UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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 January 31, 2012 or
For the quarterly period ended April 30, 2012 or
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____

Commission File Number: 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 þ 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 þ 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 o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o

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

As of ~~March~~May 522, 2012, the issuer had outstanding 32,~~008~~118,~~192~~325 shares of class A common stock, $0.01 par value.

EASYLINK SERVICES INTERNATIONAL CORPORATION

INDEX TO FORM 10-Q

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)	1
Condensed Consolidated Balance Sheets as of January 31, 2012 and July 31, 2011	1
Condensed Consolidated Balance Sheets as of April 30, 2012 and July 31, 2011	1
Condensed Consolidated Statements of Operations for the three and six months ended January 31, 2012 and 2011	2
Condensed Consolidated Statements of Operations for the three and nine months ended April 30, 2012 and 2011	2
Condensed Consolidated Statements of Other Comprehensive Income for the three and six months ended January 31, 2012 and 2011	3
Condensed Consolidated Statements of Other Comprehensive Income for the three and nine months ended April 30, 2012 and 2011	3
Condensed Consolidated Statements of Cash Flows for the six months ended January 31, 2012 and 2011	4
Condensed Consolidated Statements of Cash Flows for the nine months ended April 30, 2012 and 2011	4
Notes to Condensed Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1922
Item 3. Quantitative and Qualitative Disclosures about Market Risk	2528
Item 4. Controls and Procedures	2629
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	2730
Item 1A. Risk Factors	2731
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	2732
Item 3. Defaults Upon Senior Securities	2732
Item 4. Mine Safety Disclosures	2732
Item 5. Other Information	2732
Item 6. Exhibits	2833
Signatures	2934

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

EASYLINK SERVICES INTERNATIONAL CORPORATION

Condensed Consolidated Balance Sheets

As of ~~January~~April 3130, 2012 and July 31, 2011

(In thousands, except per share data)

(Unaudited)

	January 31, 2012			July 31, 2011
	April 30, 2012			July 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	2122,~~655~~535		$	30,178
Accounts receivable, net of allowance for doubtful accounts and allowance for sales returns and allowances of $2,267 and $2,897, respectively	26,154			29,752
Accounts receivable, net of allowance for doubtful accounts and allowance for sales returns and allowances of $2,097 and $2,897, respectively	28,087			29,752
Prepaid expenses and other current assets	53,~~437~~310			3,956
Deferred income taxes	12,~~768~~127			3,709
Total current assets	5556,~~014~~059			67,595
Property and equipment, net of accumulated depreciation of $21,993 and $21,083, respectively	9,504			10,127
Property and equipment, net of accumulated depreciation of $24,067 and $21,083, respectively	9,432			10,127
Goodwill	73,~~226~~238			73,494
Other intangible assets, net	6361,~~951~~629			68,615
Deferred income taxes, net	22,~~380~~532			22,507
Other assets	~~537~~562			721
Total assets	$	~~224~~223,~~612~~452		$	243,059
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	45,~~901~~595		$	5,527
Notes payable	1715,~~886~~978			28,088
Accrued expenses	1715,~~485~~964			19,051
Deferred revenue and other current liabilities	21,~~179~~889			3,360
Total current liabilities	4239,~~451~~426			56,026
Notes payable, net of current portion	6763,654			80,174
Deferred income taxes, net	67,~~669~~279			6,940
Other liabilities	~~883~~741			814
Total liabilities	~~117~~111,~~657~~100			143,954
Commitments and contingencies
Stockholders’ Equity:
Preferred stock: 5,000 shares authorized, including 3 shares of series E and 100 shares of series F; no shares issued or outstanding	—			—
Common stock: class A - par value $.01 per share, 300,000 shares authorized, one vote per share; 33,008 and 32,432 shares issued at January 31, 2012 and July 31, 2011, respectively	330			324
Common stock: class A - par value $.01 per share, 300,000 shares authorized, one vote per share; 33,113 and 32,432 shares issued at April 30, 2012 and July 31, 2011, respectively	331			324
Additional paid-in capital	140,~~172~~876			137,467
Treasury stock — 1,000 shares as of January 31, 2012 and July 31, 2011	(2,122		)	(2,122		)
Treasury stock — 1,000 shares as of April 30, 2012 and July 31, 2011	(2,122		)	(2,122		)
Accumulated other comprehensive loss	(3,~~821~~458		)	(2,789		)
Accumulated deficit	(2723,~~604~~275		)	(33,775		)
Total stockholders’ equity	~~106~~112,~~955~~352			99,105
Total liabilities and stockholders’ equity	$	~~224~~223,~~612~~452		$	243,059

See accompanying notes which are an integral part of these condensed consolidated financial statements.

EASYLINK SERVICES INTERNATIONAL CORPORATION

Condensed Consolidated Statements of Operations

For the three and ~~six~~nine months ended ~~January~~April 3130, 2012 and 2011

(In thousands, except per share data)

(Unaudited)

Three Months

~~Six~~Nine Months

2012

2011

2012

2011

Service revenues, net

4445,~~505~~405

47,~~425~~782

91136,~~520~~924

70117,~~160~~942

Cost of services

1415,~~566~~317

1716,~~494~~388

3045,~~274~~591

2440,~~085~~473

Gross profit

2930,~~939~~088

2931,~~931~~394

6191,~~246~~333

4677,~~075~~469

Operating expenses:

Product development and enhancement

3,~~038~~261

3,~~557~~338

69,~~037~~298

58,~~496~~833

Selling and marketing

6,~~386~~726

6,~~776~~750

1219,~~913~~639

916,~~733~~483

General and administrative

12,~~622~~583

12,~~399~~841

2639,~~877~~461

1932,~~988~~829

Acquisition and integration related

—1,033

~~817~~—

~~448~~1,480

2,415

Total Operating expenses

2223,~~046~~603

2322,~~549~~929

4669,~~275~~878

3760,~~632~~560

Operating income

76,~~893~~485

68,~~382~~465

1421,~~971~~455

816,~~443~~909

Other income (expense):

Interest expense

(1,~~431~~262

)

(1,~~598~~651

)

(24,~~989~~250

)

(24,~~411~~063

)

Other non-operating income (expense)

(~~438~~643

)

23163

(~~417~~1,060

)

~~334~~498

Total Other income (expense)

(1,~~869~~905

)

(1,~~575~~488

)

(35,~~406~~310

)

(23,~~077~~565

)

Income before income taxes

64,~~024~~580

46,~~807~~977

1116,~~565~~145

613,~~366~~344

Provision for income taxes

~~3,155~~251

12,~~868~~637

5,~~394~~645

25,~~460~~098

Net Income

24,~~869~~329

24,~~939~~340

610,~~171~~500

38,~~906~~246

Dividends on preferred stock

—

~~(1,962~~—

)

—

(2,012

)

Net income attributable to common stockholders

24,~~869~~329

~~977~~4,340

610,~~171~~500

16,~~894~~234

Basic net income per common share

0.0914

0.0314

0.1933

0.0621

Diluted net income per common share

0.0913

0.0313

0.1932

0.0620

Weighted average number of common shares outstanding – basic

3132,~~936~~040

2930,~~448~~184

31,~~805~~882

29,~~354~~625

Weighted average number of common shares outstanding – diluted

33,~~084~~360

3132,~~563~~296

33,~~106~~190

3031,~~890~~353

See accompanying notes which are an integral part of these condensed consolidated financial statements.

EASYLINK SERVICES INTERNATIONAL CORPORATION

Condensed Consolidated Statements of Other Comprehensive Income

For the three and ~~six~~nine months ended ~~January~~April 3130, 2012 and 2011

(In thousands)

(Unaudited)

	Three Months					~~Six~~Nine Months
	2012		2011			2012			2011
Net Income	$	24,~~869~~329	$	24,~~939~~340		$	610,~~171~~500		$	38,~~906~~246
Other comprehensive income:
Foreign currency translation, net of tax	770		121			(962		)	341
Foreign currency translation	216		2,695			(746		)	3,036
Net unrealized gain (loss) on derivative instrument, net of tax	—148		—(499		)	~~(70~~77		)	—(499		)
Net change to derive comprehensive income for the period, net of tax	~~770~~364		~~121~~2,196			(~~1,032~~669		)	~~341~~2,537
Comprehensive income	$	34,~~639~~693	$	36,~~060~~536		$	59,~~139~~831		$	410,~~247~~783

See accompanying notes which are an integral part of these condensed consolidated financial statements.

EASYLINK SERVICES INTERNATIONAL CORPORATION

Condensed Consolidated Statements of Cash Flows

For the ~~six~~nine months ended ~~January~~April 3130, 2012 and 2011

(In thousands)

(Unaudited)

	Six Months
	Nine Months
	2012			2011
Cash flows from operating activities:
Net Income	$	610,~~171~~500		$	38,~~906~~246
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	69,~~453~~634			69,~~922~~955
Bad debt expense	2(82		)	~~701~~1,001
Amortization of discount and other non-cash interest expense	~~325~~476			~~678~~849
Deferred income taxes, net	12,~~799~~821			14,~~763~~382
Non-cash charges for equity instruments issued for compensation and services	12,~~647~~093			~~650~~927
Changes in assets and liabilities:
Accounts receivable	42,~~091~~204			(35,~~925~~447		)
Prepaid expenses and other assets	(1,~~222~~631		)	(~~595~~3,282		)
Accounts payable	(~~655~~8		)	~~(1,319~~489		)
Accrued expenses	(12,~~934~~985		)	~~2,037~~502
Other liabilities	(12,~~078~~942		)	21,~~110~~672
Net cash provided by operating activities	1523,~~599~~342			1219,~~928~~294
Cash flows from investing activities:
Purchases of property and equipment	(12,~~392~~397		)	(1,~~075~~696		)
Acquisition, net of cash acquired	—			(101,~~314~~166		)
Net cash used in investing activities	(12,~~392~~397		)	(102,~~389~~862		)
Cash flows from financing activities:
Proceeds from sale of stock and exercise of options	1,~~003~~314			—570
Borrowings of notes payable	5,~~150~~350			122,000
Repayments of notes payable and capital lease	(2834,~~199~~424		)	(31,~~769~~770		)
Dividends paid	—			(200		)
Net cash (used in) provided by financing activities	(2227,~~046~~760		)	90,~~031~~600
Effect of foreign exchange rate changes on cash and cash equivalents	(~~684~~828		)	~~178~~421
Net (decrease) increase in cash and cash equivalents	(87,~~523~~643		)	~~748~~7,453
Cash and cash equivalents, beginning of period	30,178			20,475
Cash and cash equivalents, end of period	$	2122,~~655~~535		$	2127,~~223~~928

See accompanying notes which are an integral part of these condensed consolidated financial statements.

EASYLINK SERVICES INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements

(tabular data in thousands, except per share data)

(Unaudited)

1. BASIS OF PRESENTATION

These condensed consolidated financial statements of EasyLink Services International Corporation (referred to as “EasyLink,” the “Company,” “we,” “our” or “us”) have been prepared by the Company, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and, in the opinion of the Company, include all adjustments (which are normal and recurring in nature) necessary to present fairly the financial position of the Company at ~~January~~April 3130, 2012 and July 31, 2011, and the results of operations for the three and ~~six~~nine months ended ~~January~~April 3130, 2012 and 2011 and the cash flows for the ~~six~~nine months ended ~~January~~April 3130, 2012 and 2011. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such SEC rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended July 31, 2011.

Operating results for the three and ~~six~~nine months ended ~~January~~April 3130, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2012 or any future period.

(a) Principles of consolidation and basis of presentation

The consolidated financial statements include the accounts of EasyLink and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The Company's fiscal year ends July 31. References herein to Fiscal 2012 and Fiscal 2011 refer to the fiscal years ended July 31, 2012 and 2011, respectively.

(b) Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Significant accounting estimates used in the preparation of the Company's consolidated financial statements include the fair value of equity securities underlying stock based compensation, the collectability of receivables, the realizability of deferred tax assets, the carrying value of goodwill, intangible assets and long-lived assets and depreciation and amortization.

Assets and liabilities of the Company's foreign subsidiaries are translated at the rate of exchange existing at each reporting period, with revenues, expenses, and cash flows translated at the average of the monthly exchange rates. Adjustments resulting from translation of the financial statements are recorded as a component of accumulated other comprehensive income (loss) (“AOCI”). Also included in AOCI are the effects of exchange rate changes on intercompany balances of a long-term nature. The changes in accumulated foreign currency translation were primarily attributable to the impact of translation of the net assets of the Company's international operations, primarily denominated in Japanese Yen, Pounds Sterling and Euros. As of ~~January~~April 3130, 2012 and July 31, 2011, foreign currency translation adjustment balances of $32.08 million and $2.1 million, respectively, were reflected in the accompanying Condensed Consolidated Balance Sheets (Unaudited) in AOCI. Exchange gains (losses) on foreign currency transactions aggregating to $(0.56) million and $(01.84) million for the three and ~~six~~nine months ended ~~January~~April 3130, 2012 and ($0.2)1 million and $0.1 million for the three and ~~six~~nine months ended ~~January~~April 3130, 2011, respectively, are included in Other income (expense), in the accompanying Condensed Consolidated Statements of Operations (Unaudited).

(d) Concentrations of Credit Risk and Major Customers

Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash and accounts receivable. The Company maintains its cash in bank deposit accounts with institutions of high credit quality, the balances of which, at times, may exceed the FDIC insurance limits. Exposure to credit risk is reduced by placing such deposits with major financial institutions and monitoring their credit ratings. All accounts receivable are unsecured. The Company believes that any credit risk associated with receivables is minimal due to the number and creditworthiness of its customers. Receivables are stated at estimated net realizable value, which approximates fair value.

EASYLINK SERVICES INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(tabular data in thousands, except per share data)

(Unaudited)

For the three and ~~six~~nine months ended ~~January~~April 3130, 2012 and 2011, no single customer accounted for more than 10% of revenue. No single customer accounted for more than 10% of accounts receivable at ~~January~~April 3130, 2012 and July 31, 2011.

Approximately 3940% and 4041% of the Company’s revenues during the three and ~~six~~nine months ended ~~January~~April 3130, 2012, respectively, and 44% and 3941% of the Company’s revenues during the three and ~~six~~nine months ended ~~January~~April 3130, 2011, respectively, occurred outside of the U.S.

(e) ~~Recently~~Acquisition ~~Adopted~~and ~~Accounting~~integration ~~Pronouncements~~related charges

Acquisition and integration related charges reflected in operating expenses include, but are not limited to transaction costs such as legal and accounting professional fees directly related to acquisitions, termination and related costs for transitional and certain other employees, integration related professional fees and other post business combination related expenses. In addition, acquisition and integration charges include consultation, legal and professional fees related to the Agreement and Plan of Merger (the “Merger Agreement”) with Open Text Corporation (“Open Text”), and Epic Acquisition Sub Inc., an indirect wholly-owned subsidiary of Open Text (“Merger Sub”), entered into on May 1, 2012. See Note 12, Subsequent Events, for additional information regarding the Merger Agreement.

The following table summarizes Acquisition and integration related charges included in the accompanying Condensed Consolidated Statement of Operations (Unaudited) for the three and nine months ended April 30, 2012 and 2011:



	Three Months				Nine Months
	2012		2011		2012		2011
Legal and professional fees	$	1,033	$	—	$	1,033	$	2,044
Employee termination costs	—		—		248		371
Integration costs	—		—		199		—
Total Acquisition and integration related	$	1,033	$	—	$	1,480	$	2,415

(f) Recently Adopted Accounting Pronouncements

On June 16, 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). This update amends Accounting Standards Codification (“ASC”) Topic 220, Comprehensive Income, to provide that total comprehensive income will be reported in one continuous statement or two separate but consecutive statements of financial performance. Presentation of total comprehensive income in the statement of stockholders' equity or the footnotes will no longer be allowed. The calculation of net income and basic and diluted net income per share will not be affected. ASU 2011-005 is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2011, which means that it will be effective for Fiscal 2013. Retrospective adoption is required and early adoption is permitted. We have adopted ASU 2011-005.

(fg) Recent Accounting Pronouncements not yet adopted

In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 modifies the impairment test for goodwill and indefinite lived intangibles so that it is no longer required to calculate the fair value of a reporting unit unless the Company believes, based on qualitative factors, it is more likely than not that the reporting unit's or indefinite lived intangible asset's fair value is less than the carrying value. ASU 2011-08 is effective for fiscal years that begin after December 15, 2011, with early adoption allowed. The Company intends to adopt ASU 2011-08 effective for its fourth quarter Fiscal 2012 impairment analysis, which is not expected to have a material effect on the Company's consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820)(“ASU 2011-04”). ASU 2011-04 is intended to create consistency between ~~U.S.~~ GAAP and International Financial Reporting Standards on the definition of fair value and on the guidance on how to measure fair value and on what to disclose about fair value measurements. ASU 2011-04 will be effective for financial statements issued for fiscal periods beginning after December 15, 2011, with early adoption prohibited for public entities. The Company is currently evaluating the impact ASU 2011-04 will have on its consolidated financial statements.

2. ACQUISITION

Xpedite Business

On October 21, 2010, the Company acquired the iSend and iNotify advanced messaging businesses (the “Xpedite Business”) from Premiere Global Services, Inc. (“PGI”) for $105.0 million in cash, through the purchase of PGI’s wholly-owned subsidiaries Xpedite Systems, LLC and Premiere Global Services (UK) Limited and certain related assets owned by PGI’s subsidiary Premiere Conferencing (Canada) Limited. The Company and PGI agreed on an adjustment to the purchase price of $1.8 million during Fiscal 2011, based on the working capital of the acquired business at the acquisition date as defined in the Securities and Asset Purchase Agreement dated October 21, 2010. The Company paid the $1.8 million to PGI on February 16, 2011. The total purchase price of the Xpedite Business was $106.8 million. The Company paid for the acquisition with $6.8 million of cash on hand and a new credit facility consisting of a $110.0 million term loan (the “Term Loan”) and a $20.0 million revolving loan (the “Revolving Loan” and together with the Term Loan, the “2010 Loans”), of which $12.0 million of the Revolving Loan was drawn upon to refinance the Company's existing credit facility indebtedness. See Note 4, Indebtedness, for additional information regarding the 2010 Loans.

During the six months ended January 31, 2011, the Company incurred $4.6 million of transaction costs related to the acquisition of the Xpedite Business, of which $0.8 million and $2.4 million was expensed as incurred in accordance with ASC Topic 805, Business Combinations (“ASC 805”) in the three and six months ended January 31, 2011, respectively and $2.2 million was recorded as a discount to the Term Loan and will be amortized over the same period as the Term Loan. The Company incurred

EASYLINK SERVICES INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(tabular data in thousands, except per share data)

(Unaudited)

~~acquisition and integration related charges of $0~~2.0 ~~million and $0.4 million for the three and six months ended January 31, 2012, respectively.~~ACQUISITION

~~The~~On ~~following~~October ~~table~~21, ~~summarizes~~2010, ~~Acquisition~~the Company acquired the iSend and ~~integration~~iNotify advanced messaging businesses (the “Xpedite Business”) from Premiere Global Services, Inc. (“PGI”) for $105.0 million in cash, through the purchase of PGI’s wholly-owned subsidiaries Xpedite Systems, LLC and Premiere Global Services (UK) Limited and certain related ~~charges~~assets ~~included~~owned by PGI’s subsidiary Premiere Conferencing (Canada) Limited. The Company and PGI agreed on an adjustment to the purchase price of $1.8 million during Fiscal 2011, based on the working capital of the acquired business at the acquisition date as defined in the ~~accompanying~~Securities ~~Condensed~~and ~~Consolidated~~Asset ~~Statement~~Purchase Agreement dated October 21, 2010. The Company paid the $1.8 million to PGI on February 16, 2011. The total purchase price of ~~Operations~~the Xpedite Business was $106.8 million. The Company paid for the acquisition with $6.8 million of cash on hand and a new credit facility consisting of a $110.0 million term loan (~~Unaudited~~the “Term Loan”) ~~for~~and a $20.0 million revolving loan (the ~~three~~“Revolving Loan” and ~~six~~together ~~months~~with ~~ended~~the ~~January 31~~Term Loan, ~~2012~~the ~~and~~“2010 ~~2011:~~Loans”), of which $12.0 million of the Revolving Loan was drawn upon to refinance the Company's existing credit facility indebtedness. See Note 4, Indebtedness, for additional information regarding the 2010 Loans.

	Three Months				Six Months
	2012		2011		2012		2011
Legal and professional fees	$	—	$	461	$	—	$	2,044
Employee termination costs	—		356		249		371
Integration costs	—		—		199		—
Total Acquisition and integration related	$	—	$	817	$	448	$	2,415

During the nine months ended April 30, 2011, the Company incurred $4.6 million of transaction costs related to the acquisition of the Xpedite Business, of which $2.4 million was expensed as incurred in accordance with ASC Topic 805, Business Combinations (“ASC 805”) in the nine months ended April 30, 2011 and $2.2 million was recorded as a discount to the Term Loan and will be amortized over the same period as the Term Loan. The Company incurred acquisition and integration related charges related to the Xpedite Business of $0.5 million for the nine months ended April 30, 2012. See Note1(e), Acquisition and integration related charges, for additional information on the Company's acquisition and integration related charges.

In accordance with ASC 805, the Company accounted for the acquisition by applying the acquisition method of accounting. The acquisition method of accounting requires that the consideration transferred in a business combination be measured at fair value as of the closing date of the acquisition.

Impact on Results of Operations

The results of the Xpedite Business since October 21, 2010 are included in the Company's Condensed Consolidated Statements of Operations (Unaudited). The financial results are reported in the Company's On Demand segment. See Note 10, Segment Results for information regarding the Company's segments.

EASYLINK SERVICES INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(tabular data in thousands, except per share data)

(Unaudited)

Purchase Price Allocation

The total purchase price allocation was based on the fair values of assets acquired and liabilities assumed at October 21, 2010. The excess of the purchase price over the net tangible assets and intangible assets was recorded as goodwill. The measurement period for the acquisition has closed. The following table provides the final purchase price allocation:



Cash	$	4,657
Accounts receivable	16,284
Prepaid expenses and other current assets	1,833
Property and equipment	5,144
Goodwill	37,587
Intangible assets — customer relationships	40,800
Intangible assets — software	18,100
Intangible assets — non-competition agreements	1,200
Other Assets	300
Total assets acquired	125,905
Accounts payable and Accrued Expenses	10,229
Other current liabilities	197
Capital leases	199
Deferred income taxes	7,684
Long term liabilities	796
Total liabilities assumed	19,105

Net assets acquired	$	106,800

Acquired intangible assets are as follows:



			Weighted Average Estimated Useful Life (yrs)
Customer Relationships	$	40,800	10-12
Internally developed software	18,100		8-10
Non-competition agreements	1,200		5
Goodwill	37,587		Non-amortizable

The goodwill and intangible assets acquired in the Xpedite Business acquisition were all related to the On Demand business segment.

EASYLINK SERVICES INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(tabular data in thousands, except per share data)

(Unaudited)

Pro Forma Financial Information

The pro forma statements below are for the combined entities and demonstrate the statement of operations as if the acquisition of the Xpedite Business had occurred beginning after July 31, 2009. The statements for the Xpedite Business are based on carve-out financial statements provided by PGI, and as such, reflect expenses incurred by PGI in order to support their management structure and include allocations deemed reasonable by PGI’s management.

Pro Forma Consolidated Combined Statement of Operations (Unaudited)

	Six Months
	Nine Months
	2012			2011
Service revenues, net	$	91136,~~520~~924		$	95143,~~550~~332
Cost of services	3045,~~274~~591			3047,~~988~~376
Gross profit	6191,~~246~~333			6495,~~562~~956
Operating expenses:
Product development and enhancement	69,~~037~~298			69,~~580~~918
Selling and marketing	1219,~~913~~639			1522,~~446~~196
General and administrative	2639,~~877~~461			3447,~~717~~558
Acquisition and integration related	~~448~~1,480			2,415
Total Operating expenses	4669,~~275~~878			5982,~~158~~087
Operating income	1421,~~971~~455			513,~~404~~869
Other income (expense):
Interest expense	(24,~~989~~250		)	(24,~~938~~576		)
Other non-operating income (expense)	(~~417~~1,060		)	~~354~~503
Total Other income (expense)	(35,~~406~~310		)	(24,~~584~~073		)
Income before income taxes	1116,~~565~~145			29,~~820~~796
Provision for income taxes	5,~~394~~645			~~790~~2,743
Net Income	610,~~171~~500			27,~~030~~053
Dividends on preferred stock	—			(2,012		)
Net income attributable to common stockholders	$	610,~~171~~500		$	185,041
Basic net income per common share	$	0.1933		$	—0.17
Diluted net income per common share	$	0.1932		$	—0.16
Weighted average number of common shares outstanding – basic	31,~~805~~882			29,~~354~~625
Weighted average number of common shares outstanding –diluted	33,~~106~~190			3031,~~890~~353

EASYLINK SERVICES INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(tabular data in thousands, except per share data)

(Unaudited)

The pro forma statements reflect the results of operations for the Company for the ~~six~~nine months ended ~~January~~April 3130, 2012 and 2011, and the results of operations for the Xpedite Business for the period from August 1, 2010 through October 20, 2010. The pro forma adjustments used to prepare the statements above include the removal of intercompany interest between the Xpedite Business and PGI of $0.1 million in the ~~six~~nine months ended ~~January~~April 3130, 2011. General and administrative expenses have been increased for the amortization expense associated with the fair value adjustment at October 21, 2010 of definite lived intangible assets, for a net adjustment of $1.5 million in the ~~six~~nine months ended ~~January~~April 3130, 2011. In addition, cost of services have been decreased for the depreciation expense associated with the fair value adjustment at October 21, 2010 of fixed assets, for a net adjustment of $3.2 million in the ~~six~~nine months ended ~~January~~April 3130, 2011. Interest expense has been adjusted to reflect the 2010 Loans for a net increase of $0.6 million in the ~~six~~nine months ended ~~January~~April 3130, 2011.

3. GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible assets are summarized as follows:

	Weighted averageamortizationperiod (years)	~~January~~April 3130, 2012			July 31, 2011
Purchased customer relationships	6-12	$	59,~~758~~533		$	59,950
Internally developed systems	4-10	28,~~740~~786			28,717
Non-competition agreements	5	1,200			1,200
Trade names	<1	3,~~760~~776			3,761
Intangible assets, gross		93,~~458~~295			93,628
Less accumulated amortization:
Purchased customer relationships		(1517,~~787~~330		)	(12,640		)
Internally developed systems		(13,~~208~~757		)	(12,000		)
Non-competition agreements		(~~307~~366		)	(186		)
Trade names		(~~205~~213		)	(187		)
Accumulated amortization		(2931,~~507~~666		)	(25,013		)
Intangible assets, net		$	6361,~~951~~629		$	68,615

Indefinite lived intangible assets not subject to amortization were $3.5 million ~~and $3.5 million~~ at ~~January~~April 3130, 2012 and July 31, 2011~~, respectively~~.

The changes in the carrying amount of intangible assets for the ~~six~~nine months ended ~~January~~April 3130, 2012 isare as follows:

Balance at July 31, 2011	$	68,615
Intangible amortization	(46,~~370~~254		)
Foreign currency effect	(~~294~~732		)
Balance at January 31, 2012	$	63,951
Balance at April 30, 2012	$	61,629

The Company estimates annual amortization expense for the next five fiscal years will approximate $8.0 million.

The changes in the carrying amount of goodwill for the ~~six~~nine months ended ~~January~~April 3130, 2012 isare as follows:

Balance at July 31, 2011	$	73,494
Foreign currency effect	(~~268~~256		)
Balance at January 31, 2012	$	73,226
Balance at April 30, 2012	$	73,238

EASYLINK SERVICES INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(tabular data in thousands, except per share data)

(Unaudited)

4. INDEBTEDNESS

Long term debt and capital lease obligations at ~~January~~April 3130, 2012 and July 31, 2011 are as follows:

	January 31, 2012			July 31, 2011
	April 30, 2012			July 31, 2011
Term Loan, due October 21, 2014	$	8480,~~858~~733		$	101,750
Revolving Loan, expiring October 21, 2014	~~1,900~~—			8,000
Capital leases	~~115~~83			172
Debt discount	(1,~~334~~184		)	(1,660		)
Subtotal	8579,~~539~~632			108,262
Less current portion of capital leases	6230			87
Less debt discount	(577		)	(624		)
Less current portion of debt discount	(552		)	(624		)
Less current portion of long term debt	1816,~~400~~500			28,625
Long term debt	$	6763,654		$	80,174

During Fiscal 2011, in conjunction with the Xpedite Business acquisition, the Company entered into the 2010 Loans consisting of the $110.0 million Term Loan and the $20.0 million Revolving Loan. The Company drew $12.0 million of the Revolving Loan to refinance the Company's Revolving Credit and Term Loan Agreement dated May 19, 2009, as amended, by and among the Company, as borrower, the lenders from time to time party thereto, and SunTrust Bank, as administrative agent for the lenders.

The 2010 Loans call for quarterly payments of approximately $4.1 million with interest, which commenced on January 31, 2011, and a final balloon payment in October 2014, with interest. The 2010 Loans are secured by substantially all of the U.S. assets of the Company and guarantees by certain of the international subsidiaries of the Company and related pledges of a portion of the stock of certain of the international subsidiaries. See Note 2, Acquisition, for additional information regarding the 2010 Loans.

The debt discount consists of $2.2 million in bank fees incurred in connection with the issuance of the Term Loan. The discount is being amortized as an adjustment to the carrying value of principal with a corresponding charge to interest expense over the remaining life of the Term Loan. The fees are classified as a reduction to current and long-term liabilities within the accompanying Condensed Consolidated Balance Sheets (Unaudited) and are amortized as an adjustment to interest expense over the remaining life of the Term Loan.

The credit agreement (the "2010 Credit Agreement") for the 2010 Loans contain the following covenants: (i) requirements to deliver financial statements, other reports and notices; (ii) restrictions on additional indebtedness; (iii) restrictions on dividends, distributions and redemptions of equity and repayment of subordinated indebtedness; (iv) restrictions on liens; (v) restrictions on making certain payments; (vi) restrictions on investments; (vii) restrictions on asset dispositions and other fundamental changes; and (viii) restrictions on transactions with affiliates. In addition, the 2010 Credit Agreement contains certain financial covenants, including, among other things: (i) a maximum leverage ratio; (ii) a minimum fixed charge coverage ratio; (iii) a minimum amount of consolidated adjusted EBITDA; (iv) a maximum amount of capital expenditures; and (v) 50% of excess cash flow (as defined in the 2010 Credit Agreement), if the leverage ratio is equal to or greater than 2.0 to 1.0, and 25% of excess cash flow if the leverage ratio is greater than 1.5 to 1.0. If the leverage ratio is equal to or less than 1.5 to 1.0, the Company is not required to prepay the excess cash flow payment. The excess cash flow calculations are prepared annually as of the last day of each fiscal year. Prepayments of debt resulting from the excess cash flow calculations are due annually within thirty days of the date that the annual report on Form 10-K for such fiscal year is delivered to the administrative agent. Subsequent to October 31, 2011, the Company made a prepayment of $4.5 million related to the excess cash flow calculation. Without the permission of the lenders under the 2010 Credit Agreement, our ability to complete material acquisitions will be restricted. A default on any of these restrictions and covenants will cause, in certain circumstances, the amounts due under such agreements to become due and payable upon demand.

At ~~January~~April 3130, 2012, the Company was in compliance with all covenants under the 2010 Credit Agreement.

EASYLINK SERVICES INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(tabular data in thousands, except per share data)

(Unaudited)

Borrowings under the 2010 Credit Agreement bear interest, at the Company’s 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 the administrative agent under the 2010 Credit Agreement, (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 1.75% to 4.50%, depending on the Company’s consolidated leverage ratio at the time of such borrowing. As of ~~January~~ April 3130, 2012 the interest rate on the Term Loan was approximately 4.500%.

Within the Revolving loan there is a carve-out of $5.0 million for letters of credit and $5.0 million for borrowings under a swingline option. During the three months ended January 31, 2012, the Company began to utilize the swingline option to fund day to day cash needs where any shortfall is expected to last less than 30 days. The interest rate is equivalent to the higher of (1) the prime lending rate of the administrative agent under the 2010 Credit Agreement, (2) the U.S. Federal Funds Rate plus 0.5%, or (3) Adjusted LIBOR plus 1%, plus the applicable margin. As of ~~January~~April 3130, 2012 the outstanding balance on the swingline was $10.90 million with an interest rate of approximately 6.250%.

On February 7, 2011, the Company entered into an interest rate swap (“Swap”) as required by the 2010 Credit Agreement for 50% of the then outstanding balance on the Term Loan, which amounted to $52.9 million. The Swap was fixed at an interest rate of 1.83% and was designated as a cash flow hedge with the changes in fair value of the Swap to be recorded in accumulated other comprehensive loss ("AOCI") and as a derivative hedge asset or liability, as applicable. The Swap is designed to cover at least 50% of the then outstanding Term Loan balance and may be reduced in amount as the Term Loan is paid down, maturing in October 2014. See Note 7, Derivative Financial Instruments, for additional information regarding the Swap.

5. STOCKHOLDERS’ EQUITY

Dividends

The holders of the outstanding shares of the Company’s series C preferred stock were entitled to receive a 4% per share annual cumulative dividend payable in cash or shares of common stock at our option. Dividends accrue and were cumulative on a daily basis, whether or not earned or declared.

On January 20, 2011, the Company materially modified the rights of the Company’s series C preferred stock by filing a Certificate of Amendment (the “Series C Amendment”) to the Company’s Certificate of Incorporation relating to the Certificate of Powers, Designations, Preferences and Relative, Participating, Optional and Other Special Rights of the Series C Convertible Redeemable Preferred Stock, dated January 5, 2000. The Series C Amendment modified the terms of the series C preferred stock by (i) adjusting the conversion price of the series C preferred stock from $22.34 to $7.14, and (ii) causing all of the outstanding shares of ~~Series~~series C ~~Stock~~preferred stock to be converted into shares of the Company’s class A common stock upon the filing of the Series C Amendment at the $7.14 conversion price, which resulted in the issuance of 700,000 shares of the Company’s class A common stock to the holder of the series C preferred stock.

There were no outstanding series C preferred stock at ~~January~~April 3130, 2012 and July 31, 2011.

Under ~~generally accepted accounting principles in the U.S.~~GAAP, the difference between the fair market value of the class A common stock that the holder of the series C preferred stock would have received under the old conversion terms and the fair market value of the class A common stock actually received upon conversion under the new terms must be recorded as a dividend. As a result, the Company recorded a one-time non-cash dividend of approximately $1.96 million upon conversion of the series C preferred stock into class A common stock during Fiscal 2011.

6. EARNINGS PER SHARE

Basic earnings per common share is computed by dividing the net income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during each period. The weighted-average number of common shares outstanding does not include any potentially dilutive securities or any unvested restricted shares of common stock. These unvested restricted shares, although classified as issued and outstanding at January 31, 2012 and 2011, are considered contingently returnable until the restrictions lapse and will not be included in the basic earnings per share calculation until the shares are vested. Diluted earnings per share is calculated by dividing net income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding and all potential dilutive common shares that were outstanding during the period. The difference between basic and diluted weighted-average shares outstanding in the three and six months ended January 31, 2012 and 2011 is due to the effects of restricted stock and assumed conversion of employee incentive stock options

EASYLINK SERVICES INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(tabular data in thousands, except per share data)

(Unaudited)

~~awards~~6. EARNINGS PER SHARE

Basic earnings per common share is computed by dividing the net income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during each period. The ~~following~~weighted-average ~~table~~number ~~represents~~of acommon ~~reconciliation~~shares outstanding does not include any potentially dilutive securities or any unvested restricted shares of ~~the~~common stock. These unvested restricted shares, ~~used~~although classified as issued and outstanding at April 30, 2012 and 2011, are considered contingently returnable until the restrictions lapse and will not be included in the basic earnings per share calculation ofuntil ~~basic~~the ~~and~~shares ~~diluted~~are ~~net~~vested. Diluted ~~income~~earnings per share ~~contained~~is incalculated by dividing net income or loss attributable to common stockholders by the ~~accompanying~~weighted ~~Condensed~~average ~~Consolidated~~number ~~Statements~~of shares of ~~Operations~~common ~~(Unaudited)~~stock ~~for~~outstanding and all potential dilutive common shares that were outstanding during the period. The difference between basic and diluted weighted-average shares outstanding in the three and ~~six~~nine months ended ~~January~~April 3130, 2012 and 2011: is due to the effects of restricted stock and assumed conversion of employee incentive stock options awards.

	Three Months					Six Months
	2012		2011			2012		2011
Net income	$	2,869	$	2,939		$	6,171	$	3,906
Less: Series C preferred dividends	—		(1,962		)	—		(2,012		)
Net income available to common stockholders	$	2,869	$	977		$	6,171	$	1,894
Weighted average shares outstanding:
—Basic	31,936		29,448			31,805		29,354
Add: Stock options & restricted stock	1,148		2,115			1,301		1,536
—Diluted	33,084		31,563			33,106		30,890
Basic net income per share	$	0.09	$	0.03		$	0.19	$	0.06
Diluted net income per share	$	0.09	$	0.03		$	0.19	$	0.06

The following table represents a reconciliation of the shares used in the calculation of basic and diluted net income per share contained in the accompanying Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended April 30, 2012 and 2011:



	Three Months				Nine Months
	2012		2011		2012		2011
Net income	$	4,329	$	4,340	$	10,500	$	8,246
Less: Series C preferred dividends	—		—		—		(2,012		)
Net income available to common stockholders	$	4,329	$	4,340	$	10,500	$	6,234

Weighted average shares outstanding:
—Basic	32,040		30,184		31,882		29,625
Add: Stock options & restricted stock	1,320		2,112		1,308		1,728
—Diluted	33,360		32,296		33,190		31,353
Basic net income per share	$	0.14	$	0.14	$	0.33	$	0.21
Diluted net income per share	$	0.13	$	0.13	$	0.32	$	0.20

The following options and shares were outstanding, but were not included in the computation of weighted average diluted common share amounts as the effect of doing so would be anti-dilutive:

	Three Months		~~Six~~Nine Months
	2012	2011	2012	2011
Anti-dilutive stock options, restrictive stock, and series C preferred stock	1,~~990~~819	~~114~~721	1,~~590~~694	~~616~~351

7. DERIVATIVE FINANCIAL INSTRUMENTS

The Swap is a derivative financial instrument used by the Company principally in the management of its interest rate. The Company determined that the Swap qualifies for cash flow hedge accounting treatment in accordance with ASC Topic 815: Derivatives and Hedging (“ASC 815”). The Swap is the only derivative financial instrument that we have designated as a hedging instrument. See Note 4, Indebtedness, for additional information regarding the Swap.

When hedge accounting is elected at inception, the Company formally designates the financial instrument as a hedge of a specific underlying exposure if certain criteria are met, and documents both the risk management objectives and strategies for undertaking the hedge. The Company formally assesses both at the inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in the forecasted cash flows of the related underlying exposure. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the forecasted cash flows of the underlying exposures being hedged. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any ineffective portion of a financial instrument’s change in fair value is immediately recognized in earnings.

At January 31, 2012 and July 31, 2011, the outstanding Swap had a notional principal amount of $44.7 million and $48.8 million, respectively.

The derivative net loss on this contract recorded in AOCI by the Company at January 31, 2012 was $0.7 million. At January 31,

EASYLINK SERVICES INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(tabular data in thousands, except per share data)

(Unaudited)

~~2012,~~7. ~~the~~DERIVATIVE ~~portion~~FINANCIAL ofINSTRUMENTS ~~derivative net losses estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $0.4 million.~~

At April 30, 2012 and July 31, 2011, the outstanding Swap had a notional principal amount of $42.6 million and $48.8 million, respectively.

The derivative net loss on this contract recorded in AOCI by the Company at April 30, 2012 was $0.6 million. At April 30, 2012, the portion of derivative net losses estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $0.4 million.

The Company’s fair value of outstanding derivative contracts recorded as liabilities in the accompanying Condensed Consolidated Balance Sheets (Unaudited) were as follows:

Derivatives designated as hedging instruments under ASC 815:	Balance Sheet Location	~~January~~April 3130, 2012		July 31, 2011
Interest rate swap	Other current liabilities	$	~~607~~553	$	619
Interest rate swap	Other liabilities	~~518~~423		436
Total liabilities designated as hedging instruments under ASC 815		$	~~1,125~~976	$	1,055

The following table summarizes the impact of derivative instruments on Interest expense in the accompanying Condensed Consolidated Statements of Operations (Unaudited) for the three months ended ~~January~~April 3130, 2012, pretax:

Derivatives designated as hedging instruments under ASC 815:	Statement of Operations Location	Amount ofGain (Loss)Reclassified fromAOCI intoIncome(Effective Portion)				Amount ofGain (Loss)Recognized inIncome onDerivatives(Ineffective Portion)
Interest rate contract	Interest expense	$	~~187~~(176	)		$	—

Derivatives designated as hedging instruments under ASC 815:	Statement of Operations Location	Amount ofGain (Loss)Reclassified fromAOCI intoIncome(Effective Portion)				Amount ofGain (Loss)Recognized inIncome onDerivatives(Ineffective Portion)
Interest rate contract	Interest expense	$	392			$	—

EASYLINK SERVICES INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(tabular data in thousands, except per share data)

(Unaudited)



Derivatives designated as hedging instruments under ASC 815:	Statement of Operations Location	Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)			Amount of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)
Interest rate contract	Interest expense	$	(569	)	$	—



Derivatives designated as hedging instruments under ASC 815:	Statement of Operations Location	Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)			Amount of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)
Interest rate contract	Interest expense	$	(192	)	$	—

EASYLINK SERVICES INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(tabular data in thousands, except per share data)

(Unaudited)

8. FAIR VALUE REPORTING

ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), requires 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. The valuation techniques required by ASC 820 are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the Company. These two types of inputs create the following fair value hierarchy:


•	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 ~~January~~April 3130, 2012:

	Quoted Prices inActive Marketsfor IdenticalAssets/Liabilities(Level 1)		SignificantOtherObservableInputs (Level 2)		SignificantUnobservableInputs (Level 3)		CarryingAmount
Assets:
Cash	$	21,575	$	—	$	—	$	21,575
Cash Equivalents	$	80	$	—	$	—	$	80
Cash Equivalents	80		—		—		80
Total Assets	$	80	$	—	$	—	$	80
Total Assets	$	21,655	$	—	$	—	$	21,655
Liabilities:
Interest Rate Swap	$	—	$	~~1,126~~976	$	—	$	~~1,126~~976
Notes Payable	—		—		7974,~~283~~813		8579,~~538~~632
Total Liabilities	$	—	$	~~1,126~~976	$	7974,~~283~~813	$	8680,~~664~~608

The carrying amount of the notes payable contains a $1.32 million discount. The Company believes that the assets can be liquidated without restriction.

1516

EASYLINK SERVICES INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(tabular data in thousands, except per share data)

(Unaudited)

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at July 31, 2011, consistent with the fair value hierarchy provisions of ASC 820:

	Quoted Prices inActive Marketsfor IdenticalAssets/Liabilities(Level 1)		SignificantOtherObservableInputs (Level 2)		SignificantUnobservableInputs (Level 3)		CarryingAmount
Assets:
Cash	$	30,098	$	—	$	—	$	30,098
Cash Equivalents	$	80	$	—	$	—	$	80
Cash Equivalents	80		—		—		80
Total Assets	$	80	$	—	$	—	$	80
Total Assets	$	30,178	$	—	$	—	$	30,178
Liabilities:
Interest Rate Swap	$	—	$	1,055	$	—	$	1,055
Notes Payable	—		—		99,932		108,263
Total Liabilities	$	—	$	1,055	$	99,932	$	109,318

The carrying amount of the notes payable contains a $1.6 million discount. The Company believes that the assets can be liquidated without restriction.

9. COMMITMENTS AND CONTINGENCIES

From time to time, the Company may become 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, the Company currently does not believe that the outcome of any of these claims or any of the legal matters mentioned elsewhere in this quarterly report on Form 10-Q will have a material adverse effect on its consolidated financial position, results of operations or cash flow. The Company expenses legal fees as incurred.

New York state excise tax - On January 6, 2012, the Company received a notice from the New York State Department of Taxation and Finance (the “Department”) stating that the Department was assessing the Company draft assessments of $10.5 million based almost entirely on estimates and assumptions that an excise tax was due on 100% of the Company's New York state revenues for the calendar year ended December 31, 2000 through the calendar year ended December 31, 2009. The Company believes that the calculation of the assessment is materially flawed and intends to contest it. The Company ~~believes that any possible reasonable assessment will not be material to the Company. The Company~~ establishes liabilities when a particular contingency is probable and estimable. The Company believes an assessment is reasonably possible; however, the reasonably possible exposure to losses cannot currently be estimated at this time.

Litigation

j2 - In June 2008, j2 Global Communications, Inc. (“j2”) brought a patent infringement lawsuit against the Company, alleging that ~~the~~certain Company ~~infringes~~services infringe three of j2's patents, U.S. Patent Nos. 6,597,688 (the " '688 patent"), 7,020,132 (the " '132 patent") and 6,208,638 (the " '638 patent") and seeking damages and injunctive relief. The case is pending in the U.S. District Court for the Central District of California and is currently in the discovery phase. The Company has denied infringing any of the j2 patents and has filed a counterclaim seeking, among other things, a declaratory judgment that the j2 patents are invalid. Discovery in the matter is ongoing. The case is currently scheduled for trial in ~~November~~February ~~2012~~2013.

j2 attempted in the above-mentioned lawsuit to add an additional allegation of infringement of U.S. Patent No. 6,350,066 (the " '066 patent") against a newly acquired Xpedite Business service, which the Court denied. Thereafter, in May 2011, j2's wholly-owned subsidiary Advanced Messaging Technologies Inc. (“AMT”) brought a new patent infringement lawsuit against the Company in the U.S. District Court for the Central District of California alleging that the Company infringes ~~U.S.~~the ~~Patent~~'066 Nopatent. 6On March 9,~~350~~ 2012,~~066~~ AMT filed an Amended Complaint adding j2 as a plaintiff and adding allegations of infringement of the '688, '132, and '638 patents. AMT ~~seeks~~and j2 are seeking an injunction, royalties and damages. The Company has denied infringing the AMT patent and has filed a counterclaim seeking, among other things, a declaratory judgment that all of the ~~AMT~~asserted ~~patent~~patents isare invalid. Discovery in the matter is ongoing. The case is currently scheduled for trial in March 2013.

~~The Company believes it has meritorious defenses to the j2 and AMT allegations and because they are at various stages of defenses, the ultimate outcome or range of outcomes is not yet determinable.~~17

EASYLINK SERVICES INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(tabular data in thousands, except per share data)

(Unaudited)

In March 2011, the Company filed a patent infringement lawsuit against j2. The suit, filed by the Company's subsidiary Xpedite Systems, LLC in the U.S. District Court for the Northern District of Georgia, alleges that j2 infringes U.S. Patent No. 5,872,640 entitled "Facsimile Form Generation System" and U.S. Patent No. 7,804,823 entitled "Systems and Methods for Communicating Documents Via an Autonomous Multi-Function Peripheral Device." The Company is seeking monetary damages for past infringement, and injunctive relief prohibiting j2 from continuing to infringe the patents, among other remedies.

The ~~New~~Company ~~York~~believes ~~state~~it ~~sales~~has ~~tax~~meritorious -defenses 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 $0.5 million in tax, interest, and penalties on sales for the sales tax period beginning March 1, 2001 and ending May 31, 2004. EasyLink Services International, Inc. appealed the assessment administratively to the ~~New~~j2 ~~York Division of Tax Appeals, which resulted in an opinion in 2008 in favor of EasyLink Services International, Inc. In late July 2009, after appeal by the New York Department of Taxation~~ and ~~Finance,~~AMT ~~the~~allegations ~~decision was reversed by the administrative New York Tax Appeals Tribunal~~ and ~~remanded~~because ~~back~~they to the administrative law judge to determine allocation and penalty issues. On remand, the Administrative Law Judge upheld the Tax Department's position on the allocation issues but agreed with EasyLink on the penalty issues and cancelled all penalties. The administrative proceedings are ~~exhausted.~~at ~~EasyLink~~various isstages ~~currently pursuing a judicial appeal~~ of ~~the~~defenses, ~~July 2009 decision of~~ the ~~Tax~~ultimate ~~Appeals~~outcome ~~Tribunal~~or byrange ~~posting a bond and filing a Notice~~ of ~~Petition~~outcomes ~~with~~is ~~the~~not ~~New~~yet ~~York State Appellate Division in Albany, New York~~determinable.

~~Retarus,~~ ~~Inc.~~New -York Instate ~~June~~sales ~~2011,~~tax ~~the~~- ~~Company~~As ~~and~~a ~~its~~result ~~subsidiary~~of ~~Xpedite~~a ~~Systems~~New ~~LLC~~York ~~filed~~state asales ~~lawsuit~~tax inaudit ~~the~~completed ~~Supreme~~in ~~Court~~2005 of ~~the~~EasyLink ~~State~~Services ofInternational, ~~New York~~Inc., ~~County~~a dissolved subsidiary of ~~New~~EasyLink ~~York~~Services Corporation, ~~against~~EasyLink ~~Retarus~~Services International, Inc., ~~Donna~~was ~~Tomasino,~~assessed ~~Francis~~approximately ~~Toscano~~$0.5 ~~and~~million ~~Timothy~~in ~~Valentine~~tax, ~~asserting~~interest, ~~claims~~and ~~against~~penalties ~~Retarus,~~on ~~Inc.~~sales for ~~unfair~~the ~~competition,~~sales ~~tortious~~tax ~~interference~~period ~~with~~beginning ~~contract~~March 1, ~~aiding~~2001 and ~~abetting~~ending May 31, 2004. EasyLink is currently pursuing a ~~breach~~judicial appeal of ~~duty~~the July 2009 decision of ~~loyalty~~the ~~and~~Tax ~~trust~~Appeals ~~and~~Tribunal ~~unjust~~by ~~enrichment,~~posting a bond and ~~requesting~~filing ~~monetary~~a ~~damages~~Notice ~~against Retarus~~of Petition with the New York State Appellate Division in Albany, ~~Inc~~New York. New ~~and~~York ~~injunctive~~sales ~~relief~~tax ~~against~~audits ~~Retarus~~for subsequent periods are also underway for Easylink Services International, Inc., ~~Donna~~(for ~~Tomasino~~the period June 1, ~~Francis~~2004 ~~Toscano~~through May 31, 2005) and ~~Timothy~~Easylink ~~Valentine~~Services USA, Inc. On ~~November~~(for 7the period June 1, 2004 through February 28, 2011). The audits for the ~~parties~~subsequent toperiods are ongoing and the ~~lawsuit~~results ~~negotiated~~of ~~and~~those ~~executed~~audits aare ~~settlement~~in ~~agreement,~~significant ~~exchanged~~part ~~mutual~~contingent ~~releases,~~on ~~and~~what ~~terminated~~happens in connection with the ~~litigation~~above-referenced sales tax appeal. No liabilities or assessments have been proposed by the New York Tax Department in for the audits for the subsequent periods at this time.

In accordance with ASC Topic 450, Contingencies, the Company believes it has adequately reserved for the contingencies arising from the legal matters described above where an outcome was deemed to be reasonably probable and the loss amount could be reasonably estimated. As such, we do not 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.

10. SEGMENT RESULTS

The Company manages its operations in two business segments, which are defined as follows:


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


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

Segment information for the three and ~~six~~nine months ended ~~January~~April 3130, 2012 and 2011 is as follows:

	Three Months				~~Six~~Nine Months
	2012		2011		2012		2011
Revenue from external customers
On Demand	$	3536,~~751~~714	$	3738,~~934~~456	$	73110,~~440~~155	$	5089,~~888~~344
Supply Chain	8,~~754~~691		9,~~491~~326		1826,~~080~~769		1928,~~272~~598
Total Service revenues, net	$	4445,~~505~~405	$	47,~~425~~782	$	91136,~~520~~924	$	70117,~~160~~942

1718

EASYLINK SERVICES INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(tabular data in thousands, except per share data)

(Unaudited)

The following is a reconciliation of operating segment income to net income for the three and nine months ended April 30, 2012 and 2011:

Three Months

~~Six~~Nine Months

2012

2011

2012

2011

Operating segment income

On Demand

23,~~284~~893

2224,~~862~~302

4771,~~460~~354

3156,~~761~~063

Supply Chain

6,~~655~~195

7,~~069~~092

1319,~~786~~979

1421,~~314~~406

Segment gross profit

2930,~~939~~088

2931,~~931~~394

6191,~~246~~333

4677,~~075~~469

Corporate expenses

22,~~046~~570

22,~~732~~929

4568,~~827~~398

3558,~~217~~145

Acquisition and integration related

—1,033

~~817~~—

~~448~~1,480

2,415

Operating income

76,~~893~~485

68,~~382~~465

1421,~~971~~455

816,~~443~~909

Other income (expense), net

(1,~~869~~905

)

(1,~~575~~488

)

(35,~~406~~310

)

(23,~~077~~565

)

Income before income taxes

64,~~024~~580

46,~~807~~977

1116,~~565~~145

613,~~366~~344

Provision for income taxes

~~3,155~~251

12,~~868~~637

5,~~394~~645

25,~~460~~098

Net Income

24,~~869~~329

24,~~939~~340

610,~~171~~500

38,~~906~~246

The Company does not currently break out total assets by reportable segment as there is a high level of shared utilization between the segments.

11. INCOME TAXES

The following reconciles the Federal statutory income tax rate with the Company’s effective tax rate for the three and ~~six~~nine months ended ~~January~~April 3130, 2012 and 2011:

	Three Months				~~Six~~Nine Months
	2012		2011		2012		2011
Expected federal statutory rate	34.00	%	34.00	%	34.00	%	34.00	%
Increase (decrease) in taxes resulting from:
Permanent Differences	53.4588	%	—	%	3.1234	%	—	%
State and local income taxes, net of federal benefit	4.6150	%	43.8680	%	4.9078	%	4.6420	%
Other	(43.6953	)%	—	%	(10.9539	)%	—	%
Difference in rate for foreign taxes	(3.40.27	)%	—	%	(26.0374	)%	—	%
Prior year true-up	16(0.4016	)%	—	%	8(0.6003	)%	—	%
Total effective tax rate	525.3748	%	3837.8680	%	4634.6496	%	38.6420	%

The difference in rate for foreign tax amounts contains tax positions taken on the non-U.S. subsidiaries acquired in connection with the Xpedite Business acquisition as of the Company's fiscal year ended July 31, 2011. Pursuant to the preparation and filing of the year end tax returns during the Company's Fiscal 2012 Quarter, the Company made changes to its tax positions to more accurately reflect the foreign taxes.

The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not have any material accrued interest or penalties associated with any unrecognized tax benefits, nor was any material interest expense recognized during the year.

1819

EASYLINK SERVICES INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(tabular data in thousands, except per share data)

(Unaudited)

12. SUBSEQUENT EVENTS

Merger Agreement

On May 1, 2012, the Company entered into the Merger Agreement with Open Text and Merger Sub. Under the terms and subject to the conditions set forth in the Merger Agreement, including the requirement that the Company's stockholders approve the adoption of the Merger Agreement, Merger Sub will be merged with and into the Company, and the Company will survive the merger as a wholly-owned subsidiary of Open Text (the “Merger”). The total cash consideration upon the closing of the Merger will be approximately $251.2 million.

If the Merger is completed, each share of the Company's common stock issued and outstanding immediately prior to the effective time, other than shares owned by Open Text or Merger Sub, treasury shares or shares with respect to which the holder has properly exercised and maintained dissenters' rights, will be automatically converted into the right to receive an amount of cash equal to $7.25, without interest and less any applicable withholding taxes. Stock options outstanding immediately prior to the effective time of the Merger will be accelerated, then cancelled, and holders will receive an amount in cash equal to the difference between $7.25 and the exercise price per share of the applicable stock option.

Consummation of the Merger is subject to certain conditions, including, without limitation, the following: (i) the Merger Agreement and the Merger having been approved by the affirmative vote of a majority of the outstanding shares of the Company's class A common stock entitled to vote thereon; (ii) the holders of not more than 10% of the outstanding shares of the Company's class A common stock having properly exercised appraisal rights with respect to the Merger in accordance with applicable law; (iii) the Stockholder Rights Agreement, dated as of August 25, 2009, between the Company and American Stock Transfer and Trust Company, LLC, as rights agent, as amended by an amendment entered into pursuant to the Merger Agreement, being in full force and effect in accordance with its terms; (iv) since the date of the Merger Agreement, no “Company Material Adverse Effect” (as defined in the Merger Agreement) having occurred; (v) all waiting periods (and extensions thereof) applicable to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), and any other applicable foreign antitrust, competition or similar law having expired or been terminated; and (vi) the absence of any law, order or judgment prohibiting or otherwise making illegal consummation of the Merger. Moreover, each party's obligation to consummate the Merger is subject to certain other conditions, including without limitation (a) the accuracy of the representations and warranties made by the other party to the Merger Agreement, subject to customary materiality qualifiers, and (b) the compliance by the other party with its pre-closing obligations and covenants thereunder, subject to customary materiality qualifiers.

The Merger Agreement contains certain termination rights for both Open Text and the Company and provides that, in the event of termination of the Merger Agreement under specified circumstances, the Company may be required to reimburse Open Text for its fees and expenses incurred in connection with the preparation, negotiation, execution and performance of the Merger Agreement and may be required to pay Open Text a termination fee of $9.4 million (less any fees or expenses previously reimbursed by the Company).

A special meeting of the Company's stockholders has been scheduled for July 2, 2012, to consider a proposal to approve the adoption of the Merger Agreement. The Company has set May 22, 2012 as the record date for the special meeting. On May 22, 2012, the Company filed a Preliminary Proxy Statement on Schedule 14A with the SEC relating to such special meeting of the Company's stockholders.

On May 21, 2012, the Company and Open Text received confirmation of early termination of the waiting period under the HSR Act, effective immediately. Although early termination of the waiting period under the HSR Act has been received, the Antitrust Division of the Department of Justice and the Federal Trade Commission, state attorneys general and others may nevertheless still challenge the Merger on antitrust grounds and either before or after the completion of the Merger, any such agencies or persons or others could take action under the antitrust laws, including, without limitation, seeking to enjoin the completion of the Merger.

Litigation

Subsequent to the announcement of the Merger, the Company, its directors, Open Text and Merger Sub were named as defendants in a putative class action complaint, captioned Hull v. Kim D. Cooke, et al., Civil Action No. 12-A-04020-3, which was filed on May 7, 2012, and a putative class action complaint, captioned Biggs v. Thomas J. Stallings, et al., Civil Action No. 12-A-04328-7, which was filed on May 15, 2012, both of which were filed in the Superior Court of Gwinnett County, State of Georgia. The actions, brought on behalf of a putative class of stockholders of the Company, generally allege that the Company's directors breached their fiduciary duties owed to the Company's stockholders in connection with the proposed acquisition by,

EASYLINK SERVICES INTERNATIONAL CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)

(tabular data in thousands, except per share data)

(Unaudited)

among other things, failing to maximize stockholder value, failing to disclose all material information concerning the Merger and failing to act in the best interests of the Company's stockholders. The complaints further allege that the Company, Open Text and Merger Sub aided and abetted the purported breaches by the Company's directors. The plaintiffs seek injunctive and other equitable relief, including enjoining us from consummating the Merger, and damages, in addition to fees and costs. On May 25, 2012, the plaintiffs filed a motion to consolidate the two actions and appoint both plaintiffs as co-lead plaintiffs.

In addition, the Company, its directors and Merger Sub were named as defendants in a putative class action complaint, captioned Gross v. EasyLink Services International Corp., et al., Case No. 7505, which was filed on May 8, 2012 in the Court of Chancery of the State of Delaware. The Gross action asserted allegations similar to those asserted in the Georgia actions. On May 16, 2012, the plaintiff in the Gross action filed a request for voluntary dismissal of that case.

The Company believes that the claims asserted in these actions are without merit and intends to vigorously defend these matters.

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 on Form 10-Q regarding the timing or likelihood of completing the Merger, 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 on Form 10-Q, the words “anticipate,” “believe,” “estimate,” “expect,” “may,” “will,” “hope,” “continue” and “intend,” and words or phrases of similar import, as they relate to the timing or likelihood of completing the Merger, 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 on Form 10-Q 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 on Form 10-Q as anticipated, believed, estimated, expected, hoped or intended.

Recent Developments

On May 1, 2012, we entered into the Merger Agreement with Open Text and Merger Sub. Under the terms and subject to the conditions set forth in the Merger Agreement, including the requirement that our stockholders approve the adoption of the Merger Agreement, Merger Sub will be merged with and into us, and we will survive the merger as a wholly-owned subsidiary of Open Text (the “Merger”). The total cash consideration upon the closing of the Merger will be approximately $251.2 million. For additional information on the Merger, see Note 12, Subsequent Events of Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q (Unaudited).

Business Overview

We are a leading provider of a comprehensive suite of communication applications that enable enterprises of all sizes to communicate securely and profitably with their customers, trading partners and other third parties. We deliver our cloud-based applications-as-a-service through a proprietary business integration network ("BIN") comprised of enterprise-class platforms located in worldwide redundant and highly secure network operations centers.

Our applications include electronic fax services, electronic data interchange (“EDI”) services, multimodal notification services and other communication 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 BIN provides our customers with scalable on-demand cloud-based delivery services that are 100% outsourced, which can be accessed globally and are monitored 24 hours a day 7 days a week.

Our operations are tracked in two business segments defined as follows:


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


•	Supply Chain Messaging segment (“Supply Chain”), which includes all our EDI and telex services.

On October 21, 2010, in order to strengthen and broaden our product offerings and capture market share, we acquired the ~~iSend and iNotify advanced messaging businesses (the “~~Xpedite Business”) from ~~Premiere Global Services, Inc~~PGI. For ~~(“PGI”)~~additional ~~through~~information on the ~~purchase of PGI’s wholly-owned subsidiaries~~ Xpedite ~~Systems~~Business, see ~~LLC~~Note ~~and~~2, ~~Premiere~~Acquisition ~~Global~~of ~~Services~~Notes ~~(UK)~~to ~~Limited~~Condensed ~~and~~Consolidated ~~certain~~Financial ~~related~~Statements, ~~assets~~included ~~owned~~in bythis ~~PGI’s~~Quarterly ~~subsidiary~~Report ~~Premiere~~on ~~Conferencing~~Form 10-Q (~~Canada~~Unaudited) ~~Limited~~. Beginning from the October 21, 2010 acquisition date, the operating results of the Xpedite Business are included in the financial results of the Company. The addition of the Xpedite Business has significantly increased the revenue in our On Demand segment and affected our gross margins with related impacts on the cost of revenue and other expense items within our results of operations as compared to prior periods. The integration of the Xpedite Business and the servicing of the acquisition debt will be important drivers of our financial results in ~~future reporting periods.~~

Approximately 39% and 40% of our service revenues for the three and six months ended January 31, 2012, respectively were from customers outside of the U.S. compared to 44% and 39% for the three and six months ended January 31, 2011, respectively. Accordingly, our service revenues can fluctuate based on the performance of non-U.S. economies and significant changes in the value of the U.S. Dollar in relation to foreign currencies. Our On Demand international operations are primarily denominated in Japanese Yen, Euros, Pounds Sterling and Australian Dollars.22

future reporting periods.

Approximately 40% and 41% of our service revenues for the three and nine months ended April 30, 2012, respectively, were from customers outside of the U.S. compared to 44% and 41% for the three and nine months ended April 30, 2011, respectively. Accordingly, our service revenues can fluctuate based on the performance of non-U.S. economies and significant changes in the value of the U.S. Dollar in relation to foreign currencies. Our On Demand international operations are primarily denominated in Japanese Yen, Euros, Pounds Sterling and Australian Dollars.

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.

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 U.S. generally accepted accounting principles (“GAAP”) and fairly present our financial position and results of operations. 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. Our 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 fiscal year ended July 31, 2011. There have been no significant changes in our critical accounting policies since July 31, 2011.

2023

Fiscal 2012 Quarter Compared to the Fiscal 2011 Quarter

Results of Operations

In this quarterly report on Form 10-Q we refer to the three months ended ~~January~~April 3130, 2012 as the “Fiscal 2012 Quarter” and the three months ended ~~January~~April 3130, 2011 as the “Fiscal 2011 Quarter.”

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

	Fiscal Quarter
	2012			2011			Variance
Service revenues, net:
On Demand
Fax Services	$	27,~~061~~893		$	2728,~~986~~358		$	(~~925~~465	)
DCM Services	~~548~~521			~~469~~461			7960
Production Email	4,~~273~~453			45,~~839~~111			(~~566~~658		)
Notifications Services	21,~~171~~998			2,~~983~~792			(~~812~~794		)
Other Services	1,~~698~~849			1,~~657~~734			41115
Total On Demand	3536,~~751~~714			3738,~~934~~456			(21,~~183~~742		)
Supply Chain
EDI Services	7,~~557~~487			7,~~953~~808			(~~396~~321		)
Telex Services	1,~~197~~204			1,~~538~~518			(~~341~~314		)
Total Supply Chain	8,~~754~~691			9,~~491~~326			(~~737~~635		)
Total Service revenues, net:	4445,~~505~~405			47,~~425~~782			(2,~~920~~377		)
Cost of services:
On Demand	12,~~467~~821			1514,~~072~~154			(21,~~605~~333		)
Supply Chain	2,~~099~~496			2,~~422~~234			~~(323~~262		)
Total Cost of services	1415,~~566~~317			1716,~~494~~388			(21,~~928~~071		)
Gross profit:
On Demand	23,~~284~~893			2224,~~862~~302			~~422~~(409		)
Supply Chain	6,~~655~~195			7,~~069~~092			(~~414~~897		)
Total Gross profit	2930,~~939~~088			2931,~~931~~394			8(1,306		)
Product development and enhancement	3,~~038~~261			3,~~557~~338			(~~519~~77		)
Selling and marketing	6,~~386~~726			6,~~776~~750			(~~390~~24		)
General and administrative	12,~~622~~583			12,~~399~~841			~~223~~(258		)
Acquisition and integration related	—1,033			~~817~~—			~~(817~~1,033		)
Total Operating expenses	2223,~~046~~603			2322,~~549~~929			~~(1,503~~674		)
Other expense	(1,~~869~~905		)	(1,~~575~~488		)	(~~294~~417		)
Income before income taxes	$	64,~~024~~580		$	46,~~807~~977		$	1(2,~~217~~397	)

2124

Fiscal 2012 Quarter Highlights

Service revenues, net — Total revenue for the Fiscal 2012 Quarter was $4445.54 million, a decrease of $2.94 million, or 65.20%, as compared to the Fiscal 2011 Quarter. Foreign currency exchange translation ~~increased~~decreased revenue in the Fiscal 2012 Quarter by approximately $0.41 million. On Demand revenue decreased $21.27 million, or 54.87%. The On Demand revenue decline was primarily driven by the exit of certain low margin contracts that came with the Xpedite Business of approximately $10.18 million, coupled with declining volumes in production email related to our financial service customers and reduction in voice notification activity., which were tempered by increasing volumes in fax related to our professional service customers. Supply Chain revenue decreased $0.76 million, or 76.8%, from the Fiscal 2011 Quarter, as compared to the Fiscal 2012 Quarter, due to volume decreases in ~~EDI~~Telex and ~~Telex~~loss ~~services~~of a customer reseller in EDI.

Gross Profit — Gross profit for the Fiscal 2012 Quarter ~~remained~~decreased ~~virtually~~$1.3 ~~unchanged~~million, ~~from~~or 4.2% when compared to the Fiscal 2011 Quarter ~~at $29~~.~~9 million.~~ Gross margin for the Fiscal 2012 Quarter increased to 6766.3% from 6365.17% in the Fiscal 2011 Quarter. The increase in gross margin was mainly driven by the exit of certain low margin contracts associated with the Xpedite Business ~~coupled with a change in revenue mix~~. Total cost of services decreased $21.91 million, or 166.75%, due to reduced telecommunication costs associated with the exit of the low margin contracts mentioned above, along with reductions in employee related expense ~~and depreciation expense~~.

Operating Expenses — Operating expenses for the Fiscal 2012 Quarter totaled $2223.06 million versus $2322.59 million for the Fiscal 2011 Quarter, representing aan ~~decrease~~increase of approximately $10.57 million, or 62.49%. The ~~decrease~~increase in operating expenses is primarily due to ~~savings~~$1.0 ~~associated~~million ~~with~~in ~~the~~acquisition and integration ofrelated ~~the~~charges ~~Xpedite~~coupled ~~Business,~~with ~~which~~approximately is$0.6 ~~driven~~million byof ~~reduced~~increased ~~acquisition~~legal ~~and~~expenses ~~integration~~associated ~~related~~with ~~charges~~our ofcurrent $0litigation.8 ~~million~~See ~~and~~Note ~~decreased~~9, ~~costs~~Commitments ofand ~~$1.0~~Contingencies, ~~million~~of ~~related~~Notes to ~~the~~Condensed ~~transition~~Consolidated ~~service~~Financial ~~agreement~~Statements, ~~entered~~included ~~into~~ in ~~connection~~this ~~with~~Quarterly ~~the~~Report ~~purchase~~on ofForm ~~the~~10-Q ~~Xpedite~~(Unaudited) ~~Business~~for additional information on our current litigation. Acquisition and integration ~~related~~ charges ~~reflected~~for inthe ~~operating~~Fiscal ~~expenses~~2012 Quarter include, ~~but are not limited to~~consultation, ~~transaction costs such as~~ legal and ~~accounting~~ professional fees ~~directly~~ related to the ~~acquisition,~~Merger. See ~~termination~~Note ~~and~~12, ~~related~~Subsequent ~~costs~~Event, ~~for~~of ~~transitional~~Notes ~~and~~to ~~certain~~Condensed ~~other~~Consolidated ~~employees~~Financial Statements, ~~integration~~included ~~related~~in ~~professional~~this ~~fees~~Quarterly ~~and~~Report ~~other~~on ~~post~~Form ~~business~~10-Q ~~combination~~(Unaudited) ~~related~~for ~~expenses~~additional ~~associated~~information ~~with~~regarding the ~~Xpedite Business~~Merger. ~~During~~These ~~the~~increases ~~Fiscal~~were ~~2012~~tempered ~~Quarter~~by wereduced ~~recognized~~bad ~~increased~~debt ~~stock~~expense ~~compensation expenses~~ of $0.74 million, ~~and~~savings ~~increased~~associated ~~legal~~with ~~expenses~~the termination of ~~$1.1~~the ~~million~~transition asservices ~~compared~~agreement toassociated with the ~~Fiscal~~Xpedite ~~2011~~Business ~~Quarter. These~~acquisition ~~increases~~of ~~were~~$0.1 ~~tempered~~million, byand decreases in depreciation and amortization ~~of $1.1 million~~ in the Fiscal 2012 Quarter primarily due to the change in the preliminary estimate of the purchase price allocation of the Xpedite Business during the Fiscal 2011 Quarter coupled with the completion of amortization related to definite lived intangible assets from prior acquisitions of $0.4 million.

Other Expense — Other expenses for the Fiscal 2012 Quarter consist mainly of net interest expense of approximately $1.43 million, which included $1.0 million in net cash interest expense, $0.21 million in interest expense from the amortization of the discount on the Term Loan and $0.2 million in interest expense associated with the interest rate swap we entered into during Fiscal 2011. See Liquidity and Capital Resources below for additional information regarding the interest rate swap. Interest expense for the Fiscal 2012 Quarter decreased $0.24 million from the Fiscal 2011 Quarter, due to lower principal on the 2010 Loans. Other non-operating expense for the Fiscal 2012 Quarter totaled $0.46 million versus Other non-operating income of $~~23.~~0.2 ~~thousand~~million for the Fiscal 2011 Quarter. The increase of $0.4 million in other non-operating expense during the Fiscal 2012 Quarter relates to foreign exchange losses related to our international operations.

2225

~~Six~~Nine Months Ended ~~January~~April 3130, 2012 Compared to ~~Six~~Nine Months Ended ~~January~~April 3130, 2011

	Six Months
	Nine Months
	2012			2011			Variance
Service revenues, net:
On Demand
Fax Services	$	5583,~~128~~021		$	3866,~~293~~651		$	16,~~835~~370
DCM Services	1,~~110~~631			~~966~~1,428			~~144~~203
Production Email	913,~~261~~714			611,~~282~~392			2,~~979~~322
Notifications Services	46,~~553~~552			36,~~307~~099			~~1,246~~453
Other Services	35,~~388~~237			23,~~040~~774			1,~~348~~463
Total On Demand	73110,~~440~~155			5089,~~888~~344			2220,~~552~~811
Supply Chain
EDI Services	1522,~~508~~994			1623,~~037~~846			(~~529~~852		)
Telex Services	23,~~572~~775			34,~~235~~752			(~~663~~977		)
Total Supply Chain	1826,~~080~~769			1928,~~272~~598			(1,~~192~~829		)
Total Service revenues, net:	91136,~~520~~924			70117,~~160~~942			2118,~~360~~982
Cost of services:
On Demand	2538,~~980~~801			1933,~~127~~281			65,~~853~~520
Supply Chain	46,~~294~~790			47,~~958~~192			(~~664~~402		)
Total Cost of services	3045,~~274~~591			2440,~~085~~473			65,~~189~~118
Gross profit:
On Demand	4771,~~460~~354			3156,~~761~~063			15,~~699~~291
Supply Chain	1319,~~786~~979			1421,~~314~~406			(~~528~~1,427		)
Total Gross profit	6191,~~246~~333			4677,~~075~~469			1513,~~171~~864
Product development and enhancement	69,~~037~~298			58,~~496~~833			~~541~~465
Selling and marketing	1219,~~913~~639			916,~~733~~483			3,~~180~~156
General and administrative	2639,~~877~~461			1932,~~988~~829			6,~~889~~632
Acquisition and integration related	~~448~~1,480			2,415			(~~1,967~~935		)
Total Operating expenses	4669,~~275~~878			3760,~~632~~560			89,~~643~~318
Other expense	(35,~~406~~310		)	(23,~~077~~565		)	(1,~~329~~745		)
Income before income taxes	$	1116,~~565~~145		$	613,~~366~~344		$	52,~~199~~801

2326

~~Service~~In ~~revenues,~~Fiscal ~~net — Total revenue for the six months ended January 31, 2012 was $91.5 million, an increase of $21.4 million, or 30.4%, as compared to the six months ended January 31,~~ 2011. ~~Foreign~~we ~~currency~~acquired ~~exchange translation increased revenue in~~ the ~~six~~Xpedite ~~months~~Business ~~ended January 31, 2012 by approximately $0.5 million. On Demand revenue increased $22.5 million, or 44.3%~~ from ~~the six months ended January 31, 2011~~PGI. ~~The~~It ~~Xpedite~~should ~~Business~~be ~~contributed~~noted ~~$53.6~~that ~~million of revenue for~~ the ~~six~~comparisons ~~months ended January 31, 2012, as compared~~ to ~~$30.9 million in~~ the ~~six~~nine months ended ~~January~~April 3130, 2011, ~~which~~only ~~was~~include the ~~main~~results ~~driver~~of ~~for~~ the OnXpedite ~~Demand~~Business ~~revenue~~from ~~increase. The increase in revenue in~~ the Ondate ~~Demand~~of ~~segment was tempered by declines mentioned in~~ the ~~Fiscal 2012 Quarter coupled with decreased notification services related to the non-recurrence of governmental elections in our Asian Pacific region. Supply Chain revenue decreased $1.2 million~~acquisition, orOctober ~~6.2%~~21, ~~from the six months ended January 31~~2010, ~~2011,~~through asApril ~~compared to the six months ended January 31~~30, ~~2012, due to decreases in EDI and Telex services~~2011.

~~Gross~~Service ~~Profit~~revenues, net — ~~Gross~~Total ~~profit~~revenue ~~increased~~for ~~$15.2~~the ~~million~~nine months ended April 30, or2012 32was $136.9% million, ~~from~~an ~~the~~increase ~~six~~of ~~months~~$19.0 ~~ended~~million, ~~January~~or 3116.1%, ~~2011,~~ as compared to the ~~six~~nine months ended ~~January~~April 3130, ~~2012~~2011. ~~The~~ ~~Xpedite~~Foreign ~~Business~~currency ~~contributed~~exchange ~~$33.8~~translation ~~million~~increased revenue in ~~gross profit during~~ the ~~six~~nine months ended ~~January~~April 3130, 2012 asby ~~compared~~approximately to$0.4 million. On Demand revenue increased $1720.68 million, inor 23.3% from the ~~six~~nine months ended ~~January~~April 3130, 2011. ~~Gross~~The ~~margin~~Xpedite Business contributed $80.4 million of revenue for the ~~six~~nine months ended ~~January~~April 3130, 2012, ~~increased~~as compared to 66$59.9%5 ~~from~~million ~~65.7%~~ in the ~~six~~nine months ended ~~January~~April 3130, ~~2012~~2011, which was the main driver for the On Demand revenue increase. The increase ofin ~~gross~~revenue ~~margin~~in asthe aOn ~~percentage~~Demand segment was ~~mainly~~tempered by declines driven by the exit of certain low margin contracts that came with the Xpedite Business, ~~during~~coupled ~~the~~with ~~Fiscal~~declining ~~2012~~volumes ~~Quarter.~~in ~~The~~production Onemail ~~Demand~~related ~~services have grown~~ to ~~80.5%~~our offinancial ~~total~~service ~~revenue~~customers inand ~~the~~reduction ~~six months ended January 31, 2012 from 72.5%~~ in ~~the~~voice ~~six~~notification ~~months ended January 31~~activity, ~~2011.~~which ~~The~~were Onoffset ~~Demand~~by ~~services~~increasing ~~have~~volumes ain ~~higher~~fax ~~cost~~related ofto ~~delivery~~our ~~driven~~professional byservice ~~the telecommunication expenses for fax services~~customers. ~~Total~~Supply ~~cost~~Chain ofrevenue ~~services~~decreased ~~increased~~ $61.28 million, or 256.74%, ~~due~~from to the ~~cost~~nine ofmonths ~~delivery~~ended ~~for~~April ~~the~~30, ~~Xpedite~~2011, ~~Business~~as ~~along~~compared ~~with~~to ~~increases~~the innine ~~outside~~months ~~professional~~ended ~~services~~April 30, ~~which~~2012, ~~were~~due ~~mitigated~~to byvolume ~~reductions~~decreases in ~~employee~~Telex ~~related~~and ~~expense~~loss ~~and~~of ~~depreciation~~a ~~expense~~customer reseller in EDI.

~~Operating~~Gross ~~Expenses~~Profit — ~~Operating~~Gross ~~expenses~~profit ~~for~~increased $13.9 million, or 17.9%, from the ~~six~~nine months ended ~~January~~April 3130, 2011, as compared to the nine months ended April 30, 2012. The ~~totaled~~Xpedite Business contributed $4651.30 million ~~versus~~in gross profit during the nine months ended April 30, 2012 as compared to $3735.63 million ~~for~~in the ~~six~~nine months ended ~~January~~April 3130, 2011,. Gross ~~representing~~margin anfor ~~increase~~the ofnine ~~$8.6~~months ~~million~~ended April 30, or2012 23increased to 66.07%. ~~The~~from ~~increase~~65.7% in ~~operating expenses during~~ the ~~six~~nine months ended ~~January~~April 3130, ~~2012~~2011. The isincrease ~~primarily~~of ~~attributable~~gross tomargin as a percentage was mainly driven by the ~~acquisition~~exit of certain low margin contracts that came with the Xpedite Business, ~~which~~during ~~contributed~~the ~~$21~~Fiscal 2012 Quarter.4 ~~million,~~The orOn 46Demand services have grown to 80.24% of ~~operating~~total ~~expenses~~revenue in the ~~six~~nine months ended ~~January~~April 3130, 2012 asfrom ~~compared~~75.8% toin the nine months ended April 30, 2011. The On Demand services have a higher cost of delivery driven by the telecommunication expenses for fax services. Total cost of services increased $135.01 million, or 3412.6%, ofdue ~~operating~~to ~~expenses~~the incost of delivery for the ~~six~~Xpedite ~~months~~Business ~~ended~~along ~~January~~with 31increases in outside professional services, ~~2011~~which were mitigated by reductions in employee related expense and depreciation expense.

~~During~~Operating Expenses — Operating expenses for the ~~six~~nine months ended ~~January~~April 3130, 2012 wetotaled ~~recognized~~ $069.49 million inversus ~~acquisition and integration related charges as compared to~~ $260.46 million infor the ~~six~~nine months ended ~~January~~April 3130, 2011~~. Acquisition~~, ~~and~~representing ~~integration~~an ~~related~~increase ~~charges~~of ~~reflected~~$9.3 inmillion, ~~operating~~or ~~expenses~~15.4%. ~~include,~~The ~~but~~increase ~~are~~in ~~not~~operating ~~limited~~expenses ~~to,~~during ~~transaction~~the ~~costs~~nine ~~such~~months asended ~~legal~~April ~~and~~30, ~~accounting~~2012 ~~professional~~is ~~fees~~primarily ~~directly~~attributable ~~related~~ to the acquisition, ~~termination~~of ~~and related costs for transitional and certain other employees, integration related professional fees and other post business combination related expenses associated with~~ the Xpedite Business., ~~The~~which ~~decrease~~contributed ~~in acquisition and integrated related charges of~~ $232.04 million, ~~and~~or ~~decreased~~46.4% ~~costs~~ of ~~$1.1~~operating ~~million~~expenses ~~related to the transition service agreement entered into~~ in ~~connection with~~ the ~~purchase~~nine ofmonths ~~the~~ended ~~Xpedite~~April ~~Business~~30, ~~were~~2012 ~~slightly~~as ~~tempered~~compared byto ~~higher stock compensation costs of~~ $124.0 million, ~~increased~~or ~~legal~~39.6% ~~expenses~~ of ~~$2.3~~operating ~~million~~expenses ~~incurred~~ in the ~~six~~nine months ended ~~January~~April 3130, ~~2012~~2011. ~~We anticipate the decreases in operating expenses to continue due to savings associated with the integration of the Xpedite Business.~~

~~Other~~During ~~Expense — Other expenses for~~ the ~~six~~nine months ended ~~January~~April 3130, 2012 ~~consist mainly of net interest expense of approximately $3.0 million~~, ~~which~~we ~~included~~recognized $21.35 million in ~~net~~acquisition ~~cash~~and ~~interest~~integration ~~expense,~~related ~~$0.3~~charges ~~million~~as incompared ~~interest~~to ~~expense from the amortization of the discount on the Term Loan and~~ $02.4 million in ~~interest expense associated with~~ the ~~interest~~nine ~~rate~~months ~~swap~~ended weApril ~~entered~~30, ~~into during Fiscal~~ 2011. Acquisition ~~See Liquidity~~ and ~~Capital~~integration ~~Resources~~related ~~for~~charges ~~additional~~reflected ~~information~~in ~~regarding~~operating ~~the~~expenses ~~interest~~include, ~~rate~~but ~~swap.~~are ~~Interest~~not ~~expense~~limited ~~for~~to, ~~the~~transaction ~~six~~costs ~~months~~such ~~ended~~as ~~January~~legal ~~31,~~and ~~2012~~accounting ~~increased~~professional ~~$0.6~~fees ~~million~~directly ~~from~~related to the ~~six~~acquisition, ~~months~~termination ~~ended~~and ~~January~~related ~~31,~~costs ~~2011,~~for ~~due~~transitional toand ~~the~~certain ~~2011~~other ~~Loans~~employees, ~~entered~~integration ~~into~~related inprofessional ~~our~~fees ~~first~~and ~~fiscal~~other ~~quarter~~post ofbusiness ~~Fiscal~~combination ~~2011. Other~~related ~~non-operating~~expenses ~~expense~~associated ~~for~~with the ~~six~~Xpedite ~~months~~Business. ~~ended~~In ~~January 31~~addition, ~~2012~~acquisition ~~totaled~~and ~~$0.4~~integration ~~million~~charges ~~versus~~include ~~Other~~consultation, ~~non-operating~~legal ~~income~~and ofprofessional ~~$0.3~~fees ~~million~~related ~~for~~to the ~~six~~Merger. See ~~months~~Note ~~ended~~12, ~~January~~Subsequent 31Event, ~~2011. The increase~~ of ~~$0.7~~Notes ~~million~~to inCondensed ~~other~~Consolidated ~~non-operating~~Financial ~~expense~~Statements, ~~during~~included ~~the~~in ~~six~~this ~~months~~Quarterly ~~ended~~Report ~~January~~on ~~31,~~Form ~~2012~~10-Q ~~relates~~(Unaudited) tofor ~~foreign~~additional ~~exchange~~information ~~losses~~regarding ~~related~~the ~~to our international operations~~Merger.

In addition to the decrease in acquisition and integration related charges of $0.9 million, operating expenses decreased $1.0 million related to the termination of the transition service agreement entered into in connection with the purchase of the Xpedite Business. Amortization decreased $1.6 million due to the completion of amortization related to definite lived intangible assets from prior acquisitions. These decreases were off-set by higher stock compensation costs of $1.2 million and increased legal expenses of $3.2 million associated with our current litigation as compared to the nine months ended April 30, 2011. See Note 9, Commitments and Contingencies, of Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q (Unaudited) for additional information on our current litigation.

Other Expense — Other expenses for the nine months ended April 30, 2012 consist mainly of net interest expense of approximately $4.3 million, which included $3.2 million in net cash interest expense, $0.5 million in interest expense from the amortization of the discount on the Term Loan and $0.6 million in interest expense associated with the interest rate swap we entered into during Fiscal 2011. See Liquidity and Capital Resources for additional information regarding the interest rate swap. Interest expense for the nine months ended April 30, 2012 increased $0.2 million from the nine months ended April 30, 2011, due to the 2011 Loans, entered into in our first fiscal quarter of Fiscal 2011. Other non-operating expense for the nine months ended April 30, 2012 totaled $1.1 million versus other non-operating income of $0.5 million for the nine months ended April 30, 2011. The increase of $1.6 million in other non-operating expense during the nine months ended April 30, 2012 relates to foreign exchange losses related to our international operations.

Liquidity and Capital Resources

Our principal source of liquidity consists of cash generated from operations. Cash and cash equivalents decreased approximately $87.56 million to a total balance of $2122.75 million as of ~~January~~April 3130, 2012 from $30.2 million as of July 31, 2011, primarily as a result of repayment of outstanding indebtedness.

Operating Activities. Our net cash provided by operating activities for the ~~six~~nine months ended ~~January~~April 3130, 2012 was $1523.63 million, an increase of $25.75 million, or 2028.75%, as compared to the ~~six~~nine months ended ~~January~~April 3130, 2011. The most significant contributor to the increase in our net cash provided by operating activities is an increase of $2.3 million in our net income, which is primarily attributable to the inclusion of the Xpedite Business. As the majority of our revenue is recurring under contract, it is primarily affected by the volumes incurred by the customer using the underlying messaging application. Operating expenses are primarily driven by labor costs and telecom costs which are directly tied to customer utilization of messaging services.

24Our accounts receivable decreased approximately $2.2 million in the nine months ended April 30, 2012. We had a days sales outstanding (“DSO”) of 56.3 and 58.3 as of April 30, 2012 and July 31, 2011, respectively. We consider our DSO to be within the industry norm and do not see any trends in our DSO that will negatively affect our future liquidity.

~~Our~~Debt ~~accounts~~Financing ~~receivable~~Activities. In ~~decreased~~connection ~~approximately~~with the Xpedite Business acquisition, we entered into the 2010 Loans. The 2010 Loans call for quarterly payments of $34.61 million with interest and a final balloon payment in ~~the~~October ~~six~~2014, ~~months~~with ~~ended~~interest. At ~~January~~April 3130, 2012~~. We~~ ~~had~~there awas ~~days~~$0.0 ~~sales~~million outstanding ~~(“DSO”)~~on ofthe ~~54.92~~Revolving Loan and 58$80.37 asmillion outstanding on the Term Loan. Under the terms of ~~January 31~~the 2010 Credit Agreement, ~~2012~~we ~~and~~made ~~July~~our 31scheduled quarterly payments of $4.1 million along with interest due. During the nine months ended April 30, ~~2011~~2012, ~~respectively. We~~we ~~consider~~made ~~our~~payments ~~DSO~~in tothe beamount ~~within~~of $6.0 million on the ~~industry~~Revolving ~~norm~~Loan and dobegan ~~not~~to ~~see~~utilize the swingline option to fund day to day cash needs where any ~~trends~~shortfall inis ~~our~~expected ~~DSO~~to ~~that~~last ~~will~~less ~~negatively~~than ~~affect~~30 ~~our~~days. As ~~future~~of April 30, ~~liquidity~~2012 the outstanding balance on the swingline was $0.0 million.

Debt Financing Activities. In connection with the Xpedite Business acquisition, we entered into a new credit facility (the "2010 Credit Agreement") consisting of a $110.0 million term loan (the “Term Loan”) and a $20.0 million revolving loan (the “Revolving Loan” and together with the Term Loan, the “2010 Loans”) of which $12.0 million of the Revolving Loan was drawn upon to refinance our previous credit facility. The 2010 Loans call for quarterly payments of $4.1 million with interest and a final balloon payment in October 2014, with interest. At January 31, 2012 there was $1.9 million outstanding on the Revolving Loan and $84.9 million outstanding on the Term Loan. Under the terms of the 2010 Credit Agreement, we made our scheduled quarterly payments of $4.1 million along with interest due. During the six months ended January 31, 2012, we made payments in the amount of $6.0 million on the Revolving Loan and began to utilize the swingline option to fund day to day cash needs where any shortfall is expected to last less than 30 days. As of January 31, 2012 the outstanding balance on the swingline was $1.9 million.

For additional information pertaining to our indebtedness, see Note 4, Indebtedness, of Notes to Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q (Unaudited).

Our 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 12 months. We expect existing domestic cash, availability under our line of credit and cash equivalents and cash provided from operations to continue to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities, such as debt repayments, for at least the next 12 months and thereafter for the foreseeable future.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk Factors

We have market risk exposure from changes in interest rates and foreign currency exchange rates. We use a derivative financial instrument for the purpose of mitigating the interest rate risk exposure. We monitor these financial exposures as part of our overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effects on our operating results.

Interest Rate Risk

We have borrowings under the 2010 Credit Agreement at variable interest rates. The general level of U.S. interest rates and LIBOR affect interest expense. We use an interest rate swap to manage such risk. The net amounts to be paid or received under interest rate swap agreements are accrued as interest rates change, and are recognized over the life of the swap agreement as an adjustment to interest expense from the underlying debt to which the swap is designated. The related amounts payable to the contract counter-party are included in accrued liabilities.

Foreign Exchange Risk

We conduct business in certain foreign markets. Our primary exposure to foreign currency risk relates to investment in foreign subsidiaries that transact business in a functional currency other than the U.S. Dollar, primarily denominated in the Japanese Yen, Pound Sterling and Euro. However, the exposure is mitigated by netting operating cash flows in each country and our practice of generally reinvesting profits from international operations in order to grow the business that generated such profits.

subsidiaries that transact business in a functional currency other than the U.S. Dollar, primarily denominated in the Japanese Yen, Pound Sterling and Euro. However, the exposure is mitigated by netting operating cash flows in each country and our practice of generally reinvesting profits from international operations in order to grow the business that generated such profits.

As we increase our operations in international markets we become increasingly exposed to changes in currency exchange rates. The economic impact of currency exchange rate movements is often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause us to adjust our financing and operating strategies.

As currency exchange rates change, translation of the statements of operations of the international businesses into U.S. Dollars affects year-over-year comparability of operating results. Historically, we have not hedged translation risks because cash flows from international operations were netted and generally reinvested locally; however, we may do so in the future. Our objective in managing foreign exchange risk is to minimize the potential exposure to changes that exchange rates might have on earnings, cash flows, and financial position.

25Foreign exchange gains and (losses) on foreign currency transactions aggregated to $(0.6) million and $(1.4) million for the three and nine months ended April 30, 2012, respectively and $0.1 million and $0.1 million for the three and nine months ended April 30, 2011, respectively. As of April 30, 2012 and July 31, 2011, cumulative translation adjustments included in other comprehensive income amounted to approximately $2.8 million and $2.1 million, respectively.

affects year-over-year comparability of operating results. Historically, we have not hedged translation risks because cash flows from international operations were netted and generally reinvested locally; however, we may do so in the future. Our objective in managing foreign exchange risk is to minimize the potential exposure to changes that exchange rates might have on earnings, cash flows, and financial position.

Foreign exchange gains and (losses) on foreign currency transactions aggregated to $(0.5) million and $(0.8) million for the three and six months ended January 31, 2012, respectively and ($0.2) million and $0.1 million for the three and six months ended January 31, 2011, respectively. As of January 31, 2012 and July 31, 2011, cumulative translation adjustments included in other comprehensive income amounted to approximately $3.0 million and $2.1 million, respectively.

Sensitivity Analysis

The analysis below is hypothetical and should not be considered a projection of future risks. Earnings projections are before tax.

At ~~January~~April 3130, 2012, the potential change in fair value of our outstanding interest rate derivative instrument, assuming a 10 basis point, or approximately 35%, unfavorable shift in the underlying interest rates, would be an approximate loss of $0.1 million. The net impact on reported earnings, after also including the reduction in one year's interest expense on the related debt due to the same shift in interest rates, would be approximately a net gain of $0.1 million.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management has established and maintains 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 our Chief Executive Officer and Chief Financial Officer, as appropriate, by others within the entity to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the disclosure controls and procedures and, based on this evaluation, has concluded that disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by the report. We continually review the respective disclosure controls and procedures and make changes, as necessary, to ensure the quality of our financial reporting.

Internal Controls over Financial Reporting

There have been no changes in internal control over financial reporting that occurred during the ~~second~~Fiscal ~~quarter of fiscal year~~ 2012 Quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

2629

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

~~For~~From ~~information~~time ~~pertaining~~to time, we may become party to ~~our~~various legal proceedings and claims, ~~see~~either ~~Note~~asserted 9or unasserted, ~~Commitments~~which ~~and~~arise ~~Contingencies,~~in the ordinary course of ~~Notes~~business. While tothe ~~Condensed~~outcome ~~Consolidated~~of ~~Financial~~these ~~Statements~~matters cannot be predicted with certainty, ~~included~~we incurrently ~~this~~do ~~Quarterly~~not ~~Report~~believe that the outcome of any of these claims will have a material adverse effect on ~~Form~~our ~~10-Q~~consolidated ~~(Unaudited).~~financial position, results of operations or cash flow.

New York state excise tax - On January 6, 2012, we received a notice from the New York State Department of Taxation and Finance (the “Department”) stating that the Department was assessing we draft assessments of $10.5 million based almost entirely on estimates and assumptions that an excise tax was due on 100% of our New York state revenues for the calendar year ended December 31, 2000 through the calendar year ended December 31, 2009. We believe that the calculation of the assessment is materially flawed and intends to contest it. We believe that any possible reasonable assessment will not be material to us. We establish liabilities when a particular contingency is probable and estimable. We believe an assessment is reasonably possible; however, the reasonably possible exposure to losses cannot currently be estimated at this time.

Litigation

j2 - In June 2008, j2 Global Communications, Inc. (“j2”) brought a patent infringement lawsuit against us, alleging that certain of our services infringe three of j2's patents, U.S. Patent Nos. 6,597,688 (the " '688 patent"), 7,020,132 (the " '132 patent") and 6,208,638 (the " '638 patent") and seeking damages and injunctive relief. The case is pending in the U.S. District Court for the Central District of California and is currently in the discovery phase. We have denied infringing any of the j2 patents and has filed a counterclaim seeking, among other things, a declaratory judgment that the j2 patents are invalid. Discovery in the matter is ongoing. The case is currently scheduled for trial in February 2013.

j2 attempted in the above-mentioned lawsuit to add an additional allegation of infringement of U.S. Patent No. 6,350,066 (the " '066 patent") against a newly acquired Xpedite Business service, which the Court denied. Thereafter, in May 2011, j2's wholly-owned subsidiary Advanced Messaging Technologies Inc. (“AMT”) brought a new patent infringement lawsuit against us in the U.S. District Court for the Central District of California alleging that we infringe the '066 patent. On March 9, 2012, AMT filed an Amended Complaint adding j2 as a plaintiff and adding allegations of infringement of the '688, '132, and '638 patents. AMT and j2 are seeking an injunction, royalties and damages. We have denied infringing the AMT patent and have filed a counterclaim seeking, among other things, a declaratory judgment that all of the asserted patents are invalid. Discovery in the matter is ongoing. The case is currently scheduled for trial in March 2013.

In March 2011, we filed a patent infringement lawsuit against j2. The suit, filed by our subsidiary Xpedite Systems, LLC in the U.S. District Court for the Northern District of Georgia, alleges that j2 infringes U.S. Patent No. 5,872,640 entitled "Facsimile Form Generation System" and U.S. Patent No. 7,804,823 entitled "Systems and Methods for Communicating Documents Via an Autonomous Multi-Function Peripheral Device." We are seeking monetary damages for past infringement, and injunctive relief prohibiting j2 from continuing to infringe the patents, among other remedies.

We believe we have meritorious defenses to the j2 and AMT allegations and because they are at various stages of defenses, the ultimate outcome or range of outcomes is not yet determinable.

New York state sales tax - 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 $0.5 million in tax, interest, and penalties on sales for the sales tax period beginning March 1, 2001 and ending May 31, 2004. EasyLink Services International, Inc. appealed the assessment administratively to the New York Division of Tax Appeals, which resulted in an opinion in 2008 in favor of EasyLink Services International, Inc. In late July 2009, after appeal by the New York Department of Taxation and Finance, the decision was reversed by the administrative New York Tax Appeals Tribunal and remanded back to the administrative law judge to determine allocation and penalty issues. On remand, the Administrative Law Judge upheld the Tax Department's position on the allocation issues but agreed with EasyLink on the penalty issues and cancelled all penalties. The administrative proceedings are exhausted. EasyLink is currently pursuing a judicial appeal of the July 2009 decision of the Tax Appeals Tribunal by posting a bond and filing a Notice of Petition with the New York State Appellate Division in Albany, New York. New York sales tax audits for subsequent periods are also underway for Easylink Services International, Inc. (for the period June 1, 2004 through May 31, 2005) and Easylink Services USA, Inc. (for the period June 1, 2004 through February 28, 2011). The audits for the subsequent periods are ongoing and the results of those audits are in significant part contingent on what happens in connection with the above-referenced sales tax appeal. No liabilities or assessments have been proposed by the New York Tax Department in for the audits for the subsequent periods at this time.

Merger Related - Subsequent to the announcement of the Merger, we, our directors, Open Text and Merger Sub were named as defendants in a putative class action complaint, captioned Hull v. Kim D. Cooke, et al., Civil Action No. 12-A-04020-3, which was filed on May 7, 2012, and a putative class action complaint, captioned Biggs v. Thomas J. Stallings, et al., Civil Action No. 12-A-04328-7, which was filed on May 15, 2012, both of which were filed in the Superior Court of Gwinnett County, State of Georgia. The actions, brought on behalf of a putative class of stockholders of ours, generally allege that our directors breached their fiduciary duties owed to its stockholders in connection with the proposed acquisition by, among other things, failing to maximize stockholder value, failing to disclose all material information concerning the Merger and failing to act in the best interests of its stockholders. The complaints further allege that we, Open Text and Merger Sub aided and abetted the purported breaches by our directors. The plaintiffs seek injunctive and other equitable relief, including enjoining us from consummating the Merger, and damages, in addition to fees and costs. On May 25, 2012, the plaintiffs filed a motion to consolidate the two actions and appoint both plaintiffs as co-lead plaintiffs.

In addition, we, our directors and Merger Sub were named as defendants in a putative class action complaint, captioned Gross v. EasyLink Services International Corp., et al., Case No. 7505, which was filed on May 8, 2012 in the Court of Chancery of the State of Delaware. The Gross action asserted allegations similar to those asserted in the Georgia actions and requesting similar relief. On May 16, 2012, the plaintiff in the Gross action filed a request for voluntary dismissal of that case.

We believe that the claims asserted in these putative actions are without merit and intend to vigorously defend these matters.

Item 1A. Risk Factors

The following Risk Factor disclosure updates the risk factors as disclosed in the Company’s annual report on Form 10-K for the fiscal year ended July 31, 2011 previously filed with the SEC.

Our business could be negatively impacted by security threats, including cybersecurity threats, and other disruptions.

We may face various security threats, including cybersecurity threats to gain unauthorized access to sensitive information; threats to the safety of our directors, officers, and employees; and threats to the security of our facilities and infrastructure. Although we have utilized various systems, procedures and controls to monitor these threats and mitigate our exposure to such threats, there can be no assurance that these systems, procedures and controls will be sufficient in preventing security threats from materializing. If any of these events were to materialize, they could lead to losses of sensitive information, critical infrastructure or capabilities essential to our operations and could have a material adverse effect on our reputation, financial position, results of operations, or cash flows.

Cybersecurity attacks in particular are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data. These events could damage our reputation and lead to financial losses due to loss of business or potential liability.

We may also rely on third parties to provide our services. While they may manage their systems using information security policies and procedures, they generally face similar cybersecurity threats to their systems, which could adversely affect our business.

On May 1, 2012, we entered into the Merger Agreement with Open Text. This transaction is subject to the approval by our shareholders and subject to the satisfaction or waiver of certain other closing conditions. We may not be able to complete the Merger due to, among other things, the failure to obtain the requisite shareholder approval or the failure to satisfy other conditions to consummate the Merger.

In addition to other factors and matters contained in or incorporated by reference in this report, we believe the following factors could cause actual results to differ materially from those discussed in the forward-looking statements:


•	the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement, including a termination under circumstances that could require us to pay a termination fee;


•	Open Text's cash resources being sufficient to complete the Merger and the transactions contemplated thereby;


•	the effect of the announcement of the Merger on our business relationships, operating results and business generally, including our ability to retain key employees;


•	the inability to complete the Merger due to the failure to obtain the approval of the holders of a majority of the outstanding shares of class A common stock or the failure to satisfy other conditions to completion of the Merger,

including the failure to obtain any necessary regulatory approvals;


•	the failure of the Merger to close for any other reason;


•	the possibility that alternative takeover proposals will or will not be made;


•	risks that the proposed transaction disrupts current plans and operations and the potential difficulties in employee retention as a result of the Merger;


•	the outcome of any legal proceedings, regulatory proceedings or enforcement matters that may be instituted against us or others relating to the Merger Agreement;


•	diversion of management's and our other employees' attention from ongoing business concerns;


•	the Merger Agreement's contractual restrictions on the conduct of our business prior to the completion of the Merger;


•	the possible adverse effect on our business and the price of our shares of class A common stock if the Merger is not consummated in a timely fashion or at all; and


•	the amount of the costs, fees, expenses and charges related to the Merger.

For additional risk factors see those disclosed in our annual report on Form 10-K for the year ended July 31, 2011, 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. Mine Safety Disclosures

None.

Item 5. Other Information

None.

2732

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.

101.INS		XBRL Instance Document*

101.SCH		XBRL Taxonomy Extension Schema Document*

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*

101.LAB		XBRL Taxonomy Extension Label Linkbase Document*

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

* In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.”

2833

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: ~~March~~May 1230, 2012



	EASYLINK SERVICES INTERNATIONAL
	CORPORATION

	By:	/s/ Glen E. Shipley
		Glen E. Shipley
		Chief Financial Officer

2934

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.

101.INS		XBRL Instance Document*

101.SCH		XBRL Taxonomy Extension Schema Document*

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*

101.LAB		XBRL Taxonomy Extension Label Linkbase Document*

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

* In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall be deemed to be “furnished” and not “filed.”

3035

Filing Compare · EASYLINK SERVICES INTERNATIONAL CORP