Edgar Filing: ILINC COMMUNICATIONS INC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. (20549)

______________

FORM 10-Q

(MARK ONE)

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006

( ) 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 1-13725

_____________

ILINC COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 76-0545043
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

2999 NORTH 44TH STREET, SUITE 650, PHOENIX, ARIZONA 85018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(602) 952-1200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
______________
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 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 (X) No ( )

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes ( ) No (X)

The number of shares of Common Stock of the Registrant, par value $.001
per share, outstanding at August 1, 2006 was 32,909,703 net of shares held in
treasury.

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FORM 10-Q REPORT INDEX

PART I--FINANCIAL INFORMATION PAGE
----

Item 1--Unaudited Condensed Consolidated Financial Statements

Unaudited Condensed Consolidated Balance Sheets as of June 30, 2006 and
March 31, 2006........................................................................ 4

Unaudited Condensed Consolidated Statements of Operations for the Three
Months Ended June 30, 2006 and 2005................................................... 5

Unaudited Condensed Consolidated Statement of Changes in Shareholders'
Equity for the Three Months Ended June 30, 2006....................................... 6

Unaudited Condensed Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 2006 and 2005................................................... 7

Notes to Unaudited Condensed Consolidated Financial Statements........................ 8

Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................... 19

Item 3-- Quantitative and Qualitative Disclosures about Market Risk........................... 30

Item 4--Controls and Procedures............................................................... 30

PART II--OTHER INFORMATION

Item 1--Legal Proceedings..................................................................... 31

Item 1A--Risk Factors......................................................................... 31

Item 2--Unregistered Sales of Equity Securities and Use of Proceeds........................... 35

Item 3--Defaults of Senior Securities......................................................... 35

Item 4--Submission of Matters to a Vote of Security Holders................................... 35

Item 5--Other Information..................................................................... 35

Item 6--Exhibits.............................................................................. 36

Signatures.................................................................................... 38

Certifications................................................................................ 39

-2-

FORWARD-LOOKING STATEMENTS

Unless the context requires otherwise, references in this document to
"iLinc Communications," "iLinc" the "Company," "we," "us," and "our" refer to
iLinc Communications, Inc.

Statements contained in this Quarterly Report on Form 10-Q that involve
words like "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, the Securities Act of 1933, as amended, and the Securities Exchange Act of
1934, as amended. These are statements that relate to future periods and
include, but are not limited to, statements as to our ability to: sell our
products and services; improve the quality of our software; derive overall
benefits of our products and services; introduce new products and versions of
our existing products; sustain and increase revenue from existing products;
integrate current and emerging technologies into our product offerings; control
our expenses; control changes in our customer base; obtain sales or increase
revenue; sustain sufficient cash flow; manage liquidity and capital resources;
realize positive cash flow from operations; or realize net earnings.

Such forward-looking statements involve certain risks and uncertainties
that could cause actual results to differ materially from anticipated results.
These risks and uncertainties include, but are not limited to, our dependence on
our products or services, market demand for our products and services, our
ability to attract and retain customers and channel partners, our ability to
expand our technological infrastructure to meet the demand from our customers,
our ability to recruit and retain qualified employees, the ability of channel
partners to successfully resell our products, the status of the overall economy,
the strength of competitive offerings, the pricing pressures created by market
forces, and the risks discussed herein (see "Managements Discussion and Analysis
of Financial Condition and Results of Operations"). All forward-looking
statements included in this report are based on information available to us as
of the date hereof. We expressly disclaim any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statements
contained herein, to reflect any change in our expectations or in events,
conditions or circumstances on which any such statement is based. Readers are
urged to carefully review and consider the various disclosures made in this
report and in our other reports filed with the SEC that attempt to advise
interested parties of certain risks and factors that may affect our business.
Our reports are available free of charge as soon as reasonably practicable after
such material is electronically filed with the SEC and may be obtained through
our Web site located at www.ilinc.com.

iLinc, iLinc Communications, iLinc Suite, MeetingLinc, LearnLinc,
ConferenceLinc, SupportLinc, iLinc On-Demand, and their respective logo are
trademarks or registered trademarks of iLinc Communications, Inc. All other
company names and products may be trademarks of their respective companies.

-3-

PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ILINC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

JUNE 30, MARCH 31,
2006 2006
--------------- ---------------
(UNAUDITED) (AUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 925 $ 466
Certificates of deposit and marketable securities................................ 1,002 --
Accounts receivable, net of allowance for doubtful accounts of $144 and $120,
respectively................................................................... 2,444 2,207
Note receivable, net of allowance for doubtful accounts of $10 and $0,
respectively................................................................... -- 12
Prepaid and other current assets................................................. 79 30
--------------- ---------------
Total current assets........................................................... 4,450 2,715

Property and equipment, net ........................................................ 181 336
Goodwill............................................................................ 11,206 11,206
Intangible assets, net.............................................................. 1,630 1,731
Other assets....................................................................... 12 12
--------------- ---------------
Total assets................................................................... $ 17,479 $ 16,000
=============== ===============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt................................................ $ 586 $ 199
Accounts payable trade........................................................... 1,070 1,257
Accrued liabilities.............................................................. 1,873 2,213
Current portion of capital lease liabilities..................................... 21 70
Deferred revenue................................................................. 998 917
--------------- ---------------
Total current liabilities...................................................... 4,548 4,656

Long term debt, less current maturities, net of discount and beneficial conversion
feature of $1,383 and $1,493, at June 30 and March 31, 2006, respectively........... 6,684 6,974
--------------- ---------------
Total liabilities.............................................................. 11,232 11,630
--------------- ---------------

SHAREHOLDERS' EQUITY:
Preferred stock series A & B, 10,000,000 shares authorized:
Series A preferred stock, $.001 par value, 127,500 shares issued and outstanding,
liquidation preference of $1,275,000............................................. -- --
Series B preferred stock, $.001 par value, 70,000 shares issued and outstanding,
liquidation preference of $700,000............................................... -- --
Common stock, $.001 par value 100,000,000 shares authorized 34,342,115 and
28,923,168 issued, respectively.................................................. 34 29
Additional paid-in capital....................................................... 46,005 44,228
Accumulated deficit.............................................................. (38,384) (38,479)
Less: 1,432,412 treasury shares at cost......................................... (1,408) (1,408)
--------------- ---------------
Total shareholders' equity..................................................... 6,247 4,370
--------------- ---------------
Total liabilities and shareholders' equity..................................... $ 17,479 $ 16,000
=============== ===============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

-4-

ILINC COMMUNICATIONS, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

THREE MONTHS ENDED
JUNE 30,
-----------------------------
2006 2005
-------------- --------------
Revenues
Software licenses............................................................. $ 1,234 $ 522
Software and audio services................................................... 1,768 1,700
Maintenance and professional services......................................... 603 451
-------------- --------------
Total revenues............................................................ 3,605 2,673
-------------- --------------

Cost of revenues
Software licenses............................................................. 45 32
Software and audio services................................................... 976 1,083
Maintenance and professional services......................................... 170 113
Amortization of acquired developed technology................................. 67 119
-------------- --------------
Total cost of revenues.................................................... 1,258 1,347
-------------- --------------

Gross profit 2,347 1,326
-------------- --------------

Operating expenses
Research and development...................................................... 304 358
Sales and marketing........................................................... 858 785
General and administrative.................................................... 634 641
-------------- --------------
Total operating expenses.................................................. 1,796 1,784
-------------- --------------

Income (loss) from operations.................................................... 551 (458)

Interest expense.............................................................. (251) (268)
Amortization of beneficial debt conversion (150) (163)
-------------- --------------
Total interest expense (401) (431)
Interest income (charges) and other........................................... (27) 5
Loss on settlement of debt and other
obligations.............................................................. -- (8)
-------------- --------------

Income (loss) from continuing operations before income taxes ................. 123 (892)
Income tax expense............................................................ -- --
-------------- --------------

Income (loss) from continuing operations......................................... 123 (892)
Income from discontinued operations............................................. 11 7
-------------- --------------

Net income (loss)............................................................... 134 (885)

Series A and B preferred stock dividends........................................ (39) (25)
-------------- --------------
Income (loss) available to common shareholders.................................. $ 95 $ (910)
============== ==============
Income (loss) per common share, basic and diluted
From continuing operations.................................................... -- $ (0.04)
From discontinued operations.................................................. -- --
-------------- --------------
Net loss per common share................................................ $ -- $ (0.04)
============== ==============

Number of shares used in calculation of loss per share:
Basic........................................................................ 28,818 24,145
============== ==============
Diluted...................................................................... 28,944 24,145
============== ==============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

-5-

ILINC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)

CONVERTIBLE ADDITIONAL TOTAL
PREFERRED STOCK COMMON STOCK PAID - IN ACCUMULATED TREASURY SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY
-------- --------- -------- -------- -------- -------- -------- --------
Balances, April 1, 2006 .... 197 $ -- 28,923 $ 29 $ 44,228 $(38,479) $ (1,408) $ 4,370

Warrant grant .............. -- -- -- -- 15 -- -- 15
Vesting of restricted
stock grant ............. -- -- -- -- 10 -- -- 10
Series A and B preferred
stock dividends ......... -- -- -- -- -- (39) -- (39)
Exercise of stock options -- -- -- -- 3 -- -- 3
Issuance of common stock
in private placement .... -- -- 5,405 5 1,995 -- -- 2,000
Costs incurred in
connection with issuance
of common stock in
private placement ....... -- -- -- -- (263) -- -- (263)
Stock option compensation
expense ................. -- -- -- -- 17 -- -- 17
Net income ................. -- -- -- -- -- 134 -- 134
-------- --------- -------- -------- -------- -------- -------- --------
Balances, June 30, 2006 .... 197 $ -- 34,328 $ 34 $ 46,005 $(38,384) $ (1,408) $ 6,247
======== ========= ======== ======== ======== ======== ======== ========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

-6-

ILINC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
JUNE 30,
--------------------
2006 2005
-------- --------
Net cash used in operating activities ........................ $ (138) $ (191)
-------- --------

Cash flows from investing activities:

Investment in certificate of deposit ...................... (1,002) --
Capital expenditures ...................................... (17) (22)
Capitalization of research and development ................ (82) --
Acquisitions, net of cash acquired ........................ -- (9)
Repayment of note receivable .............................. 2 --
-------- --------
Net cash used in investing activities ................ (1099) (31)
-------- --------

Cash flows from financing activities:
Proceeds from issuance of common stock .................... 2,000 --
Series A and B preferred stock dividends .................. (39) (25)
Stock issuance expense .................................... (160) --
Proceeds from exercise of stock options ................... 3 --
Repayment of long-term debt ............................... (13) (72)
Repayment of capital lease liabilities .................... (49) (35)
Financing costs incurred .................................. -- (28)
-------- --------
Net cash provided by (used in) financing activities... 1,742 (160)
-------- --------

Cash flows from continuing operations ........................ 505 (382)
Cash flows from discontinued operations ...................... (46) 111
-------- --------

Net change in cash and cash equivalents .............. 459 (271)
Cash and cash equivalents, beginning of period ............... 466 532
-------- --------

Cash and cash equivalents, end of period ..................... $ 925 $ 261
======== ========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.

-7-

ILINC COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. ORGANIZATION AND NATURE OF OPERATIONS

Headquartered in Phoenix, Arizona, iLinc Communications, Inc. is a
leading provider of Web conferencing, audio conferencing and collaboration
software and services. The Company develops and sells software that provides
real-time collaboration and training using Web-based tools. The Company's
four-product iLinc Suite, comprised of LearnLinc, MeetingLinc, ConferenceLinc,
and SupportLinc, is an award winning virtual classroom, Web conferencing and
collaboration suite of software. With its Web collaboration, conferencing and
virtual classroom products, the Company provides what it believes to be simple,
reliable and cost-effective tools for remote presentations, meetings and online
events. The Company's software is based on a proprietary architecture and code
that finds its origins as far back as 1994, in what it believes to be the
beginnings of the Web collaboration industry. Versions of the iLinc Suite have
been translated into six languages, and it is currently available in Version
8.01. The Company's customers may choose from several different pricing and
licensing options for the iLinc Suite depending upon their needs. Uses for the
four-product suite of Web collaboration software include online business
meetings, sales presentations, training sessions, product demonstrations and
technical support assistance. The Company sells its software solutions to large
and medium-sized corporations inside and outside of the Fortune 1000. The
Company markets its products using a direct sales force and an indirect
distribution channel consisting of agents, distributors and value added
resellers. The Company allows its customers to choose between purchasing a
perpetual license and subscribing to a term license, providing for flexibility
in pricing and payment methods. The Company's revenues are a mixture of high
margin perpetual licenses of software and monthly recurring revenues from annual
maintenance, hosting and support agreements, and other products and services.

The Company maintains corporate headquarters in Phoenix, Arizona and
has occupied that 14,000 square foot Class A facility since the Company's
inception in 1998. The Phoenix lease began in 1998 and had a term of 10 years.
The Phoenix office can accommodate up to 65 employees and is fully equipped with
computer equipment and server facilities. On May 5, 2006, the Company amended
the Phoenix lease. The term was extended to February 28, 2012, the square
footage was reduced to 9,100 and the related rent expense was therefore reduced
as a result of the amendment. After this amendment, the Phoenix lease requires a
monthly rent and operating expenses of approximately $25,000.

The Company also maintains a 2,500 square foot Class B facility in
Troy, New York costing $4,600 per month with an emphasis in that location on
research and development, and technical support. Subsequent to June 30, 2006,
the Company amended the lease on its New York location, which had expired
December 31, 2005. The new lease term is effective July 1, 2006 through June 30,
2009. Under the terms of the new lease the monthly rent will be approximately
$4,000 per month.

In addition, the Company maintains offices in Springville, Utah,
occupying a Class A facility in two adjacent buildings. The first building
houses its administrative and IT functions, with 10,000 square feet of space,
with the second housing the operator complex and support staff with 6,122 square
feet. The Springville lease began in 2003 and has a term of five years. The
Springville offices can accommodate up to 100 employees and is fully equipped
with computer equipment and server facilities. The facility also provides a
fully redundant co-location and server facility for audio conferencing
activities and hosted Web conferencing services. The Springville lease requires
a monthly rent of approximately $13,500.

The Company began operations in March of 1998. Its formation included
the simultaneous rollup of fifty private businesses and an initial public
offering. The Company's initial goals included providing training enhancement
services over the Internet using a browser based system. In 2002, the Company
began shifting its focus away from its legacy business, settling on its current
focus on Web conferencing and audio conferencing and in doing so ultimately
changed its name to iLinc Communications, Inc. in February 2004.

The unaudited condensed consolidated financial statements included
herein have been prepared by the Company, pursuant to the rules and regulations
of the Securities and Exchange Commission (the "SEC"). Pursuant to such
regulations, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes the presentation
and disclosures herein are adequate to make the information not misleading, but

-8-

do not purport to be a complete presentation inasmuch as all note disclosures
required by generally accepted accounting principles are not included. In the
opinion of management, the unaudited condensed consolidated financial statements
reflect all elimination entries and normal recurring adjustments that are
necessary for a fair statement of the results for the interim periods ended June
30, 2006 and 2005.

Fiscal operating results for interim periods are not necessarily
indicative of the results for full years. It is suggested that these unaudited
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements of the Company and related notes thereto, and
management's discussion and analysis related thereto, all of which are included
in the Company's annual report on Form 10-K as of and for the year ended March
31, 2006, as filed with the SEC.

2. SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The condensed consolidated financial statements of the Company include
the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and
liabilities. The more significant areas requiring use of estimates and judgment
relate to revenue recognition, accounts receivable valuation reserves,
realizability of intangible assets, realizability of deferred income tax assets
and the evaluation of contingencies and litigation. Management bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. The results of such estimates
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
materially differ from these estimates under different assumptions or
conditions.

STOCK-BASED COMPENSATION

In December 2004, the FASB issued SFAS No. 123R, SHARE-BASED PAYMENT
("SFAS 123R"). Under this new standard, companies will no longer be able to
account for share-based compensation transactions using the intrinsic method in
accordance with APB 25. Instead, companies will be required to account for such
transactions using a fair-value method and to recognize the expense over the
service period. SFAS 123R will be effective for periods beginning after March
31, 2006 and allows for several alternative transition methods. The Company
adopted SFAS 123R, effective in the first quarter of fiscal 2007, which requires
recognition of compensation expense for all stock option or other equity-based
awards that vest or become exercisable after the option's effective date. The
Company elected the modified prospective application transition method of
adoption and, as such, prior period financial statements have not been restated.
Under this method, the fair value of all stock options granted or modified after
adoption must be recognized in the Condensed Consolidated Statement of
Operations and total compensation cost related to nonvested awards not yet
recognized, as determined under the original provisions of SFAS 123, must also
be recognized in the Condensed Consolidated Statement of Operations as vesting
occurs.

Prior to April 1, 2006, the Company accounted for share-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25 ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related interpretations and elected the disclosure option of SFAS No. 123 as
amended by SFAS No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - COMPENSATION
AND DISCLOSURE. SFAS No. 123 requires that companies either recognize
compensation expense for grants of stock, stock options and other equity
instruments based on fair value, or provide pro forma disclosure of net income
and earnings per share in the notes to the financial statements. Accordingly,
the Company measured compensation expense for stock options as the excess, if
any, of the estimated fair market value of the Company's stock at the date of
grant over the exercise price.

-9-

Under SFAS 123R, the Company recognized $27,000, net of taxes, of
compensation expense related to stock options and vesting of stock grants in the
three months ended June 30, 2006. The following table summarizes stock-based
compensation expense related to employee stock options and vesting of employee
stock grants under SFAS 123R for the three months ended June 30, 2006, which was
allocated as follows (in thousands except per share amounts):

----------------
THREE MONTHS
ENDED
JUNE 30, 2006
----------------
Stock-based compensation expense included:

Cost of sales................................................................. $ 2
Research and development...................................................... 2
Sales and marketing........................................................... 10
General and administrative.................................................... 13
----------------

Stock-based compensation expense related to employee stock options and employee
stock grants included in income from operations............................... 27
Tax benefit..................................................................... --
----------------

Stock-based compensation expense related to employee stock options and employee
stock grants, net of tax...................................................... $ 27

Decrease in basic earnings per share............................................ $ --
Decrease in diluted earnings per share.......................................... $ --

As stock-based compensation expense recognized in the Condensed
Consolidated Statement of Operations for the first quarter of fiscal 2007 is
based on options ultimately expected to vest, it has been reduced for expected
forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. Forfeitures were estimated based on historical experience.

The table below reflects net income and diluted net income per share
for the three months ended June 30, 2006 compared to the pro forma information
assuming application of SFAS 123 for the three months ended June 30, 2005 (IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS):

THREE MONTHS ENDED JUNE 30,
-------------------------------
2006 2005
------------- -------------
Net loss available to common shareholders, as reported for
the prior period (1)................................... $ N/A $ (910)
Stock-based employee compensation expense included in
reported net loss for the prior period................. N/A 10
Total stock-based employee compensation expense related to
employee stock options and vesting of employee stock
grants, net of tax..................................... (27) (62)
------------- -------------
Net income (loss) available to common shareholders,
including the effect of stock-based compensation expense.. $ 95 $ (962)
============= =============

Basic income (loss) per common share:
As reported for the prior period (1)....................... N/A $ (0.04)
Including the effect of stock-based compensation expense... $ -- $ (0.04)
============= =============

Diluted income (loss) per common share:
As reported for the prior period (1)....................... N/A $ (0.04)
Including the effect of stock-based compensation expense... $ -- $ (0.04)
============= =============

-10-

(1) Net loss and net loss per share prior to fiscal 2007 did not include
stock-based compensation expense for employee stock options under SFAS
123 because the Company did not adopt the recognition provisions of
SFAS 123.

Upon adoption of SFAS 123R, the Company continued to calculate the
value of each employee stock option, estimated on the date of grant, using the
Black-Scholes model in accordance with SFAS 123R. The weighted average fair
value of employee stock options granted during the three months ended June 30,
2006 and June 30, 2005 was $0.40 per share and $0.29 per share, respectively,
using the following weighted-average assumptions:

THREE MONTHS ENDED JUNE 30,
--------------------------------------
2006 2005
------------------ -------------------
Risk free interest rate 5.11% 4.18%
Dividend yield 0% 0%
Volatility factors of the expected
market price of the Company's
common stock 109% 111%
Weighted-average expected life of
Options 10 years 10 years

Stock options activity for the three months ended April 1, 2006 was as
follows:

WEIGHTED
AVERAGE
CONTRACTUAL AGGREGATE
SHARES SUBJECT WEIGHTED AVERAGE LIFE INTRINSIC VALUE
TO OPTIONS EXERCISE PRICE (IN YEARS) (IN THOUSANDS)
---------- -------------- ---------- --------------
Options outstanding at April 1, 2006........ 2,637,864 $1.07
Options granted......................... 37,000 $0.39
Options exercised....................... (13,542) $0.25
Options forfeited....................... (68,353) $0.33
Options expired......................... (40,390) $0.50
------------------
Options outstanding at June 30, 2006........ 2,552,579 $1.10 6.07 $ 143
------------------
Options exercisable at June 30, 2006........ 2,062,637 $1.26 5.42 $ 63
------------------

The aggregate intrinsic value in the table above represents total
pretax intrinsic value (the difference between iLinc's closing stock price on
June 30, 2006 and the exercise price, multiplied by the number of in-the-money
options) that would have been received by the option holders had all option
holders exercised their options on June 30, 2006. This amount changes based on
the fair market value of iLinc's stock. Total intrinsic value of options
exercised for the first quarter of fiscal 2007 was $2,500. The Company issues
new shares of common stock upon the exercise of stock options.

At June 30, 2006, 2,302,511 shares were available for future grants
under the Company's 1997 Stock Compensation Plan.

At June 30, 2006, the company had approximately $105,000 of total
unrecognized compensation expense, net of estimated forfeitures, related to
stock option plans that will be recognized over the weighted average period of
2.16 years.

3. EARNINGS PER SHARE

Basic earnings per share are computed by dividing net income available
to common stockholders by the weighted-average number of common shares
outstanding for each reporting period presented. Diluted earnings per share are
computed similar to basic earnings per share while giving effect to all
potential dilutive common stock equivalents that were outstanding during each
reporting period. For the three months ended June 30, 2006 and 2005, options and

-11-

warrants to purchase 4,149,353, and 4,752,602 shares of common stock
respectively were excluded from the computation of diluted earnings per share
because of their anti-dilutive effect. Additionally, for the three months ended June 30, 2006 and 2005, preferred stock and debt
convertible into 10,450,000 and 8,175,000 shares of common stock, respectively, were
excluded from the computation of diluted earnings/loss per share because
inclusion of such would be antidilutive. Furthermore, a restricted stock grant
to James Powers, the Company's CEO, of 450,000 shares has been excluded from the
earnings per share calculations.

4. GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill consisted of the following:

JUNE 30, MARCH 31,
2006 2006
---------- ----------
(IN THOUSANDS)
Goodwill................................................................... $ 11,206 $ 11,206
========== ==========

Intangible assets consisted of the following:
JUNE 30, 2006
-----------------------------------------------------------------
WEIGHTED
AVERAGE
REMAINING GROSS CARRYING ACCUMULATED
LIVES AMOUNT AMORTIZATION NET
-----------------------------------------------------------------
(YEARS) (IN THOUSANDS)
AMORTIZED INTANGIBLE ASSETS:
Deferred financing costs 4.98 $ 1,055 $ (535) $ 520
Purchased software 0.92 1,481 (1,235) 246
Customer relationship 3.92 1,230 (448) 782
Capitalized research and development -- 82 -- 82
----------------------------------------------------
$ 3,848 $ (2,218) $ 1,630
====================================================

MARCH 31, 2006
-----------------------------------------------------------------

WEIGHTED
AVERAGE
REMAINING GROSS CARRYING ACCUMULATED
LIVES AMOUNT AMORTIZATION NET
-----------------------------------------------------------------
(YEARS) (IN THOUSANDS)
AMORTIZED INTANGIBLE ASSETS:
Deferred financing costs 5.10 $ 1,080 $ (493) $ 587
Purchased software 1.17 1,481 (1,169) 312
Customer relationship 4.17 1,230 (398) 832
----------------------------------------------------
$ 3,791 $ (2,060) $ 1,731
====================================================

CAPITALIZATION OF RESEARCH AND DEVELOPMENT

In May of 2006, the Company began production of version 9.0 of its Web
collaboration software. In accordance with SFAS No. 86 ACCOUNTING FOR THE COSTS
OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED, the Company
began capitalizing certain direct and indirect research and development costs
that included employee payroll costs, consultant fees, dedicated computer
hardware costs and specialized software license costs associated with this
project. As of June 30, 2006, the Company capitalized expenses totaling $82,000.
When version 9.0 is complete and released to customers then the Company will
begin amortization of these capitalized costs, using straight line amortization
over a three year period.

-12-

5. ACCRUED LIABILITIES

Accrued liabilities consisted of the following:

JUNE 30, MARCH 31,
2006 2006
---------- ---------
(IN THOUSANDS)
Accrued state sales tax..................................................... 248 233
Accrued interest............................................................ 349 343
Amounts related to acquisitions............................................. -- 8
Accrued salaries and related benefits....................................... 449 453
Amount payable to third party providers..................................... 720 1,006
Amount payable to Interactive Alchemy....................................... 37 36
Deferred rent liability..................................................... 20 27
Liabilities from discontinued operations.................................... -- 53
Other....................................................................... 50 54
---------- ---------
Total accounts payable and accrued liabilities........................... $ 1,873 $ 2,213
========== =========

6. LONG-TERM DEBT

Long-term debt consisted of the following:

JUNE 30, MARCH 31,
2006 2006
---------- ---------
(IN THOUSANDS)
2002 Convertible redeemable unsecured subordinated notes.................... $ 5,100 $ 5,100
2004 Senior unsecured notes.................................................. 2,962 2,962
IPO shareholders' notes payable.............................................. 149 157
Other notes payable.......................................................... 442 447
---------- ---------
8,653 8,666

Less: Current portion of long-term debt...................................... (586) (199)
Discount............................................................ (811) (896)
Beneficial conversion feature....................................... (572) (597)
---------- ---------
Long-term debt, net of current portion....................................... $ 6,684 $ 6,974
========== =========

In March 2002, the Company completed a private placement offering (the
"Convertible Note Offering") raising capital of $5,775,000 that was used to
extinguish an existing line of credit. Under the terms of the Convertible Note
Offering, the Company issued unsecured subordinated convertible notes (the
"Convertible Notes"). The Convertible Notes bear interest at the rate of 12% per
annum and require quarterly interest payments, with the principal due at
maturity on March 29, 2012. The holders of the Convertible Notes may convert the
principal into shares of the Company's common stock at the fixed price of $1.00
per share. The Company may force redemption by conversion of the principal into
common stock at the fixed conversion price, if at any time the 20 trading day
average closing price of the Company's common stock exceeds $3.00 per share. The
notes are subordinated to any present or future senior indebtedness. As a part
of the Convertible Note Offering the Company also issued warrants to purchase
5,775,000 shares of the Company's common stock for an exercise price of $3.00
per share. Those warrants expired on March 29, 2005 without exercise. The fair
value of the warrants was estimated using a Black-Scholes pricing model with the
following assumptions: contractual and expected life of three years, volatility
of 75%, dividend yield of 0%, and a risk-free rate of 3.87%. A discount to the
Convertible Notes of $1,132,000 was recorded using this value, which is being
amortized to interest expense over the 10-year term of the Convertible Notes. As
the carrying value of the notes is less than the conversion value, a beneficial
conversion feature of $1,132,000 was calculated and recorded as an additional
discount to the notes and is being amortized to interest expense over the 10
year term of the Convertible Notes. Upon conversion, any remaining discount and
beneficial conversion feature will be expensed in full at the time of
conversion. During fiscal 2004, holders with a principal balance totaling
$150,000 converted their notes into 150,000 common shares of the Company. During
fiscal 2006, holders with a principal balance of $525,000 converted their notes
and $8,000 of accrued interest into 1,971,088 shares of the Company's common
stock that had been registered with the SEC at a price of $0.25, $0.26 and $0.30
per share. Since the actual conversion price for the convertible debt was less

-13-

than the fixed conversion price of $1.00, the Company recorded conversion
expense of $338,000 for the year ended March 31, 2006. During fiscal 2006, the
Company accelerated the amortization of the deferred offering costs and the
discount and beneficial conversion feature associated with the debt by expensing
$50,000 and $137,000, respectively at the time of conversion. No conversion or
debt or acceleration of amortization of costs occurred during the three months
ended June 30, 2006

In April of 2004, the Company completed a private placement offering of
unsecured senior notes (the "2004 Senior Note Offering") that provided gross
proceeds of $4.25 million. Under the terms of the 2004 Senior Note Offering, the
Company issued $3,187,000 in unsecured senior notes and 1,634,550 shares of the
Company's common stock. The senior notes were issued as a series of notes
pursuant to a unit purchase and agency agreement. The senior notes are
unsecured. The placement agent received a commission equal to 10% of the gross
proceeds together with a warrant for the purchase of 163,455 shares of the
Company's common stock with an exercise price equal to 120% of the price paid by
investors. The senior notes bear interest at a rate of 10% per annum and accrued
interest is due and payable on a quarterly basis beginning July 15, 2004, with
principal due at maturity on July 15, 2007. The senior notes are redeemable by
the Company at 100% of the principal value at any time after July 15, 2005. The
notes and common stock were issued with a debt discount of $768,000. The fair
value of the warrants was estimated and used to calculate a discount of $119,000
of which $68,000 was allocated to the notes and $51,000 was allocated to equity.
The total discount allocated to the notes of $836,000 is being amortized as a
component of interest expense over the term of the notes which is approximately
39 months. The senior notes are unsecured obligations of the Company but are
senior in right of payment to all existing and future indebtedness of the
Company. The common stock issued in the 2004 Senior Note Offering was registered
with the SEC pursuant to a resale prospectus dated August 2, 2005. Effective
August 1, 2005, holders with a principal balance totaling $225,000 converted
their senior notes and accrued interest of $800 into 903,205 shares of the
Company's common stock at a price of $0.25 per share. Since the actual
conversion price for the debt was greater than the market value of the stock at
the date of conversion, the Company recorded a gain on conversion of $9,000 for
the period ended December 31, 2005. During fiscal 2006, the Company accelerated
the amortization of the deferred offering costs and the discount associated with
the debt by expensing $10,000 and $35,000, respectively at the time of
conversion. On November 9, 2005, placement agent warrants originally issued with
an exercise price of $0.78 per common share were converted to 163,455 common
shares at an exercise price of $0.25 per share, in which the Company received
$41,000 in cash. The transaction resulted in an increase in deferred offering
costs of $7,000 and an adjustment to additional paid-in capital of $7,000. No
conversion of debt of acceleration of amortization of costs occurred during the
three months ended June 30, 2006.

On June 3, 2004, the Company executed an agreement to acquire
substantially all of the assets of and assume certain liabilities of Glyphics
Communications, Inc., ("Glyphics"), a Utah based private company, and a provider
of comprehensive audio conferencing products and services. The acquisition had a
stated effective date of June 1, 2004 and was fully consummated on June 14,
2004. The purchase price was $5.349 million. The purchase price was paid with
the assumption of $2.466 million in specific liabilities, with the balance paid
using the Company's common stock, which included the issuance of 2,820,355
shares valued at $0.98 per share upon execution of the agreement, and 308,133
shares valued at $0.39 per share upon release of escrow pending the settlement
of certain acquisition contingencies.

On April 18, 2006, 704,839 shares were released from escrow related to
the acquisition of Glyphics. Of that amount, 396,706 were returned to iLinc
Communications due to the Company assuming obligations of $377,815 greater than
scheduled in the purchase agreement. The remaining 308,133 shares were issued to
the Glyphics shareholders at $0.39 per share based on the closing price of the
agreement date of April 18, 2006. These shares were recorded as outstanding on
March 31, 2006 pursuant to the terms of the Escrow Agreement.

In connection with the Company's initial public offering (IPO) in March
of 1998, the Company issued notes to certain shareholders who had provided
capital prior to the IPO. These notes were originally due in April of 2005 and
required quarterly payments of interest only at the rate of 10%. During the
first quarter of fiscal 2006, many of the note holders agreed to extend the
maturity date and accept installment payments that were due during the year
ended March 31, 2006. The outstanding principal balance on these notes is
$149,000 as of June 30, 2006. On July 20, 2006, the Company paid $97,000 in
principal to certain note holders, with no claims of default by the remaining
holders of the outstanding IPO notes.

-14-

The aggregate maturities of long-term debt excluding capital leases for
each of the next five years subsequent to June 30, 2006 were as follows (IN
THOUSANDS):

2007.............................................................. $ 586
2008.............................................................. 2,964
2009.............................................................. 2
2010.............................................................. 1
2011.............................................................. --
Thereafter........................................................ 5,100
----------
$ 8,653
==========

7. CAPITALIZATION

On June 9, 2006, the Company completed a private placement of 5,405,405
unregistered, restricted shares of common stock providing $2.0 million in gross
cash proceeds. The Company paid its placement agent an underwriting commission
of $180,000 of which $25,000 was recorded as deferred offering costs and
incurred additional offering expenses of approximately $83,000. Pursuant to the
registration rights agreement between the parties, the Company filed a
Registration Statement on Form S-3 on July 7, 2006 to enable the resale of the
shares by the investors. The Company intends to use the proceeds for working
capital and general corporate purposes.

8. INCOME TAX EXPENSE FROM CONTINUING OPERATIONS

The Company disclosed no tax benefit on its Condensed Consolidated
Statement of Operations during the three months ended June 30, 2006 or 2005
because it concluded it is not likely it would be able to recognize the tax
asset created due to the lack of operating history of its Web conferencing and
audio conferencing business strategy. At June 30, 2006 and March 31, 2006, the
Company has net deferred tax assets of $15.8 million and $15.9 million,
respectively, with corresponding valuation allowances. The Company's tax assets
are scheduled to expire over a period of five to twenty years.

9. STOCK OPTION PLANS AND WARRANTS

The Company grants stock options under its amended and restated Stock
Compensation Plan (the "Plan"). The Company recognizes stock-based compensation
issued to employees at the intrinsic value between the exercise price of options
granted and the fair value of stock for which the options may be exercised.
However, pro forma disclosures as if the Company recognized stock-based
compensation at the fair value of the options themselves are presented below.

Under the Plan, as amended, the Company is authorized to issue
5,500,000 shares of common stock pursuant to "Awards" granted to officers and
key employees in the form of stock options.

There were 2,552,579 options outstanding under the Plan at June 30,
2006. The Compensation Committee of the Board of Directors administers the Plan.
Stock options granted to employees have a contractual term of 10 years (subject
to earlier termination in certain events) and have an exercise price no less
than the fair market value of the Company's common stock on the date of grant.
The options vest at varying rates over a one to five year period.

Following is a summary of the status of the Company's stock options as
of June 30, 2006:

WEIGHTED
NUMBER OF AVERAGE WEIGHTED AVERAGE
SHARES UNDERLYING EXERCISE FAIR-VALUE OF
OPTIONS PRICES OPTIONS GRANTED
------------------- ------------- ---------------------

Outstanding at March 31, 2006................... 2,637,864 $1.07
Granted......................................... 37,000 $0.39 $0.40
=====================
Exercised....................................... (13,542) $0.25
Forfeited....................................... (68,353) $0.33
Expired......................................... (40,390) $0.50
------------------- -------------
Outstanding at June 30, 2006.................... 2,552,579 $1.10
=================== =============

-15-

The following table summarizes information about stock options
outstanding at June 30, 2006:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE AVERAGE
NUMBER OF EXERCISE REMAINING CONTRACTUAL NUMBER OF EXERCISE
SHARES PRICE LIFE (YEARS) SHARES PRICE
-------------- ------------- --------------------------- ------------- -------------

$ 0.01 - $ 0.99 1,928,064 $ 0.51 7.01 1,444,497 $ 0.55
$ 1.00 - $ 1.99 104,125 $ 1.61 4.53 97,750 $ 1.64
$ 2.00 - $ 2.99 430,000 $ 2.22 3.03 430,000 $ 2.22
$ 3.00 - $ 8.50 90,390 $ 7.70 2.18 90,390 $ 7.70
-------------- -------------
2,552,579 2,062,637
============== =============

The following table summarizes information about stock purchase
warrants outstanding at June 30, 2006:

WARRANTS OUTSTANDING WARRANTS EXERCISABLE
--------------------------------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE AVERAGE
NUMBER OF EXERCISE REMAINING CONTRACTUAL NUMBER OF EXERCISE
SHARES PRICE LIFE (YEARS) SHARES PRICE
-------------- ----------- ------------------------ ------------- -------------

$ 0.32 -$ 0.32 50,000 $ 0.32 2.75 50,000 $ 0.32
$ 0.40 -$ 0.40 300,000 $ 0.40 0.78 300,000 $ 0.40
$ 0.42 -$ 0.42 543,182 $ 0.42 5.14 543,182 $ 0.42
$ 0.44 -$ 0.44 132,972 $ 0.44 5.20 132,972 $ 0.44
$ 0.50 -$ 0.50 700,000 $ 0.50 2.25 700,000 $ 0.50
$ 0.55 -$ 0.55 50,000 $ 0.55 2.75 50,000 $ 0.55
$ 1.50 -$ 1.50 921,510 $ 1.50 1.14 921,510 $ 1.50
-------------- ------------
2,697,664 2,697,664
============== ============

In December 2001, the Company, under the initiative of the Compensation
Committee with the approval of the Board of Directors, issued to James M.
Powers, its Chief Executive Officer, an incentive stock grant under the 1997
Stock Compensation Plan of 450,000 restricted shares of the Company's common
stock as a means to retain and incentivize the Chief Executive Officer. The
shares were valued at $405,000 based on the closing price of the stock on the
date of grant, which is recorded as compensation expense ratably over the
ten-year vesting period. The shares 100% vest after 10 years from the date of
grant or upon attaining the following share price performance criteria: 150,000
shares vest if the share price trades for $4.50 per share for 20 consecutive
days; 150,000 shares vest if the share price trades for $8.50 per share for 20
consecutive days; and 150,000 shares vest if the share price trades for $12.50
per share for 20 consecutive days. In December 2001, in connection with the
restricted stock grant, the Company loaned the Chief Executive Officer $179,000
to fund the immediate tax consequences of the grant. The Company recognized a
$179,000 charge to income at the date of grant. On June 23, 2006, the Board of
Directors, at the recommendation of the Compensation Committee of the Board,
amended the vesting performance criteria hurdles as follows: 150,000 shares vest
if the share price trades for $1.00 per share for 20 consecutive days; 150,000
shares vest if the share price trades for $2.00 per share for 20 consecutive
days; and 150,000 shares vest if the share price trades for $3.00 per share for
20 consecutive days. All other aspects of the grant remained the same.

WARRANTS

On November 19, 2003, the Company issued a warrant to purchase 250,000
shares of common stock to an advisor of the Company in exchange for certain
advisory and consulting services pursuant to a written advisory agreement that
will be provided to the Company over a three-year contractual period. The
warrants are exercisable for shares of the Company's common stock at a price of
$0.40. The warrants contain a provision that prohibited the delivery of shares
even if exercised until after February 5, 2004. The warrants are currently
treated as a variable plan grant; accordingly, the warrants will be revalued at
each quarter end and the portion related to the cumulative expired services
period less prior charges recorded will be recorded as a charge to expense
during the period. The warrants were valued using the Black-Scholes model to
calculate a fair value of $0.73 per share at March 31, 2004. A portion of the
fair value totaling $20,000 was recognized for fiscal 2004. During fiscal 2005,
the remaining balance of the warrants was expenses for $90,000.

-16-

In January 2005, in connection with the restructuring of the payments
on loan obligations due in connection with the acquisition of Glyphics, the
Company issued a warrant for 50,000 shares with an exercise price of $0.55. The
loan was guaranteed by Gary Moulton, the Company's senior vice president of
audio services, as well as a shareholder of the Company, both of whom were
formerly owners of Glyphics. The warrant was originally contracted to expire in
January 2007. The fair value of the warrant of $8,000 was estimated and expensed
in the fourth quarter of fiscal 2005 using the Black-Scholes pricing model with
the following assumptions: contractual and expected life of two years,
volatility of 72%, dividend yield of 0%, and a risk-free rate of 3.1%. In June
2005, in connection with the restructuring of the payments, the Company issued a
warrant for 50,000 shares to the Glyphics shareholder with an exercise price of
$0.32. The warrant was originally to expire in June 2007. The fair value of the
warrant of $6,500 was estimated and expensed in the first quarter of fiscal 2006
using the Black-Scholes pricing model with the following assumptions:
contractual and expected life of two years, volatility of 71%, dividend yield of
0%, and a risk-free rate of 3.6%. On April 1, 2006, the Company issued an
additional warrant for 50,000 shares with an exercise price of $0.40. The
warrant expires in April 2009. The fair value of the warrant of $15,000 was
estimated and expensed during the first quarter of fiscal 2007 using the
Black-Scholes pricing model with the following assumptions: contractual and
expected life of three years, volatility of 125%, dividend yield of 0%, and a
risk-free rate of 4.83%. On April 1, 2006, the expiration dates of the warrants
issued in January 2005 and June 2005 were extended to March 31, 2009. Based on
an analysis using the Black-Scholes pricing model, no adjustment was made to the
fair value of the two extended warrants.

Subsequent to June 30, 2006, on July 1, 2006, the Company issued a
warrant for up to 1,000,000 shares of the Company's common stock, par value
$0.001 per share, with an exercise price of $0.55 per share to ComVest West,
Inc. in connection with an agent agreement effective June 30, 2006. The warrant
expires on July 1, 2011. The warrant is subject to vesting provisions based on
net collected revenue targets over a five-year period.

10. COMMITMENTS AND CONTINGENCIES

The Company is subject to various commitments and contingencies as
described in Note 13 to the condensed consolidated financial statements in the
Company's Annual Report on Form 10-K as of and for the year ended March 31,
2006. During the three-month period ended June 30, 2006, the following changes
occurred with respect to certain of the Company's commitments and contingencies:

ROYALTY AGREEMENTS

In conjunction with the acquisition of certain assets from Mentergy,
Inc. ("Mentergy"), the Company agreed to provide a royalty earn-out payment that
is due upon collection of cash received from the sales of its Web conferencing
software. The royalty earn-out was originally equal to 20% for all revenues
collected from the sale of that Web conferencing software over a three-year
period beginning November 4, 2002, with the first $600,000 of collected revenues
not subject to the royalty, and the maximum amount being $5,000,000. After
negotiating a settlement with one of the original participants in the Mentergy
transaction during fiscal 2005, the royalty was reduced to 18.7%. The Company
accounts for any such amounts collected as additional purchase consideration in
accordance with EITF 95-8: "Accounting for Contingent Consideration Paid to the
Shareholders of an Acquired Enterprise in a Purchase Business Combination" at
the time such amounts are accrued as revenue. The Company had accrued Mentergy
royalties totaling $586,000 and $890,000 as of June 30, 2006 and March 31, 2006,
respectively (the "Royalty Accrual Amount"). On October 10, 2005, Mentergy and
the Company executed a payment agreement that provides, notwithstanding the
termination of the royalty accrual, negotiated payment terms that would require
an initial payment of $100,000 within 15 days of approval of the agreement
followed by 12 level installment payments of $76,212 plus interest per month and
a balloon payment for the entire remaining balance due on November 15, 2006, but
with the accrual of additional royalties terminating as originally intended on
November 4, 2005. As of June 30, 2006, the Company paid $557,000, net of
interest, to Mentergy in accordance with the payment agreement. Of that amount,
$252,000 was paid in the year ended March 31, 2006 and $305,000 was paid in the
quarter ending June 30, 2006. As of June 30, 2006, the outstanding balance due
to Mentergy is $586,000 net of interest.

-17-

LEASE COMMITMENTS

In May 2006, the Company amended the lease on its Phoenix location,
which was set to expire February 28, 2007. The term was extended to February 28,
2012, the square footage was reduced to 9,100 and the related rent expense was
therefore reduced as a result of the amendment. After this amendment, the
Phoenix lease requires a monthly rent and operating expenses of approximately
$25,000.

Subsequent to June 30, 2006, the Company amended the lease on its New
York location, which had expired December 31, 2005. The new lease term is
effective July 1, 2006 through June 30, 2009. Under the terms of the new lease
the monthly rent will be approximately $4,000 per month.

SUBCONTRACTOR AGREEMENT

On April 29, 2006, the Company amended its agreement with its custom
content subcontractor, Interactive Alchemy. The original agreement was a
three-year agreement effective May 1, 2003. The amendment dated April 29, 2006
extends the agreement for an additional non-cancelable two-year term effective
May 1, 2006. Under the revised agreement, Interactive Alchemy will continue to
provide custom content development services to the Company for its customers in
exchange for a fixed percentage of the Company's custom content fee. The Company
will also receive a specified amount of fees from Interactive Alchemy limited to
a cap of $200,000 in the first year and $450,000 in the second year of the
amended agreement.

LITIGATION

On June 14, 2002, the Company acquired the assets of Quisic.
Subsequently, on November 4, 2002, two former employees of Quisic (Mr.
Weathersby their former CEO and Mr. Alper their former CIO), filed a lawsuit in
the Superior Court of the State of California styled George B. Weathersby, et
al. vs. Quisic, et al. claiming damages against Quisic and the Board of
Directors of Quisic arising from their employment termination by the Quisic
Board. The Company was also added as a third party defendant with an allegation
of successor liability, but only to the extent that Quisic is found liable, and
then only to the extent the plaintiffs prove their successor liability claim
against the Company. Subsequent to the defendants' answers being filed, the
trial court ordered that an arbitration of the merits be held, which is
currently pending. The claims of Alper and Weathersby were being arbitrated
separately. As of the date of this report, the arbitrator dismissed all of
Alper's claims against the defendants, except for the only remaining defamation
claim. The Company is not liable for the defamation claim and therefore has no
further liability to Alper. The Company only acquired certain assets of Quisic
in an asset purchase transaction in exchange for 2,000,000 shares of the
Company's common stock and the assumption of $223,000 of liabilities, together
with an additional 500,000 shares of the Company's common stock that were placed
into escrow to secure a revenue performance requirement. That revenue
performance target was not achieved, and the Company demanded the return of the
shares of common stock. The shareholders of Quisic do not dispute the right of
the Company to obtain those shares. However, the shares will remain in escrow
pending resolution of the party's respective claims. Based upon the facts and
circumstances known, the Company believes that the plaintiffs' claims are
without merit, and furthermore, that the Company is not the successor of Quisic,
and therefore the Company intends to vigorously defend this aspect of the
lawsuit. While in the opinion of management, resolution of these matters is not
expected to have a material adverse effect on the Company's financial position,
results of operations or cash flows, the ultimate outcome of any litigation is
uncertain. Were an unfavorable outcome to occur that awarded to the Plaintiffs
against defendant Quisic large sums, and then the court determined that the
Company is a successor to Quisic, then the impact is likely to be material to
the Company.

11. DISCONTINUED OPERATIONS

Effective January 1, 2004, the Company discontinued its practice
management services segment. In accordance with SFAS 144 ACCOUNTING FOR
IMPAIRMENT ON DISPOSAL OF LONG-LIVED ASSETS, the Company has restated its
historical results to reflect its practice management service business segment
as a discontinued operation. For the three months ended June 30, 2006 and June
30, 2005, the Company had net income from discontinued operations of $11,000 and
$7,000, respectively.

12. RELATED PARTY TRANSACTIONS

-18-

Stock Compensation Plan of 450,000 restricted shares of the Company's common
stock as a means to retain and incentivize the Chief Executive Officer. The
shares were valued at $405,000 based on the closing price of the stock on the
date of grant, which is recorded as compensation expense ratably over the
ten-year vesting period. The shares 100% vest after 10 years from the date of
grant or upon attaining the following share price performance criteria: 150,000
shares vest if the share price trades for $4.50 per share for 20 consecutive
days; 150,000 shares vest if the share price trades for $8.50 per share for 20
consecutive days; and 150,000 shares vest if the share price trades for $12.50
per share for 20 consecutive days. In December 2001, in connection with the
restricted stock grant, the Company loaned the Chief Executive Officer $179,000
to fund the immediate tax consequences of the grant. The Company recognized a
$179,000 charge to income at the date of grant. On June 23, 2006, the Board of
Directors, at the recommendation of the Compensation Committee of the Board,
amended the vesting performance criteria hurdles as follows: 150,000 shares vest
if the share price trades for $1.00 per share for 20 consecutive days; 150,000
shares vest if the share price trades for $2.00 per share for 20 consecutive
days; and 150,000 shares vest if the share price trades for $3.00 per share for
20 consecutive days. All other aspects of the grant remained the same.

On July 21, 2005, James L. Dunn Jr., the Company's CFO, purchased a
note that had a principal balance of $8,375 at a discount from one of the IPO
Note holders. Mr. Dunn extended the term of the note that had been due until
April 1, 2006. On July 20, 2006, the Company paid $8,375 to Mr. Dunn in full
payment of the note.

At June 30, 2006 and March 31, 2006, the Company owed the four members
of the Board of Directors fees totaling $63,000 and $69,000, respectively, for
services performed during fiscal 2006 and the first quarter of fiscal 2007.

13. SUBSEQUENT EVENTS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q THAT INVOLVE
WORDS LIKE "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS,"
"ESTIMATES," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995, THE SECURITIES ACT OF 1933, AS AMENDED, AND THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. THESE ARE STATEMENTS THAT RELATE TO FUTURE PERIODS AND
INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS AS TO OUR ABILITY TO: SELL OUR
PRODUCTS AND SERVICES; IMPROVE THE QUALITY OF OUR SOFTWARE; DERIVE OVERALL
BENEFITS OF OUR PRODUCTS AND SERVICES; INTRODUCE NEW PRODUCTS AND VERSIONS OF
OUR EXISTING PRODUCTS; SUSTAIN AND INCREASE REVENUE; INTEGRATE CURRENT AND
EMERGING TECHNOLOGIES; CONTROL OUR EXPENSES; CONTROL CHANGES IN OUR CUSTOMER
BASE; CONTROL CHANGES IN OUR EMPLOYEE HEADCOUNT; MANAGE LIQUIDITY AND CAPITAL
RESOURCES; REALIZE POSITIVE CASH FLOW FROM OPERATIONS; OR REALIZE NET EARNINGS.

SUCH FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANTICIPATED RESULTS.
THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, OUR DEPENDENCE ON
OUR PRODUCTS OR SERVICES, MARKET DEMAND FOR OUR PRODUCTS AND SERVICES, OUR
ABILITY TO ATTRACT AND RETAIN CUSTOMERS AND CHANNEL PARTNERS, OUR ABILITY TO
EXPAND OUR TECHNOLOGICAL INFRASTRUCTURE TO MEET THE DEMAND FROM OUR CUSTOMERS,
OUR ABILITY TO RECRUIT AND RETAIN QUALIFIED EMPLOYEES, THE ABILITY OF CHANNEL
PARTNERS TO SUCCESSFULLY RESELL OUR PRODUCTS, THE STATUS OF THE OVERALL ECONOMY,
THE STRENGTH OF COMPETITIVE OFFERINGS, THE PRICING PRESSURES CREATED BY MARKET
FORCES, AND THE OTHER RISKS DISCUSSED HEREIN (SEE ITEM 2 "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"). ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE BASED ON INFORMATION
AVAILABLE TO US AS OF THE DATE HEREOF. WE EXPRESSLY DISCLAIM ANY OBLIGATION OR
UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN, TO REFLECT ANY CHANGE IN OUR EXPECTATIONS OR IN
EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED.

-19-

READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE
IN THIS REPORT AND IN OUR OTHER REPORTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE "SEC") THAT ATTEMPT TO ADVISE INTERESTED PARTIES OF CERTAIN
RISKS AND FACTORS THAT MAY AFFECT OUR BUSINESS. OUR REPORTS ARE AVAILABLE FREE
OF CHARGE AS SOON AS REASONABLY PRACTICABLE AFTER SUCH MATERIAL IS
ELECTRONICALLY FILED WITH THE SEC AND MAY BE OBTAINED EITHER FROM THE SEC AT
THEIR WEB SITE LOCATED AT WWW.SEC.GOV, OR THROUGH OUR WEB SITE LOCATED AT
WWW.ILINC.COM.
-------------

OVERVIEW

Headquartered in Phoenix, Arizona, iLinc Communications, Inc. is a
leading provider of Web conferencing, audio conferencing and collaboration
software and services. We develop and sell software that provides real-time
collaboration and training using Web-based tools. Our four-product iLinc Suite,
comprised of LearnLinc, MeetingLinc, ConferenceLinc, and SupportLinc, is an
award winning virtual classroom, Web conferencing and collaboration suite of
software. With our Web collaboration, conferencing and virtual classroom
products, we provide what we believe to be simple, reliable and cost-effective
tools for remote presentations, meetings and online events. Our software is
based on a proprietary architecture and code that finds its origins as far back
as 1994, in what we believe to be the beginnings of the Web collaboration
industry. Versions of the iLinc Suite have been translated into six languages,
and it is currently available in Version 8.01. Our customers may choose from
several different pricing and licensing options for the iLinc Suite depending
upon their needs. Uses for our four-product suite of Web collaboration software
include online business meetings, sales presentations, training sessions,
product demonstrations and technical support assistance. We sell our software
solutions to large and medium-sized corporations inside and outside of the
Fortune 1000. We market our products using a direct sales force and an indirect
distribution channel consisting of agents, distributors and value added
resellers. We allow customers to choose between purchasing a perpetual license
and subscribing to a term license, providing for flexibility in pricing and
payment methods. Our revenues are a mixture of high margin perpetual licenses of
software and monthly recurring revenues from annual maintenance, hosting and
support agreements, and other products and services.

PRODUCTS AND SERVICES

WEB CONFERENCING AND WEB COLLABORATION

The iLinc Suite is a four-product suite of software that addresses the
most common business collaboration needs.

LearnLinc is an Internet-based software that is designed for training
and education of remote students. With LearnLinc, instructors and students can
collaborate and learn remotely providing an enhanced learning environment that
replicates and surpasses traditional instructor-led classes. Instructors can
create courses and classes, add varied agenda items, enroll students, deliver
live instruction, and deliver content that includes audio, video, and
interactive multimedia. In combination with TestLinc, LearnLinc permits users to
administer comprehensive tests, organize multiple simultaneous breakout
sessions, and record, edit, play back, and archive entire sessions for future
use.

MeetingLinc is an online collaboration software designed to facilitate
the sharing of documents, PowerPoint(TM) presentations, graphics, and
applications between meeting participants without leaving their desks.
MeetingLinc allows business professionals, government employees, and educators
to communicate more effectively and economically through interactive online
meetings using Voice-over IP technology to avoid the expense of travel and long
distance charges. MeetingLinc allows remote participants to give presentations,
demonstrate their products and services, annotate on virtual whiteboards, edit
documents simultaneously and take meeting participants on a Web tour. Like all
of the Web collaboration products in the Suite, MeetingLinc includes integrated
voice and video conferencing services.

ConferenceLinc is a presentation software designed to deliver the
message in a one-to-many format providing professional management of Web
conferencing events. ConferenceLinc manages events such as earnings
announcements, press briefings, new product announcements, corporate internal
mass communications and external marketing events. ConferenceLinc is built on
the MeetingLinc software platform and code to combine the best interactive
features with an easy-to-use interface providing meaningful and measurable
results to presenters and participants alike. Its design includes features that

-20-

take the hassle out of planning and supporting a hosted Web seminar.
ConferenceLinc includes automatic email invitations, "one-click join"
capabilities, online confirmations, update notifications, and customized
attendee registration. With ConferenceLinc, presenters may not only present
content, but may also gain audience feedback using real-time polling, live chat,
question and answer sessions, and post-event assessments. The entire
presentation is easily recordable for viewing offline and review after the show
with the recorder capturing the content and the audio, video and participant
feedback.

SupportLinc is an online technical support and customer sales support
software designed to give customer service organizations the ability to provide
remote hands-on support for products, systems, or software applications.
SupportLinc manages the support call volume and enhances the effectiveness of
traditional telephone-based customer support systems. SupportLinc's custom
interface is designed to be simple to use so as to improve the interaction and
level of support for both customers and their technical support agents.

Our Web collaboration software is sold on a perpetual license or
periodic license basis. A customer may choose to acquire a one-time perpetual
license (the "Purchase Model") or may rent our software on an annual basis on
either a per seat or per minute basis (the "ASP Model"). Should they choose to
acquire the software using the Purchase Model, then they may either elect to
host our software behind their own firewall or they may choose to have iLinc
host it for them, depending upon their preferences, budget and IT capabilities.
Customers who select the Purchase Model, whether hosted by iLinc or the
customer, may also subscribe for ongoing customer support and maintenance
services, using a support and maintenance contract with terms from one to five
years. The maintenance and support fee charged is between 15% and 18% of the
purchase license fee that is paid for the perpetual licenses and varies
depending upon the length of the support agreement. If a customer chooses to
have iLinc host their Purchase Model licenses, then the customer is charged a
hosting fee equal to 10% of the purchase license fee that was paid for the
perpetual license.

During Fiscal 2006, iLinc launched its Enterprise Unlimited perpetual
licensing model that enables customers to pay a one-time up-front fee for
unlimited, organization-wide Web Conferencing. Those customers who qualify for
the iLinc Enterprise Unlimited site license may subscribe to an unlimited use
license. The initial iLinc Enterprise Unlimited license fee is determined based
upon the number of employees within the customer's organization and various
other factors. The annual maintenance and support fees and hosting fees
associated with an iLinc Enterprise Unlimited license are then based upon a
fixed rate per-seat license that is active on each annual anniversary of the
iLinc Enterprise Unlimited license agreement. Customers may expand the number of
active seats available to them at any time with a corresponding increase in
annual maintenance and hosting fees being charged.

Customers choosing the ASP Model pay per seat (concurrent connection)
on either a per month or per year basis depending upon the length and term of
the subscription agreement. Hosting and maintenance are included as a part of
the monthly or annual rental fees. Customers may also obtain Web conferencing
and audio conferencing on a per minute basis using the iLinc On-Demand product.
Those choosing the iLinc On-Demand product pay on a monthly basis typically
without contractual commitment.

AUDIO CONFERENCING

The Company also delivers comprehensive audio conferencing solutions
that help businesses provide virtual meetings, corporate events, distance
learning programs, and daily conference calls. Our audio conferencing offering
includes a wide array of services and products that include the following:

o AUDIO ON-DEMAND (NO RESERVATIONS NEEDED): With pre-established
calling accounts for each user, you can create or participate
in conference calls with no advance notice, 24/7;

o RESERVED AUTOMATED: The solution for recurring calls, each
participant has a permanent number and passcode;

o OPERATOR ASSISTED: For important calls, this service includes
an iLinc conference operator to host, monitor, and coordinate
the call; and,

o ONLINE SEMINARS: High-quality event services that include
invitation and user management, scripting, presentation
preparation, post show distribution, and dedicated operator
assistance from iLinc.

-21-

Customers may purchase our audio conferencing products and services
without an annual contract commitment on a monthly recurring usage basis, and
often subscribe for a fixed per-minute rate.

OTHER PRODUCTS AND SERVICES

In addition to the iLinc Suite of products and services, we offer to
our customers an array of e-Learning and training products and services. We
offer training software products that, like iLinc, promote online collaboration
with products that integrate with our LearnLinc software. These include:
TestLinc which is an assessment and quizzing tool that allows for formal testing
and evaluation of students and i-Canvas, which is a training content development
software that allows non-technical training professionals to create Web-based
training courses without programming. i-Canvas is sold on an individual user
perpetual license basis. We offer custom content development services through a
subcontractor relationship. We also offer a library of online courses focused
upon the training of executives on essential business topics. Our off-the-shelf
online library of content includes an online mini-MBA program co-developed with
the Tuck School of Business at Dartmouth College.

INDUSTRY TRENDS

Industry analyst Frost and Sullivan in their recent World Web
Conferencing Market report separates the Web Conferencing vendor community into
distinct groups that include: service providers ("Service Providers") and
software providers ("Software Providers"). The difference between Service
Providers and Software Providers is that the Service Providers effectively only
offer Web conferencing as an ASP service or rental model basis. However,
Software Providers offer Web conferencing as a solution that can be purchased
and owned by customers (whether the software is installed internally by
customers or hosted by the software provider). iLinc is one of the only
providers that effectively competes in both the Service Provider and Software
Provider markets. While we also offer our iLinc Suite as an ASP or per-minute
service, the predominate licensing arrangement selected by our customer base
remains the Purchase Model. The Web conferencing software market is the faster
growing segment, representing about $227 million of the current Web conferencing
market. A Frost and Sullivan forecast projects a 40% Compound Annual Growth Rate
("CAGR") between 2002 and 2010 (as compared with the service provider market
which is projected to grow at a 22% CAGR for the same time period). The Software
Provider market, based upon its higher growth rate, is expected to outgrow the
Service Provider market by the end of 2009.

Another important trend in the industry is the convergence of
communication technologies such as audio and Web conferencing and the increase
in demand for a single source for both of these capabilities. Frost and Sullivan
has noted, in a separate report on audio conferencing, that the demand for
integrated audio, Web, and video conferencing solutions continues to surge as
end user needs for easy-to-use, single-source solutions swell. Developing and
providing a truly converged user environment and experience, including the
integration of audio, Web and video conferencing technologies, is essential.
With the addition of audio conferencing capabilities, we have been able to
provide a single source for deeply integrated Web, audio, video as well as
Voice-over IP. Increasingly, the option a vendor chooses for Web conferencing
determines their selection for audio conferencing. We believe we have already
made significant progress in selling audio conferencing to the iLinc customer
base and we actively cross sell all of our products and services to all
customers. We believe that another benefit of the integrated conferencing
approach is customer retention. According to the same Frost and Sullivan report,
when Web conferencing and audio conferencing are sold together as an integrated
package there is a significant increase in retention of the audio conferencing
service. We are continuing to create incentives for our audio customers to be
both Web and audio customers to drive this retention.

MARKET POSITION - DIFFERENTIATORS

We view our position in the market as the best solution for the
enterprise-wide buyer that has already adopted Web conferencing, as well as
organizations that believe their usage of Web conferencing will grow quickly. As
mentioned earlier, a growing number of these organizations are using four or
more different vendors for Web or audio conferencing services and, therefore,
not realizing the economies of scale that consolidating to one or two vendors

-22-

for these services can provide. There are also other important considerations
revolving around Web conferencing such as security and bandwidth availability
that are forcing the buying decision for Web and audio conferencing out of the
business units and into the IT department. We believe that our solution uniquely
maps to critical IT requirements among these mature buyers in four important
areas.

First, we offer WEB CONFERENCING SOFTWARE WITH FLEXIBLE LICENSING
OPTIONS that allows organizations to pay a one-time license fee to install the
software inside of their environment, or to purchase perpetual licenses and have
those licenses hosted in our co-location facility. We find this flexibility to
be an important differentiator to address the needs of customers that are ready
to make an enterprise-wide decision as well as customers that think their usage
may grow throughout their organization. We believe this licensing structure also
enables us to maintain a consistent revenue stream of smaller sized purchases
while also winning larger enterprise-wide deals that help substantially increase
revenue growth.

Second, we believe we offer the HIGHEST LEVEL OF DATA SECURITY
commercially available. We believe that we are the only Web conferencing
provider that offers a customer-hosted solution with a purchase license option
and true point-to-point security with our unique combination of Advanced
Encryption Standard and secure socket layer (SSL). All information within a
session can be transmitted between meeting attendees securely without any
reduction in performance. We believe this aspect of our software has been
extremely attractive to government, military, and financial organizations as
well as to the companies that supply to these entities. We also believe that
this solution, combined with other aspects of our software, enables us to be a
more reliable solution than our Web conferencing software competitors.

Third, our solution is SUITABLE AND SCALABLE FOR ENTERPRISE-WIDE
DEPLOYMENT. The iLinc Suite contains four modes that address the most common
needs for business collaboration within the enterprise. We offer virtual
classroom software with our LearnLinc mode, presentation and sales demonstration
capabilities with MeetingLinc, customer support with SupportLinc, and a mode for
Web casts and marketing events with ConferenceLinc. Each of these modes shares a
common interface enabling users of one mode to easily understand any of our
other modes. We believe this reduces the learning curve for Web conferencing
enterprise-wide roll out and we believe increases adoption success. All users
can have access to all four modes of the suite. This is an important
differentiation because our competition typically charges separate licensing
fees for the use of separate modes. Giving users access to the full suite
supports the natural migration of Web conferencing usage from department to
department. Each of the modes has functionality built specifically for a
particular type of activity.

Fourth, we provide what we believe to be an EXCEPTIONAL "TOTAL COST OF
OWNERSHIP" VALUE. Our software and services are competitively priced but, unlike
our competitors, a customer's installation of our product is a very short and
non-labor intensive process. Maintenance of our software also requires minimal
attention from an IT perspective. We believe most of our Web conferencing
software competitors require very complex and costly implementations.

We believe that all of these factors make our solution compelling to
organizations that have already adopted the practice of Web conferencing as a
best practice as well as companies that are just starting to use Web
conferencing, but anticipate that their usage will grow quickly. We recognize
that in order to grow our market share we need to develop products that are easy
to implement and that scale with our customer needs.

SALES AND MARKETING FOCUS

To leverage these advantages, our organization continually creates new
marketing and sales campaigns that focus in four target markets.

o We sell to prospects that are using other Web conferencing
service providers that are ready to migrate to Web
conferencing software. We find that these organizations
appreciate the cost and feature advantages that our technology
offers.
o We target organizations that have a natural fit for highly
secure Web conferencing software such as government, military,
and financial organizations as well as the companies that
supply to these entities.
o We target organizations looking to deploy live, Web-based
training. Our software was originally built for training and
we have maintained a competitive technology advantage in this
area.
o We continue to cross sell all of our products and services to
our large database of existing customers.
o We look to expand distribution and gain market share by
leveraging the sales and distribution capabilities of our
partners, distributors and value added resellers.

-23-

RESULTS OF OPERATIONS

The operations of the Company involve many risks, which, even through a
combination of experience, knowledge, and careful evaluation, may not be
overcome. These risks include the fact that the market for Web conferencing
products and services is in the early stages of development and may not grow to
a sufficient size or at a sufficient rate to sustain our business. We also face
intense competition from other Web conferencing and audio conferencing providers
and may be unable to compete successfully. Many of our existing and potential
competitors have longer operating histories and significantly greater financial,
technical, and other resources and therefore may be able to more quickly respond
to changing opportunities or customer requirements. Please read also the section
entitled "Risk Factors."

REVENUES FROM CONTINUING OPERATIONS

Total revenues generated from continuing operations for the three
months ended June 30, 2006 and June 30, 2005 were $3.6 million and $2.7 million
respectively, an overall increase of approximately $932,000. Of this amount,
software license revenues increased $712,000, software and audio services
revenues increased $68,000 and maintenance and professional services revenues
increased $152,000. The overall increase was primarily the result of planned
growth in software license revenues, as well as, maintenance revenues from
renewals as our customer base continues to grow. For the three months ended June
30, 2006, software license revenues were 34% of total revenue, software and
audio services revenues were 49% of total revenue and maintenance and
professional services revenues were 17% of the total revenue, as compared to
19%, 64% and 17%, respectively, for the same three month period last year. We
expect software license revenues to continue to become a larger percentage of
total revenues as total revenues increase given our focus on the Software
Purchase Model, with a proportionate increase in maintenance and professional
service revenues.

COST OF REVENUES FROM CONTINUING OPERATIONS

Cost of software license revenue is driven by the number of software
licenses sold. It consists of royalty fees paid and rebates to third-parties on
sale of certain product software licenses as well as a small amount for the cost
of fulfillment and materials. Cost of software license revenues for the three
months ended June 30, 2006 and June 30, 2005 were $45,000 and $32,000
respectively, an increase of $13,000. The increase is primarily the result of an
increase in royalty fees for off-the-shelf courseware sales. The overall cost of
software license revenue will remain a small fraction of total software license
revenue because of the small percentage due as royalties from the sale of
off-the-shelf courses, providing high margin software sales.

Cost of software and audio services revenue uses a fully allocated
overhead method that includes an allocation of salaries and allocable expenses
resulting from the delivery of our hosted Web conferencing services, together
with all expenses associated with the delivery of our audio conferencing
services. Expenses related to our audio conferencing services that are accrued
as cost of revenues include salaries and allocable expenses of our telephone
operators, allocated facilities costs, allocated technical support costs for
support services, together with all direct telecommunication expenses for long
distance and local dial tone connectivity, and finally, allocable depreciation
and amortization expense related to our audio conferencing assets. Cost of
software and audio services for the three months ended June 30, 2006 and June
30, 2005 were $976,000 and $1.1 million, respectively, a decrease of $107,000.
This decrease was primarily a result of the full depreciation of audio
conferencing computer in May 2006, providing a decrease in depreciation expense
of $64,000 per month. In addition, office expenses decreased $22,000, consulting
and recruiting fees decreased $5,000 and the portion of overhead allocated to
cost of software and audio services decreased by $9,000 in the first quarter of
fiscal 2007 as compared to the first quarter of fiscal 2006. These decreases in
costs were partially offset by increases in telecommunications costs of $16,000
and other costs of $17,000 for the same periods.

Cost of maintenance and professional services revenue included an
allocation of technical support personnel and facilities costs allocable to
those service revenues consisting primarily of a portion of our facilities
costs, communications and depreciation expenses. But, the largest and most
variable component of the cost of maintenance and professional services arises
from the amount due to our third-party custom content subcontractor that
provides custom content services. The amount due to our third-party
subcontractor is a fixed proportion of the custom content revenue earned. The
cost of maintenance and professional services for the three months ended June
30, 2006 and June 30, 2005 were $170,000 and $113,000, respectively, an increase
of $57,000. The increase was primarily the result of a change in the level of
custom content services and therefore a corresponding increase in the amount due
to our third-party subcontractor.

-24-

Amortization of acquired developed technology consists of amortization
of software and identified intangible technology that was acquired in the
Quisic, Mentergy and Glyphics acquisitions. Amortization of acquired technology
for the three months ended June 30, 2006 and June 30, 2005 was $67,000 and
$119,000, respectively, a decrease of $52,000. The decrease is related to the
full amortization of software technology assets that were acquired from
Mentergy.

OPERATING EXPENSES FROM CONTINUING OPERATIONS

Total operating expenses consist of research and development expenses,
sales and marketing expenses, and general and administrative expenses. We
incurred total operating expenses from continuing operations of $1.8 million for
both the three months ended June 30, 2006 and June 30, 2005.

Research and development expenses represent expenses incurred in
connection with the continued development and enhancement of our software
products and new versions. Those costs consist primarily of salaries and
benefits, telecommunication allocations, rent allocations, computer equipment
allocations, and allocated depreciation and amortization expense. Research and
development expenses from continuing operations for the three months ended June
30, 2006 and June 30, 2005 were $304,000 and $358,000, respectively, a decrease
of $54,000. During the three months ended June 30, 2006, we began capitalizing
identified direct expenses associated with a specific software development upon
achieving technological feasibility for version 9.0 of our Web collaboration
software in accordance with SFAS No. 86 ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED. We will continue to
capitalize those direct costs until the new software product is ready for
distribution and sale to our customers. Once the product is released, we will
amortize these software development costs over a three year period. Most of the
decrease in the June quarter in research and development costs were attributable
to the capitalization of those costs that would otherwise have been expensed.
After taking into account the decrease from capitalized software costs, we
expect research and development costs to remain relatively flat in fiscal 2007.

Sales and marketing expenses consist primarily of sales and marketing
salaries and benefits, and also include allocated travel and entertainment
costs, allocated advertising, and other marketing expenses. Sales and marketing
expenses from continuing operations for the three months ended June 30, 2006 and
June 30, 2005 were $858,000 and $785,000, respectively, an increase of $73,000.
The increase was a result of increases in salaries and benefits of $56,000,
professional services of $22,000 and office expenses of $13,000. In addition, we
accrued rebate and sales incentives expense due to a new distributor of its
products in accordance with the distributor agreement of $29,000. These
increases were partially offset by a decrease in the occupancy expense allocated
to sales and marketing of $43,000 and a decrease in advertising and marketing
expenses of $6,000. We expect sales and marketing expenses to increase in amount
as revenues increase, but that the percentage of sales and marketing expenses
incurred in relation to total revenue to remain consistent through fiscal 2007.

General and administrative expenses consist of company-wide expenses
that are not directly related to research and development or sales and
marketing, with the bulk of those general and administrative expenses comprised
of salaries, rent and the costs associated with being a public company,
including accounting costs, legal costs, and listing fees. Although revenues
increased, general and administrative expenses from continuing operations for
the three months ended June 30, 2006 and June 30, 2005 were relatively flat at
$634,000 and $641,000, respectively, a slight decrease of $7,000. Salaries and
benefits increased $37,000 when comparing June 30, 2006 to June 30, 2005, which
was offset by a related decrease in consulting fees of $54,000 as several
administrative personnel transitioned from consultants to employees in the June
30, 2005 quarter. Other increases in general and administrative expenses in the
quarter ended June 30, 2006 as compared to June 30, 2005, included increases in
office expense of $13,000, telephone and Internet expenses of $16,000,
accounting fees of $9,000, travel and entertainment expenses of $10,000 and
other taxes of $9,000. The increases were partially offset by decreases in legal
fees of $34,000 and bad debt expense of $15,000. We expect general and
administrative expenses to remain at this level and relatively flat through
fiscal 2007.

-25-

EARNINGS FROM OPERATIONS

Throughout fiscal 2006, we implemented a company-wide overhead
reduction program. As a result of that overhead reduction program, we reduced
and then maintained expenses while increasing revenues when comparing the
overall level of revenue to expense for the quarter ended June 30, 2006 to the
quarter ended June 30, 2005. For the three months ended June 30, 2006, we
reported earnings from operations of $551,000 as compared to a loss from
operations of $458,000 for the three months ended June 30, 3005, an increase in
earnings from operations of $1.0 million. We expect to continue to hold down
costs where appropriate while we continue to invest in research and development
and likewise sales and marketing in order to increase revenues.

INTEREST EXPENSE FROM CONTINUING OPERATIONS

In order to clearly identify the difference between the interest
expense that is paid in cash on our outstanding debt and the non-cash interest
expense associated with the beneficial conversion features and conversion of its
debt, we have segregated and itemized those expenses.

Interest expense from continuing operations paid on outstanding debt
instruments for the three months ended June 30, 2006 and June 30, 2005 was
$251,000 and $268,000, respectively, a decrease of $17,000. Non-cash interest
expense for the three months ended June 30, 2006 and June 30, 2005 was $150,000
and $163,000, respectively, an increase of $13,000.

GAIN ON SETTLEMENT OF DEBT AND OTHER OBLIGATIONS FROM CONTINUING OPERATIONS/LOSS
ON SETTLEMENT OF NOTE RECEIVABLE

During the three months ended June 30, 2005, we recognized a loss of
$7,500 relating to a settlement of a note receivable when we accepted a
discounted payment in the amount of $17,500 that extinguished a note receivable
with a principal balance of $25,000.

INCOME TAX EXPENSE FROM CONTINUING OPERATIONS

We disclosed no tax benefit on our Condensed Consolidated Statement of
Operations during the three months ended June 30, 2006 or 2005 because it
concluded it is not likely it would be able to recognize the tax asset created
due to the lack of operating history of its Web conferencing and audio
conferencing business strategy. At June 30, 2006 and March 31, 2006, we had net
deferred tax assets of $15.8 million and $15.9 million, respectively, with
corresponding valuation allowances. Our tax assets are scheduled to expire over
a period of five to thirteen years.

RESULTS OF DISCONTINUED OPERATIONS

Effective January 1, 2004, we discontinued our practice management
services. Results of operations from this segment are presented as discontinued
operations for the three months ended June 30, 2006 and 2005 in accordance with
SFAS 146 ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES.

Net income from discontinued operations for the three months ended June
30, 2006 and 2005 was $11,000 and $7,000, respectively. Cash flows used in
discontinued operations were $46,000 for the three months ended June 30, 2006.
Cash flows provided by discontinued operations $111,000 for the three months
ended June 30, 2005.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2006, we had a working capital deficit of $98,000. Current
assets included $925,000 in cash, $1.0 million held in certificates of deposit
and marketable securities that mature in January 2007, $2.4 million in net
accounts receivable and $79,000 in prepaids and other assets. Current
liabilities consisted of $998,000 of deferred revenue, $607,000 of current
maturities of long-term debt and capital leases and $2.9 million in accounts
payable and accrued liabilities.

In June 2006, we raised $2,000,000 of gross proceeds in a private
placement of 5.4 million shares of common stock. A portion of the our plan to
address our working capital deficiency includes further reductions in overhead
and continued development, marketing and licensing of our iLinc suite of
products and services through the internal sales efforts and external channel
partnerships.

-26-

Cash used in operating activities from continuing operations was
$138,000 during the three months ended June 30, 2006 and $191,000 during the
three months ended June 30, 2005. Cash used in operating activities from
continuing operations during the three months ended June 30, 2006 was primarily
attributable to decreases in accounts payable and accrued expenses of $552,000,
increases in accounts receivable of $263,000, and increases in prepaid expenses
of $49,000. These items were partially offset by net income from continuing
operations of $123,000, increases in deferred revenue of $81,000, and non-cash
expenses and revenues of $522,000. Cash used in operating activities during the
three months ended June 30, 2005 was primarily attributable to a net loss from
continuing operations of $892,000, decreases in accounts receivable of $175,000
and prepaid expenses of $92,000, respectively. These items were partially offset
by non-cash expenses and revenues of $641,000 and an increase in deferred
revenue of $23,000.

Cash used in investing activities from continuing operations was $1.1
million for the three months ended June 30, 2006, while cash used in investing
activities from continuing operations was $31,000 for the three months ended
June 30, 2005. Cash used in investing activities during the three months ended
June 30, 2006 was due to an investment in a 7-month certificate of deposit of
$1.0 million, capital expenditures of $17,000 and capitalization of research and
development costs of $82,000. The repayment on notes receivable provided cash of
$2,000 during the quarter. Cash used by investing activities for the three
months ended June 30, 2005 was due to $22,000of capital expenditures and
acquisition related expenses of $9,000.

Cash provided by financing activities from continuing operations was
$1.7 million during the three months ended June 30, 2006, while cash used in
financing activities from continuing operations was $160,000 during the three
months ended June 30, 2005. Cash provided by financing activities during the
three months ended June 30, 2006 was attributable to proceeds from the issuance
of common stock of $2.0 million partially offset by stock issuance expenses of
$160,000, the repayment of debt and capital leases totaling $62,000, payment of
preferred dividends of $39,000, and additional proceeds from the exercise of
stock options of $3,000. Cash used in financing activities during the three
months ended June 30, 2005 was due to the payment of preferred dividends of
$25,000, repayment of long-term debt and capital leases of $107,000 and
financing costs of $28,000.

INFORMATION RELATED TO ACQUISITIONS AND CAPITAL RAISE ACTIVITIES

-27-

stock that had been registered with the SEC at a price of $0.25, $0.26 and $0.30
per share. Since the actual conversion price for the convertible debt was less
than the fixed conversion price of $1.00, the Company recorded conversion
expense of $338,000 for the year ended March 31, 2006. During fiscal 2006, the
Company accelerated the amortization of the deferred offering costs and the
discount and beneficial conversion feature associated with the debt by expensing
$50,000 and $137,000, respectively at the time of conversion. No conversion or
debt or acceleration of amortization of costs occurred during the three months
ended June 30, 2006

On September 16, 2003, the Company completed its private placement of
series A convertible preferred stock (the "Series A Preferred Stock") with
detachable warrants. The Company sold 30 units at $50,000 each and raised a
total of $1,500,000. Each unit consisted of 5,000 shares of Series A Preferred
Stock, par value $0.001 and a warrant to purchase 25,000 shares of common stock.
The Series A Preferred Stock is convertible into the Company's common stock at a
price of $0.50 per share, and the warrants are immediately exercisable at a
price of $1.50 per share with a three-year term. Accordingly, each share of
preferred stock is convertible into 20 shares of common stock and retains a $10
liquidation preference. The Company pays an 8% dividend to holders of the Series
A Preferred Stock, and the dividend is cumulative. The Series A Preferred Stock
is non-voting and non-participating. The shares of Series A Preferred Stock will
not be registered under the Securities Act of 1933, as amended, and were offered
in a private placement providing exemption from registration. The cash proceeds
of the private placement of Series A Preferred Stock were allocated pro rata
between the relative fair values of the Series A Preferred Stock and warrants at
issuance using the Black-Scholes valuation model for valuing the warrants. The
aggregate value of the warrants and the beneficial conversion discount of
$247,000 are considered a deemed dividend in the calculation of loss per share.
During the 2005 fiscal year, holders of 22,500 shares of Series A Preferred
Stock converted those shares into 450,000 shares of the Company's common stock.
The underlying common stock that would be issued upon conversion of the Series A
Preferred Stock and upon exercise of the associated warrants have been
registered with the SEC and may be sold pursuant to a resale prospectus dated
May 24, 2004.

-28-

using the Company's common stock, which included the issuance of 2,820,355
shares valued at $0.98 per share upon execution of the agreement, and 308,133
shares valued at $0.39 per share upon release of escrow pending the settlement
of certain acquisition contingencies.

On September 30, 2005, the Company executed definitive agreements with
nine investors to issue 70,000 unregistered shares of its Series B Preferred
Stock, par value $0.001 (the "Series B Preferred Stock") and warrants to
purchase 700,000 shares of its common stock (the "Warrants") in a private
transaction that was exempt from registration under Section 4(2) of the
Securities Act of 1933. Of the total Series B Preferred Stock issued, 15,000
shares of Series B Preferred Stock with Warrants to purchase 150,000 shares of
common stock were issued to four individuals in exchange for their cash
investment of $150,000; 15,000 shares of Series B Preferred Stock with Warrants
to purchase 150,000 shares of common stock were issued to two vendors in
exchange for an offset of their accounts payable balance in the amount of
$150,000; and 40,000 shares of Series B Preferred Stock with Warrants to
purchase 400,000 shares of common stock (effective August 29, 2005 as previously
disclosed on Form 8-K dated September 2, 2005) were issued to three
institutional investors in exchange for the offset of accrued liabilities in the
amount of $400,000 that arose from the Quisic acquisition. The Company recorded
a gain on debt conversion of $50,000 associated with this transaction since the
liabilities outstanding were $450,000 at the time of the transaction. The Series
B Preferred Stock bears an 8% dividend, was sold using a deemed $10.00 per share
issue price, and is convertible into 2,800,000 shares of the Company's common
stock using a conversion price of $0.25 per share. The Warrants that are
exercisable at an exercise price equal to $0.50 per share expire on the third
anniversary of the issue date of September 30, 2005. The aggregate value of the
warrants of $55,000 is considered a deemed dividend in the calculation of loss
per share.

CONTRACTUAL OBLIGATIONS

The following schedule details all of the Company's
indebtedness and the required payments related to such obligations at June 30,
2006 (in thousands):

DUE IN DUE IN YEARS
LESS THAN DUE IN DUE IN YEAR FOUR AND DUE AFTER
TOTAL ONE YEAR YEAR TWO THREE FIVE FIVE YEARS
------- ------- ------- ------- ------- -------

Long term debt obligations ...... $ 8,653 $ 586 $ 2,964 $ 2 $ 1 $ 5,100
Capital lease obligations ....... 21 21 -- -- -- --
Interest expense ................ 3,872 950 626 613 1,224 459
Operating lease obligations ..... 2,093 548 439 332 578 196
Base salary commitments
under employment
agreements.................... 750 375 375 -- -- --
------- ------- ------- ------- ------- -------
Total contractual obligations ... $15,389 $ 2,480 $ 4,404 $ 947 $ 1,803 $ 5,755
======= ======= ======= ======= ======= =======

OFF BALANCE SHEET TRANSACTIONS

There are no off-balance sheet transactions, arrangements, obligations
(including contingent obligations) or other relationships of the Company with
unsolicited entities or other persons that have or may have a material effect on
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources of the Company.

-29-

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. The more
significant areas requiring use of estimates relate to revenue recognition,
accounts receivable and notes receivable valuation reserves, realizability of
intangible assets, realizability of deferred income tax assets, and the
evaluation of contingencies and litigation. Management bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. The results of such estimates form the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may materially
differ from these estimates under different assumptions or conditions.

Our critical accounting policies and estimates are included in the
Company's annual report on Form 10-K for the year ended March 31, 2006 as filed
with the SEC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The following discusses our exposure to market risk related to changes
in interest rates, equity prices and foreign currency exchange rates. Market
risk generally represents the risk of loss that may result from the potential
change in the value of a financial instrument as a result of fluctuations in
interest rates and market prices. We have not traded or otherwise bought and
sold derivatives nor do we expect to in the future. We also do not invest in
market risk sensitive instruments for trading purposes.

We provide our products and services to customers in the United States,
Europe and elsewhere throughout the world. Sales are predominately made in U.S.
Dollars, however, we have sold products that were payable in Euros and Canadian
Dollars. A strengthening of the U.S. Dollar could make our products and services
less competitive in foreign markets.

The primary objective of our investment activity is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, we maintain our portfolio of cash
equivalents in a variety of money market funds.

As of June 30, 2006, the carrying value of our outstanding convertible
redeemable subordinated notes and unsecured senior notes was approximately $8.2
million at fixed interest rates of 10% to 12%. In certain circumstances, we may
redeem this long-term debt. Our other components of indebtedness of $435,000
bear interest rates of 6% to 9.75%. We have one loan for computer equipment with
a balance of $7,000, with an interest rate of 26.99%, which we plan to pay off
in the second quarter of fiscal 2007. Increases in interest rates could increase
the interest expense associated with future borrowings, if any. We do not hedge
against interest rate increases.

ITEM 4. CONTROLS AND PROCEDURES

The Company evaluated the design and operation of its disclosure
controls and procedures to determine whether they are effective in ensuring that
it discloses the required information in a timely manner and in accordance with
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the
rules and forms of the Securities and Exchange Commission. Management, including
its principal executive officer and principal financial officer, supervised and
participated in the evaluation. The principal executive officer and principal
financial officer concluded, based on their review, that its disclosure controls
and procedures, as defined by Exchange Act Rules 13a-15(e) and 15d-15(e), are
effective and ensure that (i) it discloses the required information in reports
that it files under the Exchange Act and that the filings are recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms and (ii) information required
to be disclosed in reports that it files under the Exchange Act is accumulated
and communicated to the Company's management, including its principal executive
officer and principal financial officer, to allow timely decisions regarding
required disclosure.

-30-

During the first quarter ended June 30, 2006, no changes were made to
its internal controls over financial reporting that materially affected or were
reasonably likely to materially affect these controls subsequent to the date of
their evaluation.

PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 1A. RISK FACTORS

You should carefully consider the risks described below. The risks and
uncertainties described below are not the only ones we face. If any of the
following risks actually occur, our business, financial condition or results of
operations could be materially and adversely affected. In that case, the trading
price of our common stock could be adversely affected.

WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE OUR
BUSINESS.

We have a limited operating history in the Web conferencing and audio
conferencing business. While the organizations that we have acquired have been
engaged in their respective businesses for over five years, we only recently
acquired those assets and have undertaken to integrate their assets into our
operations at varying levels. Since the acquisition of these businesses, we have
made significant changes to our product mix and service mix, our growth
strategies, our sales and marketing plans, and other operational matters. Given
our recent investment in technology, we cannot be certain that our business
model and future operating performance will yield the results that we intend. In
addition, the competitive and rapidly changing nature of the Web conferencing
and audio conferencing markets makes it difficult for us to predict future
results. Our business strategy may be unsuccessful and we may be unable to
address the risks we face.

WE FACE RISKS INHERENT IN INTERNET-RELATED BUSINESSES AND MAY BE UNSUCCESSFUL IN
ADDRESSING THESE RISKS.

We face risks frequently encountered by companies in new and rapidly
evolving markets such as Web conferencing and audio conferencing. We may fail to
adequately address these risks and, as a consequence, our business may suffer.
To address these risks among others, we must successfully introduce and attract
new customers to our products and services; successfully implement our sales and
marketing strategy to generate sufficient sales and revenues to sustain
operations; foster existing relationships with our customers to provide for
continued or recurring business and cash flow; and successfully address and
establish new products and technologies as new markets develop. We may not be
able to sufficiently address and overcome risks inherent in our business
strategy.

OUR QUARTERLY OPERATING RESULTS ARE UNCERTAIN AND MAY FLUCTUATE SIGNIFICANTLY.

Our operating results have varied significantly from quarter to quarter
and are likely to continue to fluctuate as a result of a variety of factors,
many of which we cannot control. Factors that may adversely affect our quarterly
operating results include: the size and timing of product orders; the mix of
revenue from custom services and software products; the market acceptance of our
products and services; our ability to develop and market new products in a
timely manner; the timing of revenues and expenses relating to our product
sales; and revenue recognition rules. Expense levels are based, in part, on
expectations as to future revenue and to a large extent are fixed in the short
term. To the extent we are unable to predict future revenue accurately, we may
be unable to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall.

WE HAVE LIMITED FINANCIAL RESOURCES AND MAY NOT REMAIN PROFITABLE.

We have incurred substantial operating losses and have limited
financial resources at our disposal. We have long-term obligations that we will
not be able to satisfy without additional debt and/or equity capital and/or
ultimately generating profits and cash flows from our Web conferencing and audio
conferencing operations. If we are unable to remain profitable, we will face

-31-

increasing demands for capital. We may not be successful in raising additional
debt or equity capital and may not remain profitable. As a result, we may not
have sufficient financial resources to satisfy our obligations as they come due
in the short term.

LISTING QUALIFICATIONS MAY NOT BE MET.

The American Stock Exchange's continued listing standards require that
we maintain stockholders' equity of at least $4.0 million if we have losses from
continuing operations or net losses in three of our four most recent fiscal
years. We have sustained losses in three of our four most recent fiscal years
and therefore must maintain stockholders' equity of at least $4.0 million. If
now or in the future, we fail to maintain a sufficient level of stockholders'
equity in compliance with those and other listing standards of the American
Stock Exchange, then we would be required to submit a plan to the American Stock
Exchange describing how we intended to regain compliance with the requirements.
In the event that our shares of common stock are de-listed, the liquidity and
price per share of our common stock may be adversely affected.

DILUTION TO EXISTING STOCKHOLDERS WILL OCCUR UPON ISSUANCE OF SHARES WE HAVE
RESERVED FOR FUTURE ISSUANCE.

On June 30, 2006, 34,342,115 shares of our common stock were issued, of
which 1,432,412 were held in treasury, leaving 32,909,703 issued and
outstanding. An additional 17,102,743 shares of our common stock were reserved
for issuance that would be issued as the result of the exercise of warrants or
the conversion of convertible notes and/or convertible preferred stock. The
issuance of these additional shares will reduce the percentage ownership of our
existing stockholders. The existence of these reserved shares coupled with other
factors, such as the relatively small public float, could adversely affect
prevailing market prices for our common stock and our ability to raise capital
through an offering of equity securities.

THE LOSS OF THE SERVICES OF OUR SENIOR EXECUTIVES AND KEY PERSONNEL WOULD LIKELY
CAUSE OUR BUSINESS TO SUFFER.

Our success depends to a significant degree on the performance of our
senior management team. The loss of any of these individuals could harm our
business. We do not maintain key person life insurance for any officers or key
employees other than on the life of James M. Powers, Jr., our Chairman,
President and CEO, with that policy providing a death benefit to the Company of
$1.0 million. Our success also depends on the ability to attract, integrate,
motivate and retain additional highly skilled technical, sales and marketing,
and professional services personnel. To the extent we are unable to attract and
retain a sufficient number of additional skilled personnel, our business will
suffer.

OUR INTELLECTUAL PROPERTY MAY BECOME SUBJECT TO LEGAL CHALLENGES, UNAUTHORIZED
USE OR INFRINGEMENT, ANY OF WHICH COULD DIMINISH THE VALUE OF OUR PRODUCTS AND
SERVICES.

Our success depends in large part on our proprietary technology. If we
fail to successfully enforce our intellectual property rights, the value of
these rights, and consequently, the value of our products and services to our
customers, could diminish substantially. It may be possible for third parties to
copy or otherwise obtain and use our intellectual property or trade secrets
without our authorization, and it may also be possible for third parties to
independently develop substantially equivalent intellectual property. Currently,
we do not have patent protection in place related to our products and services.
Litigation may be necessary in the future to enforce our intellectual property
rights, to protect trade secrets or to determine the validity and scope of the
proprietary rights of others. While we have not received any notice of any claim
of infringement of any of our intellectual property, from time to time we may
receive notice of claims of infringement of other parties' proprietary rights.
Such claims could result in costly litigation and could divert management and
technical resources. These types of claims could also delay product shipment or
require us to develop non-infringing technology or enter into royalty or
licensing agreements, which agreements, if required, may not be available on
reasonable terms, or at all.

COMPETITION IN THE WEB CONFERENCING AND AUDIO CONFERENCING SERVICES MARKET IS
INTENSE AND WE MAY BE UNABLE TO COMPETE SUCCESSFULLY, PARTICULARLY AS A RESULT
OF RECENT ANNOUNCEMENTS FROM LARGE SOFTWARE COMPANIES.

The markets for Web conferencing and audio conferencing products and
services are relatively new, rapidly evolving and intensely competitive.
Competition in our market will continue to intensify and may force us to reduce
our prices, or cause us to experience reduced sales and margins, loss of market
share and reduced acceptance of our services. Many of our competitors have
larger and more established customer bases, longer operating histories, greater

-32-

name recognition, broader service offerings, more employees and significantly
greater financial, technical, marketing, public relations, and distribution
resources than we do. We expect that we will face new competition as others
enter our market to develop Web conferencing and audio conferencing services.
These current and future competitors may also offer or develop products or
services that perform better than ours. In addition, acquisitions or strategic
partnerships involving our current and potential competitors could harm us in a
number of ways.

FUTURE REGULATIONS COULD BE ENACTED THAT EITHER DIRECTLY RESTRICT OUR BUSINESS
OR INDIRECTLY IMPACT OUR BUSINESS BY LIMITING THE GROWTH OF INTERNET-BASED
BUSINESS AND SERVICES.

As commercial use of the Internet increases, federal, state, and
foreign agencies could enact laws or adopt regulations covering issues such as
user privacy, content, and taxation of products and services. If enacted, such
laws or regulations could limit the market for our products and services.
Although they might not apply to our business directly, we expect that laws or
rules regulating personal and consumer information could indirectly affect our
business. It is possible that such legislation or regulation could expose us to
liability which could limit the growth of our Web conferencing and audio
conferencing products and services. Such legislation or regulation could dampen
the growth in overall Web conferencing usage and decrease the Internet's
acceptance as a medium of communications and commerce.

WE DEPEND LARGELY ON ONE-TIME SALES TO GROW REVENUES WHICH MAKE OUR REVENUES
DIFFICULT TO PREDICT.

While audio conferencing provides a more recurring revenue base, a high
percentage of our revenue is attributable to one-time purchases by our customers
rather than long-term, recurring, conferencing ASP type contracts. As a result,
our inability to continue to obtain new agreements and sales may result in lower
than expected revenue, and therefore, harm our ability to achieve or sustain
operations or profitability on a consistent basis, which could also cause our
stock price to decline. Further, because we face competition from larger,
better-capitalized companies, we could face increased downward pricing pressure
that could cause a decrease in our gross margins. Additionally, our sales cycle
varies depending on the size and type of customer considering a purchase.
Potential customers frequently need to obtain approvals from multiple decision
makers within their company and may evaluate competing products and services
before deciding to use our services. Our sales cycle, which can range from
several weeks to several months or more, combined with the license purchase
model makes it difficult to predict future quarterly revenues.

OUR OPERATING RESULTS MAY SUFFER IF WE FAIL TO DEVELOP AND FOSTER OUR VALUE
ADDED RESELLER OR DISTRIBUTION RELATIONSHIPS.

We have an existing channel and distribution network that provides
growing revenues and contributes to our high margin software sales. These
distribution partners are not obligated to distribute our services at any
minimum level. As a result, we cannot accurately predict the amount of revenue
we will derive from our distribution partners in the future. The inability or
unwillingness of our distribution partners to sell our products to their
customers and increase their distribution of our products could result in
significant reductions in our revenue, and therefore, harm our ability to
achieve or sustain profitability on a consistent basis.

SALES IN FOREIGN JURISDICTIONS BY OUR INTERNATIONAL DISTRIBUTOR NETWORK AND US
MAY RESULT IN UNANTICIPATED COSTS.

We continue to expand internationally through our value added reseller
network and OEM partners. We have limited experience in international operations
and may not be able to compete effectively in international markets. We face
certain risks inherent in conducting business internationally, such as:

o our inability to establish and maintain effective distribution
channels and partners;
o the varying technology standards from country to country;
o our inability to effectively protect our intellectual property
rights or the code to our software;
o our inexperience with inconsistent regulations and unexpected
changes in regulatory requirements in foreign jurisdictions;
o language and cultural differences;
o fluctuations in currency exchange rates;
o our inability to effectively collect accounts receivable; or
o our inability to manage sales and other taxes imposed by
foreign jurisdictions.

-33-

THE GROWTH OF OUR BUSINESS SUBSTANTIALLY DEPENDS ON OUR ABILITY TO SUCCESSFULLY
DEVELOP AND INTRODUCE NEW SERVICES AND FEATURES IN A TIMELY MANNER.

We acquired our Web conferencing software and business in November of
2002 and we acquired our audio conferencing business in June of 2004. With our
focus on those products and services, our growth depends on our ability to
continue to develop new features, products, and services around that software
and product line. We may not successfully identify, develop, and market new
products and features in a timely and cost-effective manner. If we fail to
develop and maintain market acceptance of our existing and new products to
offset our continuing development costs, then our net losses will increase and
we may not be able to achieve or sustain profitability on a consistent basis.

IF WE FAIL TO OFFER COMPETITIVE PRICING, WE MAY NOT BE ABLE TO ATTRACT AND
RETAIN CUSTOMERS.

Because the Web conferencing market is relatively new and still
evolving, the prices for these services are subject to rapid and frequent
changes. In many cases, businesses provide their services at significantly
reduced rates, for free or on a trial basis in order to win customers. Due to
competitive factors and the rapidly changing marketplace, we may be required to
significantly reduce our pricing structure, which would negatively affect our
revenue, margins and our ability to achieve or sustain profitability on a
consistent basis. We have an existing channel and distribution network that
provides growing revenues and contributes to our high margin software sales.
These distribution partners are not obligated to distribute our services at any
particular minimum level. As a result, we cannot accurately predict the amount
of revenue we will derive from our distribution partners in the future. The
inability of our distribution partners to sell our products to their customers
and increase their distribution of our products could result in significant
reductions in our revenue, and, therefore, harm our ability to achieve or
sustain profitability on a consistent basis.

IF WE ARE UNABLE TO COMPLETE OUR ASSESSMENT AS TO THE ADEQUACY OF OUR INTERNAL
CONTROLS OVER FINANCIAL REPORTING AS REQUIRED BY SECTION 404 OF THE
SARBANES-OXLEY ACT OF 2002, INVESTORS COULD LOSE CONFIDENCE IN THE RELIABILITY
OF OUR FINANCIAL STATEMENTS, WHICH COULD RESULT IN A DECREASE IN THE VALUE OF
OUR COMMON STOCK.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the
Securities and Exchange Commission adopted rules requiring non-accelerated
public companies to include in their annual reports on Form 10-K for fiscal
years beginning after December 16, 2006 a report of management on their
company's internal control over financial reporting, including management's
assessment of the effectiveness of their company's internal control over
financial reporting as of the company's fiscal year end. In addition, the
accounting firm auditing a public company's financial statements must also
attest to and report on management's assessment of the effectiveness of the
company's internal control over financial reporting as well as the operating
effectiveness of the company's internal controls. There is a risk that we may
not comply with all of its requirements. If we do not timely complete our
assessment or if our accounting firm determines that our internal controls are
not designed or operating effectively as required by Section 404, our accounting
firm may either disclaim its opinion as it is related to management's assessment
of the effectiveness of its internal controls or may issue a qualified opinion
on the effectiveness of our internal controls. If our accounting firm disclaims
its opinion or qualifies its opinion as to the effectiveness of our internal
controls, then investors may lose confidence in the reliability of our financial
statements, which could cause the market price of our common stock to decline.

WE MAY ACQUIRE OTHER BUSINESSES THAT COULD NEGATIVELY AFFECT OUR OPERATIONS AND
FINANCIAL RESULTS AND DILUTE EXISTING STOCKHOLDERS.

We may pursue additional business relationships through acquisitions
which may not be successful. We may have to devote substantial time and
resources in order to complete acquisitions and we therefore may not realize the
benefits of those acquisitions. Further, these potential acquisitions entail
risks, uncertainties and potential disruptions to our business. For example, we
may not be able to successfully integrate a company's operations, technologies,
products and services, information systems, and personnel into our business.
These risks could harm our operating results and could adversely affect
prevailing market prices for our common stock.

OUR CURRENT STOCK COMPENSATION EXPENSE NEGATIVELY IMPACTS OUR EARNINGS, AND WHEN
WE ARE REQUIRED TO REPORT THE FAIR VALUE OF EMPLOYEE STOCK OPTIONS AS AN EXPENSE
IN CONJUNCTION WITH THE NEW ACCOUNTING STANDARDS, OUR EARNINGS WILL BE ADVERSELY
AFFECTED, WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE.

-34-

Under our current accounting practice, stock compensation expense is
recorded on the date of the grant only if the current market price of the
underlying stock exceeds the exercise price. Beginning with the fiscal quarter
April 1, 2006, we will be required to report all employee stock options as an
expense based on a change in the accounting standards and our earnings will be
negatively impacted, which could adversely affect prevailing market prices for
our common stock and increase our anticipated net losses.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS OF SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

-35-

ITEM 6. EXHIBITS

(a) EXHIBITS

EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------

3.1(1) Restated Certificate of Incorporation of the Company
3.2(1) Bylaws of the Company
3.3(2) Restated Certificate of Incorporation of the Company
3.4(2) Amendment of Bylaws of the Company
3.5(3) Restated Certificate of Incorporation of the Company
3.6(9) Certificate of Designations of Series A Preferred Stock
3.7(10) Certificate of Amendment of Restated Certificate of Incorporation
of the Company
3.8 Revised Certificate of Designations of Series B Preferred Stock
4.1(1) Form of certificate evidencing ownership of Common Stock of the
Company
4.6(2) Form of certificate evidencing ownership of Common Stock of the
Company
4.7(3) Form of Convertible Redeemable Subordinated Note
4.9(9) Form of Redeemable Warrant (2003 Private Placement Offering)
*10.1(14) The Company's amended and restated stock compensation plan
*10.9(2) Employment Agreement dated November 12, 2000 between the Company
and James M. Powers, Jr.
*10.11(15) Employment Agreement dated February 15, 2001 between the Company
and James L. Dunn, Jr. with Amendments
10.14(4) Plan of Reorganization and Agreement of Merger by and among the
Company, Edge Acquisition Subsidiary, Inc. and the Stockholders of
Learning-Edge, Inc.
10.15(5) Plan of Reorganization and Agreement of Merger by and among the
Company, TW Acquisition Subsidiary, Inc., ThoughtWare
Technologies, Inc. and the Series B Preferred Stockholder of
ThoughtWare Technologies, Inc.
10.16(6) Asset Purchase Agreement by and among the Company and Quisic
Corporation. Common Stock Purchase Agreement by and between the
Company, Investor Growth Capital Limited, A Guernsey Corporation
and Investor Group, L.P., A Guernsey Limited Partnership and Leeds
Equity Partners III, L.P.
10.17(7) Asset Purchase Agreement by and among the Company, and Mentergy,
Inc. and its wholly-owned subsidiaries, LearnLinc Corp and
Gilat-Allen Communications, Inc.
10.18(16) Subcontractor Agreement between the Company and Interactive
Alchemy, Inc. with Amendments
*10.19(12) Employment Agreement dated January 6, 2004 between the Company and
Nathan Cocozza
10.20(12) Note Purchase Agreement dated February 12, 2004 between the
Company and certain creditors
10.21(12) Unit Purchase and Agency Agreement dated April 19, 2004 between
the Company and Cerberus Financial, Inc.
10.22(12) Placement Agency Agreement dated March 10, 2004 between the
Company and Peacock, Hislop, Staley, and Given, Inc.
10.23(11) Asset Purchase Agreement and Plan of Reorganization by and between
the Company and Glyphics Communications, Inc.
*10.24(13) Employment Agreement dated June 1, 2004 between the Company and
Gary L. Moulton
10.25(16) Securities Purchase Agreements effective June 9, 2006
10.26(16) Registration Rights Agreements effective June 9, 2006
14.1(13) Code of Ethics
16(8) Letter re Change in Certifying Accountant
+31.1 Chief Executive Officer Section 302 Certification
+31.2 Principal Financial Officer Section 302 Certification
+32.1 Chief Executive Officer Section 906 Certification
+32.2 Principal Financial Officer Section 906 Certification

-36-

---------------------

(1) Previously filed as an exhibit to iLinc's Registration Statement on
Form S-1 (No. 333-37633), and incorporated herein by reference.
(2) Previously filed as an exhibit to iLinc's Annual Report on Form 10-K
for the year ended March 31, 2001.
(3) Previously filed as an exhibit to iLinc's Annual Report on Form 10-K
for the year ended March 31, 2002.
(4) Previously filed as an exhibit to iLinc's Form 8-K filed October 16,
2001.
(5) Previously filed as an exhibit to iLinc's Form 8-K filed January 30,
2002.
(6) Previously filed as an exhibit to iLinc's Form 8-K filed July 2, 2002.
(7) Previously filed as an exhibit to iLinc's Form 8-K filed December 20,
2002.
(8) Previously filed as an exhibit to iLinc's Form 8-K filed April 3, 2003.
(9) Previously filed as an exhibit to iLinc's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 2003.
(10) Previously filed as an exhibit to iLinc's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 2003.
(11) Previously filed as an exhibit to iLinc's Form 8-K filed June 14, 2004.
(12) Previously filed as an exhibit to iLinc's Annual Report on Form 10-K
for the year ended March 31, 2004.
(13) Previously filed as an exhibit to iLinc's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 2004.
(14) Previously filed as an exhibit to iLinc's Annual Proxy Statement dated
July 14, 2005.
(15) Previously filed as an exhibit to iLinc's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 2005.
(16) Previously filed as an exhibit to iLinc's Annual Report on Form 10-K
for the year ended March 31, 2006.

* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to the requirements of Item 15 of Form 10-K.
+ Furnished herewith as an Exhibit

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SIGNATURES

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

ILINC COMMUNICATIONS, INC.
Dated: August 1, 2006

By:/s/ James M. Powers, Jr.
-----------------------------------
Chairman of the Board, President and
Chief Executive Officer

By:/s/ James L. Dunn, Jr.
-----------------------------------
Senior Vice President & Chief
Financial Officer

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