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 June 30, 2007



OR



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

THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from  to



Commission file number 333-135533



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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 August 10, 2007, there were 11,534,871 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


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

Consolidated Statements of Operations (unaudited) for the three months  ended June 30, 2007 and 2006

Consolidated Statements of Cash Flows (unaudited) for the three months ended June 30, 2007 and 2006

Notes to Unaudited Consolidated Financial Statements

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


Item 3.
        Quantitative and Qualitative Disclosures About Market Risk


Item 4.
        Controls and Procedures




1

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PART II

OTHER INFORMATION

Item 1.
        Legal Proceedings
        27


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


Item 3.
        Defaults Upon Senior Securities
        27


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


Item 5.
        Other Information
        27


Item 6.
        Exhibits
        28


Signatures
        31




2

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PART I

FINANCIAL INFORMATION

Item 1.
        Financial Statements


Hostopia.com Inc.

Consolidated Balance Sheets

(Expressed in U.S. dollars)

June 30,
            2007
        
        March 31,
            2007(Unaudited)AssetsCurrent assets:Cash and cash equivalents
        $
        26,373,375
        $
        27,367,667Trade accounts receivable, net of allowance for doubtful accounts of $103,263; (March 31, 2007 - $114,755)
        
        1,747,473
        
        1,320,422Deferred tax assets
        
        162,000
        
        117,000Income taxes recoverable
        
        838,898
        
        -Prepaid expenses
        
        318,552
        
        377,242Total current assets
        
        29,440,298
        
        29,182,331Property and equipment, net of accumulated amortization of $5,625,588; (March 31, 2007 - $5,163,911)
        
        3,590,021
        
        2,922,677Other assets
        
        63,056
        
        60,997Intangible assets, net of accumulated amortization of $1,863,231; (March 31, 2007 - $1,594,348)
        
        2,651,812
        
        1,690,284Deferred tax assets
        
        1,227,000
        
        1,101,000Total assets
        $
        36,972,187
        $
        34,957,289Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
        $
        360,264
        $
        380,040Accrued liabilities
        
        1,017,366
        
        705,229Payroll and other taxes payable
        
        157,255
        
        34,956Income taxes payable
        
        -
        
        269,020Current portion of deferred lease inducements
        
        79,900
        
        79,900Deferred revenue
        
        907,118
        
        983,299Current portion of long-term liability
        
        354,180
        
        72,000Total current liabilities
        
        2,876,083
        
        2,524,444Deferred lease inducements
        
        219,453
        
        237,035Long-term liability
        
        -
        
        292,957Total liabilities
        
        3,095,536
        
        3,054,436Stockholders equity:Capital stockAuthorized:30,000,000 common shares, par value $0.0001Issued and outstanding11,534,871 common shares (March 31, 2007 - 11,097,251 common shares)
        
        217,112
        
        217,069Additional paid-in capital
        
        32,615,107
        
        31,054,703Accumulated other comprehensive loss
        
        (43,881)
        
        (43,881)Retained earnings
        
        1,088,313
        
        674,962Total stockholders equity
        
        33,876,651
        
        31,902,853Total liabilities and stockholders equity
        $
        36,972,187
        $
        34,957,289


See accompanying notes to unaudited consolidated financial statements

3



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Hostopia.com Inc.

Consolidated Statements of Operations

(Expressed in U.S. dollars)

(Unaudited)

Three months ended June 30,2007
        
        2006RevenuesWebhosting and applications services
        $
        6,067,225
        $
        5,219,420Other services
        
        195,468
        
        182,116Total revenues
        
        6,262,693
        
        5,401,536Cost of revenuesWebhosting and applications services
        
        763,261
        
        562,772Other services
        
        85,093
        
        84,716Total cost of revenues
        
        848,354
        
        647,488Gross profit
        
        5,414,339
        
        4,754,048ExpensesSales and marketing (a)
        
        1,387,312
        
        1,202,350Research and development (a)
        
        885,337
        
        712,485Project management (a)
        
        530,006
        
        416,458Technical support (a)
        
        914,374
        
        678,876General and administrative (a)
        
        581,703
        
        391,319Amortization of intangible assets
        
        268,883
        
        158,422Amortization of property and equipment
        
        461,675
        
        398,2605,029,290
        
        3,958,170Income before the undernoted
        
        385,049
        
        795,878Interest income
        
        325,508
        
        21,529Interest (expense)
        
        (4,206)
        
        (4,206)321,302
        
        17,323Income before income taxes
        
        706,351
        
        813,201Income taxes (recovery)Current
        
        464,000
        
        406,000Deferred
        
        (171,000)
        
        (71,000)293,000
        
        335,000Net income
        $
        413,351
        $
        478,201Net income per shareBasic
        $
        0.04
        $
        0.11Diluted
        
        0.04
        
        0.07Weighted average number of common shares outstandingBasic
        
        11,285,370
        
        4,032,336Diluted
        
        11,481,970
        
        6,774,521(a)          Stock-based compensation is included in operating expenses as follows:Sales and marketing
        $
        29,970
        $
        34,315Research and development
        
        16,202
        
        5,443Project management
        
        4,657
        
        3,036Technical support
        
        3,633
        
        4,544General and administrative
        
        10,878
        
        9,761$
        65,340
        $
        57,099


See accompanying notes to unaudited consolidated financial statements



4

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Hostopia.com Inc.

Consolidated Statements of Cash Flows

(Expressed in U.S. dollars)

(Unaudited)

Three months ended June 30,2007
        
        2006Cash flows from operating activities:Net income
        $
        413,351
        $
        478,201Items which do not involve cash:Amortization
        
        730,558
        
        556,682Stock-based compensation
        
        65,340
        
        57,099Excess tax benefits from stock-based compensation
        
        (289,000)
        
        -Non-cash interest
        
        4,206
        
        4,206Deferred income taxes
        
        (171,000)
        
        (71,000)Deferred lease inducements
        
        (17,582)
        
        (12,128)Change in operating assets and liabilitiesTrade accounts receivable
        
        (427,051)
        
        188,318Prepaid expense
        
        58,690
        
        (89,009)Accounts payable
        
        (19,776)
        
        292,087Accrued liabilities
        
        312,137
        
        173,437Payroll taxes and other taxes payable
        
        122,299
        
        (11,677)Income taxes payable
        
        (818,918)
        
        (89,000)Deferred revenue
        
        (76,181)
        
        16,492Cash flows from operating activities
        
        (112,927)
        
        1,493,708Cash flows from (used in) financing activities:Issue of common shares on exercise of stock options
        
        1,206,107
        
        -Deferred initial public offering costs
        
        -
        
        (616,595)Repayment of long-term liabilities
        
        (14,983)
        
        (35,415)Excess tax benefits from stock-based compensation
        
        289,000
        
        -Cash flows from (used in) financing activities
        
        1,480,124
        
        (652,010)Cash flows from investing activities:Acquisition of property and equipment
        
        (1,129,019)
        
        (268,832)Acquisition of intellectual property
        
        (1,230,411)
        
        (5,910)Cash flows from investing activities
        
        (2,359,430)
        
        (274,742)Effect of currency translation on cash balances
        
        (2,059)
        
        (1,130)Increase (decrease) in cash and cash equivalents
        
        (994,292)
        
        565,826Cash and cash equivalents, beginning of period1
        
        27,367,667
        
        3,038,217Cash and cash equivalents, end of period
        $
        26,373,375
        $
        3,604,043Supplemental cash flow information:Interest paid
        $
        -
        $
        -Income taxes paid
        
        1,382,918
        
        495,000


See accompanying notes to unaudited consolidated financial statements

_________________________

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



5

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HOSTOPIA.COM INC.

Notes to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Quarters Ended June 30, 2007 and 2006



|1. |  | NATURE
OF BUSINESS
|-- |  | ------------------

Hostopia.com Inc. (the Company) was founded in December 1999 and is a provider of Web services that enable small and medium-sized businesses to establish and maintain an Internet presence. The Company has customers in the United States, Canada and the United Kingdom, which include telecommunication carriers, cable companies, Internet service providers, domain registrars and Web hosting service providers.  These communication services providers purchase the Companys Web services on a wholesale basis and resell these services under their own brands to small and medium-sized businesses. The Companys services include Website creation and maintenance applications, managed email with virus and spam protection, 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 subsidiaries BlueGenesis.com Corp., Internet Names for Business Inc. and Nexthaus Corporation, which are wholly owned. All material intercompany accounts and transactions and balances are eliminated.

These unaudited consolidated financial statements are stated in U.S. dollars. The statements have been prepared in accordance with the instructions of Form 10-Q and 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 June 30, 2007 and March 31, 2007, the consolidated statements of operations for the three months ended June 30, 2007 and 2006, the consolidated statements of cash flows for the three months ended June 30, 2007 and 2006 and the related notes to the consolidated financial statements are unaudited. These financial statements and the related notes should be read in conjunction with the audited consolidated financial statements and related notes together with managements discussion and analysis of financial position and results of operations contained in the Companys Form 10-K which includes the audited financial statements for the year 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 and include all adjustments necessary for the fair statement of the Companys financial position as of June 30, 2007, its results of operations and its cash flows for the three months ended June 30, 2007 and 2006.

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

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

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

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



6

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HOSTOPIA.COM INC.

Notes to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Three Months Ended June 30, 2007 and 2006



|2. |  | SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
|-- |  | -------------------------------------------

estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and reported amounts of revenue and expenses. Actual results could differ from those estimates.

c)
        Uncertain tax positions


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

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

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

d)
        Stock-based compensation


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

Under SFAS No. 123R the Company also estimates forfeitures in calculating the expense relating to stock-based compensation as opposed to only recognizing forfeitures and the corresponding reduction in expense as they occur. Based on its historic experience and expectations for the future, the Company has estimated expected forfeitures to occur generally 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.

e)
        Effects of prior year misstatements


In September 2006, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current year Financial Statements (SAB 108).  SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement.  The SAB required registrants to quantify misstatements using both the balance sheet and income statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors.  The SAB does not change the staffs previous guidance in SAB 99 on evaluating the materiality of misstatements.  When the effect of initial adoption is



7

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HOSTOPIA.COM INC.

Notes to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Three Months Ended June 30, 2007 and 2006



|2. |  | SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
|-- |  | -------------------------------------------

determined to be material, the SAB allows registrants to record that effect as a cumulative-effect adjustment to beginning-of-year retained earnings under U.S. GAAP.  SAB 108 is effective for the Companys annual financial statements for the  fiscal year ended March 31, 2007.

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

a)
        2000 Stock Option Plan:


All common share amounts have been restated to give effect to the one-for-five reverse stock split approved at a special meeting of shareholders on May 18, 2006. The exercise price of each option equalled a price that was not less than the price of the Company's common stock on the date of grant and an option's maximum term was seven years. Options vested over a three-year period from the date of grant. No additional options may be awarded under this plan.

b)
        2006 Stock Incentive Plan:


Under the terms of the 2006 Stock Incentive Plan (the 2006 Plan), the Company is permitted to issue stock options and stock appreciation rights to eligible participants for up to 10% of the total outstanding shares of common stock. The exercise price of each option equals a price that is not less than the volume weighted average price of the Companys stock determined during the five day period prior to the date of grant.

The Board of Directors administers the 2006 Plan and determines the terms of the options including the exercise price, the number of shares subject to individual option awards and the vesting period of options, within the limits set forth in the 2006 Plan. Options have a maximum term of seven years and vest as determined by the Board of Directors, generally over three years. On exercise the Companys policy is to issue new shares from treasury. Stock option activity under all plans year to date is summarized as follows:

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

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


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

Stock option activity during the first quarter of fiscal 2007 is summarized in the table below:



8

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HOSTOPIA.COM INC.

Notes to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Three Months Ended June 30, 2007 and 2006



|3. |  | STOCK-BASED
PLANS (CONTINUED)
|-- |  | -----------------------------

Options
Outstanding
        Weighted-
Average
Exercise
Prices
        Weighted-
Average
Remaining
Contractual
Term (years)
        Aggregate
Intrinsic
ValueBalance at March 31, 2007
        810,320
        $3.58Granted
        312,500
        $5.87Exercised
        (437,620)
        $2.76Forfeited/Expired
        (3,300)
        $4.97Balance at June 30, 2007
        681,900
        $5.16
        4.8
        $651,518Options exercisable at June 30, 2007
        281,424
        $3.60
        2.0
        $641,118


The total intrinsic value of options exercised for the three month periods ended June 30, 2007, was $1,260,068.

At June 30, 2007, there was $1,015,014 of total unrecognized stock-based compensation expense, adjusted for estimated forfeitures, related to unvested share-based awards. On a weighted average basis, unrecognized stock-based compensation expense is expected to be recognized over the next 2.7 years.

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

(i)
        
        On May 2, 2007, the Company acquired all of the intellectual property, including developed software and underlying code of Nexthaus, Inc., a U.S. based developer of leading edge 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. An additional contingent consideration of $200,000 is payable in one year on achievement of stipulated revenue targets.  In addition, a  referral fee equal to 15% of the  revenue generated by the intellectual property will be payable  until May 2, 2010.  As of June 30, 2007, no payments have been made.


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


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


Future payments to be applied against the purchase price will be determined as a percentage of actual webhosting revenue generated by the purchased accounts as follows:  the Company will 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% thereafter, 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 has been reduced by $28,030, being the estimated interest over the expected two-year life of the long-term liability.  This amount is 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.



9



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HOSTOPIA.COM INC.

Notes to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Three Months Ended June 30, 2007 and 2006



4.
        ASSET ACQUISITIONS (CONTINUED)


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


During the three months ended June 30, 2007 and 2006, the Company made payments of $14,983 and $35,415 respectively. At June 30, 2007, the remaining liability was as follows:

June 30, 2007
        
        March 31, 2007Total
        $
        354,180
        $
        364,957Less current portion
        
        354,180
        
        72,000$
        
        $
        292,957


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.

|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
June 30,2007
        
        2006Net income attributable to common stockholders - diluted
        $
        413,351
        $
        478,201Dividend accretion on Series A preferred shares
        
        -
        
        (29,081)Net income attributable to common stockholders - basic
        $
        413,351
        $
        449,120Weighted average outstanding shares of common stock
        
        11,285,370
        
        4,032,336






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HOSTOPIA.COM INC.

Notes to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Three Months Ended June 30, 2007 and 2006



|5. |  | NET
INCOME PER COMMON SHARE (CONTINUED)
|-- |  | ---------------------------------------



Three Months Ended
June 30,2007
        
        2006Dilutive effect of Series A redeemable preferred shares
        
        -
        
        2,127,658Dilutive effect of stock options and warrants (1)
        
        196,600
        
        614,527Common stock and common stock equivalent
        
        11,481,970
        
        6,774,521Net income attributable per common share:Basic
        $
        0.04
        $
        0.11Diluted
        $
        0.04
        $
        0.07


(1)
        407,460 stock options outstanding at June 30, 2007 were determined to be anti-dilutive because of the current market price of the Companys shares was below the strike price of the options and accordingly were excluded from the calculation of diluted  net  income per share


|6. |  | SERIES
A REDEEMABLE, CONVERTIBLE PREFERRED SHARES
|-- |  | -------------------------------------------------

June 30, 2007
        
        March 31, 2007Authorized:10,000,000 Series A redeemable, convertible preferred sharesIssued:Nil (March 31, 2007 - Nil Series A redeemable, convertible preferred shares)
        
        $            
        
        $


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

From inception to November 10, 2006, the Series A preferred shares accreted dividends annually at a rate of 2.2%, with a charge to additional paid-in capital. Accretive dividends in the three month period ended June 30, 2006 amounted to $29,081.

On November 10, 2006, on the completion of the Companys initial public offering, the 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 $3,422,680, net proceeds of the IPO were $18,860,457. 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.

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.



11

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HOSTOPIA.COM INC.

Notes to Unaudited Consolidated Financial Statements

(Expressed in U.S. dollars)

Three Months Ended June 30, 2007 and 2006



7.
        COMMON STOCK (CONTINUED)


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 quarter ended June 30, 2007, the Company issued 437,620 common shares pursuant to the exercise of stock options and received proceeds in the amount of $1,206,107.

8.
        RELATED PARTY TRANSACTIONS


The Company completed transactions with TELUS Corporation, a related party by virtue of its 7.4% holding of common shares of the Company, 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 centre services from December 2004 to November 2007 for an aggregate minimum amount of $1,867,140.

In March 2005, the Company's principal stockholders purchased a majority interest in GeeksForLess Inc., a supplier of templates, images and outsourced operations to the Company (the "Supplier").  Templates and images purchased by the Company are recorded as other intangible assets and amortized over their estimated useful lives.  The Company and the Supplier have entered into an agreement, whereby each party is obligated to jointly develop images for use in the business of the Company and for sale to others.  The transactions have been recorded at the exchange amount, representing the amount of consideration established and agreed to by the related parties.  The Company will earn a 10% commission on sales of these images by the Supplier to the Company's customer base.  Each party has indemnified the other for losses on claims against either party.

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:

Balance sheets
        
        June 30, 2007
        
        March 31, 2007Accounts receivable
        $
        
        $
        7,107Accounts payable
        
        122,056
        
        125,780






Three months endedJune 302007
        
        2006(Unaudited)Statements of operationsWebhosting and application services revenue
        $
        634,663
        $
        527,541Bandwidth
        
        207,260
        
        182,249Outsourced services
        
        472,688
        
        300,121Telephone services
        
        45,671
        
        50,328


12    HOSTOPIA.COM INC. Notes to Unaudited Consolidated Financial Statements (Expressed in U.S. dollars) Three Months Ended June 30, 2007 and 2006  9.
        RECENT ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED


a)
        Fair value:


In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157Fair Value Measurementsto provide enhanced guidance for using fair value to measure assets and liabilities. SFAS No. 157 also expands disclosure requirements for assets and liabilities measured at fair value, how fair value is determined, and the effect of fair value measurements on earnings. SFAS No. 157 applies whenever other authoritative literature require (or permit) certain assets

liabilities to be measured at fair value, but does not expand the use of fair value. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. Early adoption is permitted. The Company plans to adopt SFAS No. 157 effective April 1, 2008. The Company currently does not have any balance sheet items carried at fair value. However, the Company does use fair value concepts to test various long-lived assets for impairment and to initially measure assets and liabilities acquired in a business combination. Management is currently evaluating the effect of adoption.

|10. |  | GEOGRAPHIC
INFORMATION
|--- |  | ----------------------

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

Three Months Ended
June 30,2007
        
        
        2006Canada
        $
        2,822,817
        
        $
        2,348,766United States
        
        3,288,176
        
        
        2,988,533United Kingdom
        
        151,700
        
        
        64,237Total revenues
        $
        6,262,693
        
        $
        5,401,536






13

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


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

Overview

We believe we are a leading provider of Web services that enable small and medium-sized businesses to establish and maintain an Internet presence. We have over 330 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 Website promotion applications, and Website
hosting and data transfer.

Our revenue growth is derived from the number of end-users who subscribe to our Web services. To increase our revenue and take advantage of our market opportunity we plan to expand our customer base as well as further penetrate our customers existing end-user base.

We have grown our business primarily by convincing large telecommunication and cable companies that we should provide web services to  their end-users.

This strategy has been highly successful in Canada and Bell Canada, TELUS Communications Company and Rogers Cable Communications Inc. are all now 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 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.

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

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



14

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

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

We also recognize the need for prompt and professional service to our end-users to maintain and grow our end-user count. Accordingly we employ a technical support staff of approximately 78 information technology and customer service professionals to deal promptly 24 hours a day with any questions our end-users have in respect of our service. Our staff of customer service professionals has grown modestly in the past twelve months to deal with our increasing end-user base.

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 3,000 templates in our library, the majority of which were developed in the past fifteen months.

In fiscal 2007, we also began to build the capability to provide our end-users with turnkey customized websites with a higher degree of functionality. We have hired 8 personnel in support of this business opportunity. As of June 30, 2007, we have begun selling through one of our larger customers.

During the quarter, we signed 7 new contracts and added approximately 3,000 new end-users and more than 300,000 email accounts.  Most of our revenue growth related to the migration to our servers of a new customers end-users email accounts.  We also began integrating the newly acquired Nexthaus intellectual property assets that we believe will enhance our product offering to existing and prospective customers.

The migrations of British Telecoms end-users to our servers began during the current quarter and will increase revenue in the next quarter and thereafter. To date, significant expenses have been incurred in preparing for this migration increasing our operating expenses and reducing profitability.

During the current 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 provides us with a sync/ml capability.  We also purchased $1.1 million in capital assets to support the anticipated increase in our end-user base.

Key Metric

End-User Count

We grow our revenues primarily through the addition of end-user businesses who subscribe to our Web hosting and application services, also known as Web services. 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 June 30, 2007, we served approximately 263,000 end-users.

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 and other services.  We sell our services primarily on a wholesale basis to our customers.  To a lesser extent, we sell our services directly to small resellers and end-user businesses.



15

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Web Hosting and Application Services

Web hosting and application service revenues are derived from the sale and support of Web services. We generated 96.9% and 96.6% of our revenues in the three months ended June 30, 2007 and 2006, respectively from Web hosting and application services.  Our customers pay us monthly in accordance with contracts that range from one to five years for the Web services that they resell to their end-users on a subscription basis. In addition, we derive a portion of our revenues from the direct sale of Web services to small resellers and end-user businesses. We expect Web hosting and application services revenue to increase in absolute dollars and to remain relatively stable as a percentage of our total revenues.

Other Services

Other services are revenues derived from domain name registration and professional services. We derived 3.1% and 3.4% of our total revenues in the three months ended June 30, 2007 and 2006, respectively from other services. Domain name registration revenue consists of domain name registrations, renewals and transfers derived from customers, end-users and other individuals.  Professional services consist of fees we receive from our customers for services provided at their request. We expect other services revenue to increase in absolute dollars and to remain 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 maintain our application delivery platforms that we use in the delivery of our Web services. We expect that software license and hardware maintenance expenses will increase as the number of end-users increases on our system.

Referral Payments

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

Domain Name Registration Fees

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

Operating Expenses

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



16

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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 has provided 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 our end-users.

General and Administrative

General and administrative expenses consist of compensation and related expenses for administration and finance personnel, professional services that are not otherwise allocated to specific functions, insurance fees, franchise and capital taxes, banking fees, provision for bad debt expenses and other miscellaneous expenses that are not otherwise allocated.  We expect future general and administrative expenses will increase as we continue to add personnel to support the growth of our business. We also anticipate that we will incur expenses related to professional service fees and insurance fees necessary to comply with the requirements of being a public company.

Amortization

Amortization expenses consist of charges relating to the amortization of all of the property and equipment (including hardware, software, furniture and fixtures and telephone equipment), leasehold improvements, lease inducement assets, and intangible assets (including customer lists, patents, website templates and digital images). With the exception of 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 to increase as we continue to make
capital investments in our application delivery platform to support the expansion of our Web services and increasing number of end-users.



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Critical Accounting Policies

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

Revenue Recognition

Web hosting and Applications Services

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

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

Other Services

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

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.



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Accounting for Goodwill, Intangible Assets and Property and Equipment

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

Accounting for Income Taxes

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

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

Accounting for Contingencies

In the normal course of our operations, we may be subject to litigation and claims from time to time.  It is our policy to provide adequate provisions in the accounts where required.  Although it is not possible to estimate the extent of potential costs, if any, we believe that there are no issues, the ultimate resolution of which would have a material adverse effect on the results of our operations, financial position or liquidity.



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Results of Operations for the Three Month Periods ended June 30, 2007 as Compared to the Three Month Period ended June 30, 2006

Revenues

Three months endedJune 30,2007
        
        June 30,2006RevenuesWeb hosting and application services
        
        $
        6,067,225
        $
        5,219,420Other services
        
        
        195,468
        
        182,116Total revenue
        
        $
        6,262,693
        $
        5,401,536End-users at end of period
        
        
        263,300
        
        224,300Increase in end users over comparable prior period  percent
        
        
        17.4%Increase over comparable prior year period
        
        $
        861,157Increase over comparable prior year period  percent
        
        
        15.9%


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

Revenues

Total revenue increased by 15.9% to $6.3 million in the three month period ended June 30, 2007 from $5.4 million in the three month period ended June 30, 2006.

Web Hosting and Application Services

Web hosting and application services revenue increased by $848,000 or 16.2% to $6.1 million.  Our revenue growth was due to a 39,000 or 17.4% increase in end-users year over year.  We had approximately 263,000 end-users on our system as of June 30, 2007.  The end-user growth was due to a combination of new customers added over the previous twelve month period and increased penetration of our existing customer base. New customers added approximately 10,500 end-users, representing a 4% increase over the number of end-users at the beginning of the year.  Penetration of our existing customer base added approximately 28,500 end-users, representing a 13% increase over the number of end-users at the beginning of the year.  Revenue growth in the first quarter improved by 7% over the previous quarter due to the following factors including:


        a recently signed major customer added more email accounts than originally anticipated although their current plan calls for a potential cull of low activity accounts towards the end of the second quarter;



        the beginning of the migration of British Telecoms end-users



        Canadian dollar appreciation in terms of U.S. dollar reporting; and



        net end-user growth in our existing customer base.


Future  revenue  growth in the balance of fiscal 2008 will be  supported  by the
completion of the British Telecom migration  and an increase in the number of email  accounts
from a  recently  signed  customer.  We  believe  additional  email  outsourcing
contracts are likely to provide us with additional  sources of recurring revenue
while future licensing opportunities will increase our professional service fees
as  contracts  are  completed.  At the end of the  quarter we had  approximately
40,000  websites  that  we  anticipate   migrating  over  the  coming  quarters.
Accordingly we believe the moderate  sequential revenue growth we experienced in
the first  quarter  will  improve as we migrate  the  remainder  of the  British
Telecom  end-users.   This  expectation  is  dependent on  maintaining  and
growing our customers and end-users and  successfully  migrating the anticipated
websites and email accounts related to contracts in process.



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Cost of Revenues

Three months endedJune 30,2007
        
        June 30,2006Cost of RevenuesWeb hosting and application services
        $
        763,261
        $
        562,772Other services
        
        85,093
        
        84,716Total cost of revenues
        $
        848,354
        $
        647,488Percent of revenues
        
        13.5%
        
        12.0%Increase over comparable prior year period
        $
        200,866Increase over comparable prior year period - percent
        $
        31.0%


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

Cost of Revenues

Total cost of revenue increased by 31.0% to $848,000 in the three month period ended June 30, 2007 from $647,000 in the three month period ended June 30, 2006.

Web Hosting and Applications Services

Cost of Web hosting and application services revenue increased by 36% to $763,000 in the three months ended June 30, 2007 from $563,000 in the three months ended June 30, 2006.  These expenses include bandwidth expense, data center costs, software license fees, hardware maintenance fees, referral payments and credit card collection fees.  Bandwidth and data center costs increased by approximately $118,000 or 37% due in part to our 17% 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 recently signed contracts including the ongoing British Telecoms end-user migration. Software licenses fees, hardware maintenance fees and referral payments increased by approximately $91,000 or 55% due to a combination of increased software and hardware maintenance and increased referral
payments due to increased revenue. Credit card collection fees declined by approximately $9,000 or 12%.

Other Services

Cost of other services revenue remained stable at $85,000.  Other services expense includes the purchase of domain name rights that we resell to end-users. As a cost of the Other service revenue generated, this represents a small increase related to the sales mix of domains name rights increasing from 52% to 57%.

Operating Expenses

Total operating expenses increased by 28% to $5.0 million in the three months ended June 30, 2007 compared to the three months ended June 30, 2006.  Total operating expenses represented 80% and 73% of total revenue in the respective three month periods ending June 30, 2007 and 2006.

Our operating expenses will normally increase on a scaled basis against our revenue increases.  However, from time to time we incur expenses in a current period that were not incurred in the comparable period of the prior year.  This occurs primarily due to a change in business conditions from the previous quarter or because we are incurring expenses with the goal of generating future incremental revenue.  For example, in the current quarter, we incurred public company expenses that did not have a counterpart in last years comparable quarter since we were not yet a public company.  This condition will repeat itself until the third quarter of the current fiscal year.

With respect to new business thrusts, we incurred additional intellectual property amortization with respect to the patents purchased from Web.com, the Website templates purchased from GeeksForLess Inc. and the recently acquired Nexthaus assets.  We incurred additional depreciation related to our capital spending related to the British Telecom contract that we began to invest in August 2006 along with direct expense in incremental personnel.  We also incurred direct operating expenses related to Nexthaus personnel and additional personnel put in place to cover the anticipated growth in Website Experts.



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Looking forward, in the next quarter we will begin to incur expenses related to our recent license arrangement with J2 Global Communications, Inc. and our newly established customer care centre in New Brunswick.

Sales and Marketing

Three months endedJune 30,2007
        
        June 30,2006Sales and marketing
        $
        1,387,312
        $
        1,202,350Percent of revenues
        
        22.2%
        
        22.3%Increase over comparable year  period
        $
        184,962Increase over comparable year period - percent
        
        15.4%


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

Sales and marketing expenses increased by 15% to $1.4 million from $1.2 million for the three months ended June 30, 2006.  Salaries, wages and benefits, including stock option benefits increased by $192,000 or 24% as personnel has increased by 16% in the past twelve months.  This  increase is primarily related to the Website Experts website design initiative that is beginning to be used by some of our customers. Trade show expenses were $14,000 lower than the comparable quarter while advertising declined by approximately $41,000 as we continue to focus resources towards our direct sales efforts.  The $48,000 or 18% increase in allocated expenses, including rent, office, telecommunications, travel and contracted expenses in Ukraine related to the increase in sales support personnel hired to service and grow our customer base. 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.

Research and Development

Three months endedJune 30,2007
        
        June 30,2006Research and development
        $
        885,337
        $
        712,485Percent of revenues
        
        14.1%
        
        13.2%Increase over comparable year  period
        $
        172,852Increase over comparable year period - percent
        
        24.3%


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

Research and development expenses increase by 24% to $885,000 from $712,000 in the three months ended June 30, 2006.  Salaries, wages and benefits including stock option benefits increased by $93,000 or 16% compared to the prior years comparable quarter.  Personnel count increased by 12% year over year as we continued to invest in enhancing our product offerings and expanding our business including absorption of three development employees on closing of the Nexthaus deal.  Allocated expenses including rent, office, hardware, telecommunications, travel and contracted expenses in Ukraine increased by $80,000 or 52% due to the increase in contractors in Ukraine and higher hardware expenses.

Project Management

Three months endedJune 30,2007
        
        June 30,2006Project management
        $
        530,006
        $
        416,458Percent of revenues
        
        8.5%
        
        7.7%Increase over comparable year  period
        $
        113,548Increase over comparable year period - percent
        
        27.3%






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Project Management (Three Month Period Ended June 30, 2007)

Project management expenses increased by 27% to $530,000 from $416,000 in the three months ended June 30, 2006.  Salaries, wages and benefits including stock option benefits increased by $54,000 or 21% compared to the prior years comparable quarter.  Variable compensation related to increased revenue and website migrations were the primary factors. Personnel count increased 5% year over year.   Allocated expenses including rent, office, telecommunications, travel and contracted expenses in Ukraine increased by $60,000 or 39% due to the increase in end-users migrated to our system.

Technical Support

Three months endedJune 30,2007
        
        June 30,2006Technical support
        $
        914,374
        $
        678,876Percent of revenues
        
        14.6%
        
        12.6%Increase over comparable year  period
        $
        235,498Increase over comparable year period - percent
        
        34.7%


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

Technical support expenses increased by 35% to $914,000 from $679,000 in the three months ended June 30, 2006.  Salaries, wages and benefits including stock option benefits increased by $179,000 or 34% compared to the prior years comparable quarter as personnel were upgraded.  Personnel count increased by 4% year over year to support the increase in our end-users.   Allocated expenses including rent, office, telecommunications, travel and contracted expenses in Ukraine increased by $56,000 or 37% 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.

General and Administrative

Three months endedJune 30,2007
        
        June 30,2006General and administrative
        $
        581,703
        $
        391,319Percent of revenues
        
        9.3%
        
        7.2%Increase over comparable year  period
        $
        190,384Increase over comparable year period - percent
        
        48.7%


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

General and administrative expenses increased by 49% to $582,000 from $391,000 in the three months ended June 30, 2006.  Salaries, wages and benefits including stock option benefits increased by $23,000 or 8% compared to the prior years comparable quarter.  The number of personnel remained steady year over year.   We experienced a $180,000 increase in professional fees and public company expenses.  The provision for doubtful accounts declined by $36,000.  We experienced a negative currency expense swing of approximately $22,000 compared to the three months ended June 30, 2006.  Allocated expenses including rent, office, telecommunications and travel increased by $2,000 or 4% due to ongoing business growth. We do anticipate increasing professional fees including regulatory compliance related expense, higher insurance expenses and increased directors fees commensurate with the
increase in business as we move forward.





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Amortization

Three months endedJune 30,2007
        
        June 30,2006Amortization
        $
        730,558
        $
        556,682Percent of revenues
        
        11.7%
        
        10.3%Increase over comparable year period
        $
        173,876Increase over comparable year period - percent
        
        31.2%


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

Amortization expense increased by approximately 31% to $731,000 from $557,000 in the three months ended June 30, 2006.  This $174,000 increase in amortization expense is due in part to a $63,000 or 16% 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 templates, patents and the Nexthaus wireless syncing technology increased this quarters amortization expenses related to these assets by  $24,000, $33,000 and $54,000 respectively.

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

Interest income increased to $326,000 from $22,000 in the three months ended June 30, 2006 as our shortterm investments increased by approximately $23.0 million compared to the previous year. This increase was a result of our placing the proceeds from our initial public offering, completed on November 10th and the related exercise of the underwriters 15% over-allotment option on December 7th, in an investment grade money market fund yielding approximately 5%.

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

Interest expense, being imputed interest related to non interest bearing debt incurred on the purchase of a customer list, was $4,000 in the three months ended June 30, 2007 and 2006.

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

Income tax expense of $293,000 in the three months ended June 30, 2007 decreased by $42,000 from the three months ended June 30, 2006 due to a decline in taxable income.  The effective tax rate of 41.5% of pre-tax income is higher than the 41.2% in the three months ended June 30, 2006 due to a higher percentage of non-deductible items in the current period.

Liquidity and Capital Resources

Cash and cash  equivalents  are currently our primary  source of liquidity.  The
cash equivalents are  substantially  invested in a money market mutual fund that
invests  only  in  highly  rated  and  highly  liquid  money  market   financial
instruments.  We expect cash flow from operations will continue to be an ongoing
source of liquidity.  As of June 30, 2007, we had $26.4 million in cash and cash
equivalents and $26.6 million in working  capital,  as compared to $27.4 million
in cash and cash  equivalents  and $26.7 million in working  capital as of March
31, 2007.  Our cash  position  decreased  by $1.0  million due  primarily to the
$963,000  cash  payment  including  legal fees on the  purchase of  intellectual
property  from  Nexthaus  Inc.,  the purchase of capital  assets and  templates.
Positive cash inflow from operations was significantly reduced by the payment of
income tax installments in the U.S. and Canada.  Approximately $1.2 million of cash
was received on the exercise of stock options during the quarter.

Operating activities used $0.1 million of cash compared to net cash provided of $1.5 million the year earlier. The primary reasons for this $1.6 million reduction was increased tax payments of $0.9 million and a $0.6 million swing in receivables. Profitability and amortization are both expected to increase in the balance of fiscal 2008 as the British Telecom end-users are migrated to our platform.  Accordingly, operating cash flow should strengthen through the balance of the year.



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Cash flows from financing activities included $1.2 million on the exercise of stock options for which we issued 437,620 shares at an average price of US$2.76 per share.

Net cash used in investment activities totaled $2.4 million compared to $0.3 million in the three months ended June 30, 2006. Year to date we purchased $1.1 million of property and equipment primarily in support of our expanding end-user base.  We also invested $1.2 million on the acquisition of intellectual property from Nexthaus, Inc. and the purchase of additional website design templates for our template library. Capital investment is anticipated to moderate in the balance of
fiscal 2008 since we have largely built the capacity to manage the near term migrations.  However, we may incur a significant expenditure should we decide to go forward with establishing our business in a U.K. data center.

Targeted expenditures will include, but may not be limited to, 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 to serve our recently contracted U.K. customer base and provide us with a window on Europe;



        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 June 30, 2007 and our projected cash flow from operations, we have sufficient resources to finance our business, including sales and marketing expenses, research and development expenses and capital expenditures in the short and long term without raising further funds in the capital markets. We also have the liquidity to make additional investments in our application delivery platform, expand our portfolio of web services, expand further into the UK marketplace and make 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 June 30, 2007, non-U.S. dollar denominated revenues totaled approximately $2.8 million in Canada dollars and $0.2 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 revenues by approximately $0.6 million.

Interest Rate Sensitivity

We had investments in short term bank deposits and money market funds amounting to $24.2 million at June 30, 2007. We currently do not have any interest bearing debt obligations. Due to the short term nature of our investments, we believe that we do not have any material exposure to changes in the fair value of our short term investments as a result of changes in interest rates.  However, we estimate, based on the level of short term interest bearing investments at June 30, 2007, that on an annualized basis a 1% fluctuation in short term interest rates would raise or lower our net income by approximately $0.01per share.



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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 June 30, 2007 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



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PART II

OTHER INFORMATION

Item 1.
        Legal Proceedings


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

Item 1A.  Risk Factors

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

Item2.
        Unregistered Sales of Equity Securities and Use of Proceeds


On November 3, 2006, our registration statement on Form S-1 (Registration No. 333-135533), registering 4,200,000 shares of our common stock, $0.0001 par value, for sale by us was declared effective by the Securities and Exchange Commission and we commenced our initial public offering on that date. In Canada, RBC Dominion Securities Inc., TD Securities Inc., GMP Securities L.P. and Haywood Securities Inc. acted as the managing underwriters for the offering. In the United States, RBC Capital Markets Corporation, TD Securities (USA) LLC, Griffith McBurney Corp. and Haywood Securities (USA) Inc. acted as the managing underwriters for the offering. On November 10, 2006, we completed the offering at $5.30 (CDN $6.00) per share. The aggregate purchase price, before expenses, to us was $ 22.3 million (CDN$ 25.2 million) and we incurred $3.4 million in expenses, resulting in net
proceeds from the initial offering of $18.9 million. On December 7, 2006, the underwriters exercised their over-allotment option and purchased an additional 630,000 shares of our common stock for $5.22 (CDN $6.00). The aggregate purchase price, before fees, to us was $3.3 million (CDN $3.8 million). We paid the underwriters $0.2 million, resulting in net proceeds of $3.1 million (CDN $3.5 million).  The net proceeds have been invested in investment grade commercial paper.During the quarter ended June 30, 2007, we used approximately $2.4 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 $2.9 million of the net proceeds of $22 million to the purchase of long term assets.  Neither our directors, officers , affiliates, nor persons owning 10% or more of any class of our securities
received direct or indirect payments in connection with our payment of the offering-related expenses.

Item3.
        Defaults Upon Senior Securities


None.

Item4.
        Submission of Matters to a Vote of Security Holders


None.

Item5.
        Other Information


None.



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Item 6.Exhibits

Exhibit Number
        
        Description3.1(2)
        
        Amended and Restated Certificate of Incorporation of Hostopia.com Inc.3.2(3)
        
        Amended and Restated Bylaws of Hostopia.com Inc.4.1(1)
        
        Shareholder Agreement dated as of December 27, 20014.2(1)
        
        Registration Rights Agreement dated as of December 27, 20014.3(1)
        
        Warrant dated July 1, 2003 exercisable for 60,000 shares of common stock4.4(4)
        
        Specimen Stock Certificate10.1(1)
        
        Hostopia.com Inc. 2000 Stock Option Plan and forms of related agreements10.2(3)
        
        Hostopia.com Inc. 2006 Stock Option Plan and forms of related agreements10.3(1)
        
        Employment Agreement with William Campbell, dated June 1, 200610.4(1)
        
        Employment Agreement with Colin Campbell, dated June 1, 200610.5(1)
        
        Employment Agreement with Michael Mugan, dated April 1, 200610.6(1)
        
        Employment Agreement with Paul Engels, dated April 1, 200610.7(1)
        
        Employment Agreement with Dirk Bhagat, dated June 1, 200610.8(1)
        
        Management Services Agreement with John Nemanic, dated June 1, 200610.9(1)
        
        Form of Indemnification Agreement between the registrant and each of its directors and executive officers10.10(1)
        
        Asset Purchase Agreement between the registrant and FortuneCity.com Inc., dated as of January 31, 200610.11(1)
        
        Services Agreement between the registrant and Geeksforless Inc., dated as of July 1, 200510.12(1)
        
        Template Purchase Agreement between the registrant and Geeksforless Inc., dated as of February 1, 200510.13(1)
        
        Image Library Agreement between the registrant and Geeksforless Inc., dated as of January 2, 200510.14(1)
        
        Lease between Badenhurst-Airway Centre Ltd. and the registrant dated September 30, 2002, as amended10.15(1)
        
        Revolving Line of Credit Facility31.1
        
        CEO Certification required by Rule 13a-14(a) or Rule 15d-14(a)31.2
        
        CFO Certification required by Rule 13a-14(a) or Rule 15d-14(a)32.1
        
        Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of United States Code (18 U.S.C. §1350)32.2
        
        Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of United States Code (18 U.S.C. §1350)


---

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

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

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

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



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HOSTOPIA.COM INC.(Registrant)August 14, 2007
        
        /s/ COLIN CAMPBELLDate
        
        Colin Campbell
Chief Executive OfficerAugust 14, 2007
        
        /s/ MICHAEL J. MUGANDate
        
        Michael J. Mugan
Chief Financial Officer
(Principal Financial and Accounting Officer)






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Exhibit Index

Exhibit Number
        
        Description3.1(2)
        
        Amended and Restated Certificate of Incorporation of Hostopia.com Inc.3.2(3)
        
        Amended and Restated Bylaws of Hostopia.com Inc.4.1(1)
        
        Shareholder Agreement dated as of December 27, 20014.2(1)
        
        Registration Rights Agreement dated as of December 27, 20014.3(1)
        
        Warrant dated July 1, 2003 exercisable for 60,000 shares of common stock4.4(4)
        
        Specimen Stock Certificate10.1(1)
        
        Hostopia.com Inc. 2000 Stock Option Plan and forms of related agreements10.2(3)
        
        Hostopia.com Inc. 2006 Stock Option Plan and forms of related agreements10.3(1)
        
        Employment Agreement with William Campbell, dated June 1, 200610.4(1)
        
        Employment Agreement with Colin Campbell, dated June 1, 200610.5(1)
        
        Employment Agreement with Michael Mugan, dated April 1, 200610.6(1)
        
        Employment Agreement with Paul Engels, dated April 1, 200610.7(1)
        
        Employment Agreement with Dirk Bhagat, dated June 1, 200610.8(1)
        
        Management Services Agreement with John Nemanic, dated June 1, 200610.9(1)
        
        Form of Indemnification Agreement between the registrant and each of its directors and executive officers10.10(1)
        
        Asset Purchase Agreement between the registrant and FortuneCity.com Inc., dated as of January 31, 200610.11(1)
        
        Services Agreement between the registrant and Geeksforless Inc., dated as of July 1, 200510.12(1)
        
        Template Purchase Agreement between the registrant and Geeksforless Inc., dated as of February 1, 200510.13(1)
        
        Image Library Agreement between the registrant and Geeksforless Inc., dated as of January 2, 200510.14(1)
        
        Lease between Badenhurst-Airway 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



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