EasyLink Services International (ESIC) 10-Q 2008 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2008

o 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: 000-24996

EasyLink Services International Corporation

(Exact Name of Registrant as Specified in Its Charter)

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

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 filero Accelerated filero Non-acceleratedþ Smaller reporting companyo

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

As of June 9, 2008 the issuer had outstanding 25,098,390 shares of class A common stock.

EASYLINK SERVICES INTERNATIONAL CORPORATION
INDEX TO FORM 10-Q

	Page Number
PART 1 FINANCIAL INFORMATION		1
Item 1: Interim Condensed Consolidated Financial Statements		1
Condensed Consolidated Balance Sheets as of April 30, 2008 and July 31, 2007 (Unaudited)		1
Condensed Consolidated Statements of Income for the three and nine months ended April 30, 2008 and 2007 (Unaudited)		2
Condensed Consolidated Statements of Cash Flows for the nine months ended April 30, 2008 and 2007 (Unaudited)		3
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)		4
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3: Quantitative and Qualitative Disclosures about Market Risk		21
Item 4: Controls and Procedures		21
PART II OTHER INFORMATION		21
Item 1: Legal Proceedings		21
Item 1A: Risk Factors		21
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 3: Defaults Upon Senior Securities		22
Item 4: Submission of Matters to a Vote of Security Holders		22
Item 5: Other Information		22
Item 6: Exhibits		22
Signatures		24
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

Item 1. Interim Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets as of April 30, 2008 and July 31, 2007 (Unaudited)

	April 30,			July 31,
	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	27,179,529		$	5,444,176
Accounts receivable, net of allowance for doubtful accounts and allowance for sales returns and allowances of $1,541,120 and $558,643, respectively		14,070,519			3,479,134
Prepaid expenses and other current assets		4,527,665			602,516
Total current assets		45,777,713			9,525,826
Property and equipment, net		8,313,302			943,836
Goodwill		44,051,765			6,293,054
Other intangible assets, net (See Note 4)		29,119,719			3,737,003
Investments		431,020			13,223,184
Restricted cash		417,330			433,635
Deferred acquisition costs		—			1,039,076
Other assets		224,689			222,172
Total assets	$	128,335,538		$	35,417,786
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,681,117		$	615,100
Current portion of long term debt		3,907,263			10,000,000
Accrued expenses		8,377,959			1,152,774
Deferred revenue		680,971			227,496
Other current liabilities		879,421			573,577
Total current liabilities		17,526,731			12,568,947
Long term debt (See Note 5)		49,540,155			—
Deferred tax liability		10,306,895			—
Other liabilities		1,181,739			709,203
Total liabilities	$	78,555,520		$	13,278,150
Commitments and contingencies (See Note 10)
Stockholders’ Equity:
Preferred stock — 5,000,000 shares authorized, including 5,000 shares of series C and 250 shares of series D:
Series C Preferred Stock — par value $.01 per share, 44.76 votes per share; 5,000 shares issued and outstanding (liquidation value of $5,066,120 at 2008 and $5,116,164 at 2007)		50			50
Series D Preferred Stock — par value $.01 per share, 769 votes per share; zero and 250 shares issued and outstanding, respectively (liquidation value of $250,000 at 2007)		—			3
Common stock:
Class A — par value $.01 per share, 300,000,000 shares authorized, one vote per share; 25,092,835 and 23,263,056 shares issued and outstanding, respectively		250,938			232,630
Additional paid-in capital		122,326,210			101,860,585
Accumulated other comprehensive loss		(954,988	)		—
Accumulated deficit		(71,842,192	)		(79,953,632	)
Total stockholders’ equity		49,780,018			22,139,636
Total liabilities and stockholders’ equity	$	128,335,538		$	35,417,786

See notes to interim condensed consolidated financial statements.

1

Condensed Consolidated Statements of Income for the three and nine months ended April 30, 2008 and 2007(Unaudited)

	Three Months Ended						Nine Months Ended
	April 30,						April 30,
	2008			2007			2008			2007
Service revenue	$	23,599,696		$	5,390,270		$	68,236,367		$	16,500,465
Cost of services		6,701,442			1,190,759			19,745,758			3,760,384
Gross Profit		16,898,254			4,199,511			48,490,609			12,740,081
Operating expenses:
Product development and enhancement		2,111,513			595,836			5,983,735			1,898,177
Selling and marketing		2,897,718			379,589			8,207,447			1,268,905
General and administrative		7,367,411			2,589,139			21,918,906			7,677,614
Operating income		4,521,612			634,947			12,380,521			1,895,385
Other income (expense):
Interest and investment income		163,160			69,856			595,836			233,542
Interest expense		(2,306,541	)		(18,791	)		(10,464,847	)		(59,065	)
Equity in losses in investment		—			—			(930,269	)		—
Foreign exchange gain		128,292			—			914,214			—
Other income (expense)		11,209			288			89,359			(21,288	)
Income before income taxes		2,517,732			686,300			2,584,814			2,048,574
(Benefit) provision for income taxes		(4,418,376	)		135,097			(5,612,515	)		219,367
Net income		6,936,108			551,203			8,197,329			1,829,207
Dividends on preferred stock		(49,180	)		(48,767	)		(149,956	)		(233,425	)
Extinguishment of dividends on retired preferred stock		—			—			—			200,000
Income attributable to common stockholders		6,886,928		$	502,436			8,047,373		$	1,795,782
Basic income per common share	$	0.28		$	0.02		$	0.33		$	0.08
Diluted income per common share	$	0.17		$	0.02		$	0.29		$	0.07
Anti-dilutive stock options, warrants and series C preferred stock		5,793,178			2,371,473			5,625,675			1,482,592
Weighted average number of common shares outstanding — basic		24,604,376			22,823,776			24,318,536			22,759,581
Weighted average number of common shares outstanding — diluted		48,852,869			24,234,565			48,844,713			24,674,040

See notes to interim condensed consolidated financial statements.

2

Condensed Consolidated Statements of Cash Flows for the nine months ended April 30, 2008 and 2007 (Unaudited)

	Nine Months Ended April 30,
	2008			2007
Cash flows from operating activities:
Net income	$	8,197,329		$	1,829,207
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,303,225			1,517,310
Bad debt expense		373,691			364,610
Amortization of discount and other non-cash interest expense		6,963,998			58,958
Loss on disposal of fixed assets		—			52
Non-cash charges for equity instruments issued for compensation and services		345,852			694,889
Non-cash equity in losses of investment and other non-cash items		1,058,360			—
Release of valuation reserve		(4,396,995	)		—
Changes in assets and liabilities, net of effects from acquisition:
Accounts receivable		(1,480,075	)		(798,873	)
Prepaid expenses and other assets		466,745			(222,096	)
Accounts payable		149,293			(264,224	)
Accrued expenses		(8,141,307	)		298,933
Deferred revenue and other liabilities		(4,156,298	)		(239,096	)
Net cash provided by operating activities		5,683,818			3,239,670
Cash flows from investing activities:
Payment for purchase of acquisitions, net of cash acquired		(53,453,874	)		(320,551	)
Payment for investments		(429,919	)		—
Proceeds from sale of business		4,504,477			—
Purchases of property and equipment		(957,291	)		(361,341	)
Other		18,233			—
Net cash used in investing activities		(50,318,374	)		(681,892	)
Cash flows from financing activities:
Proceeds from sale of stock and exercise of options and warrants		6,629,702			375,081
Payment to retire preferred and common stock		—			(2,875,000	)
Proceeds from borrowings for acquisition		59,788,117			—
Net cash provided by (used in) financing activities		66,417,819			(2,499,919	)
Effect of foreign exchange rate changes on cash and cash equivalents		(47,910	)		—
Net increase in cash and cash equivalents		21,735,353			57,859
Cash and cash equivalents, beginning of period		5,444,176			6,988,753
Cash and cash equivalents, end of period	$	27,179,529		$	7,046,612

See notes to interim condensed consolidated financial statements.

3

EASYLINK SERVICES INTERNATIONAL CORPORATION

Notes to Interim Condensed Consolidated Financial Statements (Unaudited)

The accompanying unaudited condensed consolidated financial statements of EasyLink Services International Corporation (formerly Internet Commerce 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 the 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 year ended July 31, 2007.

The condensed consolidated balance sheet as of July 31, 2007 has been derived from the audited consolidated financial statements as of that date.

Operating results for the nine-month period ended April 30, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2008 or any future period.

1. ORGANIZATION AND NATURE OF BUSINESS

EasyLink’s original core business deploys and manages the secure and reliable electronic exchange of essential business documents over our value added network (“VAN”), hosted applications and managed services. We are known as a trusted provider of e-commerce solutions to connect businesses, regardless of their size and level of technical sophistication, with their trading communities through electronic data interchange or “EDI.”

With our acquisition on August 20, 2007 of EasyLink Service Corporation (“ESC”), we added a comprehensive portfolio of EDI services and other messaging services that deliver high volumes of mission-critical documents through various non-EDI message delivery modes including e-mail, telex and fax. Our fax services include integrated desktop messaging which allows customers to integrate fax sending and receiving with their existing corporate e-mail systems and associated administrative systems as well as production and broadcast fax messaging services. We also enable customers to automate and personalize outbound communications with their global business partners through e-mail, file transfer, document capture and management services (“DCM”) and workflow services. DCM allows customers to digitally convert paper forms into usable data that can be processed directly by enterprise systems such as production servers, workflow solutions and databases. Workflow services provide customers the capability of moving, sorting and retrieving images and documents electronically within a work group. See Note 2, Acquisitions.

We are focusing on two reportable business segments, the Supply Chain Messaging segment and the On Demand Messaging segment. The Supply Chain Messaging segment is composed of all EDI services including VAN services and browser-based and hosted applications. In addition, this segment includes all telex services. The On Demand Messaging segment includes integrated desktop messaging, production fax, broadcast fax, e-mail, file transfer, DCM and workflow services.

Our principal executive offices are located at 6025 The Corners Parkway, Suite 100, Norcross, Georgia 30092, and our telephone number at that location is (678) 533-8000.

4

2. ACQUISITIONS

EasyLink Services Corporation

On August 20, 2007, we completed our acquisition by merger of ESC, which is now a wholly-owned subsidiary. ESC is a global provider of outsourced business process automation services that enable medium and large enterprises, including a majority of the Fortune 100, to improve productivity and competitiveness by transforming manual and paper-based business processes into efficient electronic business processes. We acquired ESC to diversify our service offerings, increase our revenue and obtain a larger customer base in order to compete more effectively in the market place.

We began this acquisition process on May 3, 2007, when the Company and one of our then existing wholly-owned subsidiaries, Jets Acquisition Sub, Inc. (the “Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire ESC (the “Merger”). Under the terms of the Merger Agreement, we paid $5.80 per share in cash in exchange for each share of class A common stock of ESC, for an aggregate purchase price of approximately $70.8 million.

On May 3, 2007, in order to finance the Merger, we entered into a Securities Purchase Agreement (as amended, the “Purchase Agreement”) with certain accredited institutional investors (the “Purchasers”) affiliated with York Capital Management (“York Capital”). On July 2, 2007, in order to secure immediate bridge financing for the Merger, we entered into an additional Securities Purchase Agreement with the Purchasers (the “Bridge Agreement”), pursuant to which the Purchasers purchased an aggregate of $10 million in principal amount of Senior Secured Convertible Notes (the “Bridge Notes”) issued by EasyLink.

On August 20, 2007, pursuant to the Purchase Agreement (as amended by an Amendment to the Securities Purchase Agreement dated August 20, 2007) and the Bridge Agreement, we issued to the Purchasers in a private placement Series A Senior Secured Convertible Notes (the “Series A Notes”), Series B Senior Secured Convertible Notes (the “Series B Notes”), warrants to purchase shares of our class A common stock (the “Warrants”) and additional investment rights to acquire additional notes on the same terms as the Series A Notes (the “Additional Investment Rights”) for an aggregate purchase price of $70,105,416. Pursuant to the terms and conditions set forth in the Purchase Agreement and the Bridge Agreement, the Purchasers purchased from us Series A Notes in an original aggregate principal amount of $30 million and Series B Notes in an original aggregate principal amount of $30 million. In addition, the Purchasers converted all of the Bridge Notes into equal portions of Series A Notes and Series B Notes in an original principal amount of $10 million plus accrued interest. The Series A Notes bear interest at the prime rate plus 75 basis points (0.75%) less an interest factor based on the performance of our class A common stock, and interest is payable either quarterly in arrears or annually in advance at our option. The Series B Notes bear interest at the prime rate plus 300 basis points (3.00%) less an interest factor based on the performance of our class A common stock, and interest is payable either quarterly in arrears or annually in advance at our option.

Both the Series A Notes and the Series B Notes (collectively, the “Notes”) have a term of four years and must be repaid in 30 equal monthly installments of principal beginning 18 months after issuance. We may prepay the Notes at any time, subject to a prepayment penalty of up to 25% and certain other conditions. Prior to August 20, 2008, we may prepay $15 million of the Series B Notes from the proceeds of certain types of asset sales, which prepayment will be subject to a 12.5% prepayment penalty.

We were required to prepay a total of $5 million of the Series A Notes and $5 million of the Series B Notes plus interest prior to December 19, 2007, which prepayment would have been subject to a 12.5% prepayment penalty. Pursuant to the Second Amendment to the Securities Purchase Agreement dated December 18, 2007 (the “Second Amendment to Purchase Agreement”), however, we were relieved of the obligation to make that prepayment.

We are obligated to offer to prepay the Notes in the event of any “Asset Sale” (defined to include the issuance of any equity securities or the sale of any assets with a value of more than $500,000) or if we accumulate more than fifteen million dollars ($15,000,000) in cash and cash equivalents (defined as “Excess Cash Flow”) at the end of any fiscal quarter, with the amount of the prepayment offer to be one hundred percent (100%) of the proceeds of the Asset Sale or fifty percent (50%) of the Excess Cash Flow. Each Purchaser has ten (10) trading days in which to accept such offer.

5

Accordingly, we made offers of partial prepayment in connection with Excess Cash Flow for the fiscal quarter ended October 31, 2007 and with the sale of our web-based fax delivery business. Pursuant to the terms of the Second Amendment to Purchase Agreement, the Purchasers declined both of our offers of partial prepayment and eliminated the requirement that we reduce the outstanding balance of the Series A Notes and the Series B Notes at December 17, 2007 to $60,000,000. The Second Amendment to Purchase Agreement also clarified certain language in the Purchase Agreement to provide that Excess Cash Flow would be measured at the end of each fiscal quarter.

The Warrants entitle the Purchasers to acquire an aggregate of 4,156,448 shares of our class A common stock. The Warrants are exercisable at a price of $3.34 per share from the closing of the ESC merger until the fifth anniversary of the date a registration statement covering the resale of the shares issuable upon exercise of the Warrants is declared effective by the SEC. The Additional Investment Rights entitle the Purchasers to purchase additional notes having terms similar to the Series A Notes in an aggregate principal amount up to $10,000,000.

Under the Purchase Agreement, we are subject to certain limitations, including limitations on our ability to incur additional debt or sell assets, make certain investments and acquisitions, grant liens and pay dividends and distributions. We are also subject to financial covenants on a quarterly basis, which include minimum requirements for recurring revenue of $22.5 million; for earnings before interest, taxes, depreciation and amortization (“EBITDA”) as defined in the Purchase Agreement that range from $2.75 million to $4.5 million over the life of the Notes; and for the ratio of EBITDA to interest expense that range from 1.55 to 3.00 over the life of the Notes. The Purchase Agreement contains certain events of default (many of which are subject to applicable cure periods), including, among others, the failure to make payments when due, defaults under other contractual obligations, change of control and noncompliance with covenants.

In connection with the issuance and sale of the securities pursuant to the Purchase Agreement, ESC entered into a guaranty agreement whereby it has guaranteed the repayment of the Series A Notes and Series B Notes and provided a senior security interest in all or substantially all of its assets as collateral to secure such guarantee. We also granted a senior security interest in all or substantially all of our assets and pledged our shares of capital stock in ESC. All of the proceeds from the Purchase Agreement and the Bridge Agreement were used to finance the Merger.

Pursuant to the Purchase Agreement, we agreed to prepare and file with the SEC a registration statement covering: (1) the resale by the Purchasers of the shares of class A common stock issuable upon conversion or payment of principal and/or interest of the Series A Notes and the Series B Notes; (2) the resale by the Purchasers of the shares of class A common stock issuable upon exercise of the Warrants; (3) the resale by the Purchasers of the shares of class A common stock issuable upon conversion or payment of principal and/or interest of the additional notes on the same terms as the Series A Notes that the Purchasers have the right to acquire pursuant to the Additional Investment Rights; and (4) the resale by the Purchasers of the shares of class A common stock issuable upon conversion or payment of principal and/or interest of the additional Series A Notes and Series B Notes into which the Bridge Notes were converted (all of such securities being the “Registrable Securities”).

On February 22, 2008, we entered into the Third Amendment to Purchase Agreement with the Purchasers, further extending the date by which the initial registration statement registering shares of the class A common stock underlying the securities purchased pursuant to the Purchase Agreement must be effective. As amended, our obligation to prepare and file with the SEC a registration statement with respect to the Registrable Securities has been extended until such time as Purchasers holding at least a majority of the Registrable Securities request in writing (a “Registration Notice”) that we file such a registration statement, and we are obligated to cause such registration to become effective within 120 days following the date of the Registration Notice.

6

The following table sets forth the components of the purchase price for ESC as of August 20, 2007.

Base purchase price	$	63,378,560
EasyLink class A common stock issued		724,125
Transaction costs paid in cash		4,213,390
Transaction costs paid with stock		2,485,350
Total purchase price	$	70,801,425

The purchase price components include $13,223,184 invested in ESC common stock as of July 31, 2007 and $1,039,076 of transaction costs incurred as of July 31, 2007, which were deferred and included as other assets on the balance sheet as of that date.

The following table provides the estimated fair value of assets acquired and liabilities assumed in the ESC acquisition:

Cash	$	3,971,120
Accounts receivable		10,493,510
Prepaid expenses and other current assets		3,251,342
Fixed assets		8,969,279
Intangible assets — software		8,700,000
Intangible assets — trade names		3,185,000
Intangible assets — customer relationships		19,400,000
Accounts payable		(3,830,013	)
Accrued liabilities		(14,283,647	)
Other current liabilities		(1,321,307	)
Long term liabilities		(8,634,759	)
Fair value of net assets acquired	$	29,900,525
Goodwill	$	40,900,900
Total purchase price	$	70,801,425

Estimates of acquired intangible assets are as follows:

			Weighted Average
Acquired Intangible Assets	Estimated Fair Value		Estimated Useful Life
Customer Relationships	$	19,400,000	8
Internally developed software		8,700,000	4
Trade name		3,185,000	Indefinite
Goodwill		40,900,900	Non-amortizable

7

Proforma Financial Information

The following unaudited proforma summary financial information presents the consolidated results of operations as if the acquisition of ESC had occurred on August 1, 2006. The pro forma results are shown for illustrative purposes only and do not purport to be indicative of the results that would have been reported if the acquisition had occurred on the date indicated or indicative of the results that may occur in the future. The results of operations of ESC are consolidated with the results of operations of the Company as of the acquisition date.

	For the nine months ended April 30,
	2008		2007
Revenues	$	70,488,183	$	72,055,316
Income from continuing operations		4,432,841		(297,331	)
Income from discontinued operations		—		928,366
Net income		4,432,841		631,035
Income available to common stockholders		4,282,885		597,610
Basic income per common stock:
Income from continuing operations	$	0.18	$	(0.01	)
Income from discontinued operations	$	0.00	$	0.04
Net Income	$	0.18	$	0.03
Diluted income per common stock:
Income from continuing operations	$	0.17	$	(0.02	)
Income from discontinued operations	$	0.00	$	0.04
Net Income	$	0.17	$	0.02

8

3. DISPOSITION OF ASSETS

On December 7, 2007, the Company, ESC, and j2 Global Communications, Inc. (“j2 Global”) entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) pursuant to which ESC sold to j2 Global certain assets and liabilities relating to and used in ESC’s web-based fax delivery service known as RapidFax. The net purchase price paid by j2 Global was $5.2 million in cash after adjustment, subject to a holdback amount as set forth in the Asset Purchase Agreement. No gain or loss was recognized from this sale.

4. ACQUIRED INTANGIBLE ASSETS

Intangible assets are summarized as follows:

	Weighted
	average
	amortization	April 30,			July 31,
	period (years)	2008			2007
Mapping technology	5	$	4,780,000		$	4,780,000
Purchased customer relationships	6-8		20,053,129			2,978,789
Internally developed systems	4		11,806,570			2,840,159
Trade names	<1		3,435,000			250,000
Intangible assets, gross			40,074,699			10,848,948
Less accumulated amortization:
Mapping technology			(4,780,000	)		(4,780,000	)
Purchased customer relationships			(2,757,915	)		(905,354	)
Internally developed systems			(3,346,430	)		(1,382,742	)
Trade names			(70,635	)		(43,849	)
Accumulated amortization			(10,954,980	)		(7,111,945	)
Intangible assets, net		$	29,119,719		$	3,737,003

5. LONG TERM DEBT

Notes payable at April 30, 2008 consist of the Series A Notes and the Series B Notes issued in connection with the ESC acquisition as follows:

	Series A			Series B			Total
Face value upon issuance
On August 20, 2007	$	35,052,708		$	35,052,708		$	70,105,416
Less:
Value of beneficial conversion feature		(7,761,885	)		(7,761,885	)		(15,523,770	)
Value of warrants		(3,504,577	)		(3,504,577	)		(7,009,154	)
Debt issue costs		(156,048	)		(156,047	)		(312,095	)
Net balance at August 20, 2007		23,630,198			23,630,199			47,260,397
Accretion of discounts as non-cash interest expense		3,111,807			3,055,327			6,167,134
Net balance at April 30, 2008		26,742,005			26,685,526			53,427,531
Current portion		1,941,477			1,945,899			3,887,376
Long term balance at April 30, 2008	$	24,800,528		$	24,739,627		$	49,450,155

9

As per the requirements of Emerging Issues Task Force Issue No. 98-5 as modified by Emerging Issues Task Force Issue
No. 00-27, we recorded a beneficial conversion feature amounting to $15.5 million upon the issuance of the Series A Notes and the Series B Notes and assigned a separate fair market value as determined by the Black-Scholes option pricing method to the Warrants issued under the Purchase Agreement related to the Notes amounting to approximately $7.0 million. These amounts, totaling $22.5 million, were recorded by proportionately reducing the face value of the Series A Notes and the Series B Notes on the date of issuance with the offset to additional paid-in capital. We then must recognize the $22.5 million as interest expense in our financial statements over the life of the Notes using the interest rate method. We have also recorded $316,000 of debt issue costs as a discount to the debt, and we will also recognize that amount as interest expense over the life of the Notes. Should any of the Series A or Series B Notes be converted to common stock as per their terms, any proportional amount of the remaining unrecognized $22.8 million as of the date of conversion will be recognized as interest expense.

We are also subject to quarterly financial covenants as long as any portion of the debt is outstanding, including minimum requirements for recurring revenue of $22.5 million; for EBITDA that range from $2.75 million to $4.5 million over the life of the Notes; and for the ratio of EBITDA to interest expense that range from 1.55 to 3.0 over the life of the Notes.

6. EQUITY TRANSACTIONS

On April 25, 2008, the holder of 250 shares of our Series D Convertible Redeemable Preferred Stock gave notice to convert all of such shares. Each share of Series D Convertible Redeemable Preferred Stock was convertible into 769.23 shares of Class A common stock, resulting in an issuance of 192,307 shares. The effective date of the conversion was April 25, 2008.

On April 7, 2008, a holder of 98,600 of our warrants exercised those warrants in exchange for 98,600 shares of Class A common stock at a price of $2.22, for a total of $218,892 in cash.

7. NEW ACCOUNTING PRONOUNCEMENTS

We will be required to adopt Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”) for the fiscal year beginning August 1, 2008. SFAS 157 provides a single definition of fair value and a hierarchical framework for measuring it, as well as establishing additional disclosure requirements about the use of fair value to measure assets and liabilities.

In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities” (“SFAS 159”). SFAS 159 provides the option to report certain financial assets and liabilities at fair value, with the intent to mitigate volatility in financial reporting that can occur when related assets and liabilities are recorded on different bases and is effective for fiscal years beginning after November 15, 2007. We are in the process of evaluating the impact of SFAS 159, if elected, on our results of operations and financial position.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment to ARB No. 51” (“SFAS 160”). Under the provisions of SFAS 160, a noncontrolling interest in a subsidiary, or minority interest, must be classified as equity, and the amount of consolidated net income specifically attributable to the minority interest must be clearly identified in the consolidated statement of operations. SFAS 160 also requires consistency in the manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any noncontrolling interest retained in a deconsolidation. SFAS 160 will be effective for our fiscal year beginning August 1, 2008. We are currently evaluating the impact of the adoption of SFAS 160 on our results of operations and financial position.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”), which requires additional disclosures about the objectives of the derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on our financial position, financial performance, and cash flows. SFAS 161 is effective for us beginning with our interim period ending January 31, 2009. We are currently assessing the potential impact that adoption of SFAS 161 may have on our financial statements.

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8. RECLASSIFICATIONS OF CERTAIN COSTS

During 2008, we re-categorized reporting of certain customer and technical service costs from cost of services to general and administrative expenses, as these costs have no direct relationship to generating revenue. As such, the following reclassifications have been made to the consolidated statements of operations for the three month period ended April 30, 2007 and the nine-month period ended April 30, 2007 (unaudited). Costs of services were reduced by $808,359 for the three months ended April 30, 2007 and reclassified to general and administrative expenses. Costs of services were reduced by $2,067,709 for the nine months ended April 30, 2007 and reclassified to general and administrative expenses.

The table below summarizes the reclassifications:

	Three months ended
	April 30, 2007					Three months ended
	Previously		Customer Service			April 30, 2007
	Reported		Reclassification			Reclassified
Cost of services	$	1,999,118	$	(808,359	)	$	1,190,759
General and administrative		1,780,780		808,359			2,589,139

	Nine months ended
	April 30, 2007					Nine months ended
	Previously		Customer Service			April 30, 2007
	Reported		Reclassification			Reclassified
Cost of services	$	5,828,093	$	(2,067,709	)	$	3,760,384
General and administrative		5,609,905		2,067,709			7,677,614

9. INCOME TAXES

As of April 30, 2008, we released a portion of our valuation allowance in connection with our use of net operating loss carryforwards to offset estimated taxable income for the current fiscal year ended July 31, 2008. This release of valuation allowance resulted in a benefit of approximately $4.4 million for the nine months ended April 30, 2008. We do not anticipate releasing any additional reserve for our fiscal 2008 results.

We continue to maintain a valuation allowance against most of our deferred tax asset balance, primarily related to our net operating loss carryforward amounts of $64 million. We are in the process of conducting a review of approximately $20.2 million in additional loss carryforwards from the ESC acquisition and will evaluate the results of that study, analyze our profitability projections for future years and make appropriate revisions, if any, to the remaining valuation allowance. We expect to complete this review no later than the end of fiscal year 2008.

We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, Accounting for Income Taxes” (“FIN 48”) on August 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

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The impact of adopting FIN 48 was not material to our financial position or results of operations. During the second fiscal quarter of the nine months ended April 30, 2008, we had a $563,000 release of our FIN 48 liability due to the settlement of audits in the United States ($63,000) and the expiration of the statute of limitations in a foreign jurisdiction ($500,000). We do not expect the remaining amount of unrecognized tax benefits to change significantly in the next twelve months.

We are not currently involved in any federal or state income tax examinations. We believe that there is no tax jurisdiction in which the outcome of unresolved issues or claims is likely to be material to our financial position, cash flows or results of operations. We further believe that we have made adequate provision for all income tax uncertainties.

10. COMMITMENTS AND CONTINGENCIES

Series A and B Notes:

The Series A Notes and the Series B Notes issued pursuant to our acquisition of ESC are convertible into shares of our class A common stock at a conversion price of $3.036 per share at any time. The security agreement limits the Purchasers’ investment in our stock to 9.9% of the outstanding shares at any time, thus limiting the number of shares that can be converted at any one time.

Representations and Warranties:

As part of our standard license agreements, we have agreed to indemnify our customers against liability if our products infringe a third party’s intellectual property rights. Historically, we have not incurred any significant costs related to performance under these indemnities. As of April 30, 2008, we are not subject to or aware of any potential significant litigation alleging that our products infringe the intellectual property rights of any third parties.

Letters of Credit:

We have provided cash collateral for certificates of deposit in the aggregate amount of $417,330 at April 30, 2008, which certificates of deposit serve as security deposits for certain lease agreements.

Legal Proceedings:

From time to time, the Company 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 above mentioned legal matters will have a material adverse effect on our consolidated financial position, results of operations or cash flow.

Penalty for Failure to Register Shares:

Under the terms of the Purchase Agreement (as amended to date), if we fail to have a registration statement declared effective by the SEC for the underlying class A common shares required for the conversion of the Notes or exercise of the Warrants within 120 days after notice is requested, we will be subject to a monthly penalty of 1% of the principal amount of the outstanding Series A Notes and the Series B Notes or the value of the registrable securities underlying the Warrants. The penalty continues to apply for each month of failure to register such shares. As of June 9, 2008, we have not received a request from the Purchasers regarding conversion and registration.

In addition, if our class A common shares are no longer listed or quoted or are suspended from trading for more than three consecutive days on an eligible market, as defined in the Purchase Agreement, a penalty equal to 1% of the principal amount of the outstanding Notes would also be due. Under SFAS No. 5, “Accounting for Contingencies,” our management believes that the likelihood of these conditions taking place is remote.

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New York State Sales Tax Assessment:

As a result of a New York state sales tax audit completed in 2005 of EasyLink Services International, Inc., a dissolved subsidiary of ESC, we were assessed approximately $448,000 in New York sales taxes, penalties and interest on revenue for the period of March 1, 2001 through May 31, 2004. A study prepared by an independent tax consultant concluded that our Email and EDI services were not subject to any New York sales tax. Fax and telex services that were intrastate rather than interstate would have been subject to tax in New York if deemed to be “telecommunications services.” Our fax and telex services provide enhanced services to customers as opposed to mere transport, thereby distinguishing those services from “telecommunications services.” As a consequence, we believe that none of our fax or telex services are “telecommunications services” or are intrastate in nature, and that none of these revenues should be subject to New York state sales or local taxes.

We have appealed the assessment to an administrative law judge. The administrative law judge heard oral arguments in a hearing that took place over two days in the second half of 2007. We filed a supplemental brief in support of our position and received a response from the State of New York in early March 2008. We replied on March 31, 2008. A ruling is expected during the second half of the calendar year. We have accrued $356,000 in respect of this assessment as of April 30, 2008.

11. BUSINESS SEGMENT INFORMATION

Our two reportable segments are:

• Supply Chain Messaging segment, which includes VAN services, browser-based and hosted applications, EDI outsourcing and services, mapping and professional services, and telex services; and

• On Demand Messaging segment, which includes the integrated desktop messaging services, other fax services, DCM services, and the workflow service obtained in the ESC acquisition.

We changed our reportable segments for the 2008 fiscal year to better reflect our current business as a result of the ESC acquisition. The previous two segments, Electronic Commerce Solutions and Electronic Commerce Services, were combined into the new Supply Chain Messaging segment along with the EDI services and telex services acquired in the ESC acquisition. The On Demand Messaging segment was formed and consolidates the other ESC services described above. In reporting segment operating income, we allocate operating expenses that are directly related to the development and delivery of a reporting segment’s products and services.

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The table below summarizes information about operations for the three months ended April 30, 2008 and 2007:

	Supply Chain		On Demand		Total
Three Months Ended April 30, 2008
Revenue from external customers	$	12,317,430	$	11,282,266	$	23,599,696
Segment gross profit	$	9,213,492	$	7,684,762	$	16,898,254

The following is a reconciliation of operating segment income to net income for the three months ended April 30, 2008:

Segment gross profit	$	16,898,254
Corporate expenses		12,376,642
Operating income		4,521,612
Other income (expense), net		(2,003,880	)
Income before income taxes		2,517,732
Income tax benefit		(4,418,376	)
Net income	$	6,936,108

	Supply Chain		On Demand		Total
Three Months Ended April 30, 2007
Revenue from external customers	$	5,390,270		—	$	5,390,270
Segment gross profit	$	4,199,511		—	$	4,199,511

The following is a reconciliation of operating segment income to net income for the three months ended April 30, 2007:

Segment gross profit	$	4,199,511
Corporate expenses		(3,564,564	)
Operating income		634,947
Other income (expense), net		51,353
Income before income taxes		686,300
Income tax expense		135,097
Net income	$	551,203

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The table below summarizes information about operations for the nine months ended April 30, 2008 and 2007:

	Supply Chain		On Demand		Total
Nine Months Ended April 30, 2008
Revenue from external customers	$	36,246,455	$	31,989,912	$	68,236,367
Segment gross profit	$	26,893,641	$	21,596,968	$	48,490,609

The following is a reconciliation of operating segment income to net income for the nine months ended April 30, 2008:

Segment gross profit	$	48,490,609
Corporate expenses		36,110,088
Operating income		12,380,521
Other income (expense), net		(9,795,707	)
Income before income taxes		2,584,814
Income tax benefit		(5,612,515	)
Net income	$	8,197,329

	Supply Chain		On Demand		Total
Nine Months Ended April 30, 2007
Revenue from external customers	$	16,500,465		—	$	16,500,465
Segment gross profit	$	12,740,081		—	$	12,740,081

The following is a reconciliation of operating segment income to net income for the nine months ended April 30, 2007:

Segment gross profit	$	12,740,081
Corporate expenses		10,844,696
Operating income		1,895,385
Other income (expense), net		153,189
Income before income taxes		2,048,574
Income tax expense		219,367
Net income	$	1,829,207

12. SUBSEQUENT EVENTS

Beginning in May, 2008, we began to repurchase stock in accordance with a stock buyback program resolution adopted recently by our Board of Directors. On May 1, 2008, York Capital Management, L.P. and the other Purchasers who are party to the Securities Purchase Agreement dated May 3, 2007 (as amended, the “Purchase Agreement”) executed and delivered to the Company a Conditional Waiver and Consent to Repurchase of Common Shares, waiving the provisions of the Purchase Agreement that restricted the Company from repurchasing its own common stock to the extent that the Company’s repurchase does not exceed one million shares of the Company’s Series A common stock and that such repurchases are consummated on or before December 31, 2008. Pursuant to the resolutions adopted by our Board of Directors, all such repurchases must be made in accordance with Rule 10b-18 promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934.

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

All statements, trend analyses and other information, other than statements of historical facts, contained in the following discussion related to 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,” “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 Act and the Exchange Act.

Although we believe 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 annual report as anticipated, believed, estimated, expected or intended.

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, and valuation of investments 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.

Beneficial Conversion Feature and Accretive Interest Expense – As per the requirements of Emerging Issues Task Force Issue No. 98-5 as modified by Emerging Issues Task Force Issue No. 00-27, the Company has recognized a beneficial conversion feature of approximately $15.5 million upon issuance of the Series A Notes and Series B Notes and assigned a separate fair market value as determined by the Black-Scholes option pricing model to the Warrants issued under the Purchase Agreement of approximately $7.0 million. The combined amounts for the beneficial conversion feature and the Warrants of approximately $22.5 million proportionately reduced the face value recorded for the Series A Notes and Series B Notes on the date of issuance with the offset going to additional paid-in-capital. The Company will accrete the $22.5 million through the profit and loss statement as interest expense using the interest rate method over the life of the Series A Notes and Series B Notes. Should any of the Series A Notes and Series B Notes be converted to common stock as per their terms, any proportional amount of the remaining unaccreted $22.5 million as of the date of conversion will be recognized as interest expense. The accretive interest recorded for the first nine months of the year equals approximately $6.2 million.

For a more detailed description on the application of these and other accounting policies, see Note 2 of the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2007. Reference is also made to the discussion of the application of these critical accounting policies and estimates contained in Management’s Discussion and Analysis of Financial Condition and Results of Operation in our Annual Report on Form 10-K for fiscal 2007. During the three months ended April 30, 2008, there were no significant or material changes in the application of critical accounting policies that would require an update to the information provided in the Form 10-K for fiscal 2007.

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Nine Months Ended April 30, 2008 Compared with the Nine Months Ended April 30, 2007
Results of Operations

The following table reflects consolidated operating data by reported segment. All significant inter-segment and inter-company activities have been eliminated.

	Nine Months Ended April 30,
	2008			2007		Variance
Revenue:
Supply Chain Messaging
EDI Services	$	27,863,355		$	16,500,465	$	11,362,890
Telex Services		8,383,100			—		8,383,100
Total Supply Chain Messaging		36,246,455			16,500,465		19,745,990
On Demand Messaging
Fax Services		25,452,140			—		25,452,140
DCM Services		2,085,282			—		2,085,282
Other Services		4,452,490			—		4,452,490
Total On Demand Messaging		31,989,912			—		31,989,912
Total Revenue:		68,236,367			16,500,465		51,735,902
Cost of Revenue:
Supply Chain Messaging		9,352,814			3,760,384		5,592,430
On Demand Messaging		10,392,944			—		10,392,944
		19,745,758			3,760,384		15,985,374
Gross Margin:
Supply Chain Messaging		26,893,641			12,740,081		14,153,560
On Demand Messaging		21,596,968			—		21,596,968
		48,490,609			12,740,081		35,750,528
Product Development and Enhancement		5,983,736			1,898,177		4,085,559
Selling and Marketing		8,207,447			1,268,905		6,938,542
General and Administrative		21,918,906			7,677,614		14,241,292
		36,110,089			10,844,696		25,265,392
Other (expense) income		(9,795,706	)		153,189		(9,948,895	)
Income before income taxes	$	2,584,814		$	2,048,574	$	536,241

Revenue – Total revenue for the nine month period ended April 30, 2008, was $68.2 million, an increase of $51.7 million as compared to the nine-month period ended April 30, 2007. This increase is due to the acquisition of ESC in August 2007.

The Supply Chain Messaging segment grew $19.7 million from the nine-month period ended April 30, 2007 as compared to the nine-month period ended April 30, 2008. This increase included $8.4 million from telex services and $11.3 million from EDI services acquired from ESC. The portion of the business that generated the $16.5 million in EDI services in the 2007 fiscal period decreased $600,000 during the 2008 fiscal period due to less demand for EDI professional and managed services. The Supply Chain Messaging segment comprises approximately 53% of our revenue during the 2008 nine-month period.

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The On Demand Messaging segment is made up entirely of service lines acquired from ESC in August 2007. As a result, there is no comparability to the nine-month period ended April 30, 2007. The On Demand Messaging segment comprises approximately 47% of our revenue during the 2008 nine-month period.

Cost of Revenue – Total cost of revenue increased $16.0 million from the nine-month period ended April 30, 2007 compared to the nine-month period ended April 30, 2008. Again, this increase is due primarily to the acquisition of ESC during the first quarter of fiscal 2008. Cost of revenue consists mainly of telecommunication costs, which include interconnect, data line and telephone costs and network operating costs, which includes salaries, benefits, depreciation, rent, utilities and other operating costs. For the period ended April 30, 2008, telecommunication costs increased $9.4 million from the period ended April 30, 2007 and network operating costs increased $6.3 million from the same period ended in 2007.

Product Development – Product development costs increased $4.1 million from the nine months ended April 30, 2007 compared to the nine months ended April 30, 2008 due mainly to increased costs that were the result of the ESC acquisition. The increased costs consisted mainly of a $3.2 million increase in labor and benefits; an increase of $303,000 in rent, utilities and other operating expenses and a $263,000 increase in consultant and professional services.

Selling and Marketing – Selling and marketing expenses increased $6.9 million from the nine months ended April 30, 2007 to the nine months ended April 30, 2008 due mainly to increased costs that were the result of the ESC acquisition. The increased costs consisted of $4.7 million in labor and benefits, $1.4 million in external commissions, $330,000 in outside marketing expenses $256,000 in travel expenses and $133,000 in rent, utilities and other operating expenses.

General and Administrative – General and administrative expenses increased $14.2 million from the nine months ended April 30, 2007 to the nine months ended April 30, 2008 due mainly to increased costs that were the result of the ESC acquisition. The increased costs consisted mainly of $4.9 million in labor and benefits costs, $2.7 million in rent, utilities and other operating expenses, $1.2 million in professional and legal fees, $375,000 in software and hardware expenses, $230,000 in bank fees and $169,000 in insurance expenses. In addition to the regular operating expenses mentioned above, there was $3.1 million in amortization on the intangibles acquired in the acquisition.

Other Expense – Other expenses for the nine-month period ended April 30, 2008 consist mainly of interest expense of $10.5 million and a loss recorded under the equity method of $930,000 from our 20.7% ownership of ESC common stock outstanding prior to the acquisition on August 20, 2007. These expenses were partially offset by approximately $600,000 of interest income and approximately $914,000 of foreign exchange gains during the nine months ended April 30, 2008. Interest expense consists of $6.2 million for the non-cash interest expense (see Note 5, Long Term Debt, to the Interim Condensed Consolidated Financial Statements) and $4.3 million for interest on the outstanding debt.

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Three Months Ended April 30, 2008 Compared with the Three Months Ended April 30, 2007
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,
	2008			2007		Variance
Revenue:
Supply Chain Messaging
EDI Services	$	9,410,015		$	5,390,270	$	4,019,745
Telex Services		2,907,415			—		2,907,415
Total Supply Chain Messaging		12,317,430			5,390,270		6,927,160
On Demand Messaging
Fax Services		9,045,614			—		9,045,614
DCM Services		708,822			—		708,822
Other Services		1,527,830			—		1,527,830
Total On Demand Messaging		11,282,266			—		11,282,266
Total Revenue:		23,599,696			5,390,270		18,209,426
Cost of Revenue:
Supply Chain Messaging		3,103,939			1,190,759		1,913,180
On Demand Messaging		3,597,503			—		3,957,503
		6,701,442			1,190,759		5,510,683
Gross Margin:
Supply Chain Messaging		9,213,491			4,199,511		5,013,980
On Demand Messaging		7,684,763			—		7,684,763
		16,898,254			4,199,511		12,698,743
Product Development and Enhancement		2,111,513			595,836		1,515,677
Selling and Marketing		2,897,718			379,589		2,518,129
General and Administrative		7,367,411			2,589,139		4,778,272
		12,376,642			3,564,564		8,812,078
Other (expense) income		(2,003,880	)		51,353		(2,055,233	)
Income before income taxes	$	2,517,732		$	686,300	$	1,831,432

Revenue – Total revenue for the three months ended April 30, 2008, was $23.6 million, an increase of $18.2 million as compared to the three-month period ended April 30, 2007. This increase is primarily due to the acquisition of ESC in August 2007.

The Supply Chain Messaging segment grew $6.9 million from the three-month period ended April 30, 2007 as compared to the three-month period ended April 30, 2008. This increase included $2.9 million from telex services and $4.0 million from EDI services acquired from ESC. The portion of the business that generated the $5.4 million in EDI services in the 2007 fiscal period decreased $300,000 during the 2008 fiscal period due to less demand for EDI professional and managed services. The Supply Chain Messaging segment comprises approximately 52% of our revenue during the 2008 three-month period.

The On Demand Messaging segment is made up entirely of service lines acquired from ESC in August 2007. As a result, there is no comparability to the three-month period ended April 30, 2007. The On Demand Messaging segment comprises approximately 48% of our revenue during the 2008 three-month period.

Cost of Revenue – Total cost of revenue increased $5.5 million from the three-month period ended April 30, 2007 compared to the three-month period ended April 30, 2008 due primarily to the acquisition of ESC during the first quarter of fiscal 2008. Cost of revenue consists mainly of telecommunication costs, which include interconnect, data line and telephone costs, and network operating costs, which includes salaries, benefits, depreciation, rent, utilities and other operating costs. For the period ended April 30, 2008, telecommunication costs increased $3.2 million from the period ended April 30, 2007 and network operating costs increased $2.2 million from the same period ended in 2007.

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Product Development – Product development costs increased $1.5 million from the three-month period ended April 30, 2007 compared to the three-month period ended April 30, 2008 due mainly to increased costs that were the result of the ESC acquisition. The increased costs consisted mainly of $1.2 million in labor and benefits costs, $106,000 in rent, utilities and other operating expenses, and $75,000 in consultant and professional services costs.

Selling and Marketing – Selling and marketing expenses increased $2.5 million from the three month period ended April 30, 2007 to the three month period ended April 30, 2008 due mainly to increased costs that were the result of the ESC acquisition. The increased costs consisted mainly of $1.6 million in labor and benefits costs, $456,000 in external commissions, $111,000 in travel expenses and $57,000 in rents, utilities and other operating expenses.

General and Administrative – General and administrative expenses increased $4.8 million from the three month period ended April 30, 2007 to the three month period ended April 30, 2008 due mainly to increased costs that were the result of the ESC acquisition. The increased cost consisted mainly of $1.8 million in labor and benefits costs, $919,000 in rent, utilities and other operating expenses, $416,000 in professional and legal fees, $144,000 in software and hardware expenses, and $64,000 in bank fees. In addition to the regular operating expenses mentioned above, there was $1.1 million in amortization on the intangibles acquired in the acquisition.

Other Expense – Other expenses for the three-month period ended April 30, 2008 consists mainly of interest expense of $2.3 million, including $1.1 million in non-cash interest and $1.2 million in interest on the outstanding debt. Interest expense is also partially offset by $163,000 of interest income and approximately $128,000 of foreign exchange gains.

Liquidity and Capital Resources

Our principal source of liquidity consists of cash and cash equivalents and increased approximately $21.7 million for a total of approximately $27.2 million as of April 30, 2008 from approximately $5.4 million as of April 30, 2007. This increase in cash was primarily generated by $59.8 million in borrowings under the Series A Notes and Series B Notes issued in connection with the ESC acquisition. $51.6 million of this cash was used along with the $13.2 million of ESC common stock previously acquired to purchase ESC. We also added $4.5 million in cash from the sale of our RapidFax assets. In addition to the cash flow from the financing and investing activities, we generated $5.7 million of cash from operations. We believe these resources will provide us with sufficient liquidity to continue in operation for at least the next four fiscal quarters.

We have net operating loss (“NOL”) carryforwards for tax purposes of approximately $64 million as of April 30, 2008. These NOL carryforwards expire from 2011 to 2025. The Internal Revenue Code and Income Tax Regulations contain provisions which limit the use of available NOL carryforwards in any given year should significant changes (greater than 50%) in ownership interests occur. Our annual NOL carryforward limitations prior to the acquisition of ESC were $5.4 million. We are in the process of evaluating the possible limitations of the ESC NOL carryforwards because of the ownership change and have fully reserved the $20.2 million of the ESC NOL carryforward as of April 30, 2008. Due to the NOL carryforwards, we do not expect to make material cash outlays for US federal and state taxes during the next twelve months.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Tabular Disclosure of Contractual Obligations

We enter into many contractual and commercial undertakings during the ordinary course of business. The following table summarizes information about certain of our obligations at April 30, 2008. The table should be read together with the Notes to the Interim Consolidated Financial Statements beginning on page 6 of this Quarterly Report.

	Payment due by period
			Less than		1-3		3-5		More than
Contractual Obligations	Total		1 year		years		years		5 years
Operating Lease Obligations	$	13,915,508	$	3,362,499	$	6,207,979	$	3,098,742	$	1,246,288
Series A and B Notes	$	70,105,416	$	4,673,694	$	56,084,333	$	9,347,389	$	—
Total	$	84,020,924	$	8,036,193	$	62,292,312	$	12,446,131	$	1,246,288

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We believe that we are primarily exposed to interest rate risk. Interest rate risk refers to fluctuations in the value of a security resulting from changes in the general level of interest rates. Investments that are classified as cash and cash equivalents have original maturities of three months or less. Changes in interest rates may affect the value of these investments.

The Series A Notes and the Series B Notes issued in conjunction with the acquisition of ESC have interest rates that are tied to the prime rate. The interest rate on the Notes is also adjusted downward based on the ratio of current market price for our stock verses the conversion price if a certain volume weighted average price of our stock is maintained. These interest rate provisions expose us to interest rate risk.

With the acquisition of ESC, the portion of our revenue from foreign sources and the portion of our expenses denominated in foreign currencies are expected to increase, which may subject us to currency exchange risk.

We may invest our cash in a variety of financial instruments. If invested, we account for our investment instruments in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”). All of the cash equivalents and investments are treated as available-for-sale under SFAS 115. Investments that are classified as cash and cash equivalents have original maturities of three months or less. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may vary widely due to changes in interest rates, or we may suffer losses in principal if forced to sell securities that have seen a decline in market value due to changes in interest rates. For the quarter ended April 30, 2008, our cash investments consisted entirely of overnight cash sweep accounts invested in a fund composed primarily of triple A rated commercial paper and government agency bonds. As of April 30, 2008, the interest rate for these investments ranged from 2.43% to 3.15%.

Item 4. Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, has carried out an evaluation of the effectiveness of our disclosure controls and procedures as of April 30, 2008, pursuant to Exchange Act Rules 13a-15(e) and
15d-15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of such date our disclosure controls and procedures in place were effective to ensure material information and other information requiring disclosure is identified and communicated on a timely basis. There were no changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

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.

Item 1A. Risk Factors

The following Risk Factor disclosure updates the risk factors as disclosed in our 2007 Annual Report on Form 10-K previously filed with the SEC.

Our business could be adversely affected by unfavorable general economic and business conditions. Most of our customers are businesses that use our services for business purposes. If the general economic or business climate should become unfavorable, those factors might cause fewer new customers to purchase our services, might cause existing customers to use our services less frequently and might cause some customers to cease using our services. Any such outcomes could negatively affect our ability to generate revenue.

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We may not be profitable in the future.We have incurred significant losses since our inception in 1991, and, as of April 30, 2008, we had an accumulated deficit of approximately $71.8 million. As per the requirements of Emerging Issues Task Force Issue No. 98-5 as modified by Emerging Issues Task Force Issue No. 00-27, we recorded a beneficial conversion feature amounting to $15.5 million upon the issuance of the Series A Notes and the Series B Notes discussed earlier and assigned a separate fair market value as determined by the Black-Scholes option pricing method to the Warrants issued under the Purchase Agreement related to the Notes amounting to $7.0 million. These amounts, totaling $22.5 million, were recorded by proportionately reducing the face value of the Series A Notes and Series B Notes on the date of issuance with the offset to additional paid-in capital. We will accrete the $22.5 million through the profit and loss statement as interest expense using the interest rate method over the life of the Notes. This accretion will have a negative effect on our earnings.

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.

Item 6. Exhibits

10.1*	Amended and Restated Employment Agreement between EasyLink Services International Corporation and Thomas J. Stallings dated April 1, 2008 (incorporated by Reference to the Company’s Current Report onForm 8-K (File No. 000-24996), dated April 1, 2008, as filed with the Securities and Exchange Commission on April 2, 2008).
10.2*	Amended and Restated Employment Agreement between EasyLink Services International Corporation and Glen E. Shipley dated April 1, 2008 (incorporated by Reference to the Company’s Current Report onForm 8-K (File No. 000-24996), dated April 1, 2008, as filed with the Securities and Exchange Commission on April 2, 2008).
10.3*	Amended and Restated Employment Agreement between EasyLink Services International Corporation and Kevin R. Maloney dated April 1, 2008 (incorporated by Reference to our Current Report on Form 8-K (File No. 000-24996), dated April 1, 2008, as filed with the Securities and Exchange Commission on April 2, 2008).
10.4*	Amended and Restated Employment Agreement between EasyLink Services International Corporation and John Mecke dated April 1, 2008 (incorporated by Reference to the Company’s Current Report on Form 8-K (File No. 000-24996), dated April 1, 2008, as filed with the Securities and Exchange Commission on April 2, 2008).

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10.5*	Amended and Restated Employment Agreement between EasyLink Services International Corporation and Terri Deuel dated April 1, 2008 (incorporated by Reference to our Current Report on Form 8-K (File No. 000-24996), dated April 1, 2008, as filed with the Securities and Exchange Commission on April 2, 2008).
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.

* Confidential Treatment has been requested with respect to portions of this Exhibit. The omitted portions of this Exhibit were filed separately with the Securities and Exchange Commission.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 16, 2008

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

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EXHIBIT INDEX

Exhibits		Description
	10.1*	Amended and Restated Employment Agreement between EasyLink Services International Corporation and Thomas J. Stallings dated April 1, 2008 (incorporated by Reference to the Company’s Current Report on Form 8-K (File No. 000-24996), dated April 1, 2008, as filed with the Securities and Exchange Commission on April 2, 2008).
	10.2*	Amended and Restated Employment Agreement EasyLink Services International Corporation andGlen E. Shipley dated April 1, 2008 (incorporated by Reference to the Company’s Current Report on Form 8-K (File No. 000-24996), dated April 1, 2008, as filed with the Securities and Exchange Commission on April 2, 2008).
	10.3*	Amended and Restated Employment Agreement EasyLink Services International Corporation andKevin R. Maloney dated April 1, 2008 (incorporated by Reference to the Company’s Current Report on Form 8-K (File No. 000-24996), dated April 1, 2008, as filed with the Securities and Exchange Commission on April 2, 2008).
	10.4*	Amended and Restated Employment Agreement EasyLink Services International Corporation andJohn Mecke dated April 1, 2008 (incorporated by Reference to the Company’s Current Report on Form 8-K (File No. 000-24996), dated April 1, 2008, as filed with the Securities and Exchange Commission on April 2, 2008).
	10.5*	Amended and Restated Employment Agreement EasyLink Services International Corporation andTerri Deuel dated April 1, 2008 (incorporated by Reference to the Company’s Current Report on Form 8-K (File No. 000-24996), dated April 1, 2008, as filed with the Securities and Exchange Commission on April 2, 2008).
	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.

* Confidential Treatment has been requested with respect to portions of this Exhibit. The omitted portions of this Exhibit were filed separately with the Securities and Exchange Commission.

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