**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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**Form 10-Q**

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

**Forthe quarterly period ended December 31, 2006**

**OR**

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

**Forthe transition period from         to**

**Commissionfile number 333-135533**

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**Hostopia.comInc.**

(Exact name of Registrant as specified in its charter)

* *

| **Delaware**                                                    |   | **7372**                                                                | **65-1036866**                          |
|-----------------------------------------------------------------|--------|-------------------------------------------------------------------------|-----------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (Primary  Standard Industrial Classification Code Number)               | (I.R.S. Employer    Identification No.) |
| * *                                                        |   | ** **                                                              | ** **                              |
| ** **                                                      |   | **110  East Broward Blvd., Suite 1650  Fort Lauderdale, Florida 33301** |                                    |
| ** **                                                      |   | **(954)  463-3080**                                                     |                                    |

(Address, including zip code, and telephone number, including area code, of Registrant’sprincipal executive office)

Indicateby 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 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired 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, accelerated filer, or non-accelerated filer.  See definition of “accelerated filer” and “largeaccelerated filer” in Rule 12b-2 of the Exchange Act:

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act):

Yes  o  No  x

Asof February 9, 2007, there were 11,050,531 outstanding shares of common stock,par value $0.0001, of the registrant.

 

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**HOSTOPIA.COMINC.**

**QuarterlyReport on Form 10-Q**

**INDEX**
| **PART I**                |
|---------------------------|
| **FINANCIAL INFORMATION** |
| ** **                |
| Item 1                    | Financial Statements |
|                      |   |
|                      | Consolidated Balance  Sheets as of December 31, 2006 (unaudited) and March 31, 2006 |
|                      |   |
|                      | Consolidated  Statements of Operations (unaudited) for the three months and nine months ended  December 31, 2006 and 2005 |
|                      |   |
|                      | Consolidated  Statements of Cash Flows (unaudited) for the nine months ended December 31,  2006 and 2005 |
|                      |   |
|                      | Notes to  Unaudited  Consolidated Financial  Statements |
|                      |   |
| Item 2                    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                      |   |
| Item 3                    | Quantitative  and Qualitative Disclosures About Market Risk |
|                      |   |
| Item 4                    | Controls and  Procedures |

 
| **PART II**           |
|-----------------------|
| **OTHER INFORMATION** |
| ** **            |
| Item  1               | Legal  Proceedings |
|                  |   |
| Item  2               | Unregistered  Sales of Equity Securities and Use of Proceeds |
|                  |   |
| Item 3                | Defaults Upon Senior  Securities |
|                  |   |
| Item 4                | Submission of Matters  to a Vote of Security Holders |
|                  |   |
| Item  5               | Other  Information |
|                  |   |
| Item 6                | Exhibits |
|                  |   |
| Signatures            |

 

2

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**PART IFINANCIAL INFORMATION**

**Item 1.  Financial Statements**

**Hostopia.com Inc.Consolidated Balance Sheets(Expressed in U.S. dollars)**
| ** **                                                                                                 | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                 | ** ** | **2006**              | ** ** | **2006**           | ** ** |
| ** **                                                                                                 | ** ** | **(Unaudited)**       | ** ** | ** **         | ** ** |
| **Assets**                                                                                                 | ** ** | ** **            | ** ** | ** **         | ** ** |
| Current assets:                                                                                            |       |                  |       |               |       |
| Cash and cash  equivalents                                                                                 |       | $                     | 25,696,363 |               | $          | 3,038,217 |   |
| Trade accounts  receivable, net of allowance for doubtful accounts of $97,533; (March 31,  2006 - $48,650) |       | 1,961,738             |       | 1,568,103          |       |
| Deferred tax  assets                                                                                       |       | 255,350               |       | 83,000             |       |
| Prepaid expenses                                                                                           |       | 480,288               |       | 268,969            |       |
| Total current  assets                                                                                      |       | 28,393,739            |       | 4,958,289          |       |
|                                                                                                       |       |                  |       |               |       |
| Property and equipment,  net of accumulated amortization of $5,596,568; (March 31, 2006 - $4,273,828)      |       | 3,178,558             |       | 3,173,715          |       |
| Other assets                                                                                               |       | 60,735                |       | 60,699             |       |
| Intangible assets, net  of accumulated amortization of $543,264; (March 31, 2006 - $842,272)               |       | 1,858,516             |       | 1,608,605          |       |
| Deferred tax assets                                                                                        |       | 755,000               |       | 481,000            |       |
| Total assets                                                                                               |       | $                     | 34,246,548 |               | $          | 10,282,308 |   |
|                                                                                                       |       |                  |       |               |       |
| **Liabilities and Stockholders’  Equity**                                                             | ** ** | ** **            | ** ** | ** **         | ** ** |
| Current liabilities:                                                                                       |       |                  |       |               |       |
| Accounts payable                                                                                           |       | $                     | 695,316    |               | $          | 272,456 |   |
| Accrued liabilities                                                                                        |       | 725,865               |       | 511,525            |       |
| Payroll and  other taxes payable                                                                           |       | 8,360                 |       | 25,881             |       |
| Income taxes  payable                                                                                      |       | 168,000               |       | 155,000            |       |
| Current portion  of deferred lease inducements                                                             |       | 79,900                |       | 79,900             |       |
| Deferred revenue                                                                                           |       | 804,126               |       | 923,206            |       |
| Current portion  of long-term liability                                                                    |       | 260,000               |       | 260,000            |       |
| Total current  liabilities                                                                                 |       | 2,741,567             |       | 2,227,968          |       |
| Deferred lease  inducements                                                                                |       | 254,617               |       | 298,538            |       |
| Long-term liability                                                                                        |       | 129,931               |       | 243,639            |       |
| Total liabilities                                                                                          |       | 3,126,115             |       | 2,770,145          |       |
| Series A redeemable,  convertible preferred shares (note 6)                                                |       |                  |       |               |       |
| Authorized:                                                                                                |       |                  |       |               |       |
| 10,000,000  Series A redeemable, convertible preferred shares                                              |       |                  |       |               |       |
| Issued and  outstanding                                                                                    |       |                  |       |               |       |
| Nil (March 31,  2006 - 2,127,658 Series A shares)                                                          |       | —                |       | 5,170,448          |       |
| Stockholders’ equity:                                                                                 |       |                  |       |               |       |
| Capital stock                                                                                              |       |                  |       |               |       |
| Authorized:                                                                                                |       |                  |       |               |       |
| 30,000,000  common shares, par value $0.0001                                                               |       |                  |       |               |       |
| Issued and  outstanding                                                                                    |       |                  |       |               |       |
| 11,050,531  common shares (March 31, 2006 - 4,032,336 common shares)                                       |       | 217,064               |       | 216,362            |       |
| Additional  paid-in capital                                                                                |       | 30,844,300            |       | 3,384,339          |       |
| Deferred  stock-based compensation                                                                         |       | —                |       | (26,179            | )          |
| Accumulated  other comprehensive loss                                                                      |       | (43,881               | )          | (43,881            | )          |
| Retained  earnings (Deficit)                                                                               |       | 102,950               |       | (1,188,926         | )          |
| Total  stockholders’ equity                                                                           |       | 31,120,433            |       | 2,341,715          |       |
| Total liabilities and stockholders’ equity                                                            |       | $                     | 34,246,548 |               | $          | 10,282,308 |   |

 

See accompanyingnotes to unaudited consolidated financial statements

3

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**Hostopia.com Inc.Consolidated Statements of Operations(Expressed in U.S.dollars — except per share amounts)(Unaudited)**
| ** **                                                  | ** ** | **Three months ended December 31,** | ** ** | **Nine months ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2006**                                                | ** ** | **2005**                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                                    |       |                                                    |       |                                                   |       |   |   |   |   |
| Webhosting and applications services                        |       | $                                                       | 5,433,707  |                                                   | $          | 4,336,591 |   | $ | 16,059,489 |   | $ | 12,425,390 |   |
| Other services                                              |       | 183,142                                                 |       | 147,203                                                |       | 544,399 |   | 449,574 |   |
| Total revenues                                              |       | 5,616,849                                               |       | 4,483,794                                              |       | 16,603,888 |   | 12,874,964 |   |
|                                                        |       |                                                    |       |                                                   |       |   |   |   |   |
| Cost of revenues                                            |       |                                                    |       |                                                   |       |   |   |   |   |
| Webhosting and applications services                        |       | 624,834                                                 |       | 449,088                                                |       | 1,825,514 |   | 1,249,399 |   |
| Other services                                              |       | 84,963                                                  |       | 50,242                                                 |       | 254,066 |   | 157,643 |   |
| Total cost of revenues                                      |       | 709,797                                                 |       | 499,330                                                |       | 2,079,580 |   | 1,407,042 |   |
|                                                        |       |                                                    |       |                                                   |       |   |   |   |   |
| Gross profit                                                |       | 4,907,052                                               |       | 3,984,464                                              |       | 14,524,308 |   | 11,467,922 |   |
|                                                        |       |                                                    |       |                                                   |       |   |   |   |   |
| Expenses                                                    |       |                                                    |       |                                                   |       |   |   |   |   |
| Sales and marketing (a)                                     |       | 1,259,359                                               |       | 1,012,367                                              |       | 3,606,616 |   | 2,969,329 |   |
| Research and development (a)                                |       | 773,901                                                 |       | 524,439                                                |       | 2,268,885 |   | 1,511,700 |   |
| Project management (a)                                      |       | 407,936                                                 |       | 347,678                                                |       | 1,247,733 |   | 989,982 |   |
| Technical support (a)                                       |       | 781,916                                                 |       | 548,066                                                |       | 2,255,123 |   | 1,578,308 |   |
| General and administrative (a)                              |       | 541,285                                                 |       | 356,331                                                |       | 1,363,966 |   | 1,042,367 |   |
| Amortization of intangible assets                           |       | 201,219                                                 |       | 71,373                                                 |       | 543,264 |   | 197,802 |   |
| Amortization of property and equipment                      |       | 487,310                                                 |       | 334,009                                                |       | 1,338,253 |   | 1,001,467 |   |
|                                                        |       | 4,452,926                                               |       | 3,194,263                                              |       | 12,623,840 |   | 9,290,955 |   |
|                                                        |       |                                                    |       |                                                   |       |   |   |   |   |
| Income before  the undernoted                               |       | 454,126                                                 |       | 790,201                                                |       | 1,900,468 |   | 2,176,967 |   |
|                                                        |       |                                                    |       |                                                   |       |   |   |   |   |
| Interest income                                             |       | 180,327                                                 |       | 9,508                                                  |       | 220,026 |   | 18,109 |   |
| Interest  (expense)                                         |       | (4,206                                                  | )          | —                                                 |       | (12,618 | ) | (4,566 | ) |
|                                                        |       | 176,121                                                 |       | 9,508                                                  |       | 207,408 |   | 13,543 |   |
|                                                        |       |                                                    |       |                                                   |       |   |   |   |   |
| Income before  income taxes                                 |       | 630,247                                                 |       | 799,709                                                |       | 2,107,876 |   | 2,190,510 |   |
|                                                        |       |                                                    |       |                                                   |       |   |   |   |   |
| Income taxes  (recovery)                                    |       |                                                    |       |                                                   |       |   |   |   |   |
| Current                                                     |       | 343,000                                                 |       | 285,000                                                |       | 1,090,000 |   | 775,000 |   |
| Deferred                                                    |       | (86,000                                                 | )          | —                                                 |       | (274,000 | ) | — |   |
|                                                        |       | 257,000                                                 |       | 285,000                                                |       | 816,000 |   | 775,000 |   |
|                                                        |       |                                                    |       |                                                   |       |   |   |   |   |
| Net income                                                  |       | $                                                       | 373,247    |                                                   | $          | 514,709 |   | $ | 1,291,876 |   | $ | 1,415,510 |   |
|                                                        |       |                                                    |       |                                                   |       |   |   |   |   |
| Net income per  share (note 5)                              |       |                                                    |       |                                                   |       |   |   |   |   |
| Basic                                                       |       | $                                                       | 0.05       |                                                   | $          | 0.12 |   | $ | 0.23 |   | $ | 0.33 |   |
| Diluted                                                     |       | 0.04                                                    |       | 0.08                                                   |       | 0.18 |   | 0.21 |   |
|                                                        |       |                                                    |       |                                                   |       |   |   |   |   |
| Weighted average  number of common  shares outstanding |       |                                                    |       |                                                   |       |   |   |   |   |
| Basic                                                       |       | 7,787,745                                               |       | 4,032,336                                              |       | 5,288,716 |   | 4,032,336 |   |
| Diluted                                                     |       | 8,951,380                                               |       | 6,660,502                                              |       | 7,340,008 |   | 6,645,438 |   |

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(a)  Stock-based compensation is included in operatingexpenses as follows:
| Sales and marketing        |   | $     | 27,925 |   | $      | 4,989  |   | $      | 94,210  |   | $ | 14,967 |   |
|----------------------------|--------|-------|--------|--------|--------|--------|--------|--------|---------|--------|---|--------|--------|
| Research and development   |   | 4,468 |   | — |   | 15,074 |   | — |    |
| Project management         |   | 2,467 |   | — |   | 8,322  |   | — |    |
| Technical support          |   | 3,723 |   | — |   | 12,561 |   | — |    |
| General and administrative |   | 7,959 |   | — |   | 26,850 |   | — |    |
|                       |   | $     | 46,542 |   | $      | 4,989  |   | $      | 157,017 |   | $ | 14,967 |   |

 

See accompanying notes tounaudited financial statements

4

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**Hostopia.com Inc.Consolidated Statements of Cash Flows(Expressed in U.S.dollars)(Unaudited)**
| ** **                                          | ** ** | **Nine months ended December 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:              |       |                                                   |       |   |   |
| Net income                                          |       | $                                                      | 1,291,876  |   | $ | 1,415,510 |   |
| Items which do not involve cash:                    |       |                                                   |       |   |   |
| Amortization                                        |       | 1,881,517                                              |       | 1,199,269 |   |
| Stock-based compensation                            |       | 157,017                                                |       | 14,967 |   |
| Non-cash interest                                   |       | 12,618                                                 |       | — |   |
| Deferred income taxes                               |       | (446,350                                               | )          | 675,000 |   |
| Deferred lease inducements                          |       | (43,921                                                | )          | 40,985 |   |
| Change in operating assets and liabilities          |       |                                                   |       |   |   |
| Trade accounts receivable                           |       | (393,635                                               | )          | (377,919 | ) |
| Prepaid expense                                     |       | (211,319                                               | )          | 1,413 |   |
| Increase in other assets                            |       | —                                                 |       | (26,145 | ) |
| Accounts payable                                    |       | 422,860                                                |       | (32,452 | ) |
| Accrued liabilities                                 |       | 214,340                                                |       | 245,732 |   |
| Payroll taxes and other taxes payable               |       | (17,521                                                | )          | (434 | ) |
| Income taxes payable                                |       | 13,000                                                 |       | — |   |
| Deferred revenue                                    |       | (119,080                                               | )          | 39,105 |   |
| Cash flows from operating activities                |       | 2,761,402                                              |       | 3,195,031 |   |
|                                                |       |                                                   |       |   |   |
| Cash flows from  financing activities:              |       |                                                   |       |   |   |
| Issue of common shares on exercise of stock options |       | 1,799                                                  |       | — |   |
| Issue of common shares on exercise of warrants      |       | 192,000                                                |       | — |   |
| Issue of common shares on initial public offering   |       | 21,965,578                                             |       | — |   |
| Repayment of long-term liabilities                  |       | (126,326                                               | )          | — |   |
| Cash flows from (used in) financing activities      |       | 22,033,051                                             |       | — |   |
|                                                |       |                                                   |       |   |   |
| Cash flows from  investing activities:              |       |                                                   |       |   |   |
| Acquisition of property and equipment               |       | (1,343,096                                             | )          | (1,294,790 | ) |
| Acquisition of intellectual property                |       | (793,175                                               | )          | (231,474 | ) |
| Cash flows from investing activities                |       | (2,136,271                                             | )          | (1,526,264 | ) |
| Effect of  currency translation on cash balances    |       | (36                                                    | )          | — |   |
|                                                |       |                                                   |       |   |   |
| Increase in cash  and cash equivalents              |       | 22,658,146                                             |       | 1,668,767 |   |
|                                                |       |                                                   |       |   |   |
| Cash and cash  equivalents, beginning of period     |       | 3,038,217                                              |       | 1,897,230 |   |
| Cash and cash  equivalents, end of period           |       | $                                                      | 25,696,363 |   | $ | 3,565,997 |   |
|                                                |       |                                                   |       |   |   |
| Supplemental  cash flow information:                |       |                                                   |       |   |   |
| Interest paid                                       |       | $                                                      | —     |   | $ | 4,566 |   |
| Income taxes  paid                                  |       | 1,249,350                                              |       | 100,000 |   |

 

See accompanying notes to unaudited financialstatements

5

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**NOTES TO UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS**

**1.****NATURE OF BUSINESS**

Hostopia.com Inc. (the “Company”) was founded inDecember 1999 and is a provider of Web services that enable small andmedium-sized businesses to establish and maintain an Internet presence. TheCompany has customers in the United States, Canada and the United Kingdom,which include telecommunication carriers, cable companies, Internet serviceproviders, domain registrars and Web hosting service providers.  These communication services providerspurchase the Company’s Web services on a wholesale basis and resell theseservices under their own brands to small and medium-sized businesses. TheCompany’s services include Website creation and maintenance applications,managed email with virus and spam protection, e-commerce application services,customer communications and Website promotion applications, and Website hostingand data transfer.

**2.SIGNIFICANT ACCOUNTING POLICIES**

A description of theCompany’s significant accounting policies can be found in the Company’s March31, 2006 Annual Financial Statements as included in its Registration Statement on Form S-1 (File No.333-135533) declared effective by the Securities and Exchange Commission onNovember 3, 2006 (“Form S-1”).

a)  Basis of Presentation

These unauditedconsolidated financial statements include the accounts of the Company and itssubsidiaries BlueGenesis.comCorp. and Internet Names for Business Inc., which are wholly owned. Allmaterial intercompany accounts and transactions and balances are eliminated.

These unauditedconsolidated financial statements are stated in U.S. dollars. The statementshave been prepared in accordancewith the instructions of Form 10-Q and do not include all the information andnotes required by accounting principles generally accepted in the United Statesof America for complete financial statements.

The accompanying consolidated balance sheets as ofDecember 31, 2006 and March 31, 2006, the consolidated statements of operationsfor the three months and nine months ended December 31, 2006 and 2005, theconsolidated statements of cash flows for the nine months ended December 31,2006 and 2005 and the related notes to the consolidated financial statementsare unaudited. These financial statements and the related notes should be readin conjunction with the audited consolidated financial statements and relatednotes together with management’s discussion and analysis of financial positionand results of operations contained in the Company’s Form S-1, which includesthe audited financial statements for the year ended March 31, 2006 and theunaudited consolidated financial statements for the three months ended June 30,2006.

In the opinion of the Company’s management, with theexception of the adoption of Statement of Financial Accounting Standards (“SFAS”)No. 123R, *Share-Based Payments* (“SFAS No. 123R”),   the unaudited consolidated financialstatements have been prepared on the same basis as the audited consolidatedfinancial statements included in the Company’s Form S-1 and include alladjustments necessary for the fair statement of the Company’s financialposition as of December 31, 2006, its results of operations for the three andnine months ended December 31, 2006 and 2005 and its cash flows for the ninemonths ended December 31, 2006 and 2005. See notes 2(c) and 3 for a furtherdiscussion of the implications of  SFASNo. 123R.

The financial results for the three and nine monthsended December 31, 2006 are not necessarily indicative of the results to be expectedfor the year ending March 31, 2007. There is no difference between net incomeand total comprehensive income.

The Company has reviewed the criteria of SFAS No. 131,*Disclosures about Segments of an Enterprise andRelated Information*, and has determined that the Company iscomprised of only one segment, Webhosting and application services.

6

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On May 18, 2006, the Board of Directors authorized aone-for-five reverse stock split of the Company’s common stock and convertibleredeemable preferred stock. All common stock shares, convertible redeemablepreferred stock shares, and amounts per share data reflect the reverse stocksplit.

b)  Use ofEstimates

The accompanying unaudited interim consolidatedfinancial statements of the Company have been prepared using accountingprinciples generally accepted in the United States of America for such reports.These principles require management to make estimates and assumptions thataffect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities and reported amounts of revenue and expenses.Actual results could differ from those estimates.

c)  Stock-basedcompensation

*Prior toApril 1, 2006*

The Company accounted for stock options issued toemployees using the intrinsic value method of Accounting Principles Board (“APB”)Opinion No. 25.  Compensation expense wasrecorded on the date stock options were granted only if the current fair valueof the underlying stock exceeded the exercise price.  Deferred stock-based compensation wasamortized over the vesting period of the individual options in accordance withFASB Interpretation No. 44.

*PostApril 1, 2006*

On April 1, 2006, the Company adopted the provisionsof SFAS No. 123R, which is a revision of SFAS No. 123,*Accounting for Stock-Based Compensation* (“SFASNo. 123”). SFAS No. 123R supersedes Accounting Principles BoardOpinion No. 25,*Accounting for StockIssued to Employees* (“APB Opinion No. 25”), and amends SFASNo. 95,*Statement of Cash Flows*(“SFAS No. 95”). SFAS No. 123R requires companies to recognize in theincome statement the estimated fair value of stock-based compensation.

Prior to April 1, 2006, the Company had adopted the “disclosureonly” provisions of SFAS No.123 and SFAS No. 148 “*Accountingfor Stock-Based Compensation — Transition and Disclosure*”, whichrequired certain financial statement disclosures, including pro forma operatingresults, as if the Company had prepared its consolidated financial statementsin accordance with the fair market value method of accounting for stock-basedcompensation. In adopting SFAS No. 123R, the Company chose to apply the “modifiedprospective method”. Under this method, unvested awards at the date of adoptionwill be amortized based on the grant date fair value estimated in accordancewith the original provisions of SFAS No. 123. The Company will, as it didunder SFAS No. 123, provide pro forma disclosure of the compensation amount itwould have otherwise booked in its notes to the financial statements for anyperiod disclosed in financial statements prior to April 1, 2006. Based upon theCompany’s analysis of the requirements of SFAS No. 123R, the Companyreclassified its unamortized deferred compensation of $26,179 related to theissuance of unvested common stock awards to consultants that was previouslyreported as a contra amount in the equity section of the balance sheet toadditional paid-in capital. No other adjustments were required as the estimatedexpected forfeiture rate in respect of the consultants’ options was zero.

During the nine months ended December 31, 2006, theCompany granted 10,000 options to employees having an exercise price of $10.95per share, which amount was determined to be the fair value at the date of thegrant.  No options were granted in thethree months ended December 31, 2006. We determined the grant date fair valuerelated to this issue to be approximately $65,640.

The grant date fair value of the stock-basedcompensation award granted during the nine months ended December 31, 2006 wasestimated on the date of grant using the Black-Scholes model with the followingweighted average assumptions:

7

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| ** **                | ** ** | **Three Months**           | ** ** | **Nine Months**            | ** ** |
|---------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **Ended**                       | ** ** | **Ended**                       | ** ** |
| ** **                | ** ** | **December 31, 2006** | ** ** | **December 31, 2006** | ** ** |
| Risk free  interest rate  |       | No  grants                      |       | 4.77                            | %          |
| Expected  dividend yield  |       | No  grants                      |       | —                          |       |
| Expected  volatility      |       | No  grants                      |       | 67                              | %          |
| Expected life (in  years) |       | No grants                       |       | 5                               |       |

 

The risk-free interest rate was based on the currentlyavailable rate on a U.S. Treasury zero-coupon issue with a remaining term equalto the expected term of the option. The expected volatility of stock optionswas based on an average of historical volatility of a peer group of companiescomparable to the Company. The expected life of the Company’s options was basedon the “simplified method” accepted by the SEC Staff Accounting Bulletin SAB107 for companies with limited historical exercise experience. Under the “simplifiedmethod” the expected term is equal to the mean of the vesting term and the termto expiry. The dividend yield reflects the fact that the Company has neverdeclared or paid any cash dividends and does not currently anticipate payingcash dividends in the future.

Under SFAS No. 123R the Company also estimates forfeitures incalculating the expense relating to stock-based compensation as opposed to onlyrecognizing forfeitures and the corresponding reduction in expense as theyoccur. Based on its historic experience and expectations for the future, theCompany has estimated expected forfeitures to occur at a rate of 25%.Thisestimate will be adjusted as necessary in the future to reflect actualforfeiture experience. The Company recognizes its stock-based compensationexpense using a straight-line amortization method over the vesting period ofthe options.

As a result of the adoption of SFAS No. 123R, theCompany’s income from continuing operations before income taxes for the threeand nine months ended December 31, 2006 was approximately $41,553 and $142,050lower, respectively, and net income was $27,775 and $94,177 lower than underthe Company’s previous accounting method for stock-based compensation whichonly recognized stock-based compensation to consultants. Basic net income percommon share for the three and nine months ended December 31, 2006 weredecreased by $0.00 and $0.02 respectively, while diluted net income per sharedecreased for the same periods by $0.00 and $0.01 respectively as a result ofadopting SFAS No. 123R. There was no effect on the statement of cash flows.

Prior to adopting the provisions of SFASNo. 123R, the Company recorded compensation expense for employee stockoptions based upon their intrinsic value on the date of grant pursuant to APBOpinion No. 25. Had the Company adopted the recognition of compensationexpense for employee stock options under SFAS No.123 based on the fair value ofthe options on the date of grant, the pro forma impact on net income would havebeen as follows:
| ** **                                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **December 31, 2005**  | ** ** | **December 31, 2005** | ** ** |
| ** **                                                          | ** ** | **Pro forma**               | ** ** | **Pro forma**              | ** ** |
| ** **                                                          | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)**                 | ** ** |
| Net income  attributable to common shareholders - diluted           |       | $                                | 514,709    |                            | $          | 1,415,510 |   |
| Dividend  accretion on Series A preferred shares                    |       | (28,775                          | )          | (85,867                         | )          |
| Net income  attributable to common stockholders - basic             |       | 485,934                          |       | 1,329,643                       |       |
| Stock-based  compensation, as reported, net of tax                  |       | 3,143                            |       | 9,429                           |       |
| Pro forma  stock-based compensation, net of tax                     |       | (19,925                          | )          | (59,774                         | )          |
| Pro forma net  income attributable to common stockholders -basic    |       | $                                | 469,152    |                            | $          | 1,279,298 |   |
| Pro forma net  income attributable to common stockholders - diluted |       | $                                | 497,927    |                            | $          | 1,365,165 |   |
| Basic net income  attributable to common stockholders per share:    |       |                             |       |                            |       |
| As reported                                                         |       | $                                | 0.12       |                            | $          | 0.33 |   |
| Pro forma                                                           |       | $                                | 0.12       |                            | $          | 0.32 |   |
| Diluted net  income attributable to common stockholders per share:  |       |                             |       |                            |       |
| As reported                                                         |       | $                                | 0.08       |                            | $          | 0.21 |   |
| Pro forma                                                           |       | $                                | 0.07       |                            | $          | 0.21 |   |

 

8

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**3. STOCK-BASEDPLANS**

a)  2000 Stock Option Plan:

All common share amounts have been restated to giveeffect to the one-for-five reverse stock split approved at a special meeting ofshareholders on May 18, 2006. Under the terms of the Company’s 2000 StockOption Plan, the Board of Directors of the Company was allowed to grant optionsto its employees, non-employees and officers up to 900,000 common shares.  The exercise price of each option equalled aprice that was not less than the price of the Company’s common stock on thedate of grant and an option’s maximum term was seven years.  Options vested over a three-year period fromthe date of grant. Stock option activity under all plans year to date issummarized as follows:
| ** **                                | ** ** | **Options  Outstanding** | ** ** | **Weighted-  Average  Exercise  Prices** | ** ** | **Weighted-  Average  Remaining  Contractual  Term (years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                |
| ** **                                |
| ** **                                |
| ** **                                |
| Balance at  March 31, 2006           |       | 839,280                  |       | $                                        | 3.45       |                                                              |       |                            |       |   |
| Granted                                   |       | 10,000                   |       | $                                        | 10.95      |                                                              |       |                            |       |   |
| Exercised                                 |       | —                   |       |                                     |       |                                                              |       |                            |       |
| Forfeited                                 |       | (10,300                  | )          | $                                        | 5.35       |                                                              |       |                            |       |   |
| Balance at June  30, 2006                 |       | 838,980                  |       | $                                        | 3.52       |                                                              |       |                            |       |   |
| Granted                                   |       | —                   |       |                                     |       |                                                              |       |                            |       |
| Exercised                                 |       | (537                     | )          | $                                        | 3.35       |                                                              |       |                            |       |   |
| Forfeited                                 |       | (183                     | )          | $                                        | 3.35       |                                                              |       |                            |       |   |
|                                      |       | 838,260                  |       | $                                        | 3.52       |                                                              |       |                            |       |   |
| Granted                                   |       | —                   |       |                                     |       |                                                              |       |                            |       |
| Exercised                                 |       | —                   |       |                                     |       |                                                              |       |                            |       |
| Forfeited                                 |       | (8.240                   | )          | $                                        | 5.17       |                                                              |       |                            |       |   |
| Balance at  December 31, 2006             |       | 830,020                  |       | $                                        | 3.51       |                                                              | 1.6        |                            | $          | 1,974,102 |   |
| Options exercisable at  December 31, 2006 |       | 751,293                  |       | $                                        | 2.97       |                                                              | 1.2        |                            | $          | 1,973,944 |   |

 

The total intrinsic value of options exercised for thethree and nine month periods ended December 31, 2006, was nil and $1,047respectively.

At December 31, 2006, there was $279,953 of totalunrecognized stock-based compensation expense, adjusted for estimatedforfeitures, related to unvested share-based awards. On a weighted average basis,unrecognized stock-based compensation expense is expected to be recognized overthe next 1.8 years.

The Company’s shareholders approved the terminationand replacement of the Company’s 2000 Stock Option Plan with the 2006 StockIncentive Plan (“2006 Plan”) at a special meeting of shareholders held on May18, 2006.

b)  2006 StockIncentive Plan

Under the terms of the 2006 Stock Incentive Plan (the “2006Plan”), the Company is permitted to issue stock options and stock appreciationrights to eligible participants for up to 10% of the total outstanding sharesof common stock.  The exercise price ofeach option equals a price that is not less than the price of the Company’sstock on the date of grant and an option’s maximum term is seven years, Optionsvest over a three year period from the date of grant. No options have beenissued under the 2006 Stock Incentive Plan.

9

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The Board of Directors administers the 2006 Plan anddetermines the terms of the options including the exercise price, the number ofshares subject to individual option awards and the vesting period of options,within the limits set forth in the 2006 Plan. Options have a maximum term ofseven years and vest as determined by the Board of Directors, generally overthree years. On exercise the Company’s policy is to issue new shares fromtreasury.

**4. ASSET ACQUISITION:**

On January 31, 2006, the Company entered into anagreement to purchase a customer list from one of its customers for $1,132,000and assume the liability for future services. The Company paid $151,400 on closing.

Future payments to be applied against the purchaseprice will be determined as a percentage of actual webhosting revenue generatedby the purchased accounts as follows: the Company will pay out 37.5% of collected revenue from the customerduring the first six months following closing, 25.0% for the following sixmonths, and 12.5% thereafter, until such time as the total payments equal thepurchase price.

After deducting the value of the account receivableowed from the customer and the liability for future services assumed associatedwith the hosted accounts, the remaining amount of $570,533 has been recorded asa non-interest bearing liability. This amount has, therefore, been discounted at the rate of 5% perannum.  Accordingly, the value of thecustomer list and the long-term liability has been reduced by $28,030, beingthe estimated interest over the expected two-year life of the long-termliability.  This amount is accreted as interestexpense over the expected two-year life of the long-term liability. Thecustomer list is being amortized on a straight-line basis over its three-yearestimated useful life commencing February 1, 2006.
| Purchase price:               |   |     |      |
|-------------------------------|--------|----------|-----------|
| Customer list                 |   | $        | 1,103,970 |   |
| Liability for future services |   | (243,468 | )         |
|                          |   | $        | 860,502   |   |
| Consideration  given:         |   |     |      |
|                          |   |     |      |
| Cash                          |   | $        | 151,400   |   |
| Trade receivables             |   | 166,599  |      |
| Long-term liability           |   | 542,503  |      |
|                          |   | $        | 860,502   |   |

 

During the three months and nine months ended December31, 2006 the Company made payments of $16,418 and $113,707 respectively. AtDecember 31, 2006, the remaining liability was as follows:
|                       | ** ** | **December 31, 2006** | ** ** | **March 31, 2006** | ** ** |
|-----------------------|------------|---------------------------------|------------|------------------------------|------------|
| ** **            | ** ** | **(Unaudited)**                 | ** ** | ** **                   | ** ** |
| Total                 |       | $                               | 389,931    |                         | $          | 503,639 |   |
| Less current  portion |       | 260,000                         |       | 260,000                      |       |
|                  |       | $                               | 129,931    |                         | $          | 243,639 |   |

 

**5. NETINCOME PER COMMON SHARE:**

Basic income per common share is computed by dividingnet income by the weighted average number of shares of common stock outstandingduring the period. Dilutedearnings per common share is calculated by dividing net income, adjusted toexclude preferred dividends applicable to the redeemable preferred shares bythe weighted average number of common shares outstanding during the period,plus any additional common shares that would have been outstanding ifpotentially dilutive common shares had been issued during the period.

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SFAS No. 128, Earnings per Share, requires thatstock options, restricted stock grants and similar equity instruments grantedbe treated as potential common shares outstanding in computing diluted earningsper share by application of the treasury stock method. Under the treasury stockmethod, the amount the optionee must pay for exercising stock options, theamount of compensation cost for futureservice that has not yet recognized, and the associated amount of tax benefitsthat would be recorded in additional paid-in capital when the compensationexpense is recognized are assumed to be used to repurchase shares at theaverage share price for each period.

The table below sets forth the computation of basic and diluted net income per share:
|                                                           | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income  attributable to common stockholders - diluted |       | $                                                   | 373,247    |                                               | $          | 514,709 |   | $ | 1,291,876 |   | $ | 1,415,510 |   |
| Dividend  accretion on Series A preferred shares          |       | (12,719                                             | )          | (28,773                                            | )          | (71,034 | ) | (85,867 | ) |
| Net income  attributable to common stockholders - basic   |       | $                                                   | 360,528    |                                               | $          | 485,936 |   | $ | 1,220,842 |   | $ | 1,329,643 |   |
|                                                      |       |                                                |       |                                               |       |   |   |   |   |
| Weighted average  outstanding shares of common stock      |       | 7,787,745                                           |       | 4,032,336                                          |       | 5,288,716 |   | 4,032,336 |   |
| Dilutive effect of Series A redeemable preferred  shares  |       | 925,069                                             |       | 2,127,658                                          |       | 1,725,337 |   | 2,127,658 |   |
| Dilutive effect of stock options and warrants (1)         |       | 238,567                                             |       | 500,508                                            |       | 325,954 |   | 485,445 |   |
| Common stock and  common stock equivalent                 |       | 8,950,743                                           |       | 6,660,502                                          |       | 7,340,008 |   | 6,645,439 |   |
|                                                      |       |                                                |       |                                               |       |   |   |   |   |
| Net income  attributable per common share:                |       |                                                |       |                                               |       |   |   |   |   |
| Basic                                                     |       | $                                                   | 0.05       |                                               | $          | 0.12 |   | $ | 0.23 |   | $ | 0.33 |   |
| Diluted                                                   |       | $                                                   | 0.04       |                                               | $          | 0.08 |   | $ | 0.18 |   | $ | 0.21 |   |

----

(1)   107,800 stock options outstanding at December31, 2006 were determined to be anti-dilutive because of the current marketprice of the Company’s shares was below the strike price of the options andaccordingly were excluded from the calculation of diluted  net  incomeper share

**6. SERIES A REDEEMABLE,CONVERTIBLE PREFERRED SHARES**
|                                                                                    | ** ** | **December 31, 2006** | ** ** | **March 31, 2006** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
| Authorized:                                                                        |       |                            |       |                         |       |
| 10,000,000 Series A  redeemable, convertible preferred shares                      |       |                            |       |                         |       |
| Issued:                                                                            |       |                            |       |                         |       |
| Nil (March 31, 2006 -  2,127,658 Series A redeemable, convertible preferred shares |       | $                               | —     |                         | $          | 5,170,448 |   |
|                                                                                    |            |                                 |            |                              |            |  |  |

 

In December 2001, the Company issued 851,063Series A redeemable, convertible preferred shares for proceeds of $2,000,000, and incurred share issuancecosts of $301,046, resulting in net proceeds of $1,698,954. An additional1,276,595 Series A redeemable, convertible preferred shares were issued onconversion of stockholders’ advances and loans payable of $3,000,000.

From inception to November 10, 2006, the Series Apreferred shares accreted dividends annually at a rate of 2.2%, with a charge to additional paid-in capital,for the cumulative dividends of $800,000 that were to become

11

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payable after December 31, 2006.  The Company accreted dividends of $12,719 and$28,773 for the period up to November 10, 2006 and for the three month periodDecember 31, 2005. For the nine month periods ended December 31, 2006 and 2005the Company accreted dividends of $71,034 and $85,867 respectively.

On November 10, 2006, on the completion of the Company’sinitial public offering, the preferred shares were automatically converted into2,127,658 common shares with a total par value of $212.77. Additional paid-incapital was increased by $5,241,595 in respect of this conversion.

**7. COMMON STOCK**

On November 10, 2006, the Company completed itsinitial public offering (“IPO”) in which it sold 4,200,000 common shares at aprice of $5.30 (Cdn$6.00) per share. A total of $22,283,137  (Cdn$25,200,000) in gross proceeds was raisedin the IPO. After deducting the underwriters’ commission and offering expensesof $3,408,912, net proceeds of the IPO were $18,874,226. All 2,127,658outstanding shares of the Company’s Series A redeemable, convertible preferredshares were converted into shares of common stock, on a one-for-one basis, atthe closing of the IPO.

On December 7, 2006, the underwriters exercised theiroption to purchase an additional 15% of the common shares issued in the IPO or630,000 shares at a price of Cdn$6.00 per share.  A total of $3,091,352 (Cdn$3,553,200) wasraised after deducting the underwriters’ commission.

On December 21, 2006, the Company issued 60,000 commonshares pursuant to the exercise of warrants in the amount of $192,000.

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**8. RELATED PARTY TRANSACTIONS**

The Company completed transactions with TELUSCorporation, a related party by virtue of its 7.7% holding of common shares ofthe Company, in the normal course of operations.  The transactions have been recorded at theexchange amount, representing the amount of consideration established andagreed to by the related parties as set out below.  In addition, the Company has a commitmentwith TELUS to acquire bandwidth and data centre services from December 2004 toNovember 2007 for an aggregate minimum amount of $1,867,140.

In March 2005, the Company’s principal stockholderspurchased a majority interest in a supplier of templates, images and outsourcedoperations to the Company (the “Supplier”). Templates and images purchased by the Company are recorded as otherintangible assets and amortized over their estimated useful lives.  The Company and the Supplier have enteredinto an agreement, whereby each party is obligated to jointly develop imagesfor use in the business of the Company and for sale to others.  The transactions have been recorded at theexchange amount, representing the amount of consideration established andagreed to by the related parties.  TheCompany will earn a 10% commission on sales of these images by the Supplier tothe Company’s customer base.  Each partyhas indemnified the other for losses on claims against either party.

Aggregate related party transactions and balances areas follows:
| Balance sheets  | ** ** | **December 31, 2006** | ** ** | **March 31, 2006** | ** ** |
|----------------------|------------|---------------------------------|------------|------------------------------|------------|
| ** **           | ** ** | **(Unaudited)**                 | ** ** | ** **                   | ** ** |
| Accounts  receivable |       | $                               | 17,395     |                         | $          | 26,654 |   |
| Accounts payable     |       | 92,106                          |       | 17,990                       |       |
|                      |            |                                 |            |                              |            |  |  |

** **
|                                              | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **December 31,**            | ** ** | **December 31,**           | ** ** |
| ** **                                   | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Statements of operations**                 | ** ** | **(Unaudited)**                  | ** ** |
| Webhosting and  application services revenue |       | $                                | 544,896    |                            | $          | 483,864 |   | $ | 1,619,757 |   | $ | 1,407,433 |   |
| Bandwidth                                    |       | 173,343                          |       | 155,412                         |       | 529,981 |   | 435,433 |   |
| Outsourced  services                         |       | 350,465                          |       | 209,992                         |       | 989,137 |   | 628,935 |   |
| Telephone services                           |       | 75,492                           |       | 24,786                          |       | 183,800 |   | 80,258 |   |
|                                              |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

**9. RECENT ACCOUNTING PRONOUNCEMENTS**

a)  Fair value:

In September 2006, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 157 *Fair ValueMeasurements* to provide enhanced guidance for using fair value tomeasure assets and liabilities. SFAS No. 157 also expands disclosurerequirements for assets and liabilities measured at fair value, how fair valueis determined, and the effect of fair value measurements on earnings. SFAS No.157 applies whenever other authoritative literature require (or permit) certainassets or liabilities to be measured at fair value, but does not expand the useof fair value. SFAS No. 157 is effective for financial statements issuedfor fiscal years beginning after November 15, 2007, and interim periodswithin those years. Early adoption is permitted. The Company plans to adoptSFAS No. 157 effective April 1, 2008. The Company currently does not haveany balance sheet items carried at fair value. However, the Company does usefair value concepts to test various long-lived assets for impairment and toinitially measure assets and liabilities acquired in a business combination.Management is currently evaluating the effect of adoption.

b)  Uncertain tax positions:

In June 2006, the FASB issued Interpretation No. 48 “*Accounting for Uncertainty in Income Taxes, an interpretation of FASBstatement No. 109*” (“FIN 48”). FIN 48 requires companies to recognize the tax benefits

13

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of uncertain tax positions only where the position is “morelikely than not” to be sustained, assuming examination by tax authorities.  The amount recognized would be the amountthat represents the largest amount of tax benefit that is greater than 50%likely of being ultimately realized.  Aliability would be recognized for any benefit claimed, or expected to beclaimed, in a tax return in excess of the benefit recorded in the financialstatements, along with any interest and penalty (if applicable) on the excess.Disclosure will also be required for those uncertain tax positions where it isreasonably possible that the estimate of the tax benefit will change significantlyin the next 12 months.  FIN 48 iseffective for fiscal years beginning after December 15, 2006.  The effect, if any, of adopting FIN 48 on theCompany’s consolidated financial statements is currently being evaluated.

c)  Effects of prior year misstatements:

In September 2006, the U.S. Securities and ExchangeCommission issued Staff Accounting Bulletin No. 108, “Considering the Effectsof Prior Year Misstatements when Quantifying Misstatements in Current yearFinancial Statements”  (“SAB 108”). SAB108 provides interpretive guidance on how the effects of the carryover orreversal of prior year misstatements should be considered in quantifying acurrent year misstatement.  The SABrequired registrants to quantify misstatements using both the balance sheet andincome statement approaches and to evaluate whether either approach results inquantifying an error that is material in light of relevant quantitative andqualitative factors.  The SAB does notchange the staff’s previous guidance in SAB 99 on evaluating the materiality ofmisstatements. When the effect of initial adoption is determined to bematerial, the SAB allows registrants to record that effect as acumulative-effect adjustment to beginning-of-year retained earnings under U.S.GAAP. No such alternative is available under Canadian GAAP.  SAB 108 is effective for the Company’s annualfinancial statements for the current fiscal year ending March 31, 2007.  The Company is currently reviewing the effectof this pronouncement.

**10. Geographic Information**

The following summarizes the Company’s revenue bycountry (in thousands of dollars):
| ** **     | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|----------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **     | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **     | ** ** | **(Unaudited)**                                     | ** ** | **(Unaudited)**                                    | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
|           |       |                                                |       |                                               |       |   |   |   |   |
| Canada         |       | $                                                   | 2,454,253  |                                               | $          | 2,157,531 |   | $ | 7,221,921 |   | $ | 6,282,207 |   |
| United States  |       | 3,060,216                                           |       | 2,326,263                                          |       | 9,142,886 |   | 6,592,757 |   |
| United Kingdom |       | 102,380                                             |       |                                               |       | 239,081 |   | — |   |
| Total revenues |       | $                                                   | 5,616,849  |                                               | $          | 4,483,794 |   | $ | 16,603,888 |   | $ | 12,874,964 |   |

 

14

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**Item2.  Management’s discussion and analysisof financial condition and results of operations**

# **SPECIAL NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

Thefollowing discussion includes forward-looking statements that are nothistorical facts but reflect our current expectation regarding future results.Actual results could differ materially from the results discussed in theforward-looking statements because of a number of risks and uncertainties,including the matters discussed below and elsewhere in this Form 10-Q.   Historical trends should not be taken asindicative of future operations.

Inaddition, you should refer to the “Risk Factors” section of our RegistrationStatement on Form S-1 that was filed on November 3, 2006.

Youshould read this Form 10-Q completely. In some cases, you can identify forward-looking statements by thefollowing words: “may”, “will”, “should”, “expect”, “intend”, “plan”, “anticipated”,“believe”, ‘estimate”, “predict”, “potential”, “continue”, or the negative ofthese terms or other similar terminology. All forward-looking statements included in this Form 10-Q are based oninformation available to us as of the date of this Form 10-Q and we assume noobligation to update these cautionary statements or any forward-lookingstatements.  These statements are notguarantees of future performance.

Wequalify all the forward-looking statements contained in this Form 10-Q by theforegoing cautionary statements.

## **Overview**

Webelieve we are a leading provider of Web services that enable small andmedium-sized businesses to establish and maintain an Internet presence. We haveover 330 customers in the United States, Canada and the United Kingdom, whichinclude telecommunication carriers, cable companies, Internet serviceproviders, domain registrars and Web hosting service providers.  These communication services providerspurchase our Web services on a wholesale basis and resell these services undertheir own brands to small and medium-sized businesses. We refer to small andmedium-sized businesses which use our Web services as “end-users” or “end-userbusinesses”. Our Web services include Website creation and maintenanceapplications, managed email with virus and spam protection, e-commerceapplication services, customer communications and Website promotionapplications, and Website hosting and data transfer.

Our revenue growthis derived from the number of end-users who subscribe to our Web services. Toincrease our revenue and take advantage of our market opportunity we plan toexpand our customer base as well as further penetrate our customers’ existingend-user base.

We have grown ourbusiness primarily by convincing large telecommunication and cable companiesthat we should manage their Web hosting businesses.

This strategy hasbeen highly successful in Canada and Bell Canada, TELUS Communications Companyand Rogers Cable Communications Inc. are all now our customers. We haveexpanded geographically into the United States and in fiscal 2006 signed upVerizon, one of the largest U.S. telecommunications companies. In 2006, we alsobegan marketing our service in the United Kingdom and have already contractedto provide our service to a number of customers in this large marketplaceincluding British Telecom which was signed up to a two year outsourcingagreement  in the current quarter.

Our growthstrategy is now focused on two processes. Firstly, we acquire new customerswith large end-user bases. Secondly, we help our current customers grow theirWeb hosting businesses by providing them with marketing collateral and byproviding their end-users with improved website functionality.

We track oursuccess in two ways. Firstly, we count the number of end-users we add throughthe sign-up of new customers in the latest twelve months, both large and small.Secondly, we count the number of end-users our customers of more than twelvemonths (existing customers) have added to their Web hosting business.

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To support theacquisition of new customers we have 10 sales people focused on acquiring newbusiness in Canada, the U.S. and now the U.K. To assist them in their salesefforts, and to potentially increase our revenue per end-user, we continue toinvest in developing new software for end-users. We have 14 technicalprofessionals currently involved in product development.

When we enter intoa contract with a new customer, we must migrate their end-users to our platformeffectively and efficiently. This essential function is carried out by ourproject management staff presently consisting of 21 personnel.

We also recognizethe need for prompt and professional service to our end-users to maintain andgrow our end-user count. Accordingly we employ a technical support staff ofapproximately 78 information technology and customer service professionals todeal promptly 24 hours a day with any questions our end-users have in respectof our service. Our staff of customer service professionals has grown by 24% inthe past twelve months to deal with our increasing end-user base.

To provide ourend-users, who are often smaller businesses, with an easy method ofestablishing a Web presence, we have developed and continue to develop easilyself-customized website templates. We currently have over 3,000 templates inour library, the majority of which were developed in the past fifteen months.

In fiscal 2007, wealso began to build the capability to provide our end-users with turnkeycustomized websites with a higher degree of functionality. We have hired 6personnel in support of this business opportunity. As of December 31, 2006 thisbusiness was still considered to be in the development phase although we signedup our first customers during the current quarter.

During thequarter, we signed 14 new contracts and added approximately 10,800 newend-users.  We made progress in developingfour new Web services including: search engine optimization, an enhancedversion of our site creator software, collaborative e-mail, and a Web sitedesign service.  While the first threeservices are still in development, the fourth initiative, website design, waslaunched on October 27.  We expensed allthe research and development costs as incurred. We also expanded our softwaredelivery platform in the United States as a result of, and in anticipation of,new customers.

In November 2006,we signed a contract with BT (formerly British Telecom) after successfullycompleting a pilot project during the quarter ended September 30, 2006.  This two year contract outsources BT’s smallbusiness web hosting business to us and we believe presents a significant opportunityto the Company if we can successfully migrate their sites onto our platformover the next several quarters.  Inanticipation of the BT contract and other new business, we built up additionalcapacity and staff in the second and third quarter.  These costs contributed to an increase in ourexpenses over the last two quarters.

With theadditional funds we received on closing of the IPO and the subsequent  exercise of the 15% over-allotment option bythe underwriters, we believe we are in a strong position to execute the growthplan we outlined in our prospectus including:

·                  addingnew customers in the U.S. and the U.K.;

·                  increasingthe end-user count of our current customers because of our enhanced serviceofferings; and

·                  increasingrevenue by launching additional value-added services.

## **KeyMetric**

*End-UserCount*         We grow our revenues primarilythrough the addition of end-user businesses who subscribe to our Web hostingand application services, also known as Web services. We add end-users by twoprincipal methods: (1) organic growth from our existing customers; and (2) theaddition of new customers who migrate their end-users to our system. To alesser extent we grow our end-users through small resellers and by direct salesto end-user businesses.   As of December31, 2006, we served approximately 248,000 end-users.

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The end-user count is predictive of our future revenue growth andoperating results due to the recurring revenue nature of our business   As a result, we monitor this metric closelyto forecast and manage our growth.

## **Sourcesof Revenue**

Wederive all of our revenue from Web hosting and application services and otherservices.  We sell our services primarilyon a wholesale basis to our customers. To a lesser extent, we sell our services directly to small resellers andend-user businesses.

*Web Hosting and ApplicationServices*

Webhosting and application service revenues are derived from the sale and supportof Web services. We generated 96.7% and 96.5% of our revenues in the ninemonths ended December 31, 2006 and 2005 respectively from Web hosting andapplication services.  Our customers payus monthly in accordance with contracts that range from one to five years forthe Web services that they resell to their end-users on a subscription basis.In addition, we derive a portion of our revenues from the direct sale of Webservices to small resellers and end-user businesses. We expect Web hosting andapplication services revenue to increase in absolute dollars and to remainrelatively stable as a percentage of our total revenues.

#### *OtherServices*

Otherservices are revenues derived from domain name registration and professionalservices. We derived 3.3% and 3.5% of our total revenues in the nine monthsended December 31, 2006 and 2005 respectively from other services. Domain name registration revenue consists ofdomain name registrations, renewals and transfers derived from customers,end-users and other individuals. Professional services consist of fees we receive from our customers forservices provided at their request. We expect other services revenue toincrease in absolute dollars and to remain relatively stable as a percentage ofour total revenues.

## **Costof Revenue**

Cost of revenueconsists principally of expenses relating to bandwidth and data center costs,software license fees, hardware maintenance and referral payments and domainname registration fees. Cost of revenue does not include salary and wageexpenses, technical support costs, depreciation and amortization expensesrelating to property and equipment, acquired patents and customer lists.

*Bandwidth and Data Center*

Bandwidth and datacenter expenses primarily consist of the cost of bandwidth and leased datacenter space. We purchase bandwidth from several suppliers. We lease space infour network operations centers — three in Toronto, Ontario and one in Miami,Florida.  We utilize these facilitiesunder contracts ranging from one to three years. We pay for these services on amonthly basis and record the expenses at the time they are incurred.  We expect that bandwidth and data centerfacility costs will increase as the number of end-users increases on oursystem.

#### *SoftwareLicense and Hardware Maintenance Fees*

Software licensingand hardware maintenance fees are incurred to maintain our application deliveryplatforms that we use in the delivery of our Web services. We expect thatsoftware license and hardware maintenance expenses will increase as the numberof end-users increases on our system.

*Referral Payments*

We make referralpayments to small resellers and select customers under referral agreements. Weexpect referral payments will increase with expected increases in revenue fromthese resellers and customers.

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*Domain Name Registration Fees*

We purchase domainrights from registered ICANN suppliers for resale.   Customers and end-users purchase the rightto use domain names for a specified number of years and this right must berenewed on a periodic basis.

## **OperatingExpenses**

Operating expensescomprise all personnel costs together with advertising and marketing expenses,travel expenses, administrative expenses including insurance and professionalfees, communication expenses, rent expenses for office facilities andamortization expenses.  We utilize afunctional reporting style allocating all non-amortization expenses to salesand marketing, research and development, project management, technical supportand general and administrative.

In addition, wehave used outsourced services provided by GeeksForLess, Inc., (“GFL”), arelated party by means of common ownership, since November 2003.  Originally contracted to provide research anddevelopment, GFL has provided services in the areas of technical support,project management and sales support. All expenses incurred in the outsourcing arrangement including travel ofour North American based personnel are allocated to our functional expenseclassifications.

#### *Sales andMarketing*

Sales andmarketing expenses represent the largest percentage of our operating expenses,and consist primarily of compensation and commissions for our salespersonnel.  Other sales and marketingexpenses include amounts paid to enable our employees to attend trade shows,print and Internet banner advertising, travel expenses and allocated rent,communications and office expenses. We expect future sales and marketingexpenses will increase as we expand our efforts to increase our customers,end-users and revenues.

#### *Researchand Development*

Research and development expenses consist primarily of compensation,performance bonuses and related expenses for our research and developmentstaff, contracted offshore resources, and allocated overhead costs. We focusour research and development efforts on increasing the features andfunctionality of our Web services and the delivery of those Web services toend-users.  We expect that, in the future, research anddevelopment expenses will increase as we upgrade and enhance our existing Webservice offerings, develop new Web service offerings and expand thecapabilities of our application delivery platform infrastructure in existingand new markets.

#### *ProjectManagement*

Project managementexpenses consist of compensation and performance bonuses, allocation ofpayments to GFL for its services to the project management group, travelexpenses, allocated rent, communication and office expenses. The projectmanagement team manages new customer set ups and our customers’ end-usermigrations to our application delivery platform as well as ongoing technicalassistance to customers.  We expectfuture project management expenses will increase due to the continuing growthand complexity of our customer base.

#### *TechnicalSupport*

Technical supportexpenses consist of compensation and allocated rent, communication and officeexpenses and allocation of payments to GFL for its services to the technicalsupport group. Our technical support staff provides assistance to our customersand/or their end-users.  We employ atechnical support staff that operates 24 hours a day, 365 days a year.  We expect future technical support expenseswill increase as we increase our end-users.

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*General and Administrative*

         General and administrativeexpenses consist of compensation and related expenses for administration and finance personnel,professional services that are not otherwise allocated to specific functions,insurance fees, franchise and capital taxes, banking fees, provision for baddebt expenses and other miscellaneous expenses that are not otherwiseallocated.  We expect future general and administrative expenses will increase as wecontinue to add personnel to support the growth of our business. We alsoanticipate that we will incur expenses related to professional service fees andinsurance fees necessary to comply with the requirements of being a publiccompany.

#### *Amortization*

Amortizationexpenses consist of charges relating to the amortization of all of the propertyand equipment (including hardware, software, furniture and fixtures andtelephone equipment), leasehold improvements, lease inducement assets, andintangible assets (including customer lists, patents, website templates anddigital images). With the exception of furniture and fixtures that areamortized over a period of three to five years, and leasehold improvements thatare amortized over the expected life of the relevant lease, all other assetsare amortized over a three-year period. We believe this policy covers most risks associated with the prospect oftechnological obsolescence; however, we periodically evaluate the condition ofour asset base to determine whether additional decreases in value may berequired. We expect future amortization expenses to increase as we continue tomake capital investments in our application delivery platform to support theexpansion of our Web services and increasing number of end-users.

## **CriticalAccounting Policies**

Our discussion and analysis ofour financial condition and results of operations is based on our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expensestogether with disclosure of contingent assets and liabilities.  We review our estimates on an ongoing basis.We base our estimates on historical experience and on various other assumptionsthat we believe to be reasonable under the circumstances. Actual results may differ from these estimatesunder different assumptions or conditions.  We believethe following accounting policies, described in greater detail in Note 1 to ourconsolidated financial statements contained in our Registration Statement onForm S-1, to be critical to the judgments and estimates used in the preparationof our consolidated financial statements.

#### *RevenueRecognition*

##### Web hostingand Applications Services

We recognize revenue derived from Web hosting and applications serviceson a monthly basis as services are performed. Customers receive invoices dated the first day of the monthduring which our Web services will be provided to them.  Set-up fees received in advance from ourcustomers are deferred and recognized as revenue on a straight-line basis overthe term of the underlying service contract.

We also receive a portion of our revenue directly from end-userbusinesses and small Web hosting resellers on a monthly, quarterly,semi-annually or annual basis. We defer recognition of revenue that will beearned in a subsequent period and for which an end-user has paid in advance.The portion of Web hosting and application services revenue received from theseend-users and small Web hosting resellers is recognized as deferred revenue in the accompanying consolidatedbalance sheets. As services are performed, we recognize this revenue on astraight-line basis over the applicable service period.

##### Other Services

As a domain namereseller, as opposed to a registrar, we recognize domain name registrationrevenue when we receive payment from customers and end-users since we have noobligation to maintain a domain registry following

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a sale.  Professional service revenue is recorded based upon the extent towhich all of the contracted professional services have been provided.

#### *Allowance for Doubtful Accounts*

In accordance with our revenue recognition policy, our accounts receivableare based on customers whose payment is reasonably assured. We monitorcollections from our customers and maintain an allowance for estimated creditlosses for 100% of all customers’ accounts deemed uncollectible. For thoseaccounts not specifically identified as uncollectible, an allowance ismaintained for a specific percentage of those receivables based on agingaccounts, historical collection experience and current economic expectations.  Credit losses have historically been withinour expectations and the provisions established in our financial statements butwe cannot guarantee that we will continue to experience the same credit lossrates that we have in the past. Because we have several large customers, a changein liquidity of any one customer or our inability to collect from one of thesecustomers could have a material adverse effect on our consolidated financialposition.

#### *Accountingfor Stock-Based Compensation*

Up to and including the fiscal year ended March 31, 2006, with theexception of stock option awards made to non-employee consultants that haveprovided services to us, we elected to defer the recognition of stock basedcompensation in our accounts as permitted under Accounting Principles Board (APB) Opinion No. 25. Effective April 1, 2006, we adopted the recommendations of SFASStatement No. 123R in recording stock-basedcompensation expense in our accounts.  Accordingly, as disclosed in Note 2 to ourfinancial statements stock-based compensation expense in fiscal 2007 hasincreased over the levels of preceding years.

In accordance withSFAS No. 123R, we determine compensation cost for stock awards at fair valueand recognize the related expense over the vesting period.  The estimation of stock awards that willultimately vest requires an assessment based on actual experience or updatedestimates that may differ from our current estimates.  Such amounts will be recorded as a cumulativeadjustment in the period estimates are revised. We consider several factors when estimating expected forfeitures,including types of awards and historical experience.  Actual results and future changes inestimates may differ substantially from our current estimates.

#### *Accountingfor Goodwill, Intangible Assets and Property and Equipment*

Since our inception we have fully allocated thepurchase price of acquisitions to intangible assets.  Other intangible assets include acquiredpatents, Website templates and digital images which are amortized using the straight-linemethod over three years. We test for the impairment of intangible assetsannually, and between annual tests if an event occurs or circumstances changethat would more likely than not reduce the fair value of the intangible assetbelow its carrying amount. Similarly, we review the condition andrevenue generating potential of our property and equipment to determine whetherour depreciation policies are satisfactory in the circumstances.

#### *Accountingfor Income Taxes*

We provide for income taxes under the asset and liabilitymethod.  Under this method, deferred taxassets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities aremeasured using enacted tax rates expected to be recovered or settled.  A valuation allowance is recorded to reducedeferred income tax assets to an amount that in the opinion of management ismore likely than not to be realized.  Weconsider factors, such as the reversal of deferred income tax liabilities,projected future taxable income, the character of the income tax asset, taxplanning strategies and other factors in the determination of the valuation allowance.  The effect on deferred tax assets andliabilities of a change in tax rates is recognized in the consolidatedstatements of operations in the year that includes the enactment date.  As of December 31, 2006, we do not have anynet operating losses or other tax attributes subject to valuation allowances.

#### *Accountingfor Contingencies*

In the normal course of our operations, we may besubject to litigation and claims from time to time.  It is our policy to provide adequateprovisions in the accounts where required. Although it is not possible to estimate the

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extent of potential costs, if any, we believe that there are no issues,the ultimate resolution of which would have a material adverse effect on theresults of our operations, financial position or liquidity.

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**Results of Operations for theThree and Nine Month Periods ended December 31, 2006 as Compared to the Threeand Nine Month Periods ended December 31, 2005**

**Revenues**
| ** **                                                         | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                         | ** ** | **December 31**             | ** ** | **December 31**            | ** ** | **December 31** | ** ** | **December 31** | ** ** |
| ** **                                                         | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                               | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                           |       |                             |       |                            |       |   |   |   |   |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| Web hosting and application services                               |       | $                                | 5,433,707  |                            | $          | 4,336,591 |   | $ | 16,059,489 |   | $ | 12,425,390 |   |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| Other services                                                     |       | 183,142                          |       | 147,203                         |       | 544,399 |   | 449,574 |   |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| Total revenue                                                      |       | $                                | 5,616,849  |                            | $          | 4,483,794 |   | $ | 16,603,888 |   | $ | 12,874,964 |   |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| End-users at end  of period                                        |       | 248,200                          |       | 190,700                         |       | 248,200 |   | 190,700 |   |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| Increase in end  users over comparable prior period – percent |       | 30.2                             | %          |                            |       | 30.2 | % |   |   |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| Increase over  comparable prior year period                        |       | $                                | 1,133,055  |                            |       |   | $ | 3,728,924 |   |   |   |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| Increase over  comparable prior year period – percent         |       | 25.3                             | %          |                            |       | 29.0 | % |   |   |

** **

## **Comparisonof the Three Month Periods ended December 31, 2006 and 2005**

#### *Revenues*

Total revenueincreased by 25.3% to $5.6 million in the three month period ended December 31,2006 from $4.5 million in the three month period ended December 31, 2005.

##### Web Hostingand Application Services

Web hosting and application services revenue increasedby $1.1 million or 25.3% to $5.4 million. Our revenue growth was due to a 57,500 or 30.2% increase in end-usersyear over year.  We had approximately248,000 end-users on our system as of December 31, 2006.  The end-user growth was due to a combinationof new customers added over the previous twelve month period and increasedpenetration of our existing customer base. New customers added approximately22,300 end-users, representing a 12% increase over the number of end-users atthe beginning of the year.  Penetrationof our existing customer base added approximately 35,200 end-users,representing a 18% increase over the number of end-users at the beginning ofthe year.   Revenue growth in the thirdquarter moderated due to the coincidence of a number of factors including:

·                  a major customer running a promotionto acquire new end-users that we are supporting by not billing for end—usersacquired by this customer for a period of two months, and 

·                  asecond  major customer culling 10,000 lowvalue accounts from its portfolio

Future revenue growth infourth quarter 2007 and fiscal 2008 will be supported by the approximately11,000 websites migrated to our platform in the third quarter. In the thirdquarter we also signed a contract with a major U.S. telephone company that willbe outsourcing approximately 240,000 email accounts to us. In addition, shortlyafter quarter end we signed our first template licensing contract. We believeadditional email outsourcing contracts are likely to provide us with additionalsources of recurring revenue while future licensing opportunities will increaseour

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professional service feesas contracts are completed. At the end of the quarter we had approximately36,000 websites that we anticipate migrating over the coming quarters.Accordingly, we believe the dip in the rate of our sequential revenue growth inthe third quarter does not reflect a long term trend but was rather a shortterm anomaly and our sequential revenue growth should accelerate in the comingquarters. This expectation is dependent on maintaining and growing ourcustomers and end-users and successfully migrating the anticipated websites ande-mail accounts related to contracts in process. 

##### Other Services

Other servicerevenue, including domain name registration and professional services revenue,increased by $36,000 or 24% to $183,000 from $147,000.  The primary reason for the increase was thesale of more domain names related to the acquisition of the Web business of aformer customer in January 2006.

## **Comparisonof the Nine Month Periods ended December 31, 2006 and 2005**

Total revenueincreased by 29.0% to $16.6 million in the nine month period ended December 31,2006 from $12.9 million in the nine month period ended December 31, 2005.  During the nine month period ended December31, 2006, there was a 7.0% increase in the value of the Canadian dollar againstthe US dollar, based on the average Canada/US exchange rate during that period.If the value of the Canadian dollar had remained constant against the US dollarduring the nine month period ended December 31, 2006, the net increase inrevenue would have been $3.3 million or 24.7%.

##### Web Hostingand Application Services

Web hosting andapplication services revenue increased by $3.6 million or 29.2% to $16.1million.  Our revenue growth was due to a57,500 increase in end-users or 30.2% year over year.  We had approximately 248,000 end-users on oursystem as of December 31, 2006.  Theend-user growth was due to a combination of new customers added over theprevious twelve month period and increased penetration of our existing customerbase. New customers added approximately 22,300 end-users, representing a 12%increase over the number of end-users at the beginning of the year.  Penetration of our existing customer baseadded approximately 35,200 end-users, representing a 18% increase over thenumber of end-users at the beginning of the year.

##### Other Services

Other servicerevenue, including domain name registration and professional services revenue,increased by $95,000 or 21% to $544,000 from $450,000.  The primary reason for the increase was thesale of more domain names  related to theacquisition of the Web business of a former customer in January 2006.

**Cost of Revenues**
| ** **                                            | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **December 31**             | ** ** | **December 31**            | ** ** | **December 31** | ** ** | **December 31** | ** ** |
| ** **                                            | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Cost of Revenues                                      |       |                             |       |                            |       |   |   |   |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Web hosting and application services                  |       | $                                | 624,834    |                            | $          | 449,088 |   | $ | 1,825,514 |   | $ | 1,249,399 |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Other services                                        |       | 84,963                           |       | 50,242                          |       | 254,066 |   | 157,643 |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Total cost of revenues                                |       | $                                | 709,797    |                            | $          | 499,330 |   | $ | 2,079,580 |   | $ | 1,407,042 |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Percent of  revenues                                  |       | 12.6                             | %          | 11.1                            | %          | 12.5 | % | 10.9 | % |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Increase over  comparable prior year period           |       | $                                | 210,467    |                            |       |   | $ | 672,538 |   |   |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Increase over  comparable prior year period - percent |       | 42.1                             | %          |                            |       | 47.8 | % |   |   |

####  

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#### **Comparisonof the Three Month Periods ended December 31, 2006 and 2005**

#### *Cost ofRevenues*

Total cost ofrevenue increased by 42.1% to $710,000 in the three month period ended December31, 2006 from $499,000 in the three month period ended December 31, 2005.

##### Web Hostingand Applications Services

Cost of Web hosting and application services revenueincreased by 39% to $625,000 in the three months ended December 31, 2006 from$449,000 in the three months ended December 31, 2005.  These expenses include bandwidth expense,data center costs, software license fees, hardware maintenance fees, referralpayments and credit card collection fees. Bandwidth and data center costs increased by approximately $32,000 or12% quarter over quarter due in part to our 30% increase in end-users as wellas additional bandwidth and leased data center space acquired in anticipationof additional end-users expected from several large contracts that were invarying stages of implementation during the quarter. Software licenses fees,hardware maintenance fees and referral payments increased by approximately$116,000 or 87% due to a combination of increased software and hardwaremaintenance and increased referral payments due to increased revenue. Creditcard collection fees increased by approximately $28,000 or 72% due in largepart to the acquisition of a customer’s end-users in January 2006 and theaddition of a new customer late in the second quarter for whom we collectreceipts directly from end-users.  Sincethese end-users are billed directly, we incur the cost of account processingthrough various payment gateways.

##### Other Services

Cost of otherservices revenue increased by 69% to $85,000 from $50,000.  Other services expense includes the purchaseof domain name rights that we resell to end-users. Other services expenseincreased due in part to the 24% increase in other revenue related to domainname sales of the business acquired from a former customer in January 2006.

## **Comparisonof the Nine Month Periods ended December 31, 2006 and 2005**

#### *Cost ofRevenues*

Total cost ofrevenues increased by 47.8% to $2.1 million in the nine month period endedDecember 31, 2006 from $1.4 million in the nine month period ended December 31,2005.

##### Web Hosting andApplications Services

Cost of Web hosting and application services revenueincreased by 46% to $1.8 million in the nine months ended December 31, 2006from $1.2 million in the nine months ended December 31, 2005.  These expenses include bandwidth expense,data center costs, software license fees, hardware maintenance fees, referralpayments and credit card collection fees. Bandwidth and data center costsincreased by approximately $199,000 or 25% primarily because of our 32%increase in end-users as well as additional bandwidth and leased data centerspace acquired in anticipation of additional end-users expected from severallarge contracts that were in varying stages of negotiation during the quarter.Software licenses fees, hardware maintenance fees and referral paymentsincreased by approximately $271,000 or 79% due to a combination of increasedsoftware and hardware maintenance and increased referral payments due toincreased revenue. Higher credit card collection fees contributed approximately$106,000 to the increase due in large part to the acquisition of a customer’send-users in January 2006 and the addition of a new customer late in the secondquarter for whom we collect receipts directly from end-users.  Since these end-users are now billeddirectly, we now incur the account processing cost from various paymentgateways.

 

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##### Other Services

Cost of otherservices revenue increased by 61% to $254,000 from $158,000.  Other services expense includes the purchaseof domain name rights that we resell to end-users. Other services expenseincreased due in part to the 21% increase in other revenue related to domainname sales of the business acquired from a former customer in January 2006.

#### **OperatingExpenses**

Total operatingexpenses increased by 39% to $4.5 million in the three months ended December31, 2006 compared to the three months ended December 31, 2005.  Total operating expenses represented 79.3%and 71.2% of total revenue in the respective three month periods endingDecember 31, 2006 and 2005.

In the nine monthperiod ended December 31, 2006, total operating expenses increased by 36% to$12.6 million from $9.3 million in the nine months ended December 31,2005.  Total operating expensesrepresented 76.0% and 72.2% of total revenue in the respective nine monthperiods ending December 31, 2006 and 2005.

**Sales and Marketing**
| ** **                                            | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **December 31**             | ** ** | **December 31**            | ** ** | **December 31** | ** ** | **December 31** | ** ** |
| ** **                                            | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                  | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales and  marketing                                  |       | $                                | 1,259,359  |                            | $          | 1,012,367 |   | $ | 3,606,616 |   | $ | 2,969,329 |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Percent of  revenues                                  |       | 22.4                             | %          | 22.6                            | %          | 21.7 | % | 23.1 | % |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Increase over  comparable prior year period           |       | $                                | 246,992    |                            |       |   | $ | 637,287 |   |   |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Increase over  comparable prior year period - percent |       | 24.4                             | %          |                            |       | 21.5 | % |   |   |
|                                                       |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

####  

#### *Sales andMarketing (Three Month Period Ended December 31, 2006)*

Sales and marketingexpenses increased by 24% to $1.3 million from $1.0 million for the threemonths ended December 31, 2005. Salaries, wages and benefits, including stock option benefits, up$249,000 or 45%, accounted for most of the increase. In the past twelve monthssales and marketing staff has increased by 50%. This substantial increase was required to service the Web hostingbusiness of a former customer we acquired in January 2006, as well as to staffour new Website Experts group that was formed to focus on the burgeoningwebsite design market. Trade show expenses were $33,000 lower than thecomparable quarter while advertising declined by approximately $46,000 as weredeployed funds towards our direct sales efforts.  The $76,000 or 38% increase in allocatedexpenses, including rent, office, telecommunications, travel and contractedexpenses in Ukraine related to the increase in sales support personnel hired toservice and grow our customer base. We believe a portion of the increase insales and marketing expenses to be an investment in building recurring revenueboth from existing and new customers that will have a greater effect on thefuture years’ revenues than the current year.

#### *Sales andMarketing (Nine month period ended December 31, 2006)*

Sales andmarketing expenses increased by 22% to $3.6 million from $3.0 million for thenine months ended December 2005. Salaries, wages and benefits, including stockoption benefits, up $562,000 or 31%, accounted for most of the increase. In thepast twelve months sales and marketing staff has increased by 50%.  This substantial increase was required toservice the Web hosting business of a former customer we acquired in January2006, as well as to staff our new Website Experts group that was formed tofocus on the burgeoning website design market. Trade show expenses declined by$97,000 or 24% and advertising was reduced by $89,000 or 52%as we redeployedfunds towards our direct sales efforts. The $261,000 or 47% increase in allocated expenses, including rent,office, telecommunications, travel and contracted expenses in Ukraine relatedto the increase in sales support personnel hired to service and grow ourcustomer base.

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**Research and Development**
| ** **                                            | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **December 31**             | ** ** | **December 31**            | ** ** | **December 31** | ** ** | **December 31** | ** ** |
| ** **                                            | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                  | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Research and  development                             |       | $                                | 773,901    |                            | $          | 524,439 |   | $ | 2,268,885 |   | $ | 1,511,700 |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Percent of  revenues                                  |       | 13.8                             | %          | 11.7                            | %          | 13.7 | % | 11.7 | % |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Increase over  comparable prior year period           |       | $                                | 249,462    |                            |       |   | $ | 757,185 |   |   |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Increase over  comparable prior year period - percent |       | 47.6                             | %          |                            |       | 50.1 | % |   |   |
|                                                       |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

####  

#### *Researchand Development (Three Month Period Ended December 31, 2006)*

#### Research and development expenses increase by 48% to $774,000 from$524,000 in the three months ended December 31, 2005.  Salaries, wages and benefits including stockoption benefits increased by $214,000 or 59% compared to the prior year’scomparable quarter.  Personnel countincreased by 40% year over year as we continued to invest in enhancing ourproduct offerings and expanding our business. Allocated expenses including rent, office, hardware, telecommunications,travel and contracted expenses in Ukraine increased by $35,000 or 22% due tothe increase in personnel.

#### *Researchand Development (Nine month Period Ended December 31, 2006)*

#### Research and development expenses increase by 50% to $2.3 million from$1.5 million in the nine months ended December 31, 2005.  Salaries, wages and benefits including stockoption benefits increased by $680,000 or 65% compared to the prior year’scomparable period.  Period end personnelcount increased by 40% year over year as we continued to invest in enhancingour product offerings and expanding our business.  Allocated expenses including rent, office, hardware,telecommunications, travel and contracted expenses in Ukraine increased by$78,000 or 16% due to the increase in personnel offset by reduced hardwarespending.

**Project Management**
| ** **                                            | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **December 31**             | ** ** | **December 31**            | ** ** | **December 31** | ** ** | **December 31** | ** ** |
| ** **                                            | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                  | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Project  management                                   |       | $                                | 407,936    |                            | $          | 347,678 |   | $ | 1,247,733 |   | $ | 989,982 |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Percent of  revenues                                  |       | 7.3                              | %          | 7.8                             | %          | 7.5 | % | 7.7 | % |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Increase over  comparable prior year period           |       | $                                | 60,258     |                            |       |   | $ | 257,751 |   |   |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Increase over  comparable prior year period - percent |       | 17.3                             | %          |                            |       | 26.0 | % |   |   |
|                                                       |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

####  

#### *ProjectManagement (Three Month Period Ended December 31, 2006)*

#### Project management expenses increased by 17% to $408,000 from $348,000in the three months ended December 31, 2005. Salaries, wages and benefits including stock option benefits increasedby $7,000 or 3% compared to the prior year’s comparable quarter.  Personnel count increased 5% year overyear.   Allocated expenses includingrent, office, telecommunications, travel and contracted expenses in Ukraineincreased by $53,000 or 48% due to the increase in end-users migrated to oursystem.

#### *ProjectManagement (Nine month Period Ended December 31, 2006)*

#### Project management expenses increased by 26% to $1.2 million from $1.0million in the nine months ended December 31, 2005.  Salaries, wages and benefits including stockoption benefits increased by $99,000 or 15%

26

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#### compared tothe prior year’s comparable period. Personnel count increased 5% year over year.   Allocated expenses including rent, office,telecommunications, travel and contracted expenses in Ukraine increased by$159,000 or 49% due to the increase in end-users migrated to our system.

 

**Technical Support**
| ** **                                            | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **December 31**             | ** ** | **December 31**            | ** ** | **December 31** | ** ** | **December 31** | ** ** |
| ** **                                            | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                  | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Technical  support                                    |       | $                                | 781,916    |                            | $          | 548,066 |   | $ | 2,255,123 |   | $ | 1,578,308 |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Percent of  revenues                                  |       | 13.9                             | %          | 12.2                            | %          | 13.6 | % | 12.3 | % |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Increase over  comparable prior year period           |       | $                                | 233,850    |                            |       |   | $ | 676,815 |   |   |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Increase over  comparable prior year period - percent |       | 42.7                             | %          |                            |       | 42.9 | % |   |   |
|                                                       |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

####  

#### *TechnicalSupport (Three Month Period Ended December 31, 2006)*

#### Technical support expenses increased by 43% to $782,000 from $548,000in the three months ended December 31, 2005. Salaries, wages and benefits including stock option benefits increasedby $157,000 or 35% compared to the prior year’s comparable quarter.  Personnel count increased by 15 or 24% yearover year to support the increase in our end-users.   Allocated expenses including rent, office,telecommunications, travel and contracted expenses in Ukraine increased by$77,000 or 79% due to the increase in end-users migrated to our system and arelated increase in the number of contractors in Ukraine that assist inhandling our written and live chat technical support.

#### *TechnicalSupport (Nine month Period Ended December 31, 2006)*

#### Technical support expenses increased by 43% to $2.3 million from $1.6million in the nine months ended December 31, 2005.  Salaries, wages and benefits including stockoption benefits increased by $466,000 or 36% compared to the prior year’scomparable period.  Period end personnelcount increased by 15 or 24% year over year to support the increase in ourend-users.   Allocated expenses includingrent, office, telecommunications, travel and contracted expenses in Ukraineincreased by $211,000 or 73% due to the increase in end-users and a relatedincrease in the number of contractors in Ukraine that assist in handling ourwritten and live chat technical support.

**General and Administrative**
| ** **                                            | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **December 31**             | ** ** | **December 31**            | ** ** | **December 31** | ** ** | **December 31** | ** ** |
| ** **                                            | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                  | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and  administrative                           |       | $                                | 541,285    |                            | $          | 356,331 |   | $ | 1,363,966 |   | $ | 1,042,367 |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Percent of  revenues                                  |       | 9.6                              | %          | 7.9                             | %          | 8.2 | % | 8.1 | % |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Increase over  comparable prior year period           |       | $                                | 184,954    |                            |       |   | $ | 321,599 |   |   |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Increase over  comparable prior year period - percent |       | 51.9                             | %          |                            |       | 30.9 | % |   |   |
|                                                       |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

####  

#### *General andAdministrative (Three Month Period Ended December 31, 2006)*

General andadministrative expenses increased by 52% to $541,000 from $356,000 in the threemonths ended December 31, 2005. Salaries, wages and benefits including stock option benefits increasedby $101,000 or 43% compared to the prior year’s comparable quarter.  The number of personnel increased by 2 or 15%year over year.   We experienced a$76,000 increase in professional fees expense related to our new status as apublic company, combined with a $9,000 increase in the provision for doubtfulaccounts.  In the three months endedDecember 31,

27

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2006, we experienced a positive currency expense swing of approximately$6,000 compared to the three months ended December 31, 2005.  Allocated expenses including rent, office,telecommunications and travel increased by $3,000 or 6% due to ongoing businessgrowth. We do anticipate increases in professional fees including regulatorycompliance related expense, higher insurance expenses and increased directors’fees when we become a public company.

#### *General and Administrative (Nine month Period Ended December 31, 2006)*

General andadministrative expenses increased by 31% to $1.4 million from $1.0 million inthe nine months ended December 31, 2005. Salaries, wages and benefits including stock option benefits increasedby $169,000 or 23% compared to the prior year’s comparable period.  The number of end personnel increased by 2 or15% year over year.   Higher professionalfees expense in the nine months ended December 31, 2006 compared to the sameperiod of fiscal 2006 combined with an increase in the provision for doubtfulaccounts receivable resulted in a net year over year increase of $92,000.  In the nine months ended December 31, 2006,we experienced a negative currency expense swing of approximately $35,000compared to the nine months ended December 31, 2005.  Allocated expenses including rent, office,telecommunications and travel increased by $25,000 or 21% due to ongoing businessgrowth.

**Amortization**
| ** **                                            | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **December 31**             | ** ** | **December 31**            | ** ** | **December 31** | ** ** | **December 31** | ** ** |
| ** **                                            | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Amortization                                          |       | $                                | 688,529    |                            | $          | 405,382 |   | $ | 1,881,517 |   | $ | 1,199,269 |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Percent of  revenue                                   |       | 12.3                             | %          | 9.0                             | %          | 11.3 | % | 9.3 | % |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Increase over  comparable prior year period           |       | $                                | 283,147    |                            |       |   | $ | 682,248 |   |   |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Increase over  comparable prior year period - percent |       | 69.8                             | %          |                            |       | 56.9 | % |   |   |
|                                                       |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

####  

#### *AmortizationExpense (Three Month Period Ended December 31, 2006)*

Amortizationexpense increased by approximately 70% to $688,000 from $405,000 in the threemonths ended December 31, 2005.  This$283,000 increase in amortization expense is largely due to a $153,000 or 36%increase in amortization expense related to our investment in server storagecapacity to service the increase in end-users of our services. In addition,our  investment in customer lists,templates and patents increased this quarter’s amortization expenses related tothese assets by $90,000, $7,000 and $33,000 respectively.

#### *AmortizationExpense (Nine month Period Ended December 31, 2006)*

Amortizationexpense increased by approximately 57% to $1.9 million from $1.2 million in thenine months ended December 31, 2005  This $682,000 increase in amortization expense is largely due to a$337,000 or 32% increase in amortization expense related to our investment inserver storage capacity by to service the increase in end-users of ourservices. In addition, our investment in customer lists, templates and patentsincreased year to date amortization expenses related to these assets by$270,000, $20,000 and $55,000 respectively.

#### *InterestIncome (Three Month Period Ended December 31, 2006)*

Interest incomeincreased to $180,000 from $9,000 in the three months ended December 31, 2005as our short—term investments increased by approximately $22.0 million duringthe quarter. This increase was a result of our placing the proceeds from ourinitial public offering, completed on November 10th and the related exercise of the underwriters’15% over-allotment option on December 7th, in an investment grade money market fund yieldingapproximately 5%.

28

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*Interest Income (Nine month Period Ended December31, 2006)*

         Interest income increased to$220,000 from $18,000 in the nine months ended December 31, 2005 due in smallpart to the increase in short-term bank deposits during the first six months ofthis year as a result of cash flow from operations and the higher short-terminterest rates this year. Most of the increase relates to our short—terminvestments increasing by approximately $22.0 million during the third quarter.This increase was a result of our placing the proceeds from our initial publicoffering, completed on November 10th and the related exercise of the underwriters’ 15%over-allotment option on December 7th,in an investment grade money market fund yielding approximately 5%.  .

#### *InterestExpense (Three Month Period Ended December 31, 2006)*

Interest expensewas $4,000 in the three months ended December 31, 2006.  We did not incur interest expense in thecomparable period last year.

#### *InterestExpense (Nine month Period Ended December 31, 2006)*

Interest expenseof $13,000 in the nine months ended December 31, 2006 increased by $8,000 overthe nine months ended December 31, 2005 due to imputed interest on the longterm debt related to the purchase of web hosting assets from a customer inJanuary 2006.  Interest expense in thenine month period ended December 31, 2005 related to the self-declaration ofsales tax on out-of-state purchases of capital assets.

#### *Income TaxExpense (Three Month Period Ended December 31, 2006)*

Income tax expenseof $257,000 in the three months ended December 31, 2006 decreased by $28,000from the three months ended December 31, 2005 due to a decline in taxableincome.  The effective tax rate of 40.8%of pre-tax income is higher than the 35.6% in the three months ended December31, 2005 due to a higher percentage of non-deductible items in the currentperiod.

#### *Income TaxExpense (Nine month Period Ended December 31, 2006)*

Income tax expenseof $816,000 in the nine months ended December 31, 2006 increased by $41,000over the nine months ended December 31, 2005 despite a decline in taxableincome.  The effective tax rate of 38.7%of pre-tax income is higher than the 35.4% in the three months ended December31, 2005 due to the recognition of a higher percentage of non-deductible permanent differences in the year todate period.

## **Liquidityand Capital Resources**

Cash and cashequivalents are currently our primary source of liquidity. We expect cash flowfrom operations will continue to be an ongoing source of liquidity. As ofDecember 31, 2006, we had $25.7 million in cash and cash equivalents and $25.7million in working capital, as compared to $3.0 million in cash and cashequivalents and $2.7 million in working capital as of March 31, 2006. Our cashposition increased significantly in the current quarter as we raised $22.0million, after fees and expenses from our initial public offering of 4,200,000a common shares on November 10th and subsequent issue on December 7th of a further 630,000 common shares pursuant tothe underwriter’s 15% over-allotment option. In addition, we raised $192,000 on the exercise of 60,000 warrants inDecember 2006.

Operating activitiesprovided $2.8 million of net cash year to date, a decrease of $0.4 million from$3.2 million of operational cash flow in the nine months ended December 31,2005. The $.0.4 million decrease was primarily a result of a $0.3 milliondecrease in items not involving cash from $1.6 million to $1.9 million as $0.7million higher amortization and a $0.1 million increase stock-basedcompensation was more than offset by a $1.1 million year to date variance indeferred income taxes. A $0.1 million decline in year to date net incomeaccounted for the remaining decline in cash flow from operating activities asoperating working capital requirements increased by $0.1 million year to datein both years. As profitability and amortization are both expected to increasein fiscal 2008 and the influence of non-cash taxes are expected to moderate, weanticipate stronger cash flow from operations next year.

29

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Cash flows fromfinancing activities totaled $22.0 million as the $22.1 million of net proceedsfrom the issuance of 4,990,537 common shares was offset by the repayment of$0.1 million of long-term liabilities. In the nine months ended December 31,2005 financing activities was neither a source nor use of cash.

Net cash used ininvestment activities year to date totaled $2.1 million compared to $1.5million in the nine months ended December 31, 2005. Year to date we purchased$1.3 million of property and equipment and invested $0.8 million on thelicensing of software and the purchase of web design templates.  In the nine months ended December 31, 2005,we purchased  $1.3 million of propertyand equipment and invested $0.2 million in web design templates. The level ofcapital investment in our business is anticipated to increase in fiscal 2008 aswe substantially expand our U.K. presence and continue to grow in NorthAmerica.

Targeted expenditureswill include, but may not be limited to, the following activities:

·                  Sellingand marketing costs to prospective customers as we continue to build our keymetric of end-users;

·                  Investmentin our domestic infrastructure to support our growth in North America;

·                  Investmentin infrastructure in the United Kingdom to serve our recently contracted U.K.customer base and provide us with a window on Europe;

·                  Investmentin research and development activities to enhance our product offerings andrevenue generation per end-user; and

·                  Acquisitionof strategic technology or business operations that will enhance our ability todeliver more services and generate more revenue from our end-users.

We believe, basedon our cash and cash equivalents at December 31, 2006 and our projected cashflow from operations, we have sufficient resources to finance our business,including sales and marketing expenses, research and development expenses andcapital expenditures in the short and long term without raising further fundsin the capital markets. With the additional cash received from our initialpublic offering, we have the liquidity to make additional investments in ourapplication delivery platform, expand our portfolio of web services, expandfurther into the UK marketplace and make strategic investments in complementarybusinesses, services, products and technologies.

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

*Foreign Currency Exchange Risk*

The operatingresults and cash flows that we generate through our revenue activities aresubject to fluctuations due to changes in foreign currency exchange rates,particularly changes in the relationship of the Canadian dollar to the U.S.dollar and to a much lesser extent U.K. pounds. We have not entered into any hedging contracts but we review ourcurrency exposure periodically to ensure that our revenues in non-U.S.currencies are reasonably matched by expenses in those currencies.  During the nine months ended December 31,2006, non-U.S. dollar denominated revenues totaled  approximately $7.2 million in Canada dollarsand $0.2 million in U.K. pounds. Based on this current level of revenues anannualized 1% fluctuation in the Canadian dollar exchange rate would increaseor decrease revenues by approximately $0.1 million.

*Interest Rate Sensitivity*

We had investmentsin short term bank deposits and money market funds amounting to $23.9 millionat December 31, 2006. We currently do not have any interest bearing debtobligations. Due to the short term nature of our investments, we believe thatwe do not have any material exposure to changes in the fair value of our shortterm investments as a result of changes in interest rates.  However, we estimate, based on the level ofshort term interest bearing investments at December 31, 2006, that on anannualized basis a 1% fluctuation in short term interest rates would raise orlower our net income by approximately $0.01per share.

30

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**Item 4     Controls and Procedures**

## **Evaluationof Disclosure Controls and Procedures**

Under thesupervision and with the participation of our management, including our ChiefExecutive Officer and Chief Financial Officer, we evaluated the effectivenessof the design and operation of our disclosure controls and procedures (asdefined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of1934 (“Exchange Act”)).  Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat, as of the end of the period covered by this report, our disclosurecontrols and procedures were effective in ensuring that information required tobe disclosed by us in the reports we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin applicable rules and forms and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer as appropriate, to allow timely decisions regarding requireddisclosure.

No change in theCompany’s internal control over financial reporting has occurred during theCompany’s fiscal quarter ended December 31, 2006 that has materially affected,or is reasonably likely to materially affect, the Company’s internal controlover financial reporting.

31

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**PART II**

**OTHER INFORMATION**

**Item 1.Legal Proceedings**

From time to time we may be involved in litigationrelating to claims arising out of the conduct of our operations.  Presently, we are not involved in any materiallitigation.

**Item1A.  Risk Factors**

In addition to other information disclosed in thisQuarterly Report you should also carefully consider the risk factors:

**Risks Related to Our Business**

In addition to the other information set forthin this report, you should carefully consider the factors discussed in Part II,“Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the periodended September 30, 2006, which could materially affect our business, financialcondition or future results. The risks described in our Quarterly Report onForm 10-Q are not the only risks facing our Company. Additional risks anduncertainties not currently known to us or that we currently deem to beimmaterial also may materially adversely affect our business, financial conditionand/or operating results. There are no material changes to the Risk Factorsdescribed in our Quarterly Report on Form 10-Q for the period ended September30, 2006 other than the addition of theRisk Factor below entitled “The release of locked up common shares and exerciseof stock options in May 2007 could cause our share price to decline.”

***The release of locked up commonshares and exercise of stock options in May 2007 could cause our share price todecline.***

Approximately 56.3% or6,220,531 of our outstanding common shares are currently held by stockholderssubject to a lock up agreement with our Underwriters which expires in May2007.  Moreover, employees hold 752,207stock options that may be exercised into our common shares at a strike price substantiallybelow our current market price. The employees holding the stock options arealso subject to the lock up agreement’s prohibition to sell any common sharesprior to May 2007.  The number of sharesof common stock subject to the lock up agreement is much greater than theaverage weekly trading volume for our shares. If the stockholders and employeescurrently subject to the lock up agreement sell substantial amounts of ourcommon stock, including shares issuable upon the exercise of outstanding employeestock options, in the public market or if our stockholders and employees areperceived by the market as intending to sell substantial amounts of our commonstock, the market price of our common stock could fall.

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

OnNovember 2, 2006, our registration statement on Form S-1 (RegistrationNo. 333-135533), registering 4,200,000 shares of our common stock, $0.0001par value, for sale by us was declared effective by the Securities and ExchangeCommission and we commenced our initial public offering on that date. InCanada, RBC Dominion Securities Inc., TD Securities Inc., GMP Securities L.P.and Haywood Securities Inc. acted as the managing underwriters for theoffering. In the United States, RBC Capital Markets Corporation, TD Securities(USA) LLC, Griffith McBurney Corp. and Haywood Securities (USA) Inc. acted asthe managing underwriters for the offering. On November 10, 2006, wecompleted the offering at $5.30 (CDN $6.00) per share. The aggregate purchaseprice, before expenses, to us was $ 22.3 million (CDN$ 25.2 million) and weincurred $3.4 million in expenses, resulting in net proceeds from the initialoffering of $18.9 million. On December 7, 2006, the underwriters exercisedtheir over-allotment option and purchased an additional 630,000 shares of ourcommon stock for $5.22 (CDN $6.00). The aggregate purchase price, before fees,to us was $3.3 million (CDN $3.8 million). We paid the underwriters $0.2million, resulting in net proceeds of $3.1 million (CDN $3.5 million). The net proceeds have been invested

32

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in investment grade commercial paper.****During the quarterended December 31, 2006, we used approximately $234,000 of net proceedsfrom the IPO for the purchase of property and equipment and intellectualproperty.  Neither our directors, officers , affiliates,nor persons owning 10% or more of any class of our securities received director indirect payments in connection with our payment of the offering-relatedexpenses.

**Item 3.  DefaultsUpon Senior Securities**

None

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

None

**Item 5.  OtherInformation**

None

33

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**Item6.  Exhibits**
| Exhibit Number | ** ** | **Description**                                                                                                                                      |
|----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(2)         |       | Amended and Restated Certificate of Incorporation of  Hostopia.com Inc.                                                                         |
| 3.2(3)         |       | Amended and Restated Bylaws of  Hostopia.com Inc.                                                                                               |
| 4.1(1)         |       | Shareholder Agreement dated as of December 27,  2001                                                                                            |
| 4.2(1)         |       | Registration Rights Agreement dated as of  December 27, 2001                                                                                    |
| 4.3(1)         |       | Warrant dated July 1, 2003 exercisable for  60,000 shares of common stock                                                                  |
| 4.4(4)         |       | Specimen Stock Certificate                                                                                                                           |
| 10.1(1)        |       | Hostopia.com Inc. 2000 Stock Option Plan  and forms of related agreements                                                                  |
| 10.2(3)        |       | Hostopia.com Inc. 2006 Stock Option Plan  and forms of related agreements                                                                  |
| 10.3(1)        |       | Employment Agreement with William Campbell, dated  June 1, 2006                                                                                 |
| 10.4(1)        |       | Employment Agreement with Colin Campbell, dated  June 1, 2006                                                                                   |
| 10.5(1)        |       | Employment Agreement with Michael Mugan, dated  April 1, 2006                                                                                   |
| 10.6(1)        |       | Employment Agreement with Paul Engels, dated  April 1, 2006                                                                                     |
| 10.7(1)        |       | Employment Agreement with Dirk Bhagat, dated  June 1, 2006                                                                                      |
| 10.8(1)        |       | Management Services Agreement with John Nemanic,  dated June 1, 2006                                                                            |
| 10.9(1)        |       | Form of Indemnification Agreement between the  registrant and each of its directors and executive officers                                      |
| 10.10(1)       |       | Asset Purchase Agreement between the registrant and  FortuneCity.com Inc., dated as of January 31, 2006                                    |
| 10.11(1)       |       | Services Agreement between the registrant and  Geeksforless Inc., dated as of July 1, 2005                                                 |
| 10.12(1)       |       | Template Purchase Agreement between the registrant  and Geeksforless Inc., dated as of February 1, 2005                               |
| 10.13(1)       |       | Image Library Agreement between the registrant and  Geeksforless Inc., dated as of January 2, 2005                                         |
| 10.14(1)       |       | Lease between Badenhurst-Airway Centre Ltd. and  the registrant dated September 30, 2002, as amended                                       |
| 10.15(1)       |       | Revolving Line of Credit Facility                                                                                                                    |
| 31.1           |       | CEO Certification required by Rule 13a-14(a) or Rule  15d-14(a)                                                                                      |
| 31.2           |       | CFO Certification required by Rule 13a-14(a) or Rule  15d-14(a)                                                                                      |
| 32.1           |       | Certification required by Rule 13a-14(b) or Rule  15d-14(b) and Section 1350 of Chapter 63 of Title 18 of United States Code  (18 U.S.C. §1350) |
| 32.2           |       | Certification required by Rule 13a-14(b) or Rule  15d-14(b) and Section 1350 of Chapter 63 of Title 18 of United States Code  (18 U.S.C. §1350) |

----

(1)Incorporated by reference to theRegistrant’s Form S-1 (SEC File No. 333-135533), filed on June 30, 2006

(2)Incorporated by reference to theRegistrant’s Form S-1/A (SEC File No. 333-135533), filed on July 3, 2006

(3)Incorporated by reference to theRegistrant’s Form S-1/A (SEC File No. 333-135533), filed on August 11, 2006

(4)Incorporated by reference to the Registrant’s Form S-1/A (SEC File No.333-135533), filed on October 5, 2006

 

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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.
|        | HOSTOPIA.COM  INC.                            |
|--------|-----------------------------------------------|
|   | (Registrant)                                  |
|   |                                          |
|   | February 13,  2007                            |   | /s/ COLIN  CAMPBELL |
| Date   |                                          | Colin Campbell |
|   |                                          | Chief Executive Officer |
|   |                                          |
|   | February 13,  2007                            |   | /s/ MICHAEL J.  MUGAN |
| Date   |                                          | Michael J. Mugan |
|   |                                          | Chief Financial Officer |
|   | (Principal  Financial and Accounting Officer) |

 

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**ExhibitIndex**
| Exhibit  Number | ** ** | **Description**                                                                                                                                      |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(2)          |       | Amended and Restated Certificate of Incorporation of  Hostopia.com Inc.                                                                         |
| 3.2(3)          |       | Amended and Restated Bylaws of  Hostopia.com Inc.                                                                                               |
| 4.1(1)          |       | Shareholder Agreement dated as of December 27,  2001                                                                                            |
| 4.2(1)          |       | Registration Rights Agreement dated as of  December 27, 2001                                                                                    |
| 4.3(1)          |       | Warrant dated July 1, 2003 exercisable for  60,000 shares of common stock                                                                  |
| 4.4(4)          |       | Specimen Stock Certificate                                                                                                                           |
| 10.1(1)         |       | Hostopia.com Inc. 2000 Stock Option Plan  and forms of related agreements                                                                  |
| 10.2(3)         |       | Hostopia.com Inc. 2006 Stock Option Plan  and forms of related agreements                                                                  |
| 10.3(1)         |       | Employment Agreement with William Campbell, dated  June 1, 2006                                                                                 |
| 10.4(1)         |       | Employment Agreement with Colin Campbell, dated  June 1, 2006                                                                                   |
| 10.5(1)         |       | Employment Agreement with Michael Mugan, dated  April 1, 2006                                                                                   |
| 10.6(1)         |       | Employment Agreement with Paul Engels, dated  April 1, 2006                                                                                     |
| 10.7(1)         |       | Employment Agreement with Dirk Bhagat, dated  June 1, 2006                                                                                      |
| 10.8(1)         |       | Management Services Agreement with John Nemanic,  dated June 1, 2006                                                                            |
| 10.9(1)         |       | Form of Indemnification Agreement between the  registrant and each of its directors and executive officers                                      |
| 10.10(1)        |       | Asset Purchase Agreement between the registrant and  FortuneCity.com Inc., dated as of January 31, 2006                                    |
| 10.11(1)        |       | Services Agreement between the registrant and  Geeksforless Inc., dated as of July 1, 2005                                                 |
| 10.12(1)        |       | Template Purchase Agreement between the registrant  and Geeksforless Inc., dated as of February 1, 2005                               |
| 10.13(1)        |       | Image Library Agreement between the registrant and  Geeksforless Inc., dated as of January 2, 2005                                         |
| 10.14(1)        |       | Lease between Badenhurst-Airway Centre Ltd. and  the registrant dated September 30, 2002, as amended                                       |
| 10.15(1)        |       | Revolving Line of Credit Facility                                                                                                                    |
| 31.1            |       | CEO Certification required by Rule 13a-14(a) or Rule  15d-14(a)                                                                                      |
| 31.2            |       | CFO Certification required by Rule 13a-14(a) or Rule  15d-14(a)                                                                                      |
| 32.1            |       | Certification required by Rule 13a-14(b) or Rule  15d-14(b) and Section 1350 of Chapter 63 of Title 18 of United States Code  (18 U.S.C. §1350) |
| 32.2            |       | Certification required by Rule 13a-14(b) or Rule  15d-14(b) and Section 1350 of Chapter 63 of Title 18 of United States Code  (18 U.S.C. §1350) |

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(1)Incorporated by reference to theRegistrant’s Form S-1 (SEC File No. 333-135533), filed on June 30, 2006

(2)Incorporated by reference to theRegistrant’s Form S-1/A (SEC File No. 333-135533), filed on July 3, 2006

(3)Incorporated by reference to theRegistrant’s Form S-1/A (SEC File No. 333-135533), filed on August 11, 2006

(4)Incorporated by reference to the Registrant’s Form S-1/A (SEC File No.333-135533), filed on October 5, 2006

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