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 December 31, 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 February 13, 2008, there were 11,613,411 outstanding shares of common
        stock, par value $0.0001, of the registrant.

---

HOSTOPIA.COM INC.

Quarterly Report on Form 10-Q

INDEX



PART
        I

FINANCIAL INFORMATION

Item 1.

                    Financial Statements

                    2


Consolidated Balance Sheets as of December 31,
                        2007 (unaudited) and March 31, 2007

                    2


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

December 31, 2007 and
                        2006

                    3


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

December 31, 2007 and
                        2006

                    4


Notes to Unaudited Consolidated Financial
                        Statements

                    5Item 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
        IIOTHER 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


NOTE:On the cover of our Form 10-K
for the year ended March 31, 2007, we indicated that our common stock was registered
under Section 12(g) of the Securities Exchange Act of 1934. This was an error. Our common
stock is not registered under Section 12 and consequently we are not subject to the proxy
rules or Section 16.



1

---

PART
        I

FINANCIAL INFORMATION

Item 1.

                    Financial Statements


Hostopia.com Inc.

Consolidated Balance Sheets

(Expressed in U.S. dollars)

December 31,

                        2007

                    

                    March 31,
                        2007(Unaudited)AssetsCurrent assets:Cash and
                        cash equivalents

                    $

                    26,016,795

                    $

                    27,367,667Trade accounts receivable, net of allowance for doubtful
                        accounts of $224,953; (March 31, 2007 - $114,755)

                    

                    3,100,073

                    

                    1,320,422Deferred tax assets

                    

                    166,000

                    

                    117,000Prepaid expenses

                    

                    393,550

                    

                    377,242Income taxes recoverable

                    

                    1,341,741

                    

                    -Total current assets

                    

                    31,018,159

                    

                    29,182,331Property and equipment, net of accumulated amortization of
                        $6,678,020; (March 31, 2007 - $5,163,911)

                    

                    3,571,417

                    

                    2,922,677Other assets

                    

                    65,074

                    

                    60,997Intangible assets, net of
                        accumulated amortization of $2,519,945; (March 31, 2007 -
                        $1,594,348)

                    

                    2,414,837

                    

                    1,690,284Deferred tax assets

                    

                    1,289,000

                    

                    1,101,000Total assets

                    $

                    38,358,487

                    $

                    34,957,289Liabilities and Stockholders’ EquityCurrent liabilities:Accounts payable

                    $

                    527,538

                    $

                    380,040Accrued liabilities

                    

                    1,265,939

                    

                    705,229Payroll and other taxes payable

                    

                    36,930

                    

                    34,956Income taxes payable

                    

                    -

                    

                    269,020Current portion of deferred lease inducements

                    

                    79,900

                    

                    79,900Deferred revenue

                    

                    790,269

                    

                    983,299Current portion of long-term liability

                    

                    -

                    

                    72,000Total current liabilities

                    

                    2,700,576

                    

                    2,524,444Deferred lease inducements

                    

                    182,261

                    

                    237,035Long-term liability

                    

                    -

                    

                    292,957Total liabilities

                    

                    2,882,837

                    

                    3,054,436Stockholders’ equity:Capital stockAuthorized:30,000,000 common shares, par value $0.0001Issued and
                        outstanding11,613,411 common shares (March 31, 2007 - 11,097,251 common
                        shares)

                    

                    217,120

                    

                    217,069Additional paid-in capital

                    

                    33,142,987

                    

                    31,054,703Accumulated other comprehensive loss

                    

                    (43,881)

                    

                    (43,881)Retained earnings

                    

                    2,159,424

                    

                    674,962Total stockholders’ equity

                    

                    35,475,650

                    

                    31,902,853Total liabilities and stockholders’ equity

                    $

                    38,358,487

                    $

                    34,957,289




See
        accompanying notes to unaudited consolidated financial statements



2

---

Hostopia.com Inc.

Consolidated Statements of Operations

(Expressed in U.S. dollars)

(Unaudited)

Three months ended

                        December 31,

                    Nine months ended

                        December 31,2007

                    

                    2006

                    

                    2007

                    

                    2006RevenuesWebhosting and applications services

                    $

                    6,869,526

                    $

                    5,433,707

                    $

                    19,498,231

                    $

                    16,059,489Other services

                    

                    419,683

                    

                    183,142

                    

                    857,019

                    

                    544,399Total revenues

                    

                    7,289,209

                    

                    5,616,849

                    

                    20,355,250

                    

                    16,603,888Cost of revenuesWebhosting and applications services

                    

                    894,180

                    

                    624,834

                    

                    2,477,510

                    

                    1,825,514Other services

                    

                    66,365

                    

                    84,963

                    

                    234,620

                    

                    254,066Total cost of revenues

                    

                    960,545

                    

                    709,797

                    

                    2,712,130

                    

                    2,079,580Gross profit

                    

                    6,328,664

                    

                    4,907,052

                    

                    17,643,120

                    

                    14,524,308ExpensesSales and marketing (a)

                    

                    1,498,140

                    

                    1,259,359

                    

                    4,352,426

                    

                    3,606,616Research and development (a)

                    

                    1,084,361

                    

                    773,901

                    

                    2,939,238

                    

                    2,268,885Project management (a)

                    

                    516,464

                    

                    407,936

                    

                    1,584,132

                    

                    1,247,733Technical support (a)

                    

                    985,118

                    

                    781,916

                    

                    2,863,250

                    

                    2,255,123General and administrative (a)

                    

                    737,299

                    

                    541,285

                    

                    1,971,248

                    

                    1,363,966Amortization of intangible assets

                    

                    326,204

                    

                    201,219

                    

                    916,878

                    

                    543,264Amortization of property and equipment

                    

                    537,827

                    

                    487,310

                    

                    1,514,109

                    

                    1,338,2535,685,413

                    

                    4,452,926

                    

                    16,141,281

                    

                    12,623,840Income before the undernoted

                    

                    643,251

                    

                    454,126

                    

                    1,501,839

                    

                    1,900,468Interest income

                    

                    306,864

                    

                    180,327

                    

                    954,829

                    

                    220,026Interest (expense)

                    

                    -

                    

                    (4,206)

                    

                    (4,206)

                    

                    (12,618)306,864

                    

                    176,121

                    

                    950,623

                    

                    207,408Income before income taxes

                    

                    950,115

                    

                    630,247

                    

                    2,452,462

                    

                    2,107,876Income taxes (recovery)Current

                    

                    283,000

                    

                    343,000

                    

                    1,205,000

                    

                    1,090,000Deferred

                    

                    52,000

                    

                    (86,000)

                    

                    (237,000)

                    

                    (274,000)335,000

                    

                    257,000

                    

                    968,000

                    

                    816,000Net income

                    $

                    615,115

                    $

                    373,247

                    $

                    1,484,462

                    $

                    1,291,876Net income per shareBasic

                    $

                    0.05

                    $

                    0.05

                    $

                    0.13

                    $

                    0.23Diluted

                    

                    0.05

                    

                    0.04

                    

                    0.13

                    

                    0.18Weighted average number of common shares
                        outstandingBasic

                    

                    11,594,710

                    

                    7,787,745

                    

                    11,473,904

                    

                    5,288,716Diluted

                    

                    11,674,748

                    

                    8,951,380

                    

                    11,600,738

                    

                    7,340,008(a)          Stock-based
                        compensation is included in operating expenses as follows:Sales
                        and marketing

                    $

                    31,672

                    $

                    27,925

                    $

                    95,055

                    $

                    94,210Research and development

                    

                    40,491

                    

                    4,468

                    

                    98,600

                    

                    15,074Project management

                    

                    3,944

                    

                    2,467

                    

                    13,014

                    

                    8,322Technical support

                    

                    3,321

                    

                    3,723

                    

                    10,549

                    

                    12,561General and administrative

                    

                    24,450

                    

                    7,959

                    

                    63,448

                    

                    26,850$

                    103,878

                    $

                    46,542

                    $

                    280,666

                    $

                    157,017


See accompanying notes to unaudited consolidated financial
        statements



3

---

Hostopia.com Inc.

Consolidated Statements of Cash Flows

(Expressed in U.S. dollars)

(Unaudited)

Nine months ended December 31,2007

                    

                    2006Cash flows from operating activities:Net income

                    $

                    1,484,462

                    $

                    1,291,876Items which do not involve cash:Amortization

                    

                    2,439,706

                    

                    1,881,517Stock-based compensation

                    

                    280,666

                    

                    157,017Excess tax benefits from stock-based compensation

                    

                    (350,000)

                    

                    -Non-cash interest

                    

                    4,206

                    

                    12,618Deferred income taxes

                    

                    (237,000)

                    

                    (446,350)Deferred lease inducements

                    

                    (54,774)

                    

                    (43,921)Change in operating assets and liabilitiesTrade accounts receivable

                    

                    (1,779,651)

                    

                    (393,635)Prepaid expense

                    

                    (16,308)

                    

                    (211,319)Accounts payable

                    

                    147,498

                    

                    422,860Accrued liabilities

                    

                    560,710

                    

                    214,340Payroll taxes and other taxes payable

                    

                    1,974

                    

                    (17,521)Income taxes payable

                    

                    (1,260,761)

                    

                    13,000Deferred revenue

                    

                    (193,030)

                    

                    (119,080)Cash flows from operating activities

                    

                    1,027,698

                    

                    2,761,402Cash flows from (used in) financing activities:Issue of common shares on exercise of stock
                        options

                    

                    1,422,811

                    

                    1,799Issue of common shares on exercise of warrants

                    

                    -

                    

                    192,000Issue of common shares on initial public offering

                    

                    -

                    

                    21,965,578Refund of initial public offering expenses

                    

                    34,858

                    

                    -Repayment of long-term liabilities

                    

                    (369,163)

                    

                    (126,326)Excess tax benefits from stock-based compensation

                    

                    350,000

                    

                    -Cash flows from (used in) financing activities

                    

                    1,438,506

                    

                    22,033,051Cash flows from investing activities:Acquisition of property and equipment

                    

                    (2,162,849)

                    

                    (1,343,096)Acquisition of intellectual property

                    

                    (1,650,150)

                    

                    (793,175)Cash flows from investing activities

                    

                    (3,812,999)

                    

                    (2,136,271)Effect of currency translation on cash balances

                    

                    (4,077)

                    

                    (36)Increase (decrease) in cash and cash equivalents

                    

                    (1,350,872)

                    

                    22,658,146Cash and cash equivalents, beginning of
                        period1

                    

                    27,367,667

                    

                    3,038,217Cash and cash equivalents, end of period

                    $

                    26,016,795

                    $

                    25,696,363Supplemental cash flow information:Interest paid

                    $

                    -

                    $

                    -Income taxes paid

                    

                    2,465,760

                    

                    1,249,350


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

---

HOSTOPIA.COM INC.

Notes
        to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Three
        and Nine Months Ended December 31, 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 December 31, 2007 and March 31, 2007, the
        consolidated statements of operations for the three and nine months ended December 31, 2007
        and 2006, the consolidated statements of cash flows for the nine months ended December 31,
        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 December 31, 2007, its results of
        operations for the three and nine months ended December 31, 2007 and 2006 and its cash
        flows for the nine months ended December 31, 2007 and 2006.

The
        financial results for the nine months ended December 31, 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

---

HOSTOPIA.COM INC.

Notes
        to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Three
        and Nine Months Ended December 31, 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”). The Company adopted the provisions of FIN 48 effective April 1, 2007.
        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
        is required to 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.

Upon
        adoption, the Company had no unrecognized tax benefits or liabilities 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,
        Share Based Payments (“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

---

HOSTOPIA.COM INC.

Notes
        to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Three
        and Nine Months Ended December 31, 2007 and 2006

|**3.** | **** | **STOCK-BASED
                PLANS**
|------ | ---- | -------------------------------------

During
        the nine months ended December 31, 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.

Nine MonthsEndedDecember 31, 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.



7

---

HOSTOPIA.COM INC.

Notes
        to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Three
        and Nine Months Ended December 31, 2007 and 2006



|**4.** | **** | **ASSET
                ACQUISITIONS**
|------ | ---- | --------------------------------------

|(i) |  | On May
                    2, 2007, the Company acquired all of the intellectual property, including
                    developed software and underlying source 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.
                    As of December 31, 2007, no payments have been made. In addition, a referral
                    fee equal to 15% of the revenue generated by the intellectual property will be
                    payable until May 2, 2010.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

During the nine months ended December 31, 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

---

HOSTOPIA.COM INC.

Notes
        to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Three
        and Nine Months Ended December 31, 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

                    December 31, | Nine Months Ended

                    December 31,
|---------------------------------------------------------------------------- | - | ---------------------------------------------------- | ---------------------------------------------------
|                                                                             |   | 2007                                                 |                                                    
|Net income attributable to common stockholders -
                    diluted | $ | 615,115                                              | $                                                  
|Dividend accretion on Series A preferred shares                              |   | -                                                    |                                                    
|Net income attributable to common stockholders -
                    basic   | $ | 615,115                                              | $                                                  
|                                                                             |   |                                                      |                                                    
|                                                                             |   |                                                      |                                                    
|Weighted average outstanding shares of common stock                          |   | 11,594,710                                           |                                                    
|Dilutive effect of Series A redeemable preferred
                    shares  |   | -                                                    |                                                    
|Dilutive effect of stock options and warrants (1)                            |   | 80,038                                               |                                                    
|Common stock and common stock equivalent                                     |   | 11,674,748                                           |                                                    
|                                                                             |   |                                                      |                                                    
|Net income attributable per common share:                                    |   |                                                      |                                                    
|Basic                                                                        | $ | 0.05                                                 | $                                                  
|Diluted                                                                      | $ | 0.05                                                 | $                                                  

(1)

                    387,870 stock options outstanding at December 31, 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

---

HOSTOPIA.COM INC.

Notes
        to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Three
        and Nine Months Ended December 31, 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 nine months ended December 31, 2007, the Company issued 516,160 common shares pursuant
        to the exercise of stock options and received proceeds in the amount of
        $1,422,811.

|**8.** | **** | **RELATED
                PARTY TRANSACTIONS**
|------ | ---- | ----------------------------------------------

The
        Company completed transactions with TELUS Corporation, a related party by virtue of its
        7.3% 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 2007 to November 2010 for an
        aggregate minimum amount of $1,736,000.

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:

December 31, 2007

                    

                    March 31, 2007Balance
                        sheets:

                    

                    (Unaudited)Accounts
                        receivable

                    $

                    232,037

                    $

                    7,107Accounts
                        payable

                    

                    134,128

                    

                    125,780




Three months endedDecember 31,

                    Nine months ended
                        December 31,2007

                    

                    2006

                    

                    2007

                    

                    2006(Unaudited)Statements of operations:Webhosting and application services revenue

                    $

                    756,828

                    $

                    544,896

                    $

                    2,083,277

                    $

                    1,619,757Bandwidth

                    

                    204,276

                    

                    173,343

                    

                    642,669

                    

                    529,981Outsourced services

                    

                    429,943

                    

                    350,465

                    

                    1,349,635

                    

                    989,137Telephone services

                    

                    51,617

                    

                    75,492

                    

                    152,576

                    

                    183,800




10

---

HOSTOPIA.COM INC.

Notes
        to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Three
        and Nine Months Ended December 31, 2007 and 2006



|**9.** | **** | **RECENT
                ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED**
|------ | ---- | --------------------------------------------------------------------

In
        September 2006, the Financial Accounting Standards Board (“FASB”) issued
        SFAS No. 157 Fair Value Measurements
        to 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 for fiscal years beginning 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):



|               | Three
                    Months
                    Ended

                    December 31, | Nine
                    Months
                    Ended

                    December 31,
|-------------- | -------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------
|               |                                                                                              | 2007                                                                                       
|               | Unaudited                                                                                   
|Canada         | $                                                                                            | 3,327,930                                                                                  
|United States  |                                                                                              | 3,418,685                                                                                  
|United Kingdom |                                                                                              | 542,594                                                                                    
|Total revenues | $                                                                                            | 7,289,209                                                                                  

11

---

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 333
        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 6 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 17 personnel.



12

---

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 88 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 been reduced during the quarter
        ended December 31, 2007 following a short term spike when we opened our new customer care
        center in Miramichi, New Brunswick in the previous quarter.

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 9 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 third quarter, we signed 8 new contracts and grew our billable
        base by approximately 8,000 new end-users. Combined with the net increase in website
        additions during Q2, we experienced good revenue growth and believe revenue will continue
        to increase in the next quarter. 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
        Sony Ericsson, Nokia and Motorola.

During the third quarter, we continued to develop and integrate the Nexthaus
        SyncML technology. We also continued marketing our Website Experts services. In addition,
        in the second quarter 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 in the first quarter of fiscal 2009. We estimate these
        revenue growth initiatives increased our operating expenses, including amortization of
        intangibles, by approximately $315,000 in the quarter compared to last year.

We also incurred additional expenses in the third quarter related to 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 short term incremental cost increase incurred during the first few months to
        establish the new call center would begin to moderate as natural attrition occurred in our
        Mississauga call centre.

During the third quarter we invested approximately $218,000 in customer
        lists for new customers that we are in the process of migrating to our platform, $45,000 in
        additions to our template library and $446,000 for computer equipment.

We also estimate that our cost of revenues and operating expenses grew in
        the third quarter by $734,000 compared to last year as a result of translating our Canadian
        dollar denominated expenses into U.S. dollars.



13

---

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 December 31, 2007, we served approximately 298,000
        end-users, a net increase of approximately 38,000 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 333 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 95.8% and 96.7% of our revenues in the nine months
        ended December 31, 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 4.2% and 3.3% of our total revenues in the nine months
        ended December 31, 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.



14

---

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,
        public company costs 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.



15

---

General and Administrative

General and administrative expenses consist of compensation and related
        expenses for administration and finance personnel, public company costs and 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.

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 with definite useful lives (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 customer life.

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.



16

---

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

Other intangible assets with definite useful lives include acquired patents,
        Website templates and digital images which are amortized using the straight-line method
        over their estimated useful lives. We test for the impairment of definite life intangible
        assets 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 December 31, 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 uncertainties.



17

---

**Results of Operations for the Three and Nine Month Periods ended
        December 31, 2007 as Compared to the Three and Nine Month Periods ended December 31,
        2006**

Revenues

Three months ended

                    

                    Nine months endedDecember 31,2007

                    

                    December 31,2006

                    

                    December 31,2007

                    

                    December 31,2006RevenuesWeb hosting and application services

                    $

                    6,869,526

                    $

                    5,433,707

                    $

                    19,498,231

                    $

                    16,059,489Other services

                    

                    419,683

                    

                    183,142

                    

                    857,019

                    

                    544,399Total revenue

                    $

                    7,289,209

                    $

                    5,616,849

                    $

                    20,355,250

                    $

                    16,603,888End-users at end of period

                    

                    298,500

                    

                    248,200

                    

                    298,500

                    

                    248,200Increase in end users over comparable prior period –
                        percent

                    

                    20.2%

                    

                    

                    

                    20.2%Increase over comparable prior year period

                    $

                    1,672,360

                    

                    

                    $

                    3,751,362Increase over comparable prior year period –
                        percent

                    

                    29.8%

                    

                    

                    

                    22.6%


Comparison of the Three Month Periods ended December 31, 2007 and
        2006

Revenues

Total revenue increased by 29.8% to $7.3 million in the three month period
        ended December 31, 2007 from $5.6 million in the three month period ended December 31,
        2006.

Web
        Hosting and Application Services

Web hosting and application services revenue increased by $1.44 million or
        26.5% to $6.9 million. Our revenue growth was primarily due to a 50,200 or 20.2% increase
        in end-users year over year. We had approximately 298,000 end-users on our system as of
        December 31, 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 39,500 end-users, representing a 16% increase over the
        number of end-users at December 31, 2006. Penetration of our existing customer base added
        approximately 10,700 end-users, representing a 4% increase over the number of end-users at
        December 31, 2006. Revenue grew in the third quarter by 7% over the previous quarter
        primarily because of the following factors:

•a net increase
        of approximately 8,000 websites onto our platform during the quarter combined with a full
        quarter of revenue
        related to Q2 website additions; and

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

Revenue growth for the final quarter of fiscal 2008 will be supported
        websites added during the third quarter and 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 third 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.



18

---

Other Services

Other services revenue, including domain name registration and professional
        services revenue, increased by $237,000 to $420,000 from $183,000. The principal reasons
        for the increase was growth in our Website Experts and Nexthaus operations, and the sale of
        templates to arm’s length customers.

Comparison of the Nine Month Periods ended December 31, 2007 and
        2006

Total revenue increased by 22.6% to $20.4 million in the nine month period
        ended December 31, 2007 from $16.6 million in the nine month period ended December 31,
        2006. The 8.3% appreciation in the value of the Canadian dollar against the US dollar over
        the comparable period last year contributed 3.5% 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 $3.2 million or 18.4%.

Web
        Hosting and Application Services

Web hosting and application services revenue increased by $3.4 million or
        21.4% to $19.5 million. Our revenue growth was primarily due to a 50,200 or 20.2% increase
        in end-users year over year. We had approximately 298,000 end-users on our system as of
        December 31, 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 39,500 end-users, representing a 16% increase over the
        number of end-users at December 31, 2006. Penetration of our existing customer base added
        approximately 10,700 end-users, representing a 4% increase over the number of end-users at
        December 31, 2006

Other Services

Other services revenue, including domain name registration and professional
        services revenue, increased by $313,000 or 58% to $857,000 from $544,000 in the nine months
        ended December 31, 2006. The principal reason for the increase was growth in our Website
        Experts and Nexthaus operations. The sale of licenses on website templates also contributed
        $85,000 to the increase.

Cost
        of Revenues

Three months ended

                    

                    Nine months endedDecember 31,2007

                    

                    December 31,2006

                    

                    December 31,2007

                    

                    December 31,2006Cost of RevenuesWeb
                        hosting and application services

                    $

                    894,180

                    $

                    624,834

                    $

                    2,477,510

                    $

                    1,825,514Other
                        services

                    

                    66,365

                    

                    84,963

                    

                    234,620

                    

                    254,066Total
                        cost of revenues

                    $

                    960,545

                    $

                    709,797

                    $

                    2,712,130

                    $

                    2,079,580Percent of revenues

                    

                    13.1%

                    

                    12.6%

                    

                    13.3%

                    

                    12.5%Increase over comparable prior
                        year period

                    $

                    250,748

                    

                    

                    $

                    632,550Increase over comparable prior
                        year period - percent

                    

                    35.3%

                    

                    

                    

                    30.4%


Comparison of the Three Month Periods ended December 31, 2007 and
        2006

Cost
        of Revenues

Total cost of revenue increased by 35.3% to $961,000 in the three month
        period ended December 31, 2007 from $710,000 in the three month period ended December 31,
        2006.

Web
        Hosting and Applications Services

Cost of Web hosting and application services revenue increased by 43% to
        $894,000 in the three months ended December 31, 2007 from $625,000 in the three months
        ended December 31, 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 $150,000 or 48%
        due primarily to our 20% increase in end-users and the requirement to add to our leased
        space in our U.S. data center. Software licenses fees, hardware maintenance fees and
        referral payments increased by approximately $115,000 or 46% due to a combination of
        increased



19

---

software and hardware maintenance and increased referral payments related to
        increased revenue. Credit card collection fees increased by approximately $19,000 or
        37%.

Other Services

Cost of other services revenue declined by $19,000 to $66,000. Other
        services expense relates primarily to the purchase of domain name rights that we resell to
        end-users.

Comparison of the Nine Month Periods ended December 31, 2007 and
        2006

Cost
        of Revenues

Total cost of revenue increased by 30.4% to $2.7 million in the nine month
        period ended December 31, 2007 from $2.1 million in the nine month period ended December
        31, 2006.

Web
        Hosting and Applications Services

Cost of Web hosting and application services revenue increased by 36% to
        $2.5 million in the nine months ended December 31, 2007 from $1.6 million in the nine
        months ended December 31, 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 $352,000 or 35%
        due primarily to our 20% 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 $311,000 or 51%
        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 $11,000 or 5%.

Other Services

Cost of other services revenue declined by $19,000 to $235,000. 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 28% to $5.7 million in the three
        months ended December 31, 2007 compared to the three months ended December 31, 2006. Total
        operating expenses represented 78% and 79% of total revenue in the respective three month
        periods ending December 31, 2007 and 2006.

The increase in operating expenses 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, (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 20% 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

                    

                    Nine months endedDecember 31,
                        2007

                    

                    December 31,
                        2006

                    

                    December 31,
                        2007

                    

                    December 31,
                        2006Sales and marketing

                    $

                    1,498,140

                    $

                    1,259,359

                    $

                    4,352,426

                    $

                    3,606,616Percent of revenues

                    

                    20.6%

                    

                    22.4%

                    

                    21.4%

                    

                    21.7%






20

---



| | Three months ended |                                       | Nine months ended
| | ------------------ | ------------------------------------- | -----------------
| |                    | December 31,
                    2007 |                  

Increase over comparable year period

                    $

                    238,781

                    

                    

                    $

                    745,810Increase over comparable year period - percent

                    

                    19.0%

                    

                    

                    

                    20.7%


Sales and Marketing (Three Month Period Ended December 31,
        2007)

Sales and marketing expenses increased by 19% to $1.5 million from $1.3
        million for the three months ended December 31, 2007. Salaries, wages and benefits,
        including stock option benefits increased by $166,000 or 21%. Personnel headcount declined
        by 2 persons. 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
        $45,000 lower than the comparable quarter last year while advertising declined by
        approximately $13,000 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 Ukraine
        hired to service and grow our customer base grew by $131,000 or 47%. 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 (Nine Month Period Ended December 31,
        2007)

Sales and marketing expenses increased by 21% to $4.4 million from $3.6
        million for the nine months ended December 31, 2006. Salaries, wages and benefits,
        including stock option benefits increased by $588,000 or 25%. 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 $27,000 lower than the comparable period last
        year while advertising declined by approximately $72,000 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 $256,000 or 31%.

Research and Development

Three months ended

                    

                    Nine months endedDecember 31,2007

                    

                    December 31,2006

                    

                    December 31,2007

                    

                    December 31,2006Research and
                        development

                    $

                    1,084,361

                    $

                    773,901

                    $

                    2,939,238

                    $

                    2,268,885Percent of revenues

                    

                    14.9%

                    

                    13.8%

                    

                    14.4%

                    

                    13.7%Increase over comparable year
                        period

                    $

                    310,460

                    

                    

                    $

                    670,353Increase over comparable year
                        period - percent

                    

                    40.1%

                    

                    

                    

                    29.5%


Research and Development (Three Month Period Ended December 31,
        2007)

Research and development expenses increased by 40% to $1.1 million from
        $774,000 in the three months ended December 31, 2006. Salaries, wages and benefits
        including stock option benefits increased by $217,000 or 38% compared to the prior
        year’s comparable quarter. Personnel count decreased by 7% year over year as we
        increased our utilization of lower cost Ukrainian programmers. However, expenses remained
        high 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 $93,000 or 48% due to the increased use of Ukrainian contract
        programmers and higher rent and hardware expenses.

Research and Development (Nine Month Period Ended December 31,
        2007)

Research and development expenses increased by 30% to $2.9 million from $2.3
        million in the nine months ended December 31, 2006. Salaries, wages and benefits including
        stock option benefits increased by $473,000 or 28% compared to the prior year’s
        comparable quarter. Personnel count decreased by 7% year over year as we increased our
        utilization of lower cost Ukrainian programmers. Allocated expenses including
        rent,



21

---

office, hardware, telecommunications, travel and contracted expenses in
        Ukraine increased by $197,000 or 36% due to the increased use of Ukrainian contract
        programmers as well as higher rent and hardware expenses.

Project Management

Three months ended

                    

                    Nine months endedDecember 31,2007

                    

                    December 31,2006

                    

                    December 31,2007

                    

                    December 31,2006Project
                        management

                    $

                    516,464

                    $

                    407,936

                    $

                    1,584,132

                    $

                    1,247,733Percent of revenues

                    

                    7.1%

                    

                    7.3%

                    

                    7.8%

                    

                    7.5%Increase over comparable year
                        period

                    $

                    108,528

                    

                    

                    $

                    336,399Increase over comparable year
                        period - percent

                    

                    26.6%

                    

                    

                    

                    27.0%


Project Management (Three Month Period Ended December 31,
        2007)

Project management expenses increased by 27% to $516,000 from $408,000 in
        the three months ended December 31, 2006. Salaries, wages and benefits including stock
        option benefits increased by $48,000 or 20% 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 declined by 19% year over
        year. Allocated expenses including rent, office, telecommunications, travel and contracted
        expenses in Ukraine increased by $61,000 or 37% due to the increase in end-users migrated
        to our system.

Project Management (Nine Month Period Ended December 31,
        2007)

Project management expenses increased by 27% to $1.6 million from $1.2
        million in the nine months ended December 31, 2006. Salaries, wages and benefits including
        stock option benefits increased by $170,000 or 22% 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 $166,000
        or 34% due to the increase in end-users migrated to our system.

Technical Support

Three months ended

                    

                    Nine months endedDecember 31,2007

                    

                    December 31,2006

                    

                    December 31,2007

                    

                    December 31,2006Technical
                        support

                    $

                    985,118

                    $

                    781,916

                    $

                    2,863,250

                    $

                    2,255,123Percent of revenues

                    

                    13.5%

                    

                    13.9%

                    

                    14.1%

                    

                    13.6%Increase over comparable year
                        period

                    $

                    203,202

                    

                    

                    $

                    608,127Increase over comparable year period - percent

                    

                    26.0%

                    

                    

                    

                    27.0%


Technical Support (Three Month Period Ended December 31,
        2007)

Technical support expenses increased by 26% to $985,000 from $782,000 in the
        three months ended December 31, 2006. Salaries, wages and benefits including stock option
        benefits increased by $149,000 or 25% compared to the prior year’s comparable quarter
        as we continued to expand our new customer care center in Miramichi, New Brunswick.
        Personnel increased by 10% year over year as a result of the New Brunswick initiative and
        to support the increase in our end-users. However, as we gained experience in New
        Brunswick, our overall personnel count began to 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 $54,000
        or 31% 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 (Nine Month Period Ended December 31,
        2007)

Technical support expenses increased by 27% to $2.9 million from $2.3
        million in the nine months ended December 31, 2006. Salaries, wages and benefits including
        stock option benefits increased by $452,000 or 26% compared to the prior year’s
        comparable period as wage rates rose and personnel increased by 10% 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 $156,000 or 31% due to



22

---

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.

General and Administrative

Three months ended

                    

                    Nine months endedDecember 31,2007

                    

                    December
                        31,2006

                    

                    December 31,2007

                    

                    December 31,2006General and
                        administrative

                    $

                    737,299

                    $

                    541,285

                    $

                    1,971,248

                    $

                    1,363,966Percent of revenues

                    

                    10.1%

                    

                    9.6%

                    

                    9.7%

                    

                    8.2%Increase over comparable year
                        period

                    $

                    196,014

                    

                    

                    $

                    607,282Increase over comparable year
                        period - percent

                    

                    36.2%

                    

                    

                    

                    44.5%


General and Administrative (Three Month Period Ended December 31,
        2007)

General and administrative expenses increased by 36% to $737,000 from
        $541,000 in the three months ended December 31, 2006. Salaries, wages and benefits
        including stock option benefits decreased by $2,000 or 1% compared to the prior
        year’s comparable quarter. The number of personnel declined by 7% year over year. We
        experienced a $73,000 increase in professional fees and public company expenses. The
        provision for doubtful accounts increased by $127,000. We experienced a positive currency
        expense swing of approximately $21,000 compared to the three months ended December 31,
        2006. Allocated expenses including rent, office, telecommunications and travel increased by
        $19,000 or 35% 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 (Nine Month Period Ended December 31,
        2007)

General and administrative expenses increased by 45% to $2.0 million from
        $1.4 million in the nine months ended December 31, 2006. Salaries, wages and benefits
        including stock option benefits increased by $38,000 or 4% compared to the prior
        year’s comparable quarter. The number of personnel declined by 7% year over year. We
        experienced a $480,000 increase in professional fees and public company expenses. The
        provision for doubtful accounts increased by $50,000. We experienced a negative currency
        expense swing of approximately $6,000. Allocated expenses including rent, office,
        telecommunications and travel increased by $33,000 or 22% 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

                    

                    Nine months endedDecember 31,2007

                    

                    December
                        31,2006

                    

                    December 31,2007

                    

                    December 31,2006Amortization

                    $

                    864,031

                    $

                    688,529

                    $

                    2,430,987

                    $

                    1,881,517Percent of revenues

                    

                    11.9%

                    

                    12.3%

                    

                    11.9%

                    

                    11.3%Increase over comparable year
                        period

                    $

                    175,502

                    

                    

                    $

                    549,470Increase over comparable year period - percent

                    

                    25.5%

                    

                    

                    

                    29.2%


Amortization Expense (Three Month Period Ended December 31,
        2007)

Amortization expense increased by 25% to $864,000 from $689,000 in the three
        months ended December 31, 2006. This $176,000 increase in amortization expense is due in
        part to a $51,000 or 10% 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, $32,000, $9,000 and $80,000 respectively.



23

---

Amortization Expense (Nine Month Period Ended December 31,
        2007)

Amortization expense increased by 29% to $2.4 million from $1.9 million in
        the nine months ended December 31, 2006. This $549,000 increase in amortization expense is
        due in part to a $176,000 or 13% 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 nine month amortization expenses related to these assets
        by $8,000, $93,000, $58,000 and $214,000 respectively

Interest Income (Three Month Period Ended December 31,
        2007)

Interest income increased to $307,000 from $180,000 in the three months
        ended December 31, 2006 as our short–term investments increased by approximately
        $23.0 million in November 2006 and have remained stable since that time. 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 (Nine Month Period Ended December 31,
        2007)

Interest income increased to $955,000 from $220,000 in the nine months ended
        December 31, 2006 as our short–term investments increased by approximately $23.0
        million in November 2006 and have remained stable since that time.

Interest Expense (Three Month Period Ended December 31,
        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 December 31, 2006 totaled $4,000.

Interest Expense (Nine Month Period Ended December 31,
        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 $13,000 of imputed
        interest expensed in the nine months ended December 31, 2006

Income Tax Expense (Three Month Period Ended December 31,
        2007)

Income tax expense of $335,000 in the three months ended December 31, 2007
        increased by $78,000 from the three months ended December 31, 2006 due to an increase in
        taxable income partially offset by a reduction in our effective tax rate that was confirmed
        when we prepared and filed our tax returns for the previous fiscal year.. The effective tax
        rate of 35.3% of pre-tax income is lower than the 40.8% in the three months ended December
        31, 2006 due to the adjustment. We believe our effective tax rate will settle in the 35% -
        36% range assuming we increase our taxable income.to the level where non deductible items
        represent a lower percentage of pre tax income.

Income Tax Expense (Nine Month Period Ended December 31,
        2007)

Income tax expense of $968,000 in the nine months ended December 31, 2007
        increased by $152,000 from the nine months ended December 31, 2006 due to a increase in
        taxable income. The effective tax rate of 39.5% of pre-tax income is higher than the 38.7%
        in the nine months ended December 31, 2006 due to a higher percentage of non-deductible
        items in the year to date period.

Liquidity and Capital Resources

Cash
        and cash equivalents are currently our primary source of liquidity. At December 31, 2007,
        we had a total of $23.7 million invested in large liquid money market funds that provide us
        with same day access to liquidity. On December 31, 2007, $7.7 million was invested in a
        money market fund with $45 billion of assets that had an approximate 5% exposure to
        structured investment vehicles (“SIVs”). A further $8.0 million was invested in
        an AAA rated fund that had $9 billion in assets and approximate 1% exposure to SIVs. The
        remaining $8.0 million was invested in a money market fund that invests exclusively in U.S.
        treasury bills. We expect cash flow from operations will continue to be an ongoing source
        of liquidity. As of December 31, 2007, we had $26.0 million in cash and cash equivalents
        and $28.3 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



24

---

by $1.4
        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
        $1.4 million of cash was received on the exercise of stock options since April 1,
        2007.

Operating activities for the nine months ended December 31, 2007 generated
        $1.0 million of cash compared to the $2.8 million of cash provided in the nine months ended
        December 31, 2006. The primary reasons for this $1.8 million reduction were increased
        income tax payments and the $1.6 million increase in trade accounts receivable this year
        compared to the $0.4 million increase during the comparable period last year. As net income
        is 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 $1.4 million on the exercise
        of stock options for which we issued 516,160 shares at an average price of US$2.76 per
        share.

Net cash used in investment activities totaled $3.8 million compared to $2.1
        million in the nine months ended December 31, 2006. Year to date we purchased $2.2 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 $1.6
        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 December 31, 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 December 31, 2007, non-U.S. dollar denominated revenues totaled approximately $3.3
        million in Canada dollars and $0.5 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 $0.7 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 December 31, 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 December 31,
        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.

Credit Risk

At December 31, 2007, we had a total of $23.7 million invested in money
        market funds of which $7.7 million was invested is in a money market fund with that had an
        approximate 5% exposure to structured investment vehicles (“SIVs”) and a
        further $8.0 million was invested in a fund that had an approximate 1% exposure to SIVs.
        The remaining $8.0 million was invested in a money market fund that invests exclusively in
        U.S. treasury bills. As these funds are not insured by the FDIC or any other agency they
        accordingly involve investment risk, including the possible loss of principal amount
        invested.



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 December 31, 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.

Item
                        2.

                    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 December 31, 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 $4.3 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.

Item
                        3.

                    Defaults Upon Senior Securities


None.

Item
                        4.

                    Submission of Matters to a Vote of Security
                        Holders


None.

Item
                        5.

                    Other Information


None.



27

---

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)




---

(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



28

---

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)February 13, 2008

                    

                    /s/ COLIN CAMPBELLDate

                    

                    Colin Campbell

                        Chief Executive OfficerFebruary 13, 2008

                    

                    /s/ MICHAEL J. MUGANDate

                    

                    Michael J. Mugan

                        Chief Financial Officer

                        (Principal Financial and Accounting Officer)






29

---

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



30

---