 2,638                            |       | —       |       | 2,638      |       | — |   |
| Total expenses                                |       | 1,795,942                        |       | 1,070,697    |       | 725,245    |       | 68 |   |
|                                          |       |                             |       |         |       |       |       |   |   |
| Operating income (loss)                       |       | (220,083                         | )          | 577,023      |       | (797,106   | )          | (138 | ) |
|                                          |       |                             |       |         |       |       |       |   |   |
| Other income (expense), net                   |       | (23,028                          | )          | —       |       | (23,028    | )          | — |   |
|                                          |       |                             |       |         |       |       |       |   |   |
| Net Loss before  income taxes                 |       | $                                | (243,111   | )            | $          | 577,023    |       | (820,134 | ) | (142 | ) |

* *

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*Revenue —EC Service Bureau* — Revenue from our EC Service Bureau was35% of consolidated revenues for the 2006 Quarter compared to 38% for the 2005Quarter. The revenue decreased $72,000, or 4%, to $1,576,000 for the 2006Quarter compared to $1,648,000 for the 2005 Quarter. The revenue was primarilygenerated from services performed, customer support and licensing fees. Thedecrease was primarily the result of lower demand for these EDI services andcustomer attrition of $399,000 partially offset by a $327,000 increase as aresult of the Kodiak acquisition.

*Costof services — EC Service Bureau* — Cost of services relatingto our EC Service Bureau was 54% of revenue derived from the EC Service Bureauin the 2006 Quarter, compared to 23% of such revenue in the 2005 Quarter due tothe additional expenses associated with the operations required to support the largeincreases in the number of customers being serviced and from additionalexpenses allocated from the Kodiak operations. Cost of services relating to ourEC Service Bureau consists primarily of salaries and employee benefits,amortization, connectivity fees and rent. Cost of services relating to our ECService Bureau increased $470,000 to $849,000 in the 2006 Quarter from $379,000in the 2005 Quarter primarily due to an increase in salaries and benefits of$470,000 related to acquired businesses.

*Productdevelopment and enhancement — EC Service Bureau* — Productdevelopment and enhancement costs consist primarily of salaries and employeebenefits. Product development and enhancement costs incurred by our EC ServiceBureau decreased $57,000 to $38,000 in the 2006 Quarter from $95,000 in the2005 Quarter primarily as a result of a decrease in salaries and benefits.

*Sellingand marketing**— EC Service Bureau*— Selling and marketing expenses relating to our EC Service Bureau consistprimarily of salaries and employee benefits and amortization. Selling andmarketing expenses incurred by our EC Service Bureau increased $56,000 to$240,000 in the 2006 Quarter from $184,000 in the 2005 Quarter due to anincrease in amortization of capitalized customer relationships  of $19,000 and increased selling andmarketing expenses of $22,000 related to Kodiak services.

*Generaland administrative**— EC Service Bureau*— General and administrative expenses relating to our EC Service Bureau consistprimarily of salaries and employee benefits, office expenses, depreciation,telephone and rent. General and administrative expenses incurred by our ECService Bureau increased $253,000 to $666,000 in the 2006 Quarter from $413,000in the 2005 Quarter. Allocation of general and administrative expenses fromICC.NET increased $75,000, and bad debt expense increased $61,000 based on areview of accounts receivable collectibility. Expenses related to theacquisition of Kodiak were $204,000. These increases were partially offset by areduction in salaries and employee benefits of $84,000.

*Non-cashcharges — EC**Service Bureau* — Non-cash chargesof approximately $3,000 in the 2006 Quarter consist of stock options issued toemployees. No non-cash charge was recorded for the 2005 Quarter.

***Nine Months Ended April 30, 2006 Compared with Nine Months Ended April 30,2005.***

**Results of Operations —Consolidated**

**The following table reflects consolidated operating data byreported segments. All significant intersegment activity has been eliminated. Accordingly,the segment results below exclude the effect of transactions with oursubsidiaries.**

|                                                            | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                 | ** ** | **April 30,**              | ** ** |
| **Income (loss) before income taxes:** | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| ICC.NET                                                    |       | $                               | 1,618,342  |   | $ | (912,353 | ) |
| EC Service  Bureau                                         |       | 54,157                          |       | 518,477 |   |
| Income (loss) before  income taxes                         |       | $                               | 1,672,499  |   | $ | (393,876 | ) |

 

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**Results ofOperations — ICC.NET**

Our ICC.NETservice, our global Internet-based VAN, uses the Internet and our proprietarytechnology to deliver our customers’ documents and data files to members oftheir trading communities. The following table summarizes operating results forour ICC.NET service for the nine months ended April 30, 2006 and 2005:

|                                               | ** ** | **Nine Months Ended** | ** ** | ** **   | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|--------------|------------|------------|------------|
| ** **                                    | ** ** | **April 30,**              | ** ** | **Variance** | ** ** |
| ** **                                    | ** ** | **2006**                        | ** ** | **2005**     | ** ** | **$**      | ** ** | **%** | ** ** |
| Revenues:                                     |       |                            |       |         |       |       |       |   |   |
| VAN services                                  |       | $                               | 8,494,928  |         | $          | 7,809,292  |       | 685,636 |   | 9 |   |
| Professional services                         |       | 504,926                         |       | 323,801      |       | 181,125    |       | 56 |   |
| Mapping services                              |       | 114,235                         |       | 173,999      |       | (59,764    | )          | (34 | ) |
|                                          |       | 9,114,089                       |       | 8,307,092    |       | 806,997    |       | 10 |   |
| Expenses:                                     |       |                            |       |         |       |       |       |   |   |
| Cost of services                              |       | 2,560,295                       |       | 3,215,643    |       | (655,348   | )          | (20 | ) |
| Product development and enhancement           |       | 319,108                         |       | 396,005      |       | (76,897    | )          | (19 | ) |
| Selling and marketing                         |       | 869,708                         |       | 1,651,984    |       | (782,276   | )          | (47 | ) |
| General and administrative                    |       | 3,384,274                       |       | 3,430,536    |       | (46,262    | )          | (1 | ) |
| Non-cash charges for stock-based compensation |       | 532,838                         |       | 549,321      |       | (16,483    | )          | (3 | ) |
| Total Expenses                                |       | 7,666,223                       |       | 9,243,489    |       | (1,577,266 | )          | (17 | ) |
|                                          |       |                            |       |         |       |       |       |   |   |
| Operating income  (loss)                      |       | 1,447,866                       |       | (936,397     | )          | 2,384,263  |       | 255 |   |
|                                          |       |                            |       |         |       |       |       |   |   |
| Other income  (expense), net                  |       | 170,476                         |       | 24,044       |       | 146,432    |       | 609 |   |
|                                          |       |                            |       |         |       |       |       |   |   |
| Net Income (loss)  before income taxes        |       | $                               | 1,618,342  |         | $          | (912,353   | )          | 2,530,695 |   | 277 |   |

 

*Revenues — ICC.NET —* Revenue fromICC.NET services was 63% of consolidated revenues for the nine months ended April 30,2006 (“2006 Nine Months”) compared to 71% for the nine months ended April 30,2005 (“2005 Nine Months”), reflecting the increased revenue in the EC ServiceBureau segment due to our recent acquisitions (see Note 2 to our CondensedConsolidated Financial Statements for disclosures related to our recentacquisitions). ICC.NET service revenues increased $807,000, or 10%, to$9,114,000 for the 2006 Nine Months compared to $8,307,000 for the 2005 NineMonths. VAN service revenue increased $686,000, or 9%, to $8,495,000 for the2006 Nine Months compared to $7,809,000 for the 2005 Nine Months. The increasein VAN services revenue is attributable to an increase in transaction volume. Professionalservices revenue increased $181,000, or 56%, to $505,000 for the 2006 NineMonths compared to $324,000 for the 2005 Nine Months due to the Kodiak acquisition.Mapping services revenue decreased $60,000, or 34%, to $114,000 for the 2006Nine Months compared to $174,000 for the 2005 Nine Months. The demand for theseservices has decreased as we have accumulated numerous map configurations forvarious trading partners that may be shared by multiple customers.

*Cost of services — ICC.NET* — Cost of servicesrelating to our ICC.NET services was 28% of revenue from the ICC.NET servicesfor the 2006 Nine Months, compared to 39% for the 2005 Nine Months. Total cost ofservices decreased $655,000, or 20%, to $2,560,000 for the 2006 Nine Monthscompared to $3,215,000 for the 2005 Nine Months. Cost of services consistsprimarily of salaries and employee benefits, connectivity fees, amortization,allocation of product and development expenses and rent. This decrease wasprimarily the result of a $478,000 reduction in amortization due to mappingtechnology becoming fully amortized, a reduction in salaries and benefits of$184,000, and a $179,000 decrease in rent due primarily to a decrease in officespace allocation. These decreases were partially offset by a $244,000 increasein costs associated with the delivery of Kodiak services.

*Productdevelopment and enhancement**— ICC.NET**—* Productdevelopment and enhancement costs relating to our ICC.NET services consistprimarily of salaries and employee benefits. Product development andenhancement costs decreased $77,000 to $319,000 in the 2006 Nine Months from$396,000 in the 2005 Nine Months primarily due to a $77,000 decrease in rentdue primarily to a decrease in office space allocation.

*Sellingand marketing**— ICC.NET**—* Selling andmarketing expenses relating to our ICC.NET services consist primarily ofsalaries and employee benefits, rent, travel-related costs, advertising andtrade-show costs. Selling and marketing expenses relating to our ICC.NETservice decreased $782,000 to $870,000 in the 2006 Nine Months from $1,652,000in the 2005 Nine Months. This decrease was due primarily to a $387,000 decreasein 

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salaries and benefits, a $49,000 decrease in travelexpenses attributable to a decrease in the number of employees traveling, a$139,000 decrease in the office space allocation, and a $108,000 increase inthe ICC.NET allocation of a portion of the cost of selling and marketingfunctions to the EC Service Bureau.

*Generaland administrative**—**ICC.NET*— General and administrative expenses supporting our ICC.NET servicesconsist primarily of salaries and employee benefits, legal and professionalfees, facility costs, travel, meals and entertainment and insurance. Generaland administrative costs supporting our ICC.NET services decreased $46,000 to$3,384,000 in the 2006 Nine Months from $3,430,000 in the 2005 Nine Months. This decrease was primarily due to a decreasein consultant expenses of $91,000 related to Sarbanes-Oxley documentation, adecrease of $315,000 related to a greater ICC.NET allocation of the cost ofgeneral and administrative functions to the EC Service Bureau, and a onetime  accrual of $450,000 for a bonus programthat was made in the 2005 Nine Months. These decreases were partially offset bya one-time buyout of office space in Cary, North Carolina of $120,000,severance expense of $88,000, additions to bad debt expense of $207,000following a review of accounts receivable collectibility, an increase inprofessional fees of $106,000, an increase in depreciation of $49,000, anincrease in printing costs of $34,000, additional reoccurring general andadministrative expenses from the acquired Kodiak operations of $139,000 as wellas board of director’s fees of $90,000.

*Non-cash charges**— ICC.NET**—* Non-cash charges ofapproximately $533,000 in the 2006 Nine Months consist of $518,000 for stockoptions issued to employees and directors and an accrual of $54,000 for sharesrelated to first quarter 2006 directors’ fees offset by the reversal of a$39,000 over-accrual for shares related to director’s fees ranging from April 2005through October 2005. Non-cash charges of approximately $549,000 in the2005 Nine Months consist of $420,000 for stock options issued to employees anddirectors and $129,000 for shares of our class A common stock issued tonon-employee directors as compensation for 2005 directors’ fees.

**Results ofOperations — EC Service Bureau**

OurEC Service Bureau manages and translates supply chain information for small andmid-sized companies that exchange EDI data with other companies and providesvarious EDI and UPC services. Our EC Service Bureau also licenses EDI software,which amounts are immaterial for the periods presented. The following tablesummarizes operating results for our EC Service Bureau for the nine monthsended April 30, 2006 and 2005:

|                                               | ** ** | **Nine Months Ended** | ** ** | ** **   | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|--------------|------------|------------|------------|
| ** **                                    | ** ** | **April 30,**              | ** ** | **Variance** | ** ** |
| ** **                                    | ** ** | **2006**                        | ** ** | **2005**     | ** ** | **$**      | ** ** | **%** | ** ** |
| Revenues:                                     |       |                            |       |         |       |       |       |   |   |
| Services                                      |       | $                               | 5,451,299  |         | $          | 3,320,748  |       | 2,130,551 |   | 64 |   |
|                                          |       |                            |       |         |       |       |       |   |   |
| Expenses:                                     |       |                            |       |         |       |       |       |   |   |
| Cost of services                              |       | 2,659,206                       |       | 881,312      |       | 1,777,894  |       | 202 |   |
| Product development and enhancement           |       | 169,060                         |       | 265,400      |       | (96,340    | )          | (36 | ) |
| Selling and marketing                         |       | 635,291                         |       | 482,240      |       | 153,051    |       | 32 |   |
| General and administrative                    |       | 1,794,787                       |       | 1,173,319    |       | 621,468    |       | 53 |   |
| Non-cash charges for stock-based compensation |       | 21,445                          |       | —       |       | 21,445     |       | — |   |
| Total expenses                                |       | 5,279,789                       |       | 2,802,271    |       | 2,477,518  |       | 88 |   |
|                                          |       |                            |       |         |       |       |       |   |   |
| Operating income  (loss)                      |       | 171,510                         |       | 518,477      |       | (346,967   | )          | 67 |   |
|                                          |       |                            |       |         |       |       |       |   |   |
| Other income  (expense), net                  |       | (117,353                        | )          | —       |       | (117,353   | )          | — |   |
|                                          |       |                            |       |         |       |       |       |   |   |
| Net Income  (loss) before income taxes        |       | $                               | 54,157     |         | $          | 518,477    |       | (464,320 | ) | (90 | ) |

 

*Revenue — EC Service Bureau* —Revenue from our EC Service Bureau was 37% of consolidated revenues for the2006 Nine Months compared to 29% for the 2005 Nine Months. The revenueincreased $2,130,000, or 64%, to $5,451,000 for the 2006 Nine Months comparedto $3,321,000 for the 2005 Nine Months. The revenue was primarily generatedfrom services performed, customer support and licensing fees. The increaseoccurred as a result of our recent acquisitions.

*Cost of services — EC Service Bureau* —Cost of services relating to our EC Service Bureau was 49% of revenue derivedfrom the EC Service Bureau in the 2006 Nine Months, compared to 27% of suchrevenue in the 

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2005 Nine Months due to additional expenses associatedwith the operations required to support the large increases in the number ofcustomers being serviced and from additional expenses allocated from the Kodiakoperations. Cost of services relating to our EC Service Bureau consistsprimarily of salaries and employee benefits, amortization, connectivity feesand rent. Cost of services relating to our EC Service Bureau increased$1,778,000 to $2,659,000 in the 2006 Nine Months from $881,000 in the 2005 NineMonths primarily due to an increase in salaries and benefits of $1,692,000related to the additional personnel required to support the increase inrevenues.

*Productdevelopment and enhancement — EC Service Bureau**—* Product development and enhancementcosts consist primarily of salaries and employee benefits. Product developmentand enhancement costs incurred by our EC Service Bureau decreased $96,000 to$169,000 in the 2006 Nine Months from $265,000 in the 2005 Nine Monthsprimarily due to a reduction in salaries and benefits of $83,000.

*Selling and marketing**— EC Service Bureau**—* Selling and marketing expenses relatingto our EC Service Bureau consist primarily of salaries and employee benefitsand amortization. Selling and marketing expenses incurred by our EC ServiceBureau increased $153,000 to $635,000 in the 2006 Nine Months from $482,000 inthe 2005 Nine Months due to an increase in amortization of capitalized customerrelationships of $93,000, an increase in the ICC.NET allocation of a portion ofthe cost of selling and marketing functions to the EC Service Bureau of$108,000, and increased expenses of $81,000 related to Kodiak operations. Theseincreases were partially offset by a decrease in salaries and benefits of$93,000.

*General and administrative**— EC Service Bureau**—* General and administrative expensesrelating to our EC Service Bureau consist primarily of salaries and employeebenefits, office expenses, depreciation, telephone and rent. General andadministrative expenses incurred by our EC Service Bureau increased $622,000 to$1,795,000 in the 2006 Nine Months from $1,173,000 in the 2005 Nine Months. Allocationof general and administrative expenses from ICC.NET increased $315,000, and baddebt expense increased $186,000 based on a review of accounts receivablecollectibility. Expenses related to Kodiak operations were $395,000. Theseincreases were partially offset by a reduction in salaries and employee benefitsof $189,000 and a reduction in consultant expenses of $29,000.

*Non-cashcharges — EC**Service Bureau**—* Non-cash charges of approximately $21,000 in the2006 Nine Months consist of stock options issued to employees. No non-cashcharge was recorded for the 2005 Nine Months.

**Liquidity andCapital Resources**

Our principal sources of liquidity, which consist of unrestricted cashand cash equivalents, increased to $8,390,000 as of April 30, 2006 from$3,983,000 as of July 31, 2005. We believe these resources will provide uswith sufficient liquidity to continue in operation through April 30, 2007.

On March 16,2006, our Accounts Receivable Financing Agreement with Silicon Valley Bank (“Bank”)expired. We are currently in negotiations with the Bank for a newly structuredfinancing arrangement. There can be no assurances that we will complete a newfacility acceptable to the Company.

During the quarterending April 30, 2006, 137,331 stock options were exercised resulting inthe issuance of an equal number of shares of class A common stock forwhich we received $298,243.

On March 17,2006, we issued notice to the holders of 1,620,279 warrants exercisable intothe same number of our class A common stock that we were going to redeem thewarrants for $.10 per warrant if they were not exercised. These warrants wereoriginally issued in private placements that closed on April 30 and May 1of 2003. According to the terms of the warrants, the Company could redeem thewarrant at a price of $0.10 per warrant if at any time the closing bid priceper share of the class A common stock exceed 200% of the warrant exercise priceof $1.47 for a period of 30 consecutive trading days ending no more than fivedays prior to the date fixed for redemption. In response to the redemption notice,all of these warrant holders exercised their warrants resulting in ourreceiving $2,381,790 in cash during the quarter ending April 30, 2006.

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In addition, theholders of 279,676 warrants exercisable into the same number of our class Acommon Stock at $2.22 per share that were originally issued in a privateplacement that closed in April of 2004 voluntarily exercised theirwarrants, resulting in our receiving $620,881 in cash during the quarter endingApril 30, 2006.

We have a netoperating loss carryforward of approximately $74.8 million to offset futuretaxable income for federal income tax purposes. The utilization of the losscarryforward to reduce any such future income taxes will depend on our abilityto generate sufficient taxable income prior to the expiration of the netoperating loss carryforwards. The carryforwards expire from 2007 to 2024. TheInternal Revenue Code of 1986, as amended, and the regulations promulgatedthereunder contain provisions that limit the use of available net operating losscarryforwards in any given year should significant changes (greater than 50%)in ownership interests occur. Due to a private placement of series A preferredstock in April 1999, the net operating loss carryover of approximately$19.7 million incurred prior to the private placement and subsequent to theinitial public offering is subject to an annual limitation of approximately$1.4 million until that portion of the net operating loss is utilized orexpires. Due to the 100% ownership change when we acquired Research TriangleCommerce, Inc. (“RTCI”) in November 2000, RTCI’s net operating lossof approximately $6.3 million incurred prior to the ownership change is subjectto an annual limitation of approximately $1.1 million until that portion of thenet operating loss is utilized or expires. Additionally, the issuance of ICCstock in connection with the RTCI acquisition noted above resulted in anownership change for ICC in November 2000. The ICC net operating losscarryforward of approximately $49.4 million incurred prior to the ownershipchange is subject to an annual limitation of approximately $2.8 million untilthat portion of net operating loss is utilized or expires. Finally, due to a100% ownership change of Electronic Commerce Systems, Inc. (“ECS”) in June 2004,the acquired net operating loss of approximately $1.1 million incurred prior tothe ownership change is subject to an annual limitation of approximately$128,000 until that portion of the net operating loss is utilized or expires.

**ConsolidatedWorking Capital**

Consolidatedworking capital increased to $10,518,000 at April 30, 2006 from $4,864,000at July 31, 2005. This increase was primarily due to an increase in cashof $4,407,000 primarily resulting from the exercise of warrants and stock options,a decrease in accrued expenses of $900,000 primarily due to the cash paymentsunder our 2005 bonus program, and a decrease in other current liabilities of$509,000 primarily due to the payment of rent due on previously acquired officespace.

**Analysis of CashFlows**

Cash provided by operatingactivities was $2,123,000 in the nine months ended April 30, 2006 comparedto cash used by operating activities of $18,000 in the nine months ended April 30,2005. The increase in the nine months ended April 30, 2006 of $2,141,000was primarily the result of net income of $1,645,000 in the nine months ended April 30,2006 compared to a net loss of $394,000 in the nine months ended April 30,2005.

Cash used in investingactivities increased to $1,362,000 in the nine months ended April 30, 2006from $162,000 in the nine months ended April 30, 2005. Cash used ininvesting activities in the nine months ended April  30, 2006 resultedfrom the purchase of property and equipment of $411,000, additional costsrelating to the acquisitions of $951,000. Cash used in investing activities inthe nine months ended April 30, 2005 resulted from the purchase ofproperty and equipment of $272,000, additional costs relating to acquisitionsof $121,000, offset by cash acquired in acquisitions of $231,351.

Cash provided byfinancing activities was $3,646,000 in the nine months ended April 30,2006 compared to cash used in financing activities of $33,000 in the ninemonths ended April 30, 2005. Cash provided by financing activities in the ninemonths ended April 30, 2006 was the result of proceeds from the exerciseof employee stock options of $647,000, and proceeds from the exercise ofwarrants of $3,003,000, offset by payments of capital lease obligations ofapproximately $4,000. Cash used in financing activities in the nine monthsended April 30, 2005 was the result of common stock issued for servicesrelated to the 2004 private placement of $24,000, capital lease payments of$45,000, offset by the proceeds of $34,775 from the exercise of employee stockoptions.

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**Item 3. Quantitativeand Qualitative Disclosures About Market Risk**

**Interest Rate Risk**

We may invest our cash in a variety of financialinstruments, including taxable and tax-advantaged floating rate and fixed rateobligations of corporations, municipalities, and local, state and nationalgovernmental entities and agencies. We account for our investment instrumentsin accordance with Statement of Financial Accounting Standards No. 115, “Accountingfor Certain Investments in Debt and Equity Securities” (“SFAS No. 115”). Allof the cash equivalents and investments are treated as available-for-sale underSFAS No. 115. Investments that are classified as cash and cash equivalentshave original maturities of three months or less. Investments in both fixedrate and floating rate interest earning instruments carry a degree of interestrate risk. Fixed rate securities may have their fair market value adverselyimpacted due to a rise in interest rates, while floating rate securities mayproduce less income than expected if interest rates fall. Due in part to thesefactors, our future investment income may fall short of expectations due tochanges in interest rates, or we may suffer losses in principal if forced tosell securities that have seen a decline in market value due to changes ininterest rates. For the quarter ended April 30, 2006, our cashinvestments, if any, 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, 2006, the interest rate for thisinvestment was 4.11%.

**Item 4. Controlsand 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, 2006, pursuantto Exchange Act Rules 13(a)-15(e) and 15(d)-15(e). Basedupon that evaluation, our chief executive officer and chief financial officerhave concluded that as of such date, our disclosure controls and procedures areeffective. There was no change in our internal control over financial reportingduring the quarter ended April 30, 2006 that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

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** **

**PART II.OTHER INFORMATION**

**Item 1.    Legal Proceedings**

In May 2006,Internet Commerce Corporation, a Georgia corporation with the identical name asthe Company (the “Plaintiff”), filed a lawsuit against the Company allegingclaims for federal and state service mark infringement, federal unfaircompetition, dilution of service mark, unfair competition and deceptive tradepractices and claims under the Georgia Deceptive Trade Practices Act based uponthe Plaintiff’s claim that it has priority of the use of the services marks “InternetCommerce Corporation” and “ICC.”  TheCompany believes the claims are without merit and intends to vigorously defendthe action.

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

**Item 1A.     RiskFactors**

The following Risk Factor disclosure updates the riskfactors as disclosed in our 2005 annual report on Form 10-Kpreviously filed with the Securities and Exchange Commission.

***Risks Relating to Our Company***

***Wehave only recently begun to realize a profit, and may incur losses again.***Wereported our first profit ever for the fiscal year ending July 31, 2005. Therecan be no assurances that we may not incur losses again in the future. We haveincurred significant losses since we were founded in 1991, and, as of July 31,2005, we had an accumulated deficit of approximately $85.7 million.

***Wemust continue to grow our business in order to remain competitive.***Overthe past year, the VAN business has remained significantly price competitive. Ourmajor competitors appear to be restructuring their VAN operations to reducetheir overhead and other costs to better compete against Internet-basednetworks such as our ICC.NET service. While we have been successful inmaintaining our margins and we have increased the volume of data transmittedthrough our VAN, we have experienced price erosion in competing for largercustomers. Although we expect to continue to add new customers and increase thevolume of data transmitted through our service, we do not expect our revenuefrom VAN services to continue to grow as rapidly as in the past. If ourrevenues grow at a slower rate than we anticipate, or decrease and we areunable to adjust spending in a timely manner or if our expenses increasewithout commensurate increases in revenues, our operating results will sufferand we may again report losses.

***If weare not successful in selling our products and services, particularly from ourEC Service Bureau segment, 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 in June 2004,the MEC operations of Inovis International, Inc. in March 2005 andEnable Corp. in May 2006. Following the acquisition of Enable, we expectthe revenue from the ICC.NET segment will be approximately 55% of totalrevenue, the revenue from the EC Service Bureau segment will be approximately25% of total revenue, and the revenue from Enable will be approximately 20% oftotal revenue. However, the success of our services depends to a large extenton the future of business-to-business electronic commerce and our ability toeffectively compete in the marketplace. In particular, our success depends onthe number of customers that subscribe to our services, the volume of the data,documents or other information they send or retrieve and the price we are ableto charge for these services in light of competitive pressures. In connectionwith the assimilation of our new customers acquired from the MEC operation andthe Enable acquisition, we anticipate to see attrition to these newly acquiredcustomer bases due to the seasonal trends, integration difficulties, andcustomer defections to alternative EDI solutions. As a result, a portion of ourrevenues may be adversely affected. While we are learning to manage these newcustomers, there is no assurance that we will accurately assess the trends ofthese new customers. Accordingly, the value of these new customers, the volumeof our services subscribed by them and the possibility of payment collectionmay 

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differ materiallyfrom our current expectation. Further, since our operating expense levels arebased significantly on our expectations of future revenue, our inability toassess the trends may render us vulnerable in the case of a significantshortfall in revenues or orders from these new customers, in which case we maynot be able to reduce our operating expenses quickly in response. Therefore,any significant shortfall in revenue or orders could have an immediate adverseeffect on our operating results.

***Wemay not be successful in competing against our competitors.***Weface a significant number of competitors, ranging from very large enterprisesor divisions of very large companies to a number of relatively smallorganizations. These competitors are diverse in terms of their histories,business models, corporate strategies, financial strength, name recognition, companyreputation, customer base and breadth of offerings. Many of our largecompetitors have more history, significantly greater financial resources,larger customer bases and more easily recognized names than we do. As a result,our competitors may be able to respond more quickly to changing technology andchanges in customer requirements or be able to undertake more extensivemarketing campaigns, 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 product offerings in the marketplace.

***If weare unable to maintain or replace our existing interconnect arrangements, ourresults of operations would suffer.***We rely on many ofour competitors to interconnect with our service to promote an “open community”so all businesses can take advantage of the efficiencies of EDI, no matter whatnetwork they choose as their provider. In September 2001 and April 2002,two of our competitors, GXS and Sterling Commerce, terminated existinginterconnect agreements with us, and we made alternative arrangements to serveour customers. However, GXS has subsequently purchased the company that wasproviding our alternative arrangement. Although we had a contract forinterconnect services at a fixed price with the combined GXS through April 2006,after which the contract renews on a monthly basis, there can be no assurancesthat the contract will continue with acceptable pricing. If the pricingmaterially changes, we will have to find an acceptable alternative.

***Wemust continue to develop new products and services.***If wedo not keep pace with rapid technological changes, customer demands and intensecompetition, we will not be successful. Our market is characterized by rapidlychanging technology, customer demands and intense competition. The satisfactoryperformance, reliability and availability of our network infrastructure,customer support and document delivery systems and our web site are critical toour reputation and our ability to attract customers and maintain adequatecustomer service levels. If we cannot keep pace with these changes and maintainthe performance and reliability of our network and customer service levels, ourbusiness will suffer. The Internet’s recent growth and the intense competitionin our industry require us to continually develop strategic business andInternet solutions that enhance and improve the customer service features,functions and responsiveness of all of our existing or proposed services andthat we keep pace with competitive changes in information technology andcustomer requirements. However, there can be no assurance that we will be ableto keep pace with these changes, and if we are not successful in developing andmarketing enhancements to all of our services or customer demands, our businesswill suffer.

***Wemay need to obtain additional financing on satisfactory terms to continue tocompete successfully.***If we are unable to obtainnecessary future capital, our business will suffer. We may need to raiseadditional funds if competitive pressures or technological changes are greaterthan anticipated, if we are unable to increase revenue at anticipated rates, ifour expenses increase significantly or if our customers delay payment of ourreceivables or if we identify a suitable acquisition candidate that requires acash outlay in order to complete the transaction. We cannot assure you that anyadditional financing will be available on reasonable terms or at all. Raisingadditional funds in the future by issuing securities could adversely affect ourstockholders and negatively impact our operating results. If we raiseadditional funds through the issuance of debt securities, the holders of thedebt securities will have a claim to our assets that will have priority overany claim of our stockholders. The interest on these debt securities wouldincrease our costs and negatively impact our operating results. If we raiseadditional funds through the issuance of class A common stock or securitiesconvertible into or exchangeable for class A common stock, the 

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percentageownership of our then-existing stockholders will decrease and they mayexperience additional dilution. In addition, any convertible or exchangeablesecurities may have rights, preferences and privileges more favorable to theholders than those of the class A common stock.

***Werely on third parties to provide our services, and any failure of such thirdparties could adversely affect our business.***Failure ofour third-party providers to provide adequate Internet and telecommunicationsservice could result in significant losses of revenue. Our operations dependupon third parties for Internet access and telecommunications service. Frequentor prolonged interruptions of these services could result in significant lossesof revenues. We have experienced outages in the past and could experienceoutages, delays and other difficulties due to system failures unrelated to ourinternal activities in the future. These types of occurrences could also causeusers to perceive our services as not functioning properly and therefore causethem to use other methods to deliver and receive information. We have limitedcontrol over these third parties and cannot assure you that we will be able tomaintain satisfactory relationships with any of them on acceptable commercialterms or that the quality of services that they provide will remain at thelevels needed to enable us to conduct our business effectively.

***Wemay suffer systems failures and business interruptions that would harm ourbusiness.***Our success depends in part on the efficientand uninterrupted operation of our VAN service and Enable’s web hosting sites. Almostall of our network operating systems are located in third party co-locationfacilities. Although these facilities are designed to prevent operationalinterrupts, our systems are vulnerable to events such as damage from fire,power loss, telecommunications failures, break-ins and earthquakes. This couldlead to interruptions or delays in our service, loss of data or the inabilityto accept, transmit and confirm customer documents and data. Although we haveimplemented network security measures, our servers may be vulnerable tocomputer viruses, electronic break-ins, attempts by third parties todeliberately exceed the capacity of our systems and similar disruptions.

***If weare unable to manage our growth or successfully integrate acquisitions, ourfinancial results will suffer.***Our ability to implementour business plan successfully in a new and rapidly evolving market requireseffective planning and growth management. If we cannot manage the integrationof anticipated acquisitions, our business and financial results will suffer. Weexpect that we will need to continue to manage and to expand multiplerelationships with customers, Internet service providers and other thirdparties. We also expect that we will need to continue to improve our financialsystems, procedures and controls and will need to expand, train and manage ourworkforce, particularly our information technology and sales and marketingstaffs.

***If welose our net operating loss carryforward, our financial results will suffer.***Asof April 30, 2006, our net operating loss carryforward was approximately$74.8 million. Section 382 of the Internal Revenue Code contains rules designedto discourage 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 inadvertently create a limitationon our ability to utilize our net operating losses for tax purposes in thefuture. We are currently subject to a limitation on the utilization of aportion of our net operating loss carryforward.

***If we cannot successfully expandour business outside of the United States, our revenues and operating resultsmay be adversely affected.***Our current and futurecustomers are conducting their businesses internationally. As a result, onecomponent of our business strategy is to expand our international marketing andsales efforts, and if we do not successfully expand our business in this way,we may lose current and future customers.

***If wecannot hire and retain highly qualified employees, our business and financialresults will suffer.***We are substantially dependent onthe continued services and performance of our executive officers and other keyemployees. If we are unable to attract, assimilate and retain highly qualifiedemployees, our management may not be able to effectively manage our business,exploit opportunities and respond to competitive challenges and our businessand financial results will suffer. Many of our competitors may be able to offermore lucrative compensation packages and higher-profile employmentopportunities than we can.

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***Wedepend on our intellectual property, which may be difficult and costly toprotect.***If we fail to adequately protect our proprietaryrights, competitors could offer similar products relying on technologies wedeveloped, potentially harming our competitive position and decreasing our revenues.We attempt to protect our intellectual property rights by limiting access tothe distribution of our software, documentation and other proprietaryinformation and by relying on a combination of patent, copyright, trademark andtrade secret laws. In addition, we enter into confidentiality agreements withour employees and certain customers, vendors and strategic partners. In somecircumstances, however, we may, if required by a business relationship, provideour licensees with access to our data model and other proprietary informationunderlying our licensed applications. Despite the precautions we take, it maybe possible for unauthorized third parties to copy aspects of our current orfuture products or to obtain and use information that we regard as proprietary.Policing unauthorized use of software is difficult, and some foreign laws donot protect proprietary rights to the same extent as United States laws. Litigationmay be necessary in the future to enforce our intellectual property rights, toprotect our trade secrets or to determine the validity and scope of theproprietary rights of others, any of which could be costly and adversely affectour operating results.

***Intellectualproperty infringement claims against us could harm our business.***Ourbusiness activities and our service offerings may infringe upon the proprietaryrights of others and other parties may assert infringement claims against us. Anysuch claims and any resulting litigation could subject us to significantliability for damages and could invalidate our proprietary rights. We could berequired to enter into royalty and licensing agreements, which may be costly orotherwise burdensome or which may not be available on terms acceptable to us.

***Wemust comply in the future with new and costly reporting requirements.***Undercurrent and proposed SEC regulations, we are considered a non-accelerated filerand will have to be compliant with Section 404 of the Sarbanes-Oxley Actof 2002 (“SOX”) on or about July 31, 2008. The costs of implementing therequirements of the SOX for companies of our size have ranged fromapproximately $500,000 to over $1 million. Although we began our SOX complianceefforts in fiscal year ending July 31, 2005, there can be no assurancethat we can be in full compliance when required for reasonable costs.

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

***IfInternet usage does not continue to grow or if its infrastructure fails, ourbusiness will suffer.***If the Internet does not gainincreased acceptance for business-to-business electronic commerce, the growthof our business will be adversely affected. We cannot be certain that theinfrastructure or complementary services necessary to maintain the Internet asa useful and easy means of transferring documents and data will continue todevelop. The Internet infrastructure may not support the demands that growthmay place on it and the performance and reliability of the Internet maydecline.

***Privacyconcerns may prevent customers from using our services.***Concernsabout the security of online transactions and the privacy of users may inhibitthe growth of the Internet as a means of delivering business documents and data.We may need to incur significant expenses to protect against the threat ofsecurity breaches or to alleviate problems caused by security breaches. We relyupon encryption and authentication technology to provide secure transmission ofconfidential information. If our security measures do not prevent securitybreaches, we could suffer operating losses, damage to our reputation,litigation and possible liability. Advances in computer capabilities, newdiscoveries in the field of cryptography or other developments that rendercurrent encryption technology outdated may result in a breach of our encryptionand authentication technology and could enable an outside party to stealproprietary information or interrupt our operations.

***Governmentregulation and legal uncertainties relating to the Internet could harm ourbusiness.***Changes in the regulatory environment in theUnited States and other countries could decrease our revenues and increase ourcosts. The Internet is largely unregulated and the laws governing the Internetremain unsettled, even in areas where there has been some legislative action. Itmay take years to determine whether and how existing laws such as thosegoverning intellectual property, privacy and taxation apply to the Internet. Inaddition, because of increasing popularity and use of the Internet, any numberof laws and 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, content and distribution. The cost oftransmitting documents and data over the Internet could increase. We may not beable to increase our prices to cover these rising costs. Also, foreign and 

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state laws andregulations relating to the provision of services over the Internet are stilldeveloping. If individual states or foreign countries impose taxes or laws thatnegatively impact services provided over the Internet, our cost of providingour ICC.NET and other services may increase.

***Risks Relating to our class A common stock***

***Themarket price of our common stock is likely to be highly volatile***.During fiscal 2006, the market price of our class A common stock has been veryvolatile, ranging from a low of $1.82 to a high of $4.66, and is likely tofluctuate substantially in the future. If our class A common stock falls under$1.00 per share and fails to maintain a minimum bid price of $1.00 for 30consecutive trading days, it may no longer be eligible for trading in theNasdaq Capital Market, which would adversely affect the ability of investors tosell their shares of our class A common stock.

***Shareseligible for future sale by our existing stockholders may adversely affect ourstock price.***Since January 1, 2003, we haveregistered the resale under the Securities Act of 1933 of an aggregate of9,987,817 shares of our class A common stock. Those shares include 3,016,917shares of class A common stock issuable upon the exercise of warrants topurchase shares of class A common stock, of which 1,971,658 shares have beenissued upon warrant exercises in fiscal 2006, and 192,307 shares of class Acommon stock issuable upon conversion of our series D preferred stock. Themarket price of our class A common stock could be materially and adverselyaffected by sales of even a small percentage of these shares or the perceptionthat these sales could occur. As a result, it may be difficult to sell ourclass A common stock

***Thereis not a significant demand for our class A common stock, which may make itdifficult to sell.***The market for our class A commonstock on the Nasdaq Capital Market may be illiquid, which would restrict theability to sell shares of class A common stock and could result in increasedvolatility in the trading prices 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.

***OurBoard of Directors can issue preferred stock with rights adverse to the holdersof class A common stock.***Our Board of Directors isauthorized, without further stockholder approval, to determine the provisionsof and to issue up to 4,979,575 shares of preferred stock. Issuance ofpreferred shares with rights to dividends and other distributions, votingrights or other rights superior to the class A common stock could be adverse tothe holders of class A common stock. In addition, issuance of preferred sharescould have the effect of delaying, deterring or preventing an unsolicitedchange in control of our company, or could impose various procedural and otherrequirements that could make it more difficult for holders of our class Acommon stock to effect certain corporate actions, including the replacement ofincumbent directors and the completion of transactions opposed by the incumbentBoard of Directors. The rights of the holders of our class A common stock wouldbe subject to, and may be adversely affected by, the rights of the holders ofany preferred stock that may be issued in the future.

***Wemay have to use significant resources indemnifying our officers and directorsor paying for damages caused by their conduct.***TheDelaware 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.

***Wemight not be able to retire the series C preferred stock, the existence ofwhich would pose an impediment to our future fund raising efforts.***Webelieve the 4% annual dividend and the $10,000,000 liquidating preference ofour series C preferred stock inhibit our ability to raise capital. In 2005, webegan discussions with Cable & Wireless, PLC (“C&W”), thepurported owner of the series C preferred stock, about retiring the series Cpreferred stock. As these discussions progressed, we realized that there wassubstantial evidence that the series C preferred stock was held by Cable &Wireless USA (“C&W USA”), a formerly wholly owned subsidiary of C&Wthat filed Chapter 11 bankruptcy in the United States on December 8, 2003.On January 6, 2006 we filed a 

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complaint fordeclaratory judgment in the United States Bankruptcy Court naming OmegaLiquidating Trust (“Omega”) and C&W as defendants. We seek to have Omega,as the liquidating trust for the bankrupt C&W USA, declared the rightfulowner of our series C preferred stock and of any of our class A common stockthat have been issued but not distributed as dividends of the series C preferredstock. There can be no assurance that the ownership issue will be resolvedwithin a reasonable timeframe. Even if the ownership is ever established, wecannot be assured that we will be able to reach acceptable terms with the ownerof the series C preferred stock to retire the stock.

**Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds**

On April 19and May 3, 2006, we issued a total of 65,857 shares of class A commonstock in consideration for an aggregate price of $146,203, or $2.22 per share,in private placement transactions. These shares were issued upon the exerciseof outstanding warrants issued in 2004 in connection with a private placementof the class A common stock.

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

**Item 3. DefaultsUpon Senior Securities**

On October 14, 2004, our Board of Directorsdeclared a dividend on our series C preferred stock for 2004 payable on January 1,2005 in shares of class A common stock in the amount of $400,000, which, perthe terms of the series C preferred stock, amounted to 236,267 shares. We laterrealized that there was substantial evidence that the series C preferred stockwas held by Cable & Wireless USA, a formerly wholly owned subsidiaryof C&W that filed Chapter 11 bankruptcy in the United States on December 8,2003. As of January 1, 2006 an additional dividend to be paid in shares ofclass A common stock in the amount of $400,000, which, per the terms of theseries C preferred stock, amounted to 141,844 shares came due. On January 6,2006 we filed a complaint for declaratory judgment in the United StatesBankruptcy Court (“the Court”) seeking to have Omega, as the liquidating trustfor the bankrupt Cable & Wireless USA, declared the rightful owner ofour series C preferred stock and of any of our class A common stock that havebeen issued but not distributed as dividends of the series C preferred stock. Wehave recorded the issuance of the shares as payment for the dividend but willnot issue the certificate representing these additional shares of class Acommon stock until the ownership of these shares is conclusively settled in theCourt.

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

None.

**Item5. Other Information**

**       None.**

**Item 6. Exhibits**

3.1                                 Amendmentsto the Amended and Restated By-laws, as approved and adopted in the AnnualMeeting of Stockholders held on January 4, 2006.

31.1                           Certificationof the Chief Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

31.2                           Certificationof the Chief Financial Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

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

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*                    Inaccordance with Release No. 34-47986, this Exhibit is herebyfurnished to the SEC as an accompanying document and is not deemed “filed” forpurposes 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.

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

Date:  June 12, 2006
|        | **INTERNET COMMERCE CORPORATION** |
|--------|-----------------------------------|
|   |                              |   |
|        | By:                               | /s/ Thomas J. Stallings |
|   |                              | Thomas J. Stallings  Chief Executive Officer |
|   |                              |   |
|   | By:                               | /s/ Glen E. Shipley |
|   |                              | Glen E. Shipley  Chief Financial Officer |

 

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**EXHIBIT INDEX**
| Exhibit No.  | ** ** | **Document**                                                                                                                                  |
|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
| ** **        | ** ** | ** **                                                                                                                                    |
| Exhibit 3.1  |       | Amendments to the Amended and Restated By-laws, as  approved and adopted in the Annual Meeting of Stockholders held on  January 4, 2006. |
|              |       |                                                                                                                                          |
| Exhibit 31.1 |       | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                  |
|              |       |                                                                                                                                          |
| Exhibit 31.2 |       | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                  |
|              |       |                                                                                                                                          |
| Exhibit 32.1 |       | Certification of the Chief Executive Officer and  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002*    |

 

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*In accordancewith Release No. 34-47986, this Exhibit is hereby furnished tothe SEC as an accompanying document and is not deemed “filed” for purposes of Section 18of the Securities Exchange Act of 1934 or otherwise subject to the liabilitiesof that Section, nor shall it be deemed incorporated by reference into anyfiling under the Securities Act of 1933.

 

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