EasyLink Services International (ESIC) 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

R	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended April 30, 2010
£	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: 001-34446

EasyLink Services International Corporation

(Exact Name of Registrant as Specified in Its Charter)

Delaware	13-3645702
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
6025 The Corners Parkway, Suite 100
Norcross, Georgia	30092
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (678) 533-8000

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 R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer £ Accelerated filer £ Non-accelerated £ Smaller reporting company R

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No R

As of May 31, 2010 the issuer had outstanding 29,250,334 shares of class A common stock.

EASYLINK SERVICES INTERNATIONAL CORPORATION

INDEX TO FORM 10-Q

	Page
PART I FINANCIAL INFORMATION (Unaudited)
Item 1.   Financial Statements	1
Condensed Consolidated Balance Sheets as of April 30, 2010 and July 31, 2009	1
Condensed Consolidated Statements of Operations for the three and nine  months ended April 30, 2010 and 2009	2
Condensed Consolidated Statements of Cash Flows for the nine months ended April 30, 2010 and 2009	3
Notes to Condensed Consolidated Financial Statements	4
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.   Quantitative and Qualitative Disclosures about Market Risk	18
Item 4T.  Controls and Procedures	18
PART II OTHER INFORMATION
Item 1.   Legal Proceedings	18
Item 1A.  Risk Factors	19
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.   Defaults Upon Senior Securities	19
Item 4.   Submission of Matters to a Vote of Security Holders	19
Item 5.   Other Information	19
Item 6.   Exhibits	20
Signatures	21

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets as of April 30, 2010 and July 31, 2009 (Unaudited)

	April 30, 2010			July 31, 2009
ASSETS
Current assets:
Cash and cash equivalents	$	15,643,888		$	10,972,365
Accounts receivable, net of allowance for doubtful accounts and allowance for sales returns and allowances of $1,312,830 and $1,461,368, respectively		13,220,578			11,508,674
Prepaid expenses and other current assets		2,721,795			3,835,859
Total current assets		31,586,261			26,316,898
Property and equipment, net of accumulated depreciation of $15,538,975 and $13,574,865, respectively		6,077,448			8,230,843
Goodwill		34,306,193			34,840,654
Other intangible assets, net		16,872,700			21,406,880
Deferred tax asset, net of valuation allowance and other assets		3,146,813			5,521,428
Total assets	$	91,989,415		$	96,316,703
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,705,402		$	3,044,378
Notes payable		9,635,335			9,495,374
Accrued expenses		6,980,681			6,644,665
Accrued dividends, deferred revenue and other current liabilities		2,031,851			1,847,336
Total current liabilities		21,353,269			21,031,753
Notes payable, long term		10,265,546			17,512,034
Other liabilities		322,193			553,762
Total liabilities		31,941,008			39,097,549
Commitments and contingencies
Stockholders’ Equity:
Series C Preferred Stock — par value $.01 per share, 44.76 votes per share; 5,000 shares issued and 5,000 outstanding (liquidation value of $5,065,753 at April 2010 and $5,116,164 at July 2009)		50			50
Series E Preferred Stock — par value $0.01 per share; 6,577 shares issued and outstanding in 2010 (liquidation value of $7,229,265 at April 2010 and $6,710,342 at July 2009)		66			66
Common stock:
Class A — par value $.01 per share, 300,000,000 shares authorized, one vote per share; 30,236,584 and 27,261,193 shares issued at April 30, 2010 and July 31, 2009, respectively		302,366			272,612
Additional paid-in capital		138,749,027			138,463,290
Treasury stock — 1,000,000 shares as of April 2010 and July 2009		(2,122,288	)		(2,122,288	)
Accumulated other comprehensive loss		(6,450,313	)		(4,442,091	)
Accumulated deficit		(70,430,501	)		(74,952,485	)
Total stockholders’ equity		60,048,407			57,219,154
Total liabilities and stockholders’ equity	$	91,989,415		$	96,316,703

See notes to condensed consolidated financial statements.

1

Condensed Consolidated Statements of Operations for the three and nine months ended April 30, 2010 and 2009 (Unaudited)

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	2010			2009			2010			2009
Service revenue	$	20,593,015		$	21,038,978		$	61,495,091		$	64,710,039
Cost of services		5,509,153			6,501,061			17,272,572			19,022,699
Gross profit		15,083,862			14,537,917			44,222,519			45,687,340
Operating expenses:
Product development and enhancement		1,884,210			1,774,455			5,499,576			5,901,783
Selling and marketing		3,086,871			3,124,099			9,584,468			9,780,627
General and administrative		6,764,569			6,758,521			20,633,593			22,648,639
Intangible impairment		—			—			—			4,245,914
Operating income		3,348,212			2,880,842			8,504,882			3,110,377
Other income (expense):
Interest and investment income		6,670			10,901			21,016			152,684
Interest expense		(336,123	)		(1,584,575	)		(1,263,681	)		(10,603,230	)
Foreign exchange gain		248,993			167,663			502,554			303,813
Other income		34,198			1,247			2,913			99,812
Profit (loss) before income taxes		3,301,950			1,476,078			7,767,684			(6,936,544	)
Provision for income taxes		1,312,890			239,890			3,107,073			995,159
Net Income (loss)		1,989,060			1,236,188			4,660,611			(7,931,703	)
Dividends on preferred stock		(209,138	)		(48,767	)		(641,513	)		(149,360	)
Net income(loss) attributable to common stockholders	$	1,779,922		$	1,187,421		$	4,019,098		$	(8,081,063	)
Basic income(loss) per common share	$	0.06		$	0.05		$	0.15		$	(0.33	)
Diluted income(loss) per common share	$	0.06		$	0.05		$	0.14		$	(0.33	)
Anti-dilutive stock options, warrants, Series A and Series B Convertible Notes and Series C preferred stock		2,532,133			23,733,691			4,036,102			22,506,043
Weighted average number of common shares outstanding – basic		29,109,509			24,243,183			27,198,772			24,460,449
Weighted average number of common shares outstanding –diluted		29,793,245			24,670,190			29,519,215			24,460,449

See notes to condensed consolidated financial statements.

2

Condensed Consolidated Statements of Cash Flows for the nine months ended April 30, 2010 and 2009

(Unaudited)

	Nine Months Ended April 30,
	2010			2009
Cash flows from operating activities:	$	4,660,611		$	(7,931,703	)
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		6,147,498			6,468,531
Bad debt expense		367,614			886,621
Amortization of discount and other non-cash interest expense		404,161			6,283,810
Deferred tax expense		2,924,508			—
Non-cash charges for equity instruments issued for compensation and services		673,626			738,832
Non-cash equity in losses of investment and other non-cash items		105,351			77,731
Goodwill and intangible impairment		—			4,245,914
Changes in assets and liabilities
Accounts receivable		(2,221,244	)		132,897
Prepaid expenses and other assets		1,077,625			1,983,235
Accounts payable		(330,114	)		685,950
Accrued expenses		182,248			(4,416,827	)
Other liabilities		(720,067	)		(1,371,375	)
Net cash provided by operating activities		13,271,817			7,783,616
Cash flows from investing activities:
Purchases of property and equipment		(866,622	)		(3,211,356	)
Other		-			53,924
Net cash used in investing activities		(866,622	)		(3,157,432	)
Cash flows from financing activities:
Proceeds from sale of stock and exercise of options		144,750			2,774
Purchase of treasury stock		—			(1,818,963	)
Dividends paid		(200,000	)		(200,000	)
Net repayments of notes payable and capital lease		(7,510,688	)		(23,938,502	)
Net cash (used in) financing activities		(7,565,938	)		(25,954,691	)
Effect of foreign exchange rate changes on cash and cash equivalents		(102,938	)		(1,037,746	)
Net (decrease) increase in cash and cash equivalents		4,671,523			(22,366,253	)
Cash and cash equivalents, beginning of period		10,972,365			32,091,005
Cash and cash equivalents, end of period	$	15,643,888		$	9,724,752

See notes to condensed consolidated financial statements.

3

EASYLINK SERVICES INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of EasyLink Services International Corporation (referred to as “EasyLink,” the “Company,” “we,” “our” or “us”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. In the opinion of management, such statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of our financial position, results of operations and cash flows as of the dates and for the periods indicated. Pursuant to the requirements of the Securities and Exchange Commission (“SEC”) applicable to Quarterly Reports on Form 10-Q, the accompanying financial statements do not include all disclosures required by GAAP for annual financial statements. While we believe the disclosures presented are adequate to make the information not misleading, these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2009.

The condensed consolidated balance sheet as of July 31, 2009 has been derived from the audited consolidated financial statements as of that date.

Operating results for the nine–month period ended April 30, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2010 or any future period.

Principles of consolidation and basis of presentation

The consolidated financial statements include the accounts of EasyLink and our wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation.

Recently Adopted Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 168 The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“SFAS 168”). The FASB Accounting Standards Codification has become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB effective September 15, 2009. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws continue to be sources of authoritative GAAP for SEC registrants. On the effective date of SFAS 168, the Codification superseded all then-existing non-SEC accounting and reporting standards.

In August 2009 the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2009-05 Fair Value Measurements and Disclosures (Topic 820) (“ASU 2009-05”).  ASU 2009-05 provides clarification that the fair value measurement of liabilities in which a quoted price in an active market for the identical liability is not available should be developed based on a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as assets or another valuation technique that is consistent with the principles of Topic 820 — Fair Value Measurements and Disclosures. ASU 2009-05 also clarifies that there is no requirement to adjust the fair value related to the existence of a restriction that prevents the transfer of the liability and that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. This guidance was effective for the Company as of October 31, 2009 and did not have a significant impact on the Company’s consolidated financial statements.

4

Recent accounting pronouncements not yet adopted

In October 2009, the Financial Accounting Standards Board issued ASU No.2009-13 Revenue Recognition (Topic 605) “Multiple-Deliverable Revenue Arrangements”.  As this ASU is only effective for fiscal year ends beginning on or after June 15, 2010 we will review and make a determination at that time.

In October 2009, the Financial Accounting Standards Board issued ASU No.2009-14 Software (Topic 985) “Certain Revenue Arrangements That Include Software Elements – a consensus of the FASB Emerging Issues Task Force”.  As this ASU is only effective for fiscal year ends beginning on or after June 15, 2010 we will review and make a determination of its affect on revenue at that time.

2. ACQUIRED INTANGIBLE ASSETS

Intangible assets net of accumulated amortization are summarized as follows:

	Weighted average amortization period (years)	April 30, 2010			July 31, 2009
Purchased customer relationships	6-8	$	17,775,533		$	18,056,771
Internally developed systems	4		10,481,232			10,607,355
Trade names	<1		3,720,820			3,766,992
Intangible assets, gross		$	31,977,585		$	32,431,118
Less accumulated amortization:
Purchased customer relationships		$	(6,871,527	)	$	(4,919,923	)
Internally developed systems			(8,091,295	)		(5,989,037	)
Trade names			(142,063	)		(115,278	)
Accumulated amortization			(15,104,885	)		(11,024,238	)
Intangible assets, net		$	16,872,700		$	21,406,880

Trade names in the amount of $3,470,820 are not amortizable.

3. NOTES PAYABLE

Long term debt and capital lease obligations at April 30, 2010 and July 31, 2009 are as follows:

	April 30, 2010		July 31, 2009
Term Loan	$	20,416,667	$	27,916,667
Capitalized leases		—		10,688
Subtotal		20,416,667		27,927,355
Less debt discount		515,786		919,947
Less current portion of long term debt		9,635,335		9,495,374
Long term debt	$	10,265,546	$	17,512,034

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4. STOCKHOLDERS’ EQUITY

Dividends

The holders of the outstanding shares of our series C preferred stock are entitled to receive a 4% per share annual cumulative dividend payable in cash or shares of common stock at our option.  Dividends accrue and are cumulative on a daily basis, whether or not earned or declared.  The series C preferred stock has a par value of $0.01 and a liquidation value of $1,000 per share.

As of April 30, 2010 and July 31, 2009, accrued dividends, for the series C preferred stock, of $65,753 and $116,164, respectively, were included in accrued expenses on our balance sheet. Total liquidation preferences of the series C preferred stock were $5,065,753 and $5,116,164 at April 30, 2010 and July 31, 2009, respectively.

On May 19, 2009, 6,577 shares of series E preferred stock were issued with a par value of $0.01 and a liquidation value of $1,000 per share. The preferred stock pays dividends at the rate of 10% for year 1, 12% for year 2, 14% for year 3 and 16% for each year thereafter.

As of April 30, 2010 and July 31, 2009, accrued dividends, for the series E preferred stock, of $625,265 and $133,342, respectively, were included in accrued expenses on our balance sheet. Total liquidation preferences of the series E preferred stock were $7,229,265 and $6,710,342 at April 30, 2010 and July 31, 2009, respectively.

Warrants

On February 1, 2010 and February 19, 2010, the Company issued 2,587,648 and 239,313 shares, respectively, of the Company’s class A common stock (the “Shares”) to York Capital Management, L.P. and certain of its affiliates (collectively, “York Capital”) upon York Capital’s exercise of certain outstanding warrants entitling York Capital to acquire an aggregate of up to 2,841,892 shares of the Company’s class A common stock (the “Warrants”).  York Capital had previously received the Warrants pursuant to the Securities Exchange Agreement  entered into on May 19, 2009 by and among the Company and York Capital.

Stockholder Rights Agreement and Authorization of Series F Junior Participating Preferred Stock

On August 25, 2009, the board of directors adopted a stockholder rights agreement and declared a dividend distribution of one right for each outstanding share of the Company’s class A common stock to stockholders of record at the close of business on September 8, 2009. The description and terms of the rights were set forth in a Stockholder Rights Agreement, by and between the Company and American Stock Transfer and Trust Company, LLC, as rights agent, dated as of August 25, 2009 (the “Stockholder Rights Agreement”). The board of directors of the Company also adopted resolutions on August 25, 2009 providing for the issuance of a series of preferred stock of the Company, par value $.01 per share, designated as series F Junior Participating Preferred Stock, as set forth in a Certificate of the Powers, Designations, Preferences and Relative, Participating, Optional and Other Special Rights of the series F Junior Participating Preferred Stock (the “Certificate of Designations”). The Certificate of Designations became effective on August 31, 2009.

5. INCOME TAXES

Pursuant to generally accepted accounting principles (“GAAP”) in the United States  a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Current tax expense is based on the financial results for the year as adjusted for items that are non-assessable or disallowed for tax purposes. The tax expense is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

6

5. INCOME TAXES (Continued)

The tax expense for the three and nine months ended April 30, 2010 represents the taxes that we would expect to pay at statutory rates.  As noted above, GAAP requires the application of a “more likely than not” threshold to the recognition and derecognition of tax positions and also require that a change in judgment related to prior years’ tax positions be recognized in the quarter of such change.  We have had taxable income for the last 13 quarters and continue to forecast future taxable income. As a result, we plan to review the existing valuation allowance on our net operating loss carryforwards of approximately $27.3 million in the final quarter of this fiscal year, which may result in the release of all or some of the valuation allowance.

6. FAIR VALUE REPORTING

GAAP clarifies that fair value is an exit price, representing the amount that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

• Level 1 — Observable inputs such as quoted prices in active market;

• Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

• Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at April 30, 2010:

	Quoted Prices in Active Markets for Identical Assets (Liabilities) (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Carrying Amount
Cash	$	12,824,104		—		—		$	12,824,104
Cash Equivalents	$	2,819,784		—		—		$	2,819,784
Notes Payable		—		—	$	(19,568,948	)	$	(19,900,880	)

The carrying amount of the notes payable contains a $515,786 discount. Management believes that the assets can be liquidated without restriction.

7. COMMITMENTS AND CONTINGENCIES

Litigation

From time to time, we may be party to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business.  While the outcome of these matters cannot be predicted with certainty, we do not believe that the outcome of any of these claims or any of the legal matters mentioned elsewhere in this Quarterly Report will have a material adverse effect on our consolidated financial position, results of operations or cash flow.

Beginning in June 2008, j2 Global Communications, Inc. (“j2”) brought a series of two patent infringement lawsuits against us in U.S. District Court.  j2 alleges that we infringed upon three of j2's patents, U.S. Patent Nos. 6,597,688, 7,020,132 and 6,208,638.  The cases are pending in the U.S. District Court for the Central District of California and are currently in the discovery phase.

In connection with the termination of an agreement to sell the portal operations of our discontinued India.com business, one of our subsidiaries is party to pending litigation (India.com v. Dalal).  Judgment was entered against the subsidiary in the amount of $1,482,347.  We have filed a notice of appeal in the matter and intend to vigorously pursue the issue.

7

7. COMMITMENTS AND CONTINGENCIES (Continued)

As a result of a New York state sales tax audit completed in 2005 of EasyLink Services International, Inc., a dissolved subsidiary of EasyLink Services Corporation, EasyLink Services International was assessed approximately $450,000 in tax, interest, and penalties on sales for the sales tax period beginning March 1, 2001 and ending May 31, 2004.  The case has been remanded back to the administrative law judge to determine allocation and penalty issues.  We expect to appeal the Tribunal’s decision judicially once all administrative law proceedings are completed.

The outcome of litigation may not be assured, and despite management’s views of the merits of any litigation, or the reasonableness of our estimates and reserves, our cash balances could nonetheless be materially affected by an adverse judgment.  In accordance with GAAP, we believe we have adequately reserved for the contingencies arising from the above legal matters where an outcome was deemed to be probable and the loss amount could be reasonably estimated.  As such, we do not currently believe that the anticipated outcome of the aforementioned proceedings will have a materially adverse impact on our financial condition, cash flows or results of operations.

8. INTERIM SEGMENT DISCLOSURES

Our operations are divided into two business segments, which are defined as follows:

• Supply Chain Messaging Segment (“Supply Chain”), which includes all our electronic data interchange (“EDI”) and telex services.

• On Demand Messaging Segment (“On Demand”), which includes all fax, e-mail, document capture and management (“DCM”) and workflow services.

The table below summarizes information about operations for the fiscal quarters ended April 30, 2010 and 2009:

	Supply Chain		On Demand		Total
Quarter Ended April 30, 2010
Revenue from external customers	$	10,157,244	$	10,435,771	$	20,593,015
Segment gross profit	$	7,592,199	$	7,491,663	$	15,083,862

The following is a reconciliation of operating segment income to net income for the quarter ended April 30, 2010:

Segment gross profit	$	15,083,862
Corporate expenses		11,735,650
Operating income		3,348,212
Other income (expense), net		(46,262	)
Income before income taxes		3,301,950
Income tax expense		1,312,890
Net income	$	1,989,060

8

8. INTERIM SEGMENT DISCLOSURES (Continued)

	Supply Chain		On Demand		Total
Quarter Ended April 30, 2009
Revenue from external customers	$	10,348,534	$	10,690,444	$	21,038,978
Segment gross profit	$	7,184,346	$	7,353,571	$	14,537,917

The following is a reconciliation of operating segment income to net income for the quarter ended April 30, 2009:

Segment gross profit	$	14,537,917
Corporate expenses		11,657,075
Operating income		2,880,842
Other income (expense), net		(1,404,764	)
Income before income taxes		1,476,078
Income tax expense		239,890
Net income	$	1,236,188

The table below summarizes information about operations for the nine months ended April 30, 2010 and 2009:

	Supply Chain		On Demand		Total
Nine Months Ended April 30, 2010
Revenue from external customers	$	30,966,381	$	30,528,710	$	61,495,091
Segment gross profit	$	23,014,371	$	21,208,148	$	44,222,519

The following is a reconciliation of operating segment income to net income for the nine months ended April 30, 2010:

Segment gross profit	$	44,222,519
Corporate expenses		35,717,637
Operating income		8,504,882
Other income (expense), net		(737,198	)
Income before income taxes		7,767,684
Income tax expense		3,107,073
Net income	$	4,660,611

	Supply Chain		On Demand		Total
Nine Months Ended April 30, 2009
Revenue from external customers	$	32,396,416	$	32,313,623	$	64,710,039
Segment gross profit	$	23,449,218	$	22,238,122	$	45,687,340

The following is a reconciliation of operating segment income to net income for the nine months ended April 30, 2009:

Segment gross profit	$	45,687,340
Corporate expenses		38,331,049
Intangible impairment		4,245,914
Operating income		3,110,377
Other income (expense), net		(10,046,921	)
Loss before income taxes		(6,936,544	)
Income tax expense		995,159
Net loss	$	(7,931,703	)

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9. DERIVATIVE FINANCIAL INSTRUMENTS

As of April 30, 2010, we had no known material derivative financial instruments.

10. SUBSEQUENT EVENTS

On May 19, 2010, the Company entered into a Commitment Increase Amendment to Revolving Credit and Term Loan Agreement (the “Commitment Increase Amendment”) by and among the Company, as borrower, the lenders from time to time party thereto (the “Lenders”), and SunTrust Bank, as administrative agent for the Lenders.  Pursuant to the Commitment Increase Amendment, the Company partially exercised its rights under the accordion feature of its existing Revolving Credit and Term Loan Agreement dated May 19, 2009 (the “Credit Agreement”) and increased its borrowing under the Credit Agreement and the related Term Notes by an aggregate of $5 million.  The Company entered into Amended and Restated Term Notes dated May 19, 2010 in favor of the Lenders evidencing the increased principal amount of its borrowing.

The Company used the proceeds of the $5 million loan increase plus approximately $2.2 million of its cash on hand to redeem all of its outstanding Series E Preferred stock held by York Capital.

The increased principal amount of the Term Loan will be due and payable in quarterly installments beginning on July 31, 2010 and ending on April 30, 2012, subject to acceleration in the event of a default.  

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

Forward Looking Statement Disclaimer

All statements other than statements of historical facts included in this Quarterly Report regarding our financial position, business strategy and plans and objectives of management for future operations are forward-looking statements. These forward-looking statements are based on the beliefs of management, as well as assumptions made by and information currently available to management. When used in this quarterly report, the words “anticipate,” “believe,” “estimate,” “expect,” “may,” “will,” “hope,” “continue” and “intend,” and words or phrases of similar import, as they relate to our financial position, business strategy and plans, or objectives of management, are intended to identify forward-looking statements. These statements reflect our current view with respect to future events and are subject to risks, uncertainties and assumptions related to various factors, including, without limitation, those described in Item 1A of Part II of this Quarterly Report under the heading “Risk Factors” and in our registration statements and periodic reports filed with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Securities Act of 1933, as amended (the “Securities Act”).

Although we believe that our expectations are reasonable, we cannot assure you that our expectations will prove to be correct. Should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described in this Quarterly Report as anticipated, believed, estimated, expected, hoped or intended.

Business Overview

We are a global provider of value added services that facilitate the electronic exchange of documents and information between enterprises, their trading communities and their customers. We deliver most of our services through a global IP network, which hosts our applications on enterprise-class platforms that are comprised of server and network operations centers located worldwide.

Our core services include EDI services, fax services, telex services and other services that are integral to the movement of money, materials, products, people and information in the global economy including documents such as insurance claims, trade and travel confirmations, purchase orders, invoices, shipping notices and funds transfers that help our customers to be more efficient and mobile. Our operations include two business segments defined as follows:

· Supply Chain segment, which includes all our EDI and telex services.

· On Demand segment, which includes all fax, e-mail, DCM and workflow services.

Global macro economic trends are important barometers for our business. Changes in the level of economic activity are reflected directly in the volumes of our services used by our customers in both segments of our business. As the United States and global economies have experienced recession, we have seen a decrease in the volume of demand for our services from existing customers, as well as increasing pricing pressure and customer bankruptcies and reorganizations. However, extended economic slowdowns can possibly improve customer acquisition opportunities as larger companies look to outsource business functions in our service segments to reduce internal costs. We expect volume trends to reverse when and as the United States and global economies move into a more robust recovery and current unemployment levels begin to decline.  Our management has taken steps to adjust our cost structure to reflect the decrease in demand for our services, which steps have positively impacted our profitability.  However, there can be no assurance that we can achieve further offsetting cost reductions if revenue continues to drop significantly

Approximately 25% of our revenue comes from international operations. Accordingly, our revenue can vary based on the performance of non-US economies and on the prevailing exchange rates of the relevant currencies (principally, the euro and the British pound) compared to the US dollar.

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We have grown our business significantly through acquisitions in recent years. We continue to seek to reap the benefits of those acquisitions through the integration and consolidation of operations and the cross-selling of services across the combined customer base. The current economic climate may provide additional opportunities for consolidative or synergistic acquisitions.

Critical Accounting Policies and Significant Use of Estimates in Financial Statements

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses. We consider certain accounting policies related to revenue recognition, valuation of acquired intangibles and impairment of long-lived assets, including goodwill to be critical policies due to the estimation process involved in each. Management discusses its estimates and judgments with the Audit Committee of our Board of Directors.

We discuss our critical accounting policies in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended July 31, 2009. There have been no significant changes in our critical accounting policies since July 31, 2009.

Nine Months Ended April 30, 2010 Compared with the Nine Months Ended April 30, 2009

Results of Operations

The following table reflects consolidated operating data by reported segment. All significant intersegment activity has been eliminated. Accordingly, the segment results below exclude the effect of transactions with our subsidiaries.

	Nine Months Ended April 30,
	2010			2009			Variance
Revenue:
Supply Chain Messaging
EDI Services	$	24,846,669		$	24,996,8488		$	(150,179	)
Telex Services		6,119,724			7,399,568			(1,279,844	)
Total Supply Chain Messaging		30,966,393			32,396,416			(1,430,023	)
On Demand Messaging
Fax Services		24,885,631			25,883,384			(997,753	)
DCM Services		1,519,114			2,046,495			(527,381	)
Other Services		4,123,953			4,383,744			(259,791	)
Total On Demand Messaging		30,528,698			32,313,623			(1,784,925	)
Total Revenue:		61,495,091			64,710,039			(3,214,948	)
Cost of Revenue:
Supply Chain Messaging		7,952,010			8,947,198			(995,188	)
On Demand Messaging		9,320,562			10,075,501			(754,939	)
Total Cost of Revenue		17,272,572			19,022,699			(1,750,127	)
Gross Margin:
Supply Chain Messaging		23,014,383			23,449,218			(434,835	)
On Demand Messaging		21,208,136			22,238,122			(1,029,986	)
Total Gross Margin		44,222,519			45,687,340			(1,464,821	)
Product Development and Enhancement		5,499,576			5,901,783			(402,207	)
Selling and Marketing		9,584,468			9,780,627			(196,159	)
General and Administrative		20,633,593			22,648,639			(2,015,046	)
Intangible Impairment		—			4,245,914			(4,245,914	)
Total product, selling and G&A expenses		35,717,637			42,576,963			(6,859,326	)
Other (expense) income		(737,198	)		(10,046,921	)		9,309,723
Income (loss) before income taxes	$	7,767,684		$	(6,936,544	)	$	14,704,2288

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Revenue — Total revenue for the nine months ended April 30, 2010 was approximately $61.5  million, a decrease of approximately $3.2 million or 5.0% as compared to the nine-month period ended April 30, 2009. This decrease in revenues is primarily due to revenue from the first quarter of fiscal 2009 that was not affected by the global economic slowdown as well as reduced customer volume.

The Supply Chain Messaging segment decreased approximately $1.4 million, or 4.4%, from the nine-month period ended April 30, 2009, as compared to the nine-month period ended  April 30, 2010, due to a decrease of approximately $150,000 (a 0.6% decrease)  in EDI services and a decrease of approximately $1.3 million (a 17.3% decrease) in Telex services.

The On Demand Messaging segment decreased approximately $1.8 million, or 5.5%, from the nine-month period ended April 30, 2009, as compared to the nine-month period ended  April 30, 2010, due to decreases of approximately $2.3 million (a 30.4% decrease) for Production Fax services and approximately $527,000 (a 25.8% decrease) for DCM services.  The reductions were partially offset by a $1.5 million (8.7% increase) increase in Desktop Fax services.

Gross Profit and Gross Margin — Gross profit decreased approximately $1.5 million, or 3.2% from the nine-month period ended April 30, 2009, as compared to the nine-month period ended  April 30, 2010, due to the decrease in customer revenues.  However, gross margin improved to 71.9% for the nine-month period ended April 30, 2010, as compared to 70.6% for the nine-month period ended April 30, 2009 due mainly to reduced network operations expenses.

Cost of Revenue — Total cost of revenue on a year over year basis decreased approximately $1.8 million, or 9.2%, due mainly to reductions in labor and related expenses of approximately $1.5 million (a 25.2% decrease), approximately $285,000 in reduced equipment expense (a 27.6 % decrease), approximately $206,000 in reduced building related expenses (a 26.0% decrease), and approximately $126,000 (a 40.7% decrease) in reduced travel and other costs.  All of the reductions are a result of management’s continued efforts to streamline operations and reduce costs.  These reductions were partially offset by an approximate $237,000 (a 2.7% increase) increase in telecom expense and an approximate $64,000 (a 4.0% increase) increase in depreciation expense due to infrastructure upgrades.

Product Development — Product development costs decreased approximately $402,000, or 6.8%, from the nine-month period ended April 30, 2009, as compared to the nine-month period ended  April 30, 2010. These decreased costs consisted mainly of a decrease of approximately $165,000  (a 94.3% decrease) in telecom and equipment expense , an approximate $99,000 decrease (a 89.3% decrease) in building related expenses, an approximate $74,000 decrease (a 71.5% decrease) in travel related expenses and an approximate decrease of $72,000 (a 62.2% reduction) for outside professionals and consultants. The decreases were part of the company’s restructuring during the previous quarters for which benefits are now being realized.

Selling and Marketing — Selling and marketing expenses decreased approximately $196,000, or 2.0%, from the nine-month period ended April 30, 2009, as compared to the nine-month period ended  April 30, 2010. These decreased costs consisted mainly of outside professional services of approximately $457,000 (a 21.9% reduction) and a $167,000 decrease (a 21.9% decrease) in travel related costs.  The reductions were partially offset by an increase in compensation and benefits expense of approximately $311,000 (a 4.9% increase) and an increase in lead generation and web marketing expenses of approximately $160,000 (an 87.3% increase).

General and Administrative and Intangible Impairment — General and administrative and intangible impairment expenses decreased approximately $6.3 million, or 23.2%, from the nine-month period ended April 30, 2009, as compared to the nine-month period ended  April 30, 2010. The reduction in expense was attributed to an approximate $1.5 million charge in the fiscal year 2009 for professional fees related to the due diligence of an acquisition that did not occur, a reduction of compensation and benefits of approximately $809,000 (a 9.8% decrease) due to organizational restructuring, the reduction of bad debt expense of approximately $521,000 (a 58.6% decrease) due to increased collection efforts, an approximate $94,000 (an 11.9% decrease) decrease in equipment expense and a decrease in intangible amortization expense of approximately $4.6 million (a 51.6% decrease) due mainly to an impairment of intangible assets in fiscal year 2009 of approximately $4.2 million which, in turn, caused a decrease of continued amortization expense of approximately $400,000.  These decreases are partially offset by a $500,000 increase in accrued expenses, a $260,000 (a 49.8% increase) increase in other outside professional services and an approximate $125,000 (a 6.2% increase) increase in building related expenses due to a one-time payment for a lease buyout.

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Operating Income — Operating income increased approximately $5.4 million from the nine-month period ended April 30, 2009, as compared to the nine-month period ended April 30, 2010, mainly from the $4.2 million impairment of intangible assets during 2009, the $1.5 million in professional fees booked in 2009 that related to the due diligence of an acquisition that did not occur as well as savings from management’s cost cutting efforts and the reduced professional fees in 2010.

Other Expense — Other expenses for the nine-month period ended April 30, 2010 consist mainly of net interest expense of approximately $1.3 million which included approximately $860,000 in net cash interest expense and approximately $404,000 in interest expense from the amortization of the discount on our Term Loan.  Interest expenses for the nine-month period ended April 30, 2010 decreased approximately $9.3 million from the nine-month period ended April 30, 2009, due mainly to the elimination of $6.3 million in non-cash interest accrued in fiscal 2009 from the refinancing of the debt and a $1.7 million early payment penalty recorded as interest expense that was paid as a result of the Company making an early payment on the previous outstanding debt.  An additional $1.1 million of interest expense was recognized in 2009 due to the higher balance on the outstanding debt as well as a higher interest rate at April 30, 2009 on the outstanding debt as compared to the existing Term Note balance and interest rate at April 30, 2010.  Other expense was also lower due to approximately $503,000 of foreign exchange gains during the nine-month period ended April 30, 2010.

Net income — Net income increased approximately $12.6 million, or 158.7%, from the nine-month period ended April 30, 2009, as compared to the nine-month period ended April 30, 2010, due primarily to $4.2 million for the impairment of intangibles recognized in 2009 and the $9.3 million reduction in interest expense.

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Three Months Ended April 30, 2010 Compared with the Three Months Ended April 30, 2009

Results of Operations

The following table reflects consolidated operating data by reported segment. All significant intersegment activity has been eliminated. Accordingly, the segment results below exclude the effect of transactions with our subsidiaries.

	Three Months Ended April 30,
	2010			2009			Variance
Revenue:
Supply Chain Messaging
EDI Services	$	8,215,485		$	8,029,866		$	185,619
Telex Services		1,941,760			2,318,668			(376,908	)
Total Supply Chain Messaging		10,157,245			10,348,534			(191,289	)
On Demand Messaging
Fax Services		8,680,228			8,550,085			130,143
DCM Services		482,546			613,592			(131,046	)
Other Services		1,272,996			1,526,767			(253,771	)
Total On Demand Messaging		10,435,770			10,690,444			(254,674	)
Total Revenue:		20,593,015			21,038,978			(445,963	)
Cost of Revenue:
Supply Chain Messaging		2,565,045			3,164,188			(599,143	)
On Demand Messaging		2,944,108			3,336,873			(392,765	)
Total Cost of Revenue		5,509,153			6,501,061			(991,908	)
Gross Margin:
Supply Chain Messaging		7,592,200			7,184,346			407,854
On Demand Messaging		7,491,662			7,353,571			138,091
Total Gross Margin		15,083,862			14,537,917			545,945
Product Development and Enhancement		1,884,210			1,774,455			109,755
Selling and Marketing		3,086,871			3,124,099			(37,228	)
General and Administrative		6,764,569			6,758,521			6,048
Total product, selling and G&A expenses		11,735,650			11,657,075			78,575
Other (expense) income		(46,262	)		( 1,404,764	)		1,358,502
Income before income taxes	$	3,301,950		$	1,476,078		$	1,825,872

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Revenue — Total revenue for the three months ended April 30, 2010 was approximately $20.6 million, a decrease of approximately $446,000, or 2.1%, as compared to the three-month period ended April 30, 2009. This decrease in revenues is primarily due to reduced customer volume resulting from the continued global economic slowdown. The effect of the exchange rate fluctuations on revenues for the quarterly comparison was an increase of approximately $200,000 due mainly to the strengthening of the Great British Pound year over year.

The Supply Chain Messaging segment decreased approximately $191,000, or 1.8%, from the three-month period ended April 30, 2009, as compared to the three-month period ended April 30, 2010, due to decrease of approximately $377,000  (a 16.3% decrease) in Telex services.  The decreases were partially offset by an increase of approximately $185,000 (a 2.3% increase) in EDI services.

The On Demand Messaging segment decreased approximately $254,000, or 2.4%, from the three-month period ended April 30, 2009, as compared to the three-month period ended April 30, 2010, due to decreases of approximately $307,000 (a 14.7% decrease) for Production Fax services, approximately $254,000 (a 16.6% decrease) for Other services and approximately $131,000 (a 21.4% decrease) for DCM services.  These reductions were partially offset by increases of $444,000 (a 7.1% increase) for Desktop Fax Services.

Gross Profit and Gross Margin — Gross profit decreased approximately $546,000, or 3.8%, from the three-month period ended April 30, 2009, as compared to the three-month period ended April 30, 2010, due to the decrease in customer volumes.  However, gross margin increased to 73.2% for the three-month period ended April 30, 2010 as compared to 69.1% for the period ending April 30, 2009 due mainly to one-time reduced network operations expenses.  These reduced network operations expenses are not sustainable and will not be experienced in future periods.

Cost of Revenue — Total cost of revenue decreased approximately $992,000, or 15.2%, due mainly to reductions in labor and related expenses of approximately $398,000 (a 21.0% decrease), approximately $204,000 in reduced hardware and software maintenance expense (a 60.8% decrease), approximately $185,000 (a 5.9% decrease) in reduced telecom expense, and approximately $76,000 in reduced building related expenses (a 29.0% decrease).  Foreign currency effects had a minor effect on the year over year cost of revenues.

Product Development — Product development costs increased approximately $110,000, or 6.2%, from the three-month period ended April 30, 2009, compared to the three-month period ended April 30, 2010. These increased costs consisted mainly of approximately $196,000 in increased labor and benefits.  These increases were partially offset by a reduction in telecom and equipment expense of approximately $41,000 (a 49.7% reduction), an approximate decrease of $31,000 (an 87.4% reduction) for building related costs and an approximate decrease of $18,000 (a 58.8% decrease) for travel related expenses. The decreases were part of the company’s restructuring during the previous quarters for which benefits are now being realized.  Foreign currency effects had a minor effect on the year over year product development costs.

Selling and Marketing — Selling and marketing expenses decreased approximately $37,000, or 1.2%, from the three-month period ended April 30, 2009, compared to the three-month period ended April 30, 2010. These decreased costs consisted mainly of an approximate decrease of $155,000 (a 82.0% decrease) in consulting and recruiting expenses, an approximate decrease of $107,000 (a 13% decrease) for non-employee commissions, an approximate decrease of $53,000 (a 22.9% decrease) in travel related expenses and an approximate decrease of $39,000 (a 99.6% decrease) for seminars   These decreases were partially offset by an increase due to the fluctuation in foreign currency of approximately $100,000, an approximate $186,000 (a 9.7% increase) increase in labor, commissions and benefits and an approximate $47,000 (a 89.1% increase) increase in miscellaneous marketing expense  These increases are due to an increased effort to generate new business by promoting the EasyLink brand and products.

General and Administrative and Intangible Impairment — General and administrative expenses increased approximately $6,000, or 0.1%, from the three-month period ended April 30, 2009 to the three-month period ended April 30, 2010. Although the quarterly comparatives remained relatively consistent,  there was an increase of approximately $594,000 (a 214.0% increase) in legal expenses and an increase due to foreign exchange of $52,000.  This increase was partially offset by a reduction of bad debt expense of approximately $196,000 (a 62.4% decrease) due to increased collection efforts, a decrease of approximately $175,000 (a 6.6% decrease) in salary and benefit related costs due to organizational restructuring, a decrease in equipment expense of approximately $69,000 (a 28.0% decrease), and a decrease in depreciation and amortization of approximately $87,000 (a 5.7% decrease).

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Operating Income — Operating income increased approximately $467,000, or 16.2%, from the three-month period ended April 30, 2009 as compared to the three-month period ended April 30, 2010 due mainly to the improved gross margins.  These improved margins were partially offset by $189,000 in increased costs due to foreign currency fluctuations.

Other Expense — Other expenses for the three-month period ended April 30, 2010 consist mainly of interest expense of approximately $336,000, which included approximately $216,000 in cash interest expense and approximately $120,000 in interest expense from the amortization of the discount on our Term Loan.  Interest expenses for the three-month period ended April 30, 2010 decreased approximately $1.2 million from the three-month period ended April 30, 2009 due mainly to the elimination of $1.0 million in non-cash interest due to the refinancing of the previous held debt and $200,000 of cash interest expense related to the outstanding debt.  In addition, there was an increase in foreign currency gain of approximately $81,000.

Net income — Net income increased approximately $753,000, or 60.9%, from the three-month period ended April 30, 2009 as compared to the three-month period ended April 30, 2010 due primarily to the improvement in operating income and the reduction in interest expense.

Liquidity and Capital Resources

Our principal source of liquidity consists of cash generated from operations. As the majority of our revenue is reoccurring under contract, it is primarily affected by the volumes incurred by the customer using the underlying messaging service. Operating expenses are primarily driven by labor and telecom costs which are directly tied to customer utilization of messaging services. Cash and cash equivalents increased approximately $4.6 million to a total balance of approximately $15.6 million as of April 30, 2010 from approximately $11.0 million as of July 30, 2009. This increase in cash was primarily caused by approximately $13.9 million in operating cash flow. These cash flows were partially offset by approximately $889,000 in investing cash flow for the purchase of computer equipment and $7.5 million for principal and interest payments under our Term Loan.

Our liquidity will be affected by the three year Term Loan that calls for quarterly principal payments of approximately $2.5 million that are prorated at the beginning and end of the terms.  Borrowings under the Term Loan bear interest, at our election, at a rate tied to one of the following rates, in each case plus a specified margin: (i) the higher of (1) the prime lending rate of SunTrust Bank, the administrative agent for the Lenders, (2) the U.S. Federal Funds Rate plus 0.5%, and (3) adjusted one-month LIBOR plus 1.0%; (ii) adjusted LIBOR for the interest period of such borrowing; and (iii) a LIBOR index rate. The interest margin for each such type of borrowing varies from 2.50% to 4.50%, depending on our consolidated leverage ratio at the time of such borrowing.  The interest rate on the Term Loan as of April 30, 2010 was 3.73%.

On May 19, 2010, the Company used the proceeds of  $5 million from the Commitment Increase Amendment with its current Lenders plus approximately $2.2 million of its cash on hand to redeem all of its outstanding Series E Preferred stock held by York Capital. The increased principal amount of the Term Loan will be due and payable in quarterly installments beginning on July 31, 2010 and ending on April 30, 2012, subject to acceleration in the event of a default.  The new quarterly principal payments of $3,125,000 are $625,000 greater than our original principal payment. 

The accounts receivable increased in the third quarter due to payment delays by several large customers.  Management believes that existing cash and cash equivalent balances and cash provided from operations will provide sufficient liquidity to meet the operating and capital expenditure needs for existing operations during the next twelve months.

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable to smaller reporting companies.

Item 4T. Controls and Procedures

Disclosure Controls and Procedures

EasyLink management has established and maintained disclosure controls and procedures as defined in Exchange Act Rules  13a-15(e) and 15d-15(e) that are designed to provide reasonable assurance that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, reported and is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, by others within the entity to allow timely decisions regarding required disclosure.  Our management, including the Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of the disclosure controls and procedures and, based on this evaluation, have concluded that disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by the report.  EasyLink continually reviews the respective disclosure controls and procedures and make changes, as necessary, to ensure the quality of its financial reporting.

Internal Controls over Financial Reporting

There have been no changes in internal control over financial reporting that occurred during the third quarter of fiscal year 2010 that have materially affected, or are reasonably likely to materially affect, EasyLink’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be party to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business.  While the outcome of these matters cannot be predicted with certainty, we do not believe that the outcome of any of these claims or any of the legal matters mentioned elsewhere in this Quarterly Report will have a material adverse effect on our consolidated financial position, results of operations or cash flow.

Beginning in June 2008, j2 Global Communications, Inc. (“j2”) brought a series of two patent infringement lawsuits against us in U.S. District Court.  j2 alleges that we infringed upon three of j2's patents, U.S. Patent Nos. 6,597,688, 7,020,132 and 6,208,638.  The cases are pending in the U.S. District Court for the Central District of California and are currently in the discovery phase.

In connection with the termination of an agreement to sell the portal operations of our discontinued India.com business, one of our subsidiaries is party to pending litigation (India.com v. Dalal).  Judgment was entered against the subsidiary in the amount of $1,482,347.  We have filed a notice of appeal in the matter and intend to vigorously pursue the issue.

As a result of a New York state sales tax audit completed in 2005 of EasyLink Services International, Inc., a dissolved subsidiary of EasyLink Services Corporation, EasyLink Services International, Inc. was assessed approximately $450,000 in tax, interest, and penalties on sales for the sales tax period beginning March 1, 2001 and ending May 31, 2004.  The case has been remanded back to the administrative law judge to determine allocation and penalty issues.  We expect to appeal the Tribunal’s decision judicially once all administrative law proceedings are completed.

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The outcome of litigation may not be assured, and despite management’s views of the merits of any litigation, or the reasonableness of our estimates and reserves, our cash balances could nonetheless be materially affected by an adverse judgment.  In accordance with GAAP, we believe we have adequately reserved for the contingencies arising from the above legal matters where an outcome was deemed to be probable and the loss amount could be reasonably estimated.  As such, we do not currently believe that the anticipated outcome of the aforementioned proceedings will have a materially adverse impact on our financial condition, cash flows or results of operations.

Item 1A. Risk Factors

There are no updates to the risk factors as disclosed in our Annual Report on Form 10-K for the year ended July 31, 2009 previously filed with the SEC.

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

None.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibit Number	Description
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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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.

Date: June 7, 2010

EASYLINK SERVICES INTERNATIONAL
CORPORATION
By:	/s/ Glen E. Shipley
	Glen E. Shipley
	Chief Financial Officer

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EXHIBIT INDEX

Exhibit Number	Description
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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