UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



Form 10-Q



QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended September 30, 2007



OR



TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from         to



Commission file number 333-135533



Hostopia.com Inc.

(Exact name of Registrant as specified in its charter)



Delaware
(State or other jurisdiction of
incorporation or organization)
        7372
(Primary Standard Industrial
Classification Code Number)
        65-1036866
(I.R.S. EmployerIdentification 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s principal executive office)



Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes      No



Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or non-accelerated filer.  See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer
        
        Accelerated Filer
        
        Non-Accelerated Filer




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

Yes
        
        No




As of November 13, 2007, there were 11,559,111 outstanding shares of common stock, par value $0.0001, of the registrant.

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HOSTOPIA.COM INC.

Quarterly Report on Form 10-Q

INDEX



PART I

FINANCIAL INFORMATION

Item 1.
        Financial Statements
        2


Consolidated Balance Sheets as of September 30, 2007 (unaudited) and March 31, 2007
        2


Consolidated Statements of Operations (unaudited) for the three and six months ended

September 30, 2007 and 2006
        3


Consolidated Statements of Cash Flows (unaudited) for the six months ended

September 30, 2007 and 2006
        4


Notes to Unaudited Consolidated Financial Statements
        5


Item 2.
        Managements Discussion and Analysis of Financial Condition and Results of Operations
        12


Item 3.
        Quantitative and Qualitative Disclosures About Market Risk
        25


Item 4.
        Controls and Procedures
        26


PART II

OTHER INFORMATION

Item 1.
        Legal Proceedings
        27


Item 2.
        Unregistered Sales of Equity Securities and Use of Proceeds
        27


Item 3.
        Defaults Upon Senior Securities
        27


Item 4.
        Submission of Matters to a Vote of Security Holders
        27


Item 5.
        Other Information
        27


Item 6.
        Exhibits
        28


Signatures
        29




1

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PART I

FINANCIAL INFORMATION

Item 1.
        Financial Statements


Hostopia.com Inc.

Consolidated Balance Sheets

(Expressed in U.S. dollars)

September 30,2007
        
        March 31,2007(Unaudited)AssetsCurrent assets:Cash and cash equivalents
        $
        26,073,572
        $
        27,367,667Trade accounts receivable, net of allowance for doubtful accounts of $102,399; (March 31, 2007 - $114,755)
        
        2,024,459
        
        1,320,422Deferred tax assets
        
        134,000
        
        117,000Income taxes recoverable
        
        1,025,408
        
        -Prepaid expenses
        
        372,173
        
        377,242Total current assets
        
        29,629,612
        
        29,182,331Property and equipment, net of accumulated amortization of $6,140,198; (March 31, 2007 - $5,163,911)
        
        3,662,957
        
        2,922,677Other assets
        
        64,840
        
        60,997Intangible assets, net of accumulated amortization of $2,185,022; (March 31, 2007 - $1,594,348)
        
        2,485,891
        
        1,690,284Deferred tax assets
        
        1,373,000
        
        1,101,000Total assets
        $
        37,216,300
        $
        34,957,289Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
        $
        333,236
        $
        380,040Accrued liabilities
        
        1,161,046
        
        705,229Payroll and other taxes payable
        
        27,821
        
        34,956Income taxes payable
        
        -
        
        269,020Current portion of deferred lease inducements
        
        79,900
        
        79,900Deferred revenue
        
        839,600
        
        983,299Current portion of long-term liability
        
        -
        
        72,000Total current liabilities
        
        2,441,603
        
        2,524,444Deferred lease inducements
        
        201,364
        
        237,035Long-term liability
        
        -
        
        292,957Total liabilities
        
        2,642,967
        
        3,054,436Stockholders equity:Capital stockAuthorized:30,000,000 common shares, par value $0.0001Issued and outstanding11,559,111 common shares (March 31, 2007 - 11,097,251 common shares)
        
        217,115
        
        217,069Additional paid-in capital
        
        32,855,790
        
        31,054,703Accumulated other comprehensive loss
        
        (43,881)
        
        (43,881)Retained earnings
        
        1,544,309
        
        674,962Total stockholders equity
        
        34,573,333
        
        31,902,853Total liabilities and stockholders equity
        $
        37,216,300
        $
        34,957,289


See accompanying notes to unaudited consolidated financial statements



2

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Hostopia.com Inc.

Consolidated Statements of Operations

(Expressed in U.S. dollars)

(Unaudited)

Three months ended
September 30,
        Six months ended
September 30,2007
        
        2006
        
        2007
        
        2006RevenuesWebhosting and applications services
        $
        6,561,480
        $
        5,406,362
        $
        12,628,705
        $
        10,625,782Other services
        
        241,868
        
        179,141
        
        437,336
        
        361,257Total revenues
        
        6,803,348
        
        5,585,503
        
        13,066,041
        
        10,987,039Cost of revenuesWebhosting and applications services
        
        820,069
        
        637,908
        
        1,583,330
        
        1,200,680Other services
        
        83,162
        
        84,387
        
        168,255
        
        169,103Total cost of revenues
        
        903,231
        
        722,295
        
        1,751,585
        
        1,369,783Gross profit
        
        5,900,117
        
        4,863,208
        
        11,314,456
        
        9,617,256ExpensesSales and marketing (a)
        
        1,466,974
        
        1,144,907
        
        2,854,286
        
        2,347,257Research and development (a)
        
        969,540
        
        782,499
        
        1,854,877
        
        1,494,984Project management (a)
        
        537,662
        
        423,339
        
        1,067,668
        
        839,797Technical support (a)
        
        963,758
        
        794,331
        
        1,878,132
        
        1,473,207General and administrative (a)
        
        652,246
        
        431,362
        
        1,233,949
        
        822,681Amortization of intangible assets
        
        321,791
        
        183,623
        
        590,674
        
        342,045Amortization of property and equipment
        
        514,607
        
        452,683
        
        976,282
        
        850,9435,426,578
        
        4,212,744
        
        10,455,868
        
        8,170,914Income before the undernoted
        
        473,539
        
        650,464
        
        858,588
        
        1,446,342Interest income
        
        322,457
        
        18,170
        
        647,965
        
        39,699Interest (expense)
        
        -
        
        (4,206)
        
        (4,206)
        
        (8,412)322,457
        
        13,964
        
        643,759
        
        31,287Income before income taxes
        
        795,996
        
        664,428
        
        1,502,347
        
        1,477,629Income taxes (recovery)Current
        
        458,000
        
        341,000
        
        922,000
        
        747,000Deferred
        
        (118,000)
        
        (117,000)
        
        (289,000)
        
        (188,000)340,000
        
        224,000
        
        633,000
        
        559,000Net income
        $
        455,996
        $
        440,428
        $
        869,347
        $
        918,629Net income per shareBasic
        $
        0.04
        $
        0.10
        $
        0.08
        $
        0.21Diluted
        
        0.04
        
        0.07
        
        0.08
        
        0.15Weighted average number of common shares outstandingBasic
        
        11,539,583
        
        4,032,406
        
        11,413,172
        
        4,032,371Diluted
        
        11,649,774
        
        6,310,070
        
        11,583,421
        
        6,310,035(a)          Stock-based compensation is included in operating expenses as follows:Sales and marketing
        $
        33,412
        $
        31,970
        $
        63,382
        $
        66,285Research and development
        
        41,908
        
        5,163
        
        58,110
        
        10,606Project management
        
        4,413
        
        2,819
        
        9,070
        
        5,855Technical support
        
        3,594
        
        4,294
        
        7,227
        
        8,838General and administrative
        
        28,121
        
        9,130
        
        38,999
        
        18,891$
        111,448
        $
        53,376
        $
        176,788
        $
        110,475


See accompanying notes to unaudited consolidated financial statements



3

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Hostopia.com Inc.

Consolidated Statements of Cash Flows

(Expressed in U.S. dollars)

(Unaudited)

Six months ended September 30,2007
        
        2006Cash flows from operating activities:Net income
        $
        869,347
        $
        918,629Items which do not involve cash:Amortization
        
        1,566,956
        
        1,192,988Stock-based compensation
        
        176,788
        
        110,475Excess tax benefits from stock-based compensation
        
        (316,000)
        
        -Non-cash interest
        
        4,206
        
        8,412Deferred income taxes
        
        (289,000)
        
        (105,000)Deferred lease inducements
        
        (35,671)
        
        (26,730)Change in operating assets and liabilitiesTrade accounts receivable
        
        (704,037)
        
        172,827Prepaid expense
        
        5,069
        
        (111,516)Accounts payable
        
        (46,804)
        
        191,506Accrued liabilities
        
        455,817
        
        205,622Payroll taxes and other taxes payable
        
        (7,135)
        
        (17,938)Income taxes payable
        
        (978,428)
        
        (131,000)Deferred revenue
        
        (143,699)
        
        (18,695)Cash flows from operating activities
        
        557,409
        
        2,389,580Cash flows from (used in) financing activities:Issue of common shares on exercise of stock options
        
        1,273,487
        
        1,799Refund of  initial public offering expenses
        
        34,858Repayment of long-term liabilities
        
        (369,163)
        
        (105,701)Deferred initial public offering costs
        
        -
        
        (1,202,400)Excess tax benefits from stock-based compensation
        
        316,000
        
        -Cash flows from (used in) financing activities
        
        1,255,182
        
        (1,306,302)Cash flows from investing activities:Acquisition of property and equipment
        
        (1,716,562)
        
        (987,263)Acquisition of intellectual property
        
        (1,386,281)
        
        (746,015)Cash flows from investing activities
        
        (3,102,843)
        
        (1,733,278)Effect of currency translation on cash balances
        
        (3,843)
        
        (1,124)Increase (decrease) in cash and cash equivalents
        
        (1,294,095)
        
        (651,124)Cash and cash equivalents, beginning of period1
        
        27,367,667
        
        3,038,217Cash and cash equivalents, end of period
        $
        26,073,572
        $
        2,387,093Supplemental cash flow information:Interest paid
        $
        -
        $
        -Income taxes paid
        
        1,900,428
        
        795,000


See accompanying notes to unaudited consolidated financial statements

_________________________

|1 |  | Cash
and cash equivalents consists primarily of an amount invested in a highly rated money
market mutual fund, as well as cash on deposit and bank certificates of deposit.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



4

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HOSTOPIA.COM INC.

Notes to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Three and Six Months Ended September 30, 2007 and 2006



1.
        NATURE OF BUSINESS


Hostopia.com Inc. (the Company) was founded in December 1999 and is a provider of Web services that enable small and medium-sized businesses to establish and maintain an Internet presence. The Company has customers in the United States, Canada and the United Kingdom, which include telecommunication carriers, cable companies, Internet service providers, domain registrars and Web hosting service providers.  These communication services providers purchase the Companys Web services on a wholesale basis and resell these services under their own brands to small and medium-sized businesses. The Companys services include Website creation and maintenance applications, managed email with security applications including virus and spam protection, wireless mobility applications, e-commerce application services, customer communications and Website promotion applications, and Website hosting and
data transfer.

2.
        SIGNIFICANT ACCOUNTING POLICIES


A description of the Companys significant accounting policies can be found in the Companys March 31, 2007 Annual Financial Statements as reported on its Form 10-K filed with the Securities and Exchange Commission on June 28, 2007.

a)
        Basis of Presentation


These unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, BlueGenesis.com Corp., Internet Names for Business Inc. and Nexthaus Corporation. All material intercompany accounts and transactions and balances are eliminated.

These unaudited consolidated financial statements are stated in U.S. dollars and have been prepared in accordance with the instructions of Form 10-Q. They do not include all the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements.

The accompanying consolidated balance sheets as of September 30, 2007 and March 31, 2007, the consolidated statements of operations for the three and six months ended September 30, 2007 and 2006, the consolidated statements of cash flows for the six months ended September 30, 2007 and 2006 and the related notes to the consolidated financial statements are unaudited. These financial statements and the related notes should be read in conjunction with the audited consolidated financial statements and related notes together with managements discussion and analysis of financial position and results of operations contained in the Companys Form 10-K which includes the audited financial statements for the years ended March 31, 2007 and 2006.

In the opinion of the Companys management, the unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements included in the Companys Form 10-K except for changes in accounting policy relating to adopting FASB Interpretation No. 48and include all adjustments necessary for the fair statement of the Companys financial position as of September 30, 2007, its results of operations for the three and six months ended September 30, 2007 and 2006 and its cash flows for the six months ended September 30, 2007 and 2006.

The financial results for the six months ended September 30, 2007 are not necessarily indicative of the results to be expected for the year ending March 31, 2008. There is no difference between net income and total comprehensive income.

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

On May 18, 2006, the Board of Directors authorized a one-for-five reverse stock split of the Companys common stock and convertible redeemable preferred stock. All common stock shares, convertible redeemable preferred shares, and amounts per share data reflect the reverse stock split.



5

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HOSTOPIA.COM INC.

Notes to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Three and Six Months Ended September 30, 2007 and 2006



2.
        SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


b)
        Use of Estimates


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

c)
        Uncertain tax positions


In June 2006, the FASB issued Interpretation No. 48 Accounting for Uncertainty in Income Taxes, an Interpretation of FASB statement No. 109 (FIN 48).  Under FIN 48, the Company will recognize the tax benefits of uncertain tax positions only where the position is more likely than not to be sustained, assuming examination by tax authorities.  The amount to be recognized is the amount that represents the largest amount of tax benefit that is greater than 50% likely of being ultimately realized. For tax positions that are not more likely than not to be sustained upon audit, the Company will not recognize any portion of the benefit in its consolidated financial statements. A liability will be recognized by the Company for any benefit claimed, or expected to be claimed, in a tax return in excess of the benefit recorded
in the financial statements, along with any interest and penalty (if applicable) on the excess.  The Company will at year end also disclose any uncertain tax positions where it is reasonably possible that the estimate of the tax benefit will change significantly in the next 12 months.  The Company adopted the provisions of FIN 48 effective April 1, 2007.

Upon adoption, the Company had no unrecognized tax benefits liability and no liability in respect of either penalties or interest. Interest or penalties in respect of income taxes, if any, subsequently recognized will be recognized as an income tax expense. There is significant judgment used in determining the likelihood of the Companys tax positions being sustained upon audit. In future periods, the Company will adjust any unrecognized tax benefits, as well as the related interest and penalties, in light of changing facts and circumstances. In future periods, favorable resolutions of uncertain tax positions will be recognized as a reduction to its effective income tax rate while any unfavorable resolutions, in excess of the amount of any unrecognized tax benefit, will result in an increase in income tax expense and higher effective tax rate.

Hostopia and its subsidiaries file income tax returns in the U.S. Federal jurisdiction, State of Florida, Canada and the province of Ontario. Hostopia currently may be subject to reassessment in all of these jurisdictions for years beginning in 2000. No examination is currently in progress in any of these jurisdictions.

d)
        Stock-based compensation


On April 1, 2006, the Company adopted the provisions of SFAS No. 123R, which is a revision of SFAS No. 123,Accounting for Stock-Based Compensation(SFAS No. 123). SFAS No. 123R superseded Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees(APB Opinion No. 25), and amended SFAS No. 95,Statement of Cash Flows(SFAS No. 95). SFAS No. 123R requires companies to recognize in the income statement the estimated fair value of stock-based compensation.

Under SFAS No. 123R the Company also estimates forfeitures in calculating the expense relating to stock-based compensation as opposed to only recognizing forfeitures and the corresponding reduction in expense as they occur. Based on its historic experience and expectations for the future, the Company has estimated expected forfeitures will generally occur at a rate of 25%. This estimate will be adjusted as necessary in the future to reflect actual forfeiture experience. The Company recognizes its stock-based compensation expense using a straight-line amortization method over the vesting period of the options.



6

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HOSTOPIA.COM INC.

Notes to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Three and Six Months Ended September 30, 2007 and 2006



3.
        STOCK-BASED PLANS


During the six months ended September 30, 2007, the Company granted 312,500 options to employees having an exercise price of $5.87 per share. The grant day fair value of $3.06 per option was calculated using the Black-Scholes-Merton model and the assumptions noted below. The total value of 312,500 options granted was $956,250. This amount, adjusted for forfeitures related to terminations and in certain instances performance, will be expensed on a straight line basis over the three year vesting period.

Six MonthsEndedSeptember 30, 2007Risk free interest rate
        
        
        4.47
        %Expected dividend yield
        
        
        --Expected volatility
        
        
        55
        %Expected life (in years)
        
        
        5


The risk-free interest rate was based on the currently available rate on a Canadian government zero-coupon issue with a remaining term equal to the expected term of the option. The expected volatility of stock options was based on the Companys historical volatility adjusted by a factor of 120% due to the short term nature of the Companys historical data. The expected life of the Companys options was based on the simplified method accepted by the SEC Staff Accounting Bulletin SAB 107 for companies with limited historical exercise experience. Under the simplified method the expected term is equal to the mean of the vesting term and the term to expiry. The dividend yield reflects the fact that the Company has never declared or paid any cash dividends and does not currently anticipate paying cash dividends in the future.

Stock option activity during the six months ended September 30, 2007 is summarized in the table below:

Options
Outstanding
        Weighted-
Average
Exercise
Prices
        Weighted-
Average
Remaining
Contractual
Term (years)
        Aggregate
Intrinsic
ValueBalance at March 31, 2007
        810,320
        $3.58Granted
        312,500
        $5.87Exercised
        (461,860)
        $2.76Forfeited/Expired
        (10,040)
        $5.32Balance at September 30, 2007
        650,920
        $5.24
        4.7
        $754,478Options exercisable at September 30, 2007
        262,867
        $3.82
        3.2
        $658,507


The total intrinsic value of options exercised for the six months ended September 30, 2007, was $1,273,408.

At September 30, 2007, there was $906,506 of total unrecognized stock-based compensation expense, adjusted for estimated forfeitures, related to unvested share-based awards. On a weighted average basis, unrecognized stock-based compensation expense is expected to be recognized over the next 2.5 years.



7

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HOSTOPIA.COM INC.

Notes to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Three and Six Months Ended September 30, 2007 and 2006



4.
        ASSET ACQUISITIONS


(i)
        On May 2, 2007, the Company acquired all of the intellectual property, including developed software and underlying code of Nexthaus, Inc., a U.S. developer of software applications for mobile devices for cash consideration of $950,000.  The acquired software uses wireless communications to synchronize data between computers and mobile devices, such as calendar and contact updates from a desktop to a smart phone. Additional contingent consideration of $200,000 is payable on May 25, 2008 if stipulated revenue targets are achieved.  In addition, a  referral fee equal to 15% of the  revenue generated by the intellectual property will be payable until May 2, 2010.  As of September 30, 2007, no payments have been made.


Purchase price:Intellectual property
        $
        950,000Consideration given:Cash
        $
        950,000


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


Payments to be applied against the purchase price were to be determined as a percentage of actual webhosting revenue generated by the purchased accounts as follows:  the Company agreed to pay out 37.5% of collected revenue from the customer during the first six months following closing, 25.0% for the following six months, and 12.5% until such time as the total payments equal the purchase price.

After deducting the value of the account receivable owed from the customer and the liability for future services assumed associated with the hosted accounts, the remaining amount of $570,533 has been recorded as a non-interest bearing liability.  This amount has, therefore, been discounted at the rate of 5% per annum.  Accordingly, the value of the customer list and the long-term liability were reduced by $28,030, being the estimated interest over the expected two-year life of the long-term liability.  This amount was being accreted as interest expense over the expected two-year life of the long-term liability. The customer list is being amortized on a straight-line basis over its three-year estimated useful life commencing February 1, 2006.

Purchase price:Customer list
        $
        1,103,970Liability for future services
        
        (243,468)$
        860,502Consideration given:Cash
        $
        151,400Trade receivables
        
        166,599Long-term liability
        
        542,503$
        860,502


During the six months ended September 30, 2007 and 2006, the Company made payments of $369,163 and $97,289 respectively.On July 10, 2007, the Company accelerated the payment of the remaining liability in exchange for a two year extension of the marketing agreement under which it has operated since February 1, 2006.



8

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HOSTOPIA.COM INC.

Notes to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Three and Six Months Ended September 30, 2007 and 2006

5.
        NET INCOME PER COMMON SHARE


Basic income per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is calculated by dividing net income, adjusted to exclude preferred dividends applicable to the redeemable preferred shares by the weighted average number of common shares outstanding during the period, plus any additional common shares that would have been outstanding if potentially dilutive common shares had been issued during the period.

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

The table below sets forth the computation of basic and diluted net income per share:

Three Months Ended
September 30,
        Six Months Ended
September 30,2007
        
        2006
        
        2007
        
        2006Net income attributable to common stockholders - diluted
        $
        455,996
        $
        440,428
        $
        869,347
        $
        918,629Dividend accretion on Series A preferred shares
        
        -
        
        (29,234)
        
        -
        
        (58,315)Net income attributable to common stockholders - basic
        $
        455,996
        $
        411,194
        $
        869,347
        $
        860,314Weighted average outstanding shares of common stock
        
        11,539,583
        
        4,032,336
        
        11,413,172
        
        4,032,371Dilutive effect of Series A redeemable preferred shares
        
        -
        
        2,127,658
        
        -
        
        2,127,658Dilutive effect of stock options and warrants (1)
        
        110,191
        
        150,006
        
        170,249
        
        150,006Common stock and common stock equivalent
        
        11,649,774
        
        6,310,070
        
        11,583,421
        
        6,310,035Net income attributable per common share:Basic
        $
        0.04
        $
        0.10
        $
        0.08
        $
        0.21Diluted
        $
        0.04
        $
        0.07
        $
        0.08
        $
        0.15


(1)
        417,880 stock options outstanding at September 30, 2007 were determined to be anti-dilutive.


6.
        SERIES A REDEEMABLE, CONVERTIBLE PREFERRED SHARES


On November 10, 2006, on the completion of the Companys initial public offering, all preferred shares were automatically converted into 2,127,658 common shares with a total par value of $212.77. Additional paid-in capital was increased by $5,241,595 in respect of this conversion.

7.
        COMMON STOCK


On November 10, 2006, the Company completed its initial public offering (IPO) in which it sold 4,200,000 common shares at a price of $5.30 (Cdn$6.00) per share. A total of $22,283,137 (Cdn$25,200,000) in gross proceeds was raised in the IPO. After deducting the underwriters commission and offering expenses of $3,387,822, net proceeds of the IPO were $18,895,315. All 2,127,658 outstanding shares of the Companys Series A redeemable, convertible preferred shares were converted into shares of common stock, on a one-for-one basis, at the closing of the IPO.



9

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HOSTOPIA.COM INC.

Notes to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Three and Six Months Ended September 30, 2007 and 2006



7.
        COMMON STOCK (CONTINUED)


On December 7, 2006, the underwriters exercised their option to purchase an additional 15% of the common shares issued in the IPO or 630,000 shares at a price of Cdn$6.00 per share.  A total of $3,091,352 (Cdn$3,553,200) was raised after deducting the underwriters commission.

On December 21, 2006, the Company issued 60,000 common shares pursuant to the exercise of warrants and received proceeds in the amount of $192,000.

During the year ended March 31, 2007, the Company issued 47,257 common shares pursuant to the exercise of stock options and received proceeds in the amount of $130,495.

During the six months ended September 30, 2007, the Company issued 461,860 common shares pursuant to the exercise of stock options and received proceeds in the amount of $1,273,487.

8.
        RELATED PARTY TRANSACTIONS


The Company completed transactions with TELUS Corporation, a related party by virtue of its 7.4% holding of common shares of the Company and its representation on the Board of Directors, in the normal course of operations.  The transactions have been recorded at the exchange amount, representing the amount of consideration established and agreed to by the related parties as set out below.  In addition, the Company has a commitment with TELUS to acquire bandwidth and data center services from December 2004 to November 2007 for an aggregate minimum amount of $1,867,140.

In March 2005, the Company's principal stockholders purchased a majority interest in GeeksForLess Inc., a supplier of templates, images and outsourced operations to the Company (the "Supplier").  Templates and images purchased by the Company are recorded as other intangible assets and amortized over their estimated useful lives.  The Company had previously entered into agreements with the Supplier for website templates and images, dated February 2005 and January 2005 respectively, which the Supplier assigned to the Company as of June 1, 2007 on the closing of the purchase of certain assets of TemplateRover.com., a division of the Supplier as described below.

On June 1, 2007, the Company purchased the remaining templates, images and marketing software from GeeksForLess Inc. for $232,921 (Cdn$247,000) in cash, which amount was considered to be fair market value.

Aggregate related party transactions and balances are as follows:

September 30, 2007
        
        March 31, 2007Balance sheets:
        
        (Unaudited)Accounts receivable
        $
        
        $
        7,107Accounts payable
        
        163,944
        
        125,780




Three months endedSeptember 30,
        Six months endedSeptember 30,2007
        
        2006
        
        2007
        
        2006(Unaudited)Statements of operations:Webhosting and application services revenue
        $
        691,786
        $
        547,320
        $
        1,326,449
        $
        1,074,061Bandwidth
        
        230,683
        
        174,389
        
        437,943
        
        356,638Outsourced services
        
        447,004
        
        338,551
        
        919,692
        
        638,672Telephone services
        
        55,288
        
        57,980
        
        100,959
        
        108,308






10

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HOSTOPIA.COM INC.

Notes to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Three and Six Months Ended September 30, 2007 and 2006



9.
        RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED


In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157Fair Value Measurementsto provide enhanced guidance for using fair value to measure assets and liabilities. SFAS No. 157 also expands disclosure requirements for assets and liabilities measured at fair value, how fair value is determined, and the effect of fair value measurements on earnings. SFAS No. 157 applies whenever other authoritative literature require (or permit) certain assets liabilities to be measured at fair value, but does not expand the use of fair value. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. Early adoption is permitted. The Company plans to adopt SFAS No. 157 effective April 1, 2008. The Company currently does
not have any balance sheet items carried at fair value. However, the Company does use fair value concepts to test various long-lived assets for impairment and to initially measure assets and liabilities acquired in a business combination. Management is currently evaluating the effect of adoption.

In February 2007, FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(SFAS 159). SFAS No. 159 allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities, as well as, certain non financial instruments that are similar to financial instruments, at fair value (the fair value option). The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is selected for an instrument, SFAS No.159 specifies that all subsequent changes in fair value for that instrument shall be reported in earnings. SFAS No. 159 is effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007. The Company is currently assessing the impact of SFAS No. 159, but does not expect it to have a
material impact on its financial position, results of operations, cash flows or disclosures.

10.
        GEOGRAPHIC INFORMATION


The following summarizes the Companys revenue by country (in thousands of dollars):

ThreeMonthsEnded
September 30,
        SixMonthsEnded
September 30,2007
        
        2006
        
        2007
        
        2006UnauditedCanada
        $
        3,051,924
        $
        2,418,902
        $
        5,874,741
        $
        4,767,668United States
        
        3,436,485
        
        3,094,137
        
        6,724,661
        
        6,082,670United Kingdom
        
        314,939
        
        72,464
        
        466,639
        
        136,701Total revenues
        $
        6,803,348
        $
        5,585,503
        $
        13,066,041
        $
        10,987,039






11

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


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The following discussion includes forward-looking statements that are not historical facts but reflect our current expectation regarding future results. Actual results could differ materially from the results discussed in the forward-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 as indicative of future operations.

In addition, you should refer to the Risk Factors section of our Annual Report on Form 10-K for the fiscal year ended March 31, 2007 for a discussion of other factors that could cause our actual results to vary materially from those implied by any forward looking statements contained in this document.

You should read this Form 10-Q completely.  In some cases, you can identify forward-looking statements by the following words: may, will, should, expect, intend, plan, anticipated, believe, estimate, predict, potential, continue, or the negative of these terms or other similar terminology.  All forward-looking statements included in this Form 10-Q are based on information available to us as of the date of this Form 10-Q and we assume no obligation to update these cautionary statements or any forward-looking statements.  These statements are not guarantees of future performance and you should not regard them to be representations or warranties by us that we will achieve our objectives and goals in a specific time period, if ever.

We qualify all the forward-looking statements contained in this Form 10-Q by the foregoing cautionary statements.

Overview

We believe we are a leading provider of Web services that enable small and medium-sized businesses to establish and maintain an Internet presence. We have 335 customers in the United States, Canada and the United Kingdom, which include telecommunication carriers, cable companies, Internet service providers, domain registrars and Web hosting service providers.  These communication services providers purchase our Web services on a wholesale basis and resell these services under their own brands to small and medium-sized businesses. We refer to small and medium-sized businesses which use our Web services as end-users or end-user businesses. Our Web services include Website creation and maintenance applications, managed email with virus and spam protection, e-commerce application services, customer communications and Wireless mobility applications, Website promotion
applications, and Website hosting and data transfer.

We have grown our business primarily selling our web services to large telecommunication and cable companies who in turn resell the services to their end-users thereby increasing the end user count we both serve and the amount of services sold individually to each end-user.

Our wholesale service offering has been successful in Canada where Bell Canada, TELUS Communications Company and Rogers Cable Communications Inc. are counted among our customers. We have expanded geographically into the United States and in fiscal 2006 entered into an agreement with Verizon Directories Corp. which was subsequently acquired by Idearc Inc. In addition to Idearc, we have a number of other large and mid-sized U.S. based customers who are prominent in the telecommunications, cable and broadband service market. In 2006, we also began marketing our service in the United Kingdom and have already contracted to provide our service to a number of customers in this large marketplace including British Telecom which entered into a two year Web services agreement with us in fiscal 2007.

To support the acquisition of new customers we have 8 sales people focused on acquiring new business in Canada, the U.S. and the U.K. To assist our sales efforts, and to potentially increase our revenue per end-user, we continue to invest in developing new software products and services for end-users. We have 14 technical professionals currently involved in product development.

When we enter into a contract with a new customer, we are often required to migrate their end-users to our platform. Such migrations help our revenue growth because migrated end-users are billable on a monthly basis. This essential function is carried out by our project management staff presently consisting of 20 personnel.



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We also recognize the need for professional services to our customers and their end-users to maintain and grow our end-user count. Accordingly we employ a technical support staff of approximately 96 information technology and customer service professionals to deal promptly, 24 hours a day, with any questions end-users have in respect of our service. Our staff of customer service professionals has grown during the quarter ended September 30, 2007 as we opened our new customer care center in Miramichi, New Brunswick.

To provide our end-users, who are often smaller businesses, with an easy method of establishing a Web presence, we have developed and continue to develop easily self-customized website templates. We currently have over 5,000 templates in our library, the majority of which were developed in the past eighteen months.

In fiscal 2007, we also began a website development service business called Website Experts that designs web sites and e-commerce enabled business applications for our customers end users. We have hired 8 personnel in support of this business opportunity. As of July 2007, we have begun selling Website Experts services through a number of our customers.

During the second quarter, we signed 12 new contracts and grew our billable base
by approximately 28,000 new end-users.  As a result, we experienced good revenue
growth and believe  revenue will continue to increase in the next  quarter.  Our
end-user  growth was largely  attributable  to our completing one of the largest
migrations of end-users  onto our platform in company  history.  We  experienced
positive  growth  from a  number  of our  existing  customers;  however  we also
experienced  a reduction in end-users  from one of our US customers who chose to
eliminate  approximately 3,000 of its relatively  low-revenue end-users from our
platform.  We  currently  plan to migrate a further  12,000  end-users  onto our
servers in the third and fourth  quarters  and also expect net  end-user  growth
from existing customers.  We continue to expect revenue will grow by at least 18
to 22% in fiscal 2008 over fiscal 2007.

During the first quarter, we applied a portion of the funds derived from our November 2006 Initial Public Offering to the acquisition of the intellectual property of Nexthaus Inc. that will help us develop and bring to market a service that allows mobile phone users to share data between various email systems and their mobility devices over a wireless network. These services are known to the wireless mobility and email industries as SyncML based services, referring to the global standard for sharing data between devices, largely adopted by the leading mobility device manufacturers such as R.I.M., Nokia, Motorola and the like

During the second  quarter,  we continued to develop and  integrate the Nexthaus
SyncML technology.  We also continued marketing our Website Experts services. In
addition,   we  licensed   the  digital  fax  patent   portfolio  of  J2  Global
Communications,  Inc. and are  presently  developing  a marketing  plan to begin
selling fax to email services to our customers. We estimate these revenue growth
initiatives  increased  our  operating  expenses,   including   amortization  of
intangibles,   by  approximately  $300,000  in  the  quarter  compared  to  last
year.

We also  began to incur  additional  expenses  in the  second  quarter  with the
opening  of our new  customer  care  center in New  Brunswick.  We  opened  this
facility  primarily  because  we were  becoming  physically  constrained  in our
Mississauga  facility as a result of our growing  end-user count.  New Brunswick
offered us a large,  bilingual,  stable,  professional and competitively  priced
work force from which to staff up as we continue to grow our end-user  base. The
combination of better service at a lower cost was compelling and  accordingly we
determined the estimated  $150,000 in additional costs we incurred this quarter,
during the training and transition period, was a sound economic decision. During
the second quarter we invested approximately $80,000 to purchase a building for
our new customer care center and invested an additional  $520,000 in servers and
related computer equipment.

In  addition  to  higher  costs  related  to  revenue  growth  and   operational
efficiencies  initiatives,  we also incurred $190,000 of additional  expenses in
the quarter  compared to last year as a result of our new public company status.
We also  estimate  that our cost of revenues and expenses  grew in the second  quarter  by  $210,000
compared to last year as a result of translating our Canadian dollar denominated
expenses into U.S. dollars.



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Key Metric

End-User Count

We add end-users by two principal methods: (1) organic growth from our existing customers; and (2) the addition of new customers who migrate their end-users to our system. To a lesser extent we grow our end-users through small resellers and by direct sales to end-user businesses.  As of September 30, 2007, we served approximately 291,000 end-users, a net increase of approximately 31,000 since March 31, 2007.

Changes in the number of end-users are predictive of our future revenue and operating results due to the recurring revenue that we receive from the sale of our Web services.   As a result, we monitor this metric closely to forecast and manage our growth.

Sources of Revenue

We derive all of our revenue from Web hosting and application services including stand alone email and other services.  We sell substantially all of our services through our 335 wholesale customers although we do sell some services directly to small resellers and end-user businesses.

Web Hosting and Application Services

Web hosting and application service revenues are derived from the sale and support of Web services. We generated 96.7% and 96.7% of our revenues in the six months ended September 30, 2007 and 2006, respectively from Web hosting and application services.  Our customers pay us monthly in accordance with contracts that range from one to five years for the 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 Web services to small resellers and end-user businesses. We expect Web hosting and application services revenue to increase in absolute dollars and to remain relatively stable as a percentage of our total revenues.

Other Services

Other services revenues are derived from domain name registration and professional services. We derived 3.3% and 3.3% of our total revenues in the six months ended September 30, 2007 and 2006, respectively from other services. Domain name registration revenue consists of domain name registrations, renewals and transfers.. Our professional services include the design of websites under our Website Experts brand, the sale of the right to use our templates as well as technical assistance requested by our customers. We expect other services revenue will increase in absolute dollars while remaining relatively stable as a percentage of our total revenues.

Cost of Revenue

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

Bandwidth and Data Center

Bandwidth and data center expenses primarily consist of the cost of bandwidth and leased data center space. We purchase bandwidth from several suppliers. We lease space in four network operations centers - three in Toronto, Ontario and one in Miami, Florida.  We utilize these facilities under contracts ranging from one to three years. We pay for these services on a monthly basis and record the expenses at the time they are incurred.  We expect that bandwidth and data center facility costs will increase as the number of end-users increases on our system.

Software License and Hardware Maintenance Fees

Software licensing and hardware maintenance fees are incurred to enhance or maintain the delivery of Web services or applications. We expect that software license and hardware maintenance expenses will increase as the number of end-users increases on our system.



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Referral Payments

We make referral payments to small resellers and select customers under referral agreements. We expect referral payments will increase with expected increases in revenue from these resellers and customers.

Domain Name Registration Fees

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

Operating Expenses

Operating expenses comprise all personnel costs together with advertising and marketing expenses, travel expenses, administrative expenses including insurance and professional fees, communication expenses, rent expenses for office facilities and amortization expenses.  We utilize a functional reporting style allocating all non-amortization expenses to sales and marketing, research and development, project management, technical support and general and administrative.

In addition, we have used outsourced services provided by GeeksForLess, Inc., (GFL), a related party by means of common ownership, since November 2003.  Originally contracted to provide research and development, GFL now also provides services in the areas of technical support, project management and sales support.  All expenses incurred in the outsourcing arrangement, including travel of our North American based personnel, are allocated to our functional expense classifications.

Sales and Marketing

Sales and marketing expenses represent the largest percentage of our operating expenses, and consist primarily of compensation and commissions for our sales personnel.  Other sales and marketing expenses 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 marketing expenses will increase as we expand our efforts to increase our customers, end-users and revenues.

Research and Development

Research and development expenses consist primarily of compensation, performance bonuses and related expenses for our research and development staff, contracted offshore resources, and allocated overhead costs. We focus our research and development efforts on increasing the features and functionality of our Web services and the delivery of those Web services to end-users.  We expect that, in the future, research and development expenses will increase as we upgrade and enhance our existing Web service offerings, develop new Web service offerings and expand the capabilities of our application delivery platform infrastructure in existing and new markets.

Project Management

Project management expenses consist of compensation and performance bonuses, allocation of payments to GFL for its services to the project management group, travel expenses, allocated rent, communication and office expenses. The project management team manages new customer set ups and our customers end-user migrations to our application delivery platform as well as ongoing technical assistance to customers.  We expect future project management expenses will increase due to the continuing growth and complexity of our customer base.

Technical Support

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



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General and Administrative

General and administrative expenses 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 bad debt expenses and other miscellaneous expenses that are not otherwise allocated.  We expect future general and administrative expenses will increase as we continue to add personnel to support the growth of our business. We also anticipate that we will incur expenses related to professional service fees and insurance fees necessary to comply with the requirements of being a public company.

Amortization

Amortization expenses consist of charges relating to the amortization of all of the property and equipment (including buildings, hardware, software, furniture and fixtures and telephone equipment), leasehold improvements, lease inducement assets, and intangible assets (including customer lists, patents, website templates and digital images). With the exception of the building which is being amortized over twenty years, furniture and fixtures that are amortized over a period of three to five years, and leasehold improvements that are amortized over the expected life of the relevant lease, all other assets are amortized over a three-year period.  We believe this policy covers most risks associated with the prospect of technological obsolescence; however, we periodically evaluate the condition of our asset base to determine whether additional decreases in value may be required. We expect
future amortization expenses will increase as we continue to make capital investments in our application delivery platform to support the expansion of our Web services and the increasing number of end-users.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses together 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 assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.  We believe the following accounting policies, described in greater detail in Note 1 to our consolidated financial statements contained in our Form 10-K
to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

Web hosting and Applications Services

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

We also receive a portion of our revenue directly from end-user businesses and small Web hosting resellers on a monthly, quarterly, semi-annually or annual basis. We defer recognition of revenue that will be earned 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 these end-users and small Web hosting resellers  is recognized as deferred revenue in the accompanying consolidated balance sheets. As services are performed, we recognize this revenue on a straight-line basis over the applicable service period.

Other Services

As a domain name reseller, as opposed to a registrar, we recognize domain name registration revenue when we receive payment from customers and end-users since we have no obligation to maintain a domain registry following a sale.  Professional service revenue is recorded based upon the extent to which all of the contracted professional services have been provided.



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Allowance for Doubtful Accounts

In accordance with our revenue recognition policy, our accounts receivable are based on customers whose payment is reasonably assured. We monitor collections from our customers and maintain an allowance for estimated credit losses for 100% of all customers accounts deemed uncollectible. For those accounts not specifically identified as uncollectible, an allowance is maintained for a specific percentage of those receivables based on aging accounts, historical collection experience and current economic expectations.  Credit losses have historically been within our expectations and the provisions established in our financial statements but we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Because we have several large customers, a change in liquidity of any one customer or our inability to collect from one of these customers
could have a material adverse effect on our consolidated financial position.

Accounting for Stock-Based Compensation

Up to and including the fiscal year ended March 31, 2006, with the exception of stock option awards made to non-employee consultants that have provided services to us, we elected to defer the recognition of stock-based compensation in our accounts as permitted  under Accounting Principles Board (APB) Opinion No. 25.  Effective April 1, 2006, we adopted the recommendations of SFAS Statement No. 123R in recording stock-based compensation expense in our accounts.

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

Accounting for Goodwill, Intangible Assets and Property and Equipment

Since our inception we have fully allocated the purchase price of acquisitions to intangible assets.  Other intangible assets include acquired patents, Website templates and digital images which are amortized using the straight-line method over three years. We test for the impairment of intangible assets annually, and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the intangible asset below its carrying amount. Similarly, we review the condition and revenue generating potential of our property and equipment to determine whether our depreciation policies are satisfactory in the circumstances.

Accounting for Income Taxes

We provide for income taxes under the asset and liability method.  Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled.  A valuation allowance is recorded to reduce deferred income tax assets to an amount that in the opinion of management is more likely than not to be realized.  We consider factors, such as the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax asset, tax planning strategies and other factors in the determination of the valuation allowance.  The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the consolidated statements of operations in the year that includes the enactment date.  As of September 30, 2007, we do not have any net operating losses or other tax attributes subject to valuation allowances.

We conducted a review of our tax positions in accordance with the recommendations of FIN 48 which we adopted effective April 1, 2007.  We determined that we did not have any material tax filing positions.

Accounting for Contingencies

In the normal course of our operations, we may be subject to litigation and claims from time to time.  It is our policy to provide adequate provisions in the accounts where required.  Although it is not possible to estimate the 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 the results of our operations, financial position or liquidity.



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Results of Operations for the Three and Six Month Periods ended September 30, 2007 as Compared to the Three and Six Month Periods ended September 30, 2006

Revenues

Three months ended
        
        Six months endedSeptember 30,2007
        
        September 30,2006
        
        September 30,2007
        
        September 30,2006RevenuesWeb hosting and application services
        $
        6,561,480
        $
        5,406,362
        $
        12,628,705
        $
        10,625,782Other services
        
        241,868
        
        179,141
        
        437,336
        
        361,257Total revenue
        $
        6,803,348
        $
        5,585,503
        $
        13,066,041
        $
        10,987,039End-users at end of period
        
        291,000
        
        237,400
        
        291,000
        
        237,400Increase in end users over comparable prior period - percent
        
        22.6%
        
        
        
        22.6%Increase over comparable prior year period
        $
        1,217,845
        
        
        $
        2,079,002Increase over comparable prior year period  percent
        
        21.8%
        
        
        
        18.9%


Comparison of the Three Month Periods ended September 30, 2007 and 2006

Revenues

Total revenue increased by 21.8% to $6.8 million in the three month period ended September 30, 2007 from $5.6 million in the three month period ended September 30, 2006.

Web Hosting and Application Services

Web hosting and application services revenue increased by $1.16 million or 21.4% to $6.6 million.  Our revenue growth was primarily due to a 53,600 or 22.6% increase in end-users year over year.  We had approximately 291,000 end-users on our system as of September 30, 2007.  The end-user growth was due to a combination of new customers added over the previous twelve month period and increased penetration of our existing customer base. New customers added approximately 33,900 end-users, representing a 14% increase over the number of end-users at September 30, 2006.  Penetration of our existing customer base added approximately 19,700 end-users, representing a 8% increase over the number of end-users at September 30, 2006.  Revenue grew in the second quarter by 8% over the previous quarter primarily because of the following factors:


        a net increase of  approximately 28,000 websites onto our platform in the quarter;



        the migration of approximately 375,000 email accounts onto our platform during the first quarter; and



        the increased value of our Canadian dollar denominated revenue in terms of our U.S. dollar reporting currency.


Revenue  growth  for  the  balance  of  fiscal  2008  will be  supported  by the
anticipated  migration  of an  estimated  12,000  websites  to our  servers.  We
anticipate  email  outsourcing  contracts will likely provide us with additional
recurring  revenue  while  future  licensing   opportunities  may  increase  our
professional service fees. Growth in our Website Experts and Nexthaus businesses
should  also  provide  some  additional  revenue.  Accordingly  we  believe  the
sequential  revenue  growth we  experienced in the second quarter will continue,
but at a lower  rate.   This belief is dependent on maintaining and growing
the  number of our  customers  and  end-users  and  successfully  migrating  the
anticipated websites and email accounts to our servers.



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Other Services

Other services revenue, including domain name registration and professional services revenue, increased by $63,000 or 35% to $242,000 from $179,000.  The principal reason for the increase was growth in our Website Experts operation.

Comparison of the Six Month Periods ended September 30, 2007 and 2006

Total revenue increased by 18.9% to $13.1 million in the six month period ended September 30, 2007 from $11.0 million in the six month period ended September 30, 2006. The 4.7% appreciation in the value of the Canadian dollar against the US dollar over the comparable period last year contributed 2.1% to revenue growth.  If the value of the Canadian dollar had remained constant against the US dollar, the net increase in revenue would have been $1.9 million or 16.8%.

Web Hosting and Application Services

Web hosting and application services revenue increased by $2.0 million or 18.8% to $12.6 million.  Our revenue growth was primarily due to a 53,600 or 22.6% increase in end-users year over year.  We had approximately 291,000 end-users on our system as of September 30, 2007.  The end-user growth was due to a combination of new customers added over the previous twelve month period and increased penetration of our existing customer base. New customers added approximately 33,900 end-users, representing a 14% increase over the number of end-users at September 30, 2006.  Penetration of our existing customer base added approximately 19,700 end-users, representing a 8% increase over the number of end-users at September 30, 2006

Other Services

Other services revenue, including domain name registration and professional services revenue, increased by $76,000 or 21% to $437,000 from $361,000 in the six months ended September 30, 2006.  The principal reason for the increase was growth in our Website Experts operation.

Cost of Revenues

Three months ended
        
        Six months endedSeptember 30,2007
        
        September 30,2006
        
        September 30,2007
        
        September 30,2006Cost of RevenuesWeb hosting and application services
        $
        820,069
        $
        637,908
        $
        1,583,330
        $
        1,200,680Other services
        
        83,162
        
        84,387
        
        168,255
        
        169,103Total cost of revenues
        $
        903,231
        $
        722,295
        $
        1,751,585
        $
        1,369,783Percent of revenues
        
        13.3%
        
        12.9%
        
        13.4%
        
        12.5%Increase over comparable prior year period
        $
        180,936
        
        
        $
        381,802Increase over comparable prior year period - percent
        
        25.1%
        
        
        
        27.9%


Comparison of the Three Month Periods ended September 30, 2007 and 2006

Cost of Revenues

Total cost of revenue increased by 25.1% to $903,000 in the three month period ended September 30, 2007 from $722,000 in the three month period ended September 30, 2006.

Web Hosting and Applications Services

Cost of Web hosting and application services revenue increased by 29% to $820,000 in the three months ended September 30, 2007 from $638,000 in the three months ended September 30, 2006.  These expenses include bandwidth expense, data center costs, software license fees, hardware maintenance fees, referral payments and credit card collection fees.  Bandwidth and data center costs increased by approximately $84,000 or 23% due primarily to our 23% increase in end-users. Software licenses fees, hardware maintenance fees and referral payments increased by approximately $105,000 or 53% due to a combination of increased software and hardware maintenance and increased referral payments related to increased revenue. Credit card collection fees declined by approximately $6,000 or 8%.



19

---

Other Services

Cost of other services revenue declined $1,000 to $83,000.  Other services expense relates primarily to the purchase of domain name rights that we resell to end-users.

Comparison of the Six Month Periods ended September 30, 2007 and 2006

Cost of Revenues

Total cost of revenue increased by 27.9% to $1.8 million in the six month period ended September 30, 2007 from $1.4 million in the six month period ended September 30, 2006.

Web Hosting and Applications Services

Cost of Web hosting and application services revenue increased by 32% to $1.6 million in the six months ended September 30, 2007 from $1.2 million in the six months ended September 30, 2006.  These expenses include bandwidth expense, data center costs, software license fees, hardware maintenance fees, referral payments and credit card collection fees.  Bandwidth and data center costs increased by approximately $202,000 or 30% due primarily to our 23% increase in end-users as well as additional bandwidth and leased data center space acquired in anticipation of the migration of additional end-users related to the nearly completed British Telecoms end-user migration. Software licenses fees, hardware maintenance fees and referral payments increased by approximately $196,000 or 54% due to a combination of increased software and hardware maintenance and increased referral payments
related to increased revenue. Credit card collection fees declined by approximately $15,000 or 10%.

Other Services

Cost of other services revenue declined $1,000 to $168,000.  Other services expense relates primarily to the purchase of domain name rights that we resell to end-users.

Operating Expenses

Total operating expenses increased by 29% to $5.4 million in the three months ended September 30, 2007 compared to the three months ended September 30, 2006.  Total operating expenses represented 80% and 75% of total revenue in the respective three month periods ending September 30, 2007 and 2006.

The increase in operating expenses and the operating expense ratio related  primarily to: (1) increased personnel to develop Website Experts and the Nexthaus mobile syncing technology, (2) higher amortization expenses related to the licensing of technology and the acquisition of Nexthaus intellectual property, (3) higher sales commissions related to the large end user migrations in the quarter, (4) significantly higher general and administration expenses related to public company costs, (5) higher technical support costs related to the initial startup of the New Brunswick customer care center, (6) higher variable costs required to support the 23% year over year increase in end users, and (7) the effect of the appreciation of the Canadian dollar on our Canadian dollar denominated expenses.

We expect in the next quarter we will continue to incur expenses related to our recent license arrangement with J2 Global Communications, Inc., our development of the Nexthaus mobile syncing technology and our recently established customer care center in New Brunswick. Accordingly while we anticipate continued revenue growth will begin to bring the operating expense ratio down it will remain above the ratio of the previous year.

Sales and Marketing

Three months ended
        
        Six months endedSeptember 30,2007
        
        September 30,2006
        
        September 30,2007
        
        September 30,2006Sales and marketing
        $
        1,466,974
        $
        1,144,907
        $
        2,854,286
        $
        2,347,257Percent of revenues
        
        21.6%
        
        20.5%
        
        21.8%
        
        21.4%Increase over comparable year period
        $
        322,067
        
        
        $
        507,029Increase over comparable year period - percent
        
        28.1%
        
        
        
        21.6%






20

---

Sales and Marketing (Three Month Period Ended September 30, 2007)

Sales and marketing expenses increased by 28% to $1.5 million from $1.1 million for the three months ended September 30, 2006.  Salaries, wages and benefits, including stock option benefits increased by $230,000 or 29%.  Personnel levels held steady.  The increase is related to the increase in the Website Experts website design initiative that is beginning to be used by some of our customers and commissions on the increased revenue generated from the recent customer migrations. This higher commission level will continue to increase wages over the next few quarters. Trade show expenses were $31,000 higher than the comparable quarter last year while advertising declined by approximately $17,000 as we continue to focus resources towards our direct sales efforts.  In aggregate allocated expenses, including rent, office, telecommunications, travel as well as expenses related to the increase
in contract sales support personnel in the Ukraine hired to service and grow our customer base grew by $77,000 or 29%. We believe a portion of the increase in sales and marketing expenses to be an investment in building recurring revenue both from existing and new customers that will have a greater effect on the future years revenues than the current year.

Sales and Marketing (Six Month Period Ended September 30, 2007)

Sales and marketing expenses increased by 23% to $2.9 million from $2.3 million for the six months ended September 30, 2006.  Salaries, wages and benefits, including stock option benefits increased by $423,000 or 27%. The increase is related to the increase in the Website Experts website design initiative that is beginning to be used by some of our customers and commissions on the increased revenue generated from recent customer migrations. Trade show expenses were $18,000 higher than the comparable period last year while advertising declined by approximately $59,000 as we continue to focus resources towards our direct sales efforts.  In aggregate allocated expenses, including rent, office, telecommunications, travel as well as contracted expenses in Ukraine related to the increase in sales support personnel hired to service and grow our customer base increased by $125,000 or 23%.

Research and Development

Three months ended
        
        Six months endedSeptember 30,2007
        
        September 30,2006
        
        September 30,2007
        
        September 30,2006Research and development
        $
        969,540
        $
        782,499
        $
        1,854,877
        $
        1,494,984Percent of revenues
        
        14.3%
        
        14.0%
        
        14.2%
        
        13.6%Increase over comparable year period
        $
        187,041
        
        
        $
        359,893Increase over comparable year period - percent
        
        23.9%
        
        
        
        24.1%


Research and Development (Three Month Period Ended September 30, 2007)

Research and development expenses increased by 24% to $970,000 from $782,000 in the three months ended September 30, 2006.  Salaries, wages and benefits including stock option benefits increased by $163,000 or 28% compared to the prior years comparable quarter.  Personnel count decreased by 5% year over year as we increased our utilization of lower cost Ukrainian programmers. However, expenses rose significantly this quarter as we absorbed the cost associated with our on-going Nexthaus mobile synchronization initiative. Accordingly we expect research and development expenses will remain at the current higher level over the remainder of fiscal 2008. Allocated expenses including rent, office, hardware, telecommunications, travel and contracted expenses in Ukraine increased by $24,000 or 12% due to the increased use of Ukrainian contract programmers and higher rent and hardware expenses.

Research and Development (Six Month Period Ended September 30, 2007)

Research and development expenses increased by 24% to $1.9 million from $1.5 million in the six months ended September 30, 2006.  Salaries, wages and benefits including stock option benefits increased by $256,000 or 22% compared to the prior years comparable quarter.  Personnel count decreased by 5% year over year as we increased our utilization of lower cost Ukrainian programmers. Allocated expenses including rent, office, hardware, telecommunications, travel and contracted expenses in Ukraine increased by $104,000 or 29% due to the increased use of Ukrainian contract programmers as well as higher rent and hardware expenses.



21

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Project Management

Three months ended
        
        Six months endedSeptember 30,2007
        
        September 30,2006
        
        September 30,2007
        
        September 30,2006Project management
        $
        537,662
        $
        423,339
        $
        1,067,668
        $
        839,797Percent of revenues
        
        7.9%
        
        7.6%
        
        8.2%
        
        7.6%Increase over comparable year period
        $
        114,323
        
        
        $
        227,871Increase over comparable year period - percent
        
        27.0%
        
        
        
        27.1%


Project Management (Three Month Period Ended September30, 2007)

Project management expenses increased by 27% to $538,000 from $423,000 in the three months ended September 30, 2006.  Salaries, wages and benefits including stock option benefits increased by $68,000 or 26% compared to the prior years comparable quarter.  Variable compensation related to increased revenue and website migrations were the primary factors driving the higher expense as personnel count remained stable year over year.   Allocated expenses including rent, office, telecommunications, travel and contracted expenses in Ukraine increased by $46,000 or 28% due to the increase in end-users migrated to our system.

Project Management (Six Month Period Ended September30, 2007)

Project management expenses increased by 27% to $1.1 million from $840,000 in the six months ended September 30, 2006.  Salaries, wages and benefits including stock option benefits increased by $122,000 or 23% compared to the prior years comparable quarter.  Variable compensation related to increased revenue and website migrations were the primary factors driving expenses up.  Allocated expenses including rent, office, telecommunications, travel and contracted expenses in Ukraine increased by $106,000 or 33% due to the increase in end-users migrated to our system.

Technical Support

Three months ended
        
        Six months endedSeptember 30,2007
        
        September 30,2006
        
        September 30,2007
        
        September 30,2006Technical support
        $
        963,758
        $
        794,331
        $
        1,878,132
        $
        1,473,207Percent of revenues
        
        14.2%
        
        14.2%
        
        14.4%
        
        13.4%Increase over comparable year period
        $
        169,427
        
        
        $
        404,925Increase over comparable year period - percent
        
        21.3%
        
        
        
        27.5%


Technical Support (Three Month Period Ended September 30, 2007)

Technical support expenses increased by 21% to $964,000 from $794,000 in the three months ended September 30, 2006.  Salaries, wages and benefits including stock option benefits increased by $124,000 or 20% compared to the prior years comparable quarter as we established our new customer care center in Miramichi, New Brunswick.  Personnel increased by 23% year over year as a result of the New Brunswick initiative and to support the increase in our end-users. However, as we gain experience in New Brunswick, we expect our overall personnel count will come back into line due to natural attrition in our Mississauga customer care center.   Allocated expenses including rent, office, telecommunications, travel and contracted expenses in Ukraine increased by $45,000 or 27% due to the increase in end-users on our system and a related increase in the number of contractors in Ukraine that
assist in handling our written and live chat technical support.

Technical Support (Six Month Period Ended September 30, 2007)

Technical support expenses increased by 27% to $1.9 million from $1.5 million in the six months ended September 30, 2006.  Salaries, wages and benefits including stock option benefits increased by $303,000 or 26% compared to the prior years comparable period as wage rates rose and personnel increased by 23% year over year as a result of the New Brunswick initiative and to support the increase in our end-users.   Allocated expenses including rent, office, telecommunications, travel and contracted expenses in Ukraine increased by $102,000 or 32% due to the increase in end-users on our system and a related increase in the number of contractors in Ukraine that assist in handling our written and live chat technical support.



22

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General and Administrative

Three months ended
        
        Six months endedSeptember 30,2007
        
        September 30,2006
        
        September 30,2007
        
        September 30,2006General and administrative
        $
        652,246
        $
        431,362
        $
        1,233,949
        $
        822,681Percent of revenues
        
        9.6%
        
        7.7%
        
        9.4%
        
        7.5%Increase over comparable year period
        $
        220,884
        
        
        $
        411,268Increase over comparable year period - percent
        
        51.1%
        
        
        
        50.0%


General and Administrative (Three Month Period Ended September 30, 2007)

General and administrative expenses increased by 51% to $652,000 from $431,000 in the three months ended September 30, 2006.  Salaries, wages and benefits including stock option benefits increased by $17,000 or 6% compared to the prior years comparable quarter.  The number of personnel declined by 18% year over year.   We experienced a $229,000 increase in professional fees and public company expenses.  The provision for doubtful accounts decreased by $42,000.  We experienced a negative currency expense swing of approximately $5,000 compared to the three months ended June 30, 2006.  Allocated expenses including rent, office, telecommunications and travel increased by $12,000 or 25% due to ongoing business growth. We anticipate increasing professional fees including regulatory compliance related expense, higher insurance expenses and increased directors fees.

General and Administrative (Six Month Period Ended September 30, 2007)

General and administrative expenses increased by 50% to $1.2 million from $823,000 in the six months ended September 30, 2006.  Salaries, wages and benefits including stock option benefits increased by $40,000 or 7% compared to the prior years comparable quarter.  The number of personnel declined by 18% year over year.   We experienced a $408,000 increase in professional fees and public company expenses.  The provision for doubtful accounts decreased by $78,000.  We experienced a negative currency expense swing of approximately $27,000.  Allocated expenses including rent, office, telecommunications and travel increased by $14,000 or 15% due to ongoing business growth. We anticipate increasing professional fees including regulatory compliance related expense, higher insurance expenses and increased directors fees.

Amortization

Three months ended
        
        Six months endedSeptember 30,2007
        
        September 30,2006
        
        September 30,2007
        
        September 30,2006Amortization
        $
        836,398
        $
        636,306
        $
        1,566,956
        $
        1,192,988Percent of revenues
        
        12.3%
        
        11.4%
        
        12.0%
        
        10.9%Increase over comparable year period
        $
        200,092
        
        
        $
        373,968Increase over comparable year period - percent
        
        31.4%
        
        
        
        31.3%


Amortization Expense (Three Month Period Ended September 30, 2007)

Amortization expense increased by 31% to $836,000 from $636,000 in the three months ended September 30, 2006.  This $200,000 increase in amortization expense is due in part to a $62,000 or 14% increase in amortization expense related to our investment in server storage capacity to service the increase in end-users of our services. In addition, our investment in customer lists, templates, patent licenses and the Nexthaus mobile syncing technology increased this quarters amortization expenses related to these assets by $4,000, $37,000, $17,000 and $80,000 respectively.



23

---

Amortization Expense (Six Month Period Ended September 30, 2007)

Amortization expense increased by 31% to $1.6 million from $1.2 million in the six months ended September 30, 2006.  This $374,000 increase in amortization expense is due in part to a $125,000 or 15% increase in amortization expense related to our investment in server storage capacity to service the increase in end-users of our services. In addition, our investment in customer lists, templates, patents and the Nexthaus mobile syncing technology increased the six month  amortization expenses related to these assets by $4,000,  $61,000, $50,000 and $134,000 respectively

Interest Income (Three Month Period Ended September 30, 2007)

Interest income increased to $322,000 from $18,000 in the three months ended September 30, 2006 as our shortterm investments increased by approximately $23.0 million compared to the previous year. This increase was a result of our placing the proceeds from our initial 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 yielding approximately 5%.

Interest Income (Six Month Period Ended September 30, 2007)

Interest income increased to $648,000 from $40,000 in the six months ended September 30, 2006 as our shortterm investments increased by approximately $23.0 million compared to the previous year.

Interest Expense (Three Month Period Ended September 30, 2007)

Interest related to imputed interest on non-interest bearing debt ceased to be expensed when this debt was paid off in early July, 2007. Imputed interest expensed in the three months ended September 30, 2006 totaled $4,000.

Interest Expense (Six Month Period Ended September 30, 2007)

Interest related to imputed interest on non-interest bearing debt ceased to be expensed when this debt was paid off in early July, 2007. Imputed interest in fiscal 2007, expensed prior to the debt being paid off  was $4,000 compared to $8,000 of imputed interest expensed in the six months ended September 30, 2006

Income Tax Expense (Three Month Period Ended September 30, 2007)

Income tax expense of  $340,000 in the three  months  ended  September  30, 2007
increased by $116,000  from the three months ended  September 30, 2006 due to an
increase in taxable income. The effective tax rate of 42.7% of pre-tax income is
higher  than the 33.7% in the three  months  ended  September  30, 2006 due to a
higher percentage of non-deductible items in the current period.

Income Tax Expense (Six Month Period Ended September 30, 2007)

Income tax  expense of  $633,000  in the six months  ended  September  30,  2007
increased by $74,000 from the six months  ended  September  30, 2006 due to a
increase in taxable income. The effective tax rate of 42.1% of pre-tax income is
higher than the 37.8% in the six months ended September 30, 2006 due to a higher
percentage of non-deductible items in the current period.

Liquidity and Capital Resources

Cash and cash equivalents are currently our primary source of liquidity. The cash equivalents are substantially invested in a money market mutual fund that invests only in highly rated and highly liquid money market financial instruments. We expect cash flow from operations will continue to be an ongoing source of liquidity. As of September 30, 2007, we had $26.1 million in cash and cash equivalents and $27.2 million in working capital, as compared to $27.4 million in cash and cash equivalents and $26.7 million in working capital as of March 31, 2007. Our cash position decreased by $1.3 million due primarily to the $963,000 cash payment (including legal fees) on the purchase of intellectual property from Nexthaus Inc., the $100,000 payment to J2 Global Communications, Inc. for a license to use their digital fax patent portfolio and the purchase of capital assets and templates. Cash flow
from operations was significantly reduced by the payment of income tax installments in the U.S. and Canada. Approximately $1.3 million of cash was received on the exercise of stock options since April 1, 2007.



24

---

Operating  activities for the six months ended September 30, 2007 generated $0.6
million of cash  compared to the $2.4 million of cash provided in the six months
ended  September 30, 2006. The primary  reasons for this $1.8 million  reduction
were  increased  tax payments of $0.8  million and the $0.9 million  increase in
trade accounts receivable this year compared to the $0.2 million decrease during
the comparable period last year. As net income and non-cash amortization expense
are both expected to increase during the balance of fiscal 2008 and tax payments
as well as trade  accounts  receivable are expected to use less cash, we believe
operating   cash  flow   should   strengthen   through   the   balance   of  the
year.

Cash flows from financing activities included $1.3 million on the exercise of stock options for which we issued 461,860 shares at an average price of US$2.76 per share.

Net cash used in investment activities totaled $3.1 million compared to $1.7 million in the six months ended September 30, 2006. Year to date we purchased $1.7 million of property and equipment primarily to support our expanding end-user base including the establishment of a customer care center in Miramichi, New Brunswick.  We also invested $1.4 million on the acquisition of intellectual property from Nexthaus, Inc., the acquisition of a license covering fax to email from J2 Global Communications, Inc. and the purchase of additional website design templates for our template library. Capital investment is expected to moderate during the balance of fiscal 2008 as we have the capacity to handle near term end-user growth.  We expect future expenditures may include the following activities:


        Selling and marketing costs to prospective customers as we continue to build our key metric of end-users;



        Investment in our domestic infrastructure to support further growth in North America;



        Investment in infrastructure in the United Kingdom once our U.K. customer base reaches a requisite level;



        Investment in research and development activities to enhance our product offerings and revenue per end-user; and



        Acquisition of strategic technology or business operations that will enhance our ability to deliver more services and generate more revenue from our end-users.


We believe, based on our cash and cash equivalents at September 30, 2007 and our projected cash flow from operations, we have sufficient resources to finance our business, including sales and marketing expenses, research and development expenses and capital expenditures in the short and long term without raising further funds in the capital markets. We also have the liquidity to make additional investments in our application delivery platform, expand our portfolio of web services, expand further into the UK marketplace and make small and medium size strategic investments in complementary businesses, services, products and technologies.

Item 3.
        Quantitative and Qualitative Disclosures About Market Risk


Foreign Currency Exchange Risk

The operating results and cash flows that we generate through our revenue activities are subject 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 our currency exposure periodically to ensure that our revenues in non-U.S. currencies are reasonably matched by expenses in those currencies.  During the three months ended September 30, 2007, non-U.S. dollar denominated revenues totaled approximately $3.1 million in Canada dollars and $0.3 million in U.K. pounds. Based on this current level of revenues an annualized 5% fluctuation in the Canadian dollar exchange rate would increase or decrease annual revenues by approximately $0.6 million.



25

---

Interest Rate Sensitivity

We had investments in short term bank deposits, bank certificates of deposit and money market funds amounting to $24.5 million at September 30, 2007. We currently do not have any interest bearing debt obligations. Due to the short term nature of our investments, we believe that we do not have any material exposure to changes in the fair value of our short term investments as a result of changes in interest rates.  However, we estimate, based on the level of short term interest bearing investments at September 30, 2007, that on an annualized basis a 1% fluctuation in short term interest rates would raise or lower our net income by approximately $0.01 per share.

Item 4.
        Controls and Procedures


Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)).  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.

No change in the Companys internal control over financial reporting has occurred during the Companys fiscal quarter ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



26

---

PART II

OTHER INFORMATION

Item 1.
        Legal Proceedings


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

Item 1A.  Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part II, Item 1A. Risk Factors in our Annual Report on Form 10-K for the fiscal year ended March 31, 2007, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. There are no material changes to the Risk Factors described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2007.

Item2.
        Unregistered Sales of Equity Securities and Use of Proceeds


On November 3, 2006, our registration statement on Form S-1 (Registration No. 333-135533), registering 4,200,000 shares of our common stock, $0.0001 par value, for sale by us was declared effective by the Securities and Exchange Commission and we commenced our initial public offering on that date. In Canada, RBC Dominion Securities Inc., TD Securities Inc., GMP Securities L.P. and Haywood Securities Inc. acted as the managing underwriters for the offering. In the United States, RBC Capital Markets Corporation, TD Securities (USA) LLC, Griffith McBurney Corp. and Haywood Securities (USA) Inc. acted as the managing underwriters for the offering. On November 10, 2006, we completed the offering at $5.30 (CDN $6.00) per share. The aggregate purchase price, before expenses, to us was $ 22.3 million (CDN$ 25.2 million) and we incurred $3.4 million in expenses, resulting in net
proceeds from the initial offering of $18.9 million. On December 7, 2006, the underwriters exercised their over-allotment option and purchased an additional 630,000 shares of our common 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 $0.2 million, resulting in net proceeds of $3.1 million (CDN $3.5 million).  The net proceeds have been invested in investment grade commercial paper.During the quarter ended September 30, 2007, we used approximately $0.7 million of net proceeds from the IPO for the purchase of property and equipment and intellectual property. Since the closing of our Initial Public Offering, we have applied approximately $3.6 million of the net proceeds of $22 million to the purchase of long term assets.  Neither our directors, officers, affiliates, nor persons owning 10% or more of any class of our securities
received direct or indirect payments in connection with our payment of the offering-related expenses.

Item3.
        Defaults Upon Senior Securities


None.

Item4.
        Submission of Matters to a Vote of Security Holders


None.

Item5.
        Other Information


None.



27

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Item 6.Exhibits

Exhibit Number
        
        Description3.1(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, 20014.2(1)
        
        Registration Rights Agreement dated as of December 27, 20014.3(1)
        
        Warrant dated July 1, 2003 exercisable for 60,000 shares of common stock4.4(4)
        
        Specimen Stock Certificate10.1(1)
        
        Hostopia.com Inc. 2000 Stock Option Plan and forms of related agreements10.2(3)
        
        Hostopia.com Inc. 2006 Stock Option Plan and forms of related agreements10.3(1)
        
        Employment Agreement with William Campbell, dated June 1, 200610.4(1)
        
        Employment Agreement with Colin Campbell, dated June 1, 200610.5(1)
        
        Employment Agreement with Michael Mugan, dated April 1, 200610.6(1)
        
        Employment Agreement with Paul Engels, dated April 1, 200610.7(1)
        
        Employment Agreement with Dirk Bhagat, dated June 1, 200610.8(1)
        
        Management Services Agreement with John Nemanic, dated June 1, 200610.9(1)
        
        Form of Indemnification Agreement between the registrant and each of its directors and executive officers10.10(1)
        
        Asset Purchase Agreement between the registrant and FortuneCity.com Inc., dated as of January 31, 200610.11(1)
        
        Services Agreement between the registrant and Geeksforless Inc., dated as of July 1, 200510.12(1)
        
        Template Purchase Agreement between the registrant and Geeksforless Inc., dated as of February 1, 200510.13(1)
        
        Image Library Agreement between the registrant and Geeksforless Inc., dated as of January 2, 200510.14(1)
        
        Lease between Badenhurst-Airway Centre Ltd. and the registrant dated September 30, 2002, as amended10.15(1)
        
        Revolving Line of Credit Facility31.1
        
        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 the Registrants Form S-1 (SEC File No. 333-135533), filed on June 30, 2006

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

(3)Incorporated by reference to the Registrant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 the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HOSTOPIA.COM INC.(Registrant)November 13, 2007
        
        /s/ COLIN CAMPBELLDate
        
        Colin Campbell
Chief Executive OfficerNovember 13, 2007
        
        /s/ MICHAEL J. MUGANDate
        
        Michael J. Mugan
Chief Financial Officer
(Principal Financial and Accounting Officer)






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Exhibit Index

Exhibit Number
        
        Description3.1(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, 20014.2(1)
        
        Registration Rights Agreement dated as of December 27, 20014.3(1)
        
        Warrant dated July 1, 2003 exercisable for 60,000 shares of common stock4.4(4)
        
        Specimen Stock Certificate10.1(1)
        
        Hostopia.com Inc. 2000 Stock Option Plan and forms of related agreements10.2(3)
        
        Hostopia.com Inc. 2006 Stock Option Plan and forms of related agreements10.3(1)
        
        Employment Agreement with William Campbell, dated June 1, 200610.4(1)
        
        Employment Agreement with Colin Campbell, dated June 1, 200610.5(1)
        
        Employment Agreement with Michael Mugan, dated April 1, 200610.6(1)
        
        Employment Agreement with Paul Engels, dated April 1, 200610.7(1)
        
        Employment Agreement with Dirk Bhagat, dated June 1, 200610.8(1)
        
        Management Services Agreement with John Nemanic, dated June 1, 200610.9(1)
        
        Form of Indemnification Agreement between the registrant and each of its directors and executive officers10.10(1)
        
        Asset Purchase Agreement between the registrant and FortuneCity.com Inc., dated as of January 31, 200610.11(1)
        
        Services Agreement between the registrant and Geeksforless Inc., dated as of July 1, 200510.12(1)
        
        Template Purchase Agreement between the registrant and Geeksforless Inc., dated as of February 1, 200510.13(1)
        
        Image Library Agreement between the registrant and Geeksforless Inc., dated as of January 2, 200510.14(1)
        
        Lease between Badenhurst-Airway Center Ltd. and the registrant dated September 30, 2002, as amended10.15(1)
        
        Revolving Line of Credit Facility31.1
        
        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 the Registrants Form S-1 (SEC File No. 333-135533), filed on June 30, 2006

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

(3)Incorporated by reference to the Registrant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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