Edgar Filing: ILINC COMMUNICATIONS INC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. (20549)

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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, 2007

( ) 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

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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)

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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 9, 2007 was 33,785,431 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, 2007 and March 31, 2007.............................. 4

Unaudited Condensed Consolidated Statements of Operations
for the Three Months Ended June 30, 2007 and 2006............. 5

Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months Ended June 30, 2007 and 2006............. 6

Notes to Unaudited Condensed Consolidated Financial
Statements.................................................... 7

Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 17

Item 3--Quantitative and Qualitative Disclosures about Market Risk.... 29

Item 4--Controls and Procedures....................................... 29

PART II--OTHER INFORMATION

Item 1--Legal Proceedings............................................. 29

Item 1A--Risk Factors................................................. 29

Item 2--Unregistered Sales of Equity Securities and Use of Proceeds... 33

Item 3--Defaults of Senior Securities................................. 33

Item 4--Submission of Matters to a Vote of Security Holders........... 33

Item 5--Other Information............................................. 33

Item 6--Exhibits...................................................... 34

Signatures............................................................ 36

Certifications........................................................ 37

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 Annual Report on Form 10-K 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 including those related to sales and marketing, research and
development, and general and administrative expenses; control changes in our
customer base; support our customers and provide sufficient technological
infrastructure; obtain sales or increase revenues; impact the results of legal
proceedings; control and implement changes in our employee headcount; obtain
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 "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. 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, EventPlus, On-Demand, iReduce, iLinc Enterprise
Unlimited and its logos are trademarks or registered trademarks of iLinc
Communications, Inc. All other company names and products may be trademarks of
their respective companies.

PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

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

JUNE 30, MARCH 31,
2007 2007
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 1,174 $ 1,057
Certificates of deposit and marketable securities ................ 510 504
Accounts receivable, net of allowance for doubtful accounts of
$127 and $117 at June 30 and March 31, 2007, respectively ...... 2,970 2,530
Note receivable .................................................. -- 14
Prepaid and other current assets ................................. 753 766
-------- --------
Total current assets ........................................... 5,407 4,871

Property and equipment, net ......................................... 732 691
Goodwill ............................................................ 11,206 11,206
Intangible assets, net .............................................. 1,694 1,556
Other assets ........................................................ 14 14
-------- --------
Total assets ................................................... $ 19,053 $ 18,338
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt ................................ $ 130 $ 143
Accounts payable trade ........................................... 1,237 1,169
Accrued liabilities .............................................. 1,323 1,119
Current portion of capital lease liabilities ..................... 73 45
Deferred revenue ................................................. 1,724 1,483
-------- --------
Total current liabilities ...................................... 4,487 3,959

Long term debt, less current maturities, net of discount and
beneficial conversion feature of $942 and $993, at June 30
and March 31, 2007, respectively .................................. 7,439 7,406
Capital lease liabilities, less current maturities .................. 257 223
Deferred tax liability .............................................. 320 299
-------- --------
Total liabilities .............................................. 12,503 11,887
-------- --------

SHAREHOLDERS' EQUITY:
Preferred stock series A & B, 10,000,000 shares authorized:
Series A preferred stock, $.001 par value, 115,000 shares issued
and outstanding, liquidation preference of $1,150,000 ............ -- --
Series B preferred stock, $.001 par value, 59,500 shares issued
and outstanding, liquidation preference of $595,000 .............. -- --
Common stock, $.001 par value 100,000,000 shares authorized
35,017,843 and 28,923,168 issued at June 30, and March
31, respectively ................................................. 35 35
Additional paid-in capital ......................................... 46,670 46,614
Accumulated deficit ................................................ (38,747) (38,790)
Less: 1,432,412 treasury shares at cost ........................... (1,408) (1,408)
-------- --------
Total shareholders' equity ..................................... 6,550 6,451
-------- --------
Total liabilities and shareholders' equity ..................... $ 19,053 $ 18,338
======== ========

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

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

THREE MONTHS ENDED
JUNE 30,
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2007 2006
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Revenues
Software licenses .................................... $ 1,152 $ 1,234
Subscription and audio services ...................... 2,324 1,768
Maintenance and professional services ................ 648 603
-------- --------
Total revenues ................................... 4,124 3,605
-------- --------

Cost of revenues
Software licenses .................................... 67 45
Subscription and audio services ...................... 1,002 976
Maintenance and professional services ................ 184 170
Amortization of acquired and developed software ...... 45 67
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Total cost of revenues ........................... 1,298 1,258
-------- --------

Gross profit ............................................ 2,826 2,347
-------- --------

Operating expenses
Research and development ............................. 385 304
Sales and marketing .................................. 1,252 858
General and administrative ........................... 712 634
-------- --------
Total operating expenses ......................... 2,349 1,796
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Income from operations .................................. 477 551

Interest expense ........................................ (270) (251)
Amortization of beneficial debt conversion .............. (81) (150)
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Total interest expense ........................... (351) (401)
Interest income (charges) and other ..................... (27) (27)
-------- --------
Income from continuing operations before income taxes ... 99 123
Income taxes ............................................ (21) --
-------- --------

Income from continuing operations ....................... 78 123
Income from discontinued operations ..................... -- 11
-------- --------

Net income .............................................. 78 134
Series A and B preferred stock dividends ............. (35) (39)
-------- --------
Income available to common shareholders ................. $ 43 $ 95
======== ========
Income per common share, basic and diluted
From continuing operations ........................... -- --
From discontinued operations ......................... -- --
-------- --------
Net income per common share ...................... $ -- $ --
======== ========

Number of shares used in calculation of income per share:
Basic ................................................ 33,585 28,818
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Diluted .............................................. 34,343 28,944
======== ========

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

ILINC COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
JUNE 30,
------------------
2007 2006
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Net cash provided by (used in) operating activities ............... $ 484 $ (138)
------- -------

Cash flows from investing activities:
Investment in certificate of deposit ........................... (6) (1,002)
Capital expenditures ........................................... (38) (17)
Capitalization of software development costs ................... (264) (82)
Repayment of note receivable ................................... 14 2
------- -------
Net cash used in investing activities ..................... (294) (1,099)
------- -------

Cash flows from financing activities:
Proceeds from issuance of common stock ......................... -- 2,000
Series A and B preferred stock dividends ....................... (35) (39)
Stock issuance expense ......................................... -- (160)
Proceeds from exercise of stock options ........................ -- 3
Repayment of long-term debt .................................... (31) (13)
Repayment of capital lease liabilities ......................... (7) (49)
------- -------
Net cash (used in) provided by financing activities ....... (73) 1,742
------- -------

Cash flows from continuing operations ............................. 117 505
Cash flows from discontinued operations ........................... -- (46)
------- -------

Net change in cash and cash equivalents ................... 117 459
Cash and cash equivalents, beginning of period .................... 1,057 466
------- -------

Cash and cash equivalents, end of period .......................... $ 1,174 $ 925
======= =======

Supplemental Schedule of Noncash Investing and Financing Activities

THREE MONTHS ENDED
JUNE 30,
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2007 2006
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Fair value of warrants recorded as prepaid ........................ (1) --
Addition of assets under capital leases ........................... 69 --

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

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
9.0. 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, value added resellers
and OEM partners. 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 and periodic licenses of software, monthly recurring revenues
from annual maintenance, hosting and support agreements, audio conferencing
services and other products and services.

The Company maintains corporate headquarters in Phoenix, Arizona and
has occupied that 9,100 square foot Class A facility since the Company's
inception in 1998. The Phoenix office can accommodate up to 50 employees and is
fully equipped with up-to-date computer equipment and server facilities. The
Phoenix lease requires a monthly rent and operating expenses of approximately
$25,000 and will expire on February 28, 2012.

The Company also maintains a 2,500 square foot Class B facility in
Troy, New York with an emphasis in that location on research and development and
technical support. On July 5, 2006, the Company amended the New York lease that
now expires on June 30, 2009. The New York lease requires a monthly rent and
operating expenses of approximately $4,000.

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 that
expires January 2, 2008. The Springville offices can accommodate up to 100
employees and is fully equipped with up-to-date computer equipment. The
Springville lease requires a monthly rent and operating expenses of
approximately $15,000.

The Company began operations in March of 1998. Its formation included
the simultaneous rollup of fifty private businesses (affiliated practices) 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
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 three months ended June
30, 2007 and 2006.

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, 2007, 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.

CERTIFICATE OF DEPOSIT

The Company holds various certificates of deposit at financial
institutions. These certificates have maturities of six months from the date of
acquisition, which precludes them from being accounted for as a cash equivalent.

CUSTOMER CONCENTRATIONS

Account receivable balances for two customers totaled approximately 13%
and 9% of the total balance outstanding, respectively at June 30, 2007 and
accounts receivable balances for two customers totaled approximately 9% and 6%
of the total balance outstanding at March 31, 2007.

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 are required to account for such
transactions using a fair-value method and to recognize the expense over the
service period. SFAS 123R became effective for the Company for periods beginning
after March 31, 2006 and allows for several alternative transition methods. The
Company adopted SFAS 123R, effective April 1, 2006, 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 non-vested awards not yet recognized, as
determined under the original provisions of SFAS 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, 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. Under the prior method, the Company measured compensation 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 and provided pro
forma disclosure of net income and earnings per share in the notes to the
financial statements.

INCOME PER SHARE

Basic income per share is 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, 2007 and 2006, options and warrants
to purchase 2,234,443 and 4,149,353 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, 2007 and 2006,
preferred stock and debt convertible into 9,780,000 and 10,450,000 shares of
common stock, respectively, were excluded from the computation of diluted
earnings per share because inclusion of such would be antidilutive. Furthermore,
a restricted stock grant of 450,000 shares has been excluded from the income per
share calculations for the three months ended June 30, 2007 and 2006 because the
measurement date stock price exceeds the average stock price for all periods
presented.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 06-03 ("EITF 06-03"), "How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement (That Is, Gross versus Net Presentation)." EITF 06-03 provides
that the presentation of taxes assessed by a governmental authority that is
directly imposed on a revenue-producing transaction between a seller and a
customer on either a gross basis (included in revenues and costs) or on a net
basis (excluded from revenues) is an accounting policy decision that should be
disclosed. The provisions of EITF 06-03 became effective as of December 31,
2006. The Company's adoption of ETIF 06-03 has not and is not expected to have a
material effect on its consolidated financial position or results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48, ACCOUNTING
FOR UNCERTAINTY IN INCOME TAXES - AN INTERPRETATION OF FASB STATEMENT NO. 109
(FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute
for financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return, and also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for the Company and has
been adopted beginning in the first quarter of fiscal 2008. After analysis of
the Company's income tax position, the Company has determined that the impact of
the adoption of FIN 48 is not significant to the Company's financial position or
results of operations.

In September 2006, the FASB issued SFAS No. 157, FAIR VALUE
MEASUREMENTS (SFAS 157), which provides guidance on how to measure assets and
liabilities that use fair value. SFAS 157 will apply whenever another US GAAP
standard requires (or permits) assets or liabilities to be measured at fair
value but does not expand the use of fair value to any new circumstances. This
standard also will require additional disclosures in both annual and quarterly
reports. SFAS 157 will be effective for fiscal 2009. The Company is currently
evaluating the potential impact this standard may have on its financial position
and results of operations.

On February 15, 2007, the FASB issued SFAS No. 159, THE FAIR VALUE
OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES (SFAS No. 159). Under this
Standard, the Company may elect to report financial instruments and certain
other items at fair value on a contract-by-contract basis with changes in value
reported in earnings. This election is irrevocable. SFAS No. 159 provides an
opportunity to mitigate volatility in reported earnings that is caused by
measuring hedged assets and liabilities that were previously required to use a
different accounting method than the related hedging contracts when the complex
provisions of SFAS No. 133 hedge accounting are not met. SFAS No. 159 is
effective for years beginning after November 15, 2007. Early adoption within 120
days of the beginning of the company's 2008 fiscal year is permissible, provided
the company has not yet issued interim financial statement for 2008 and has
adopted SFAS No. 157. The Company is currently evaluating the potential impact
of adopting this Standard.

In September 2006, SEC issued SAB No. 108, CONSIDERING THE EFFECTS OF
PRIOR YEAR MISSTATEMENTS WHEN QUANTIFYING CURRENT YEAR MISSTATEMENTS. SAB No.
108 requires analysis of misstatements using both an income statement (rollover)
approach and a balance sheet (iron curtain) approach in assessing materiality
and provides for a one-time cumulative effect transition adjustment. SAB No. 108
was effective for the Company's fiscal year 2007 annual financial statements.
The Company adopted SAB 108 effective April 1, 2006.

3. INTANGIBLE ASSETS, NET

Intangible assets consisted of the following:
JUNE 30, 2007
------------------------------------------------------------
WEIGHTED
AVERAGE
REMAINING GROSS CARRYING ACCUMULATED
LIVES AMOUNT AMORTIZATION NET
------------------------------------------------------------
(YEARS) (IN THOUSANDS)
AMORTIZED INTANGIBLE ASSETS:
Deferred financing costs 4.31 $ 919 $ (438) $ 481
Purchased software 0.00 1,481 (1,481) --
Customer relationship 2.92 1,230 (648) 582
Capitalized software development costs 3.00 631 -- 631
---------------------------------------------
$ 4,261 $ (2,567) $ 1,694
=============================================

MARCH 31, 2007
------------------------------------------------------------
WEIGHTED
AVERAGE
REMAINING GROSS CARRYING ACCUMULATED
LIVES AMOUNT AMORTIZATION NET
------------------------------------------------------------
(YEARS) (IN THOUSANDS)
AMORTIZED INTANGIBLE ASSETS:

Deferred financing costs 4.57 $ 919 $ (407) $ 512
Purchased software 0.17 1,481 (1,437) 44
Customer relationship 3.17 1,230 (597) 633
Capitalized software development costs 3.00 367 -- 367
---------------------------------------------
$ 3,997 $ (2,441) $ 1,556
=============================================

CAPITALIZATION OF SOFTWARE DEVELOPMENT COSTS

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 software development costs that
included expenses related to employee payroll costs, consultant fees, dedicated
computer hardware costs and specialized software license costs associated with
this project. As of June 30, 2007, the Company had capitalized direct and
indirect software development costs totaling $631,000 since technological
feasibility was achieved in May 2006. For the three months ended June 30, 2007,
the Company had capitalized direct and indirect software development costs
totaling $264,000. Version 9.0 was completed and released to customers in June
of 2007. The Company will begin amortization of these capitalized costs, using
straight-line amortization over a three year period beginning July 1, 2007.

4. ACCRUED LIABILITIES

Accrued liabilities consisted of the following:

JUNE 30, MARCH 31,
2007 2007
------- -------
(IN THOUSANDS)
Accrued state sales tax .................................... $ 77 $ 77
Accrued interest payable ................................... 286 290
Amount payable to third party providers .................... 125 258
Amount payable to custom content subcontractor ............. 134 62
Accrued salaries and related benefits ...................... 664 394
Other ...................................................... 37 38
------- -------
Total accrued liabilities ............................... $ 1,323 $ 1,119
======= =======

5 LONG-TERM DEBT

Long-term debt consisted of the following:

JUNE 30, MARCH 31,
2007 2007
------- -------
(IN THOUSANDS)
2002 Convertible redeemable unsecured subordinated notes ... $ 5,100 $ 5,100
2004 Senior unsecured notes ................................ 2,962 2,962

Other unsecured notes payable .............................. 449 480
------- -------
8,511 8,542

Less: Current portion of long-term debt .................... (130) (143)
Discount .......................................... (471) (497)
Beneficial conversion feature ..................... (471) (496)
------- -------
Long-term debt, net of current portion ..................... $ 7,439 $ 7,406
======= =======

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.
These 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 the 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 ten 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 years 2004, 2005 and
2006, holders with a principal balance totaling $675,000 converted their notes
into 2,121,088 shares of the Company's common stock at prices from $0.25 to
$0.30 per share. No conversion of debt or acceleration of amortization of costs
occurred during the year ended March 31, 2007 or for the three months ended June
30, 2007.

pursuant to a unit purchase and agency agreement. 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 originally bore
an interest rate of 10% per annum and accrued interest is due and payable on a
quarterly basis, 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 originally 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
original term of the notes which was thirty-nine 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. No conversion of debt to equity or acceleration of amortization
of costs related to such conversions occurred during the year ended March 31,
2007. In December, 2006, the Company negotiated a modification of the terms of
the senior notes to extend the maturity date from July 15, 2007 to July 15,
2010. In exchange for the extension, the interest rate increased from 10% per
annum to 12% per annum, with the new increased interest rate to begin to accrue
under the amendment on January 16, 2007, and continue thereafter at that rate
until maturity or the senior notes are fully paid. All other terms and
provisions of the senior notes remained unchanged. The direct expenses of the
note amendment was $101,000 and the estimated fair value of the warrant issued
to the placement agent of $42,000 were recorded as a deferred offering cost and
both are being amortized as a component of interest expense over the term of the
senior notes.

In connection with the Company's acquisition of Glyphics, the Company
assumed an unsecured credit line with an original principal balance of $400,000.
On April 1, 2007, the note with a principal balance of $398,000 was modified to
provide for fixed payments of principal, due in 60 equal monthly installments
plus variable interest, with the final payment due April 1, 2012. The note had a
principle balance of $387,000 at June 30, 2007.

The aggregate maturities of long-term debt excluding capital leases for
each of the next five years subsequent to June 30, 2007 were as follows (IN
THOUSANDS):

2008 ........................................................... $ 130
2009 ........................................................... 74
2010 ........................................................... 80
2011 ........................................................... 3,049
2012 ........................................................... 5,178
Thereafter ..................................................... --
------
$8,511
======

6. CAPITALIZATION

COMMON STOCK

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 has used the proceeds for working capital and general
corporate purposes. The Company paid its placement agent an underwriting
commission of $185,000 of which $25,000 was recorded as deferred offering costs,
and incurred additional offering expenses of approximately $103,000. Pursuant to
the registration rights agreement between the parties, the Company filed a
Registration Statement on Form S-3 to enable the resale of the shares by the
investors which was declared effective on September 29, 2006.

7. INCOME TAX EXPENSE FROM CONTINUING OPERATIONS

The Company recorded deferred income tax expense of $21,000 for the
three months ended June 30, 2007. The expense resulted from the recognition of
the deferred income tax liability related to the tax deductible goodwill
recognized on the Company's purchase of Quisic and LearnLinc. The Company has
recorded a valuation allowance for its deferred tax assets due to the lack of
profitable operating history. Based on the financial results for the year ending

March 31, 2007 and the three months ended June 30, 2007, the Company has
exhibited the ability to generate a taxable income. In the event that the
Company determines that it would be able to realize its deferred tax assets in
the future, an adjustment to the deferred tax asset would increase net income
through a tax benefit in the period such a determination was made that the
Company has met the more likely than not threshold for such recognition.

The Company adopted FIN 48 as of April 1, 2007. The adoption of FIN 48
has not had an impact on the Company's financial position or results of
operations for the three months ended June 30, 2007. The Company has no
unrecognized tax benefit, as described in FIN 48, as of June 30, 2007.

It is the Company's policy to recognize interest and penalties related
to unrecognized tax benefits as a component of income tax expense. There are no
interest or penalties accrued as of June 30, 2007. Furthermore, there were no
interest or penalties recorded during the three months ended June 30, 2007.

The Company is subject to income tax examinations for U.S. Federal
income taxes and state income taxes from fiscal 2005 forward. As of June 30,
2007, the Company is not undergoing an U.S. Federal or state tax audits. The
Company does not anticipate that total unrecognized tax benefits will
significantly change prior to March 31, 2008.

There was no current income tax expense for the three months ended June
30, 2007 and 2006 because net operating loss carry-forwards were utilized to
eliminate taxable income.

8. STOCK OPTION PLANS AND WARRANTS

The Company grants stock options under its amended and restated 1997
Stock Compensation Plan (the "Plan"). The Company calculates the fair value of
options on the day of grant and amortizes the fair value over the vesting
period. 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 3,179,131 options outstanding under the Plan at June 30,
2007. 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.

In accordance with SFAS 123R, the Company recognized $36,000 and
$27,000, net of taxes, of compensation expense related to stock options and
vesting of stock grants in the three months ended June 30, 2007 and 2006,
respectively. 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, 2007 and 2006, which was allocated
as follows (in thousands except per share amounts):

---------------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 2007 JUNE 30, 2006
---------------------------
Stock-based compensation expense included:
Cost of sales ................................................... $ 4 $ 2
Research and development ........................................ 3 2
Sales and marketing ............................................. 14 10
General and administrative ...................................... 5 3
------------ ------------
Total .................................................... 26 17
Stock-based compensation expense related to employee stock grants
included in general and administrative costs .................... 10 10
------------ ------------
Stock-based compensation expense related to employee stock options
and employee stock grants included in income from operations ... 36 27
Tax benefit ....................................................... -- --
------------ ------------

Stock-based compensation expense related to employee stock
options and employee stock grants, net of tax ................... $ 36 $ 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 three months ended June 30, 2007
and 2006 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 Company calculates 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, 2007 and 2006 was $0.64 per share and
$0.40 per share, respectively, using the following weighted-average assumptions:

THREE MONTHS ENDED JUNE 30,
------------- --------------
2007 2006
------------- --------------
Risk free interest rate 4.6% - 5.0% 5.11%
Dividend yield 0% 0%
Volatility factors of the expected
market price of the Company's
common stock 90% - 93% 109%
Weighted-average expected life of
Options 10 years 10 years

The Company estimates the fair value of stock options granted using the
Black-Scholes option valuation model approach. The Company amortizes the fair
value on a straight-line basis. All options are amortized over the requisite
service periods of the awards, which are generally the vesting periods. The
expected term of the options granted represents the period of time that they are
outstanding. Management estimated the expected term of the options granted based
on the period of time the options will be outstanding. Management has determined
that there were no meaningful differences in option exercise activity based on
the demographics tested. The Company estimates the volatility of its options at
the date of grant based on the historic volatility of its common stock for the
previous two years. The Company bases the risk-free interest rate that it uses
in the Black-Scholes option valuation model on the implied yield in effect at
the time of the option grant on U.S. Treasury bond issues with equivalent
remaining terms. The Company has never paid a cash dividend on its common stock
and does not anticipate paying any cash dividends in the foreseeable future.
Consequently, the Company uses an expected dividend yield of zero in the
Black-Scholes option valuation model. SFAS 123R requires the Company to estimate
forfeitures at the time of grant and revise those estimates in subsequent
periods if actual forfeitures differ from those estimates. The Company uses
historical data to estimate pre-vesting option forfeitures and records
share-based compensation expense only for those awards that are expected to
vest.

Stock options activity for the three months ended June 30, 2007 was as
follows:

WEIGHTED
AVERAGE
WEIGHTED CONTRACTUAL AGGREGATE
SHARES SUBJECT AVERAGE LIFE INTRINSIC VALUE
TO OPTIONS EXERCISE PRICE (IN YEARS) (IN THOUSANDS)
-------------- ----------------- ------------ --------------
Options outstanding at April 1, 2007........ 3,138,552 $0.98
Options granted.......................... 64,500 $0.72
Options exercised........................ -- $0.00
Options forfeited........................ (22,359) $0.46
Options expired.......................... (1,562) $0.36
--------------
Options outstanding at June 30, 2007........ 3,179,131 $0.98 5.95 $ 418
--------------
Options exercisable at June 30, 2007........ 2,464,553 $1.13 5.07 $ 279
--------------

The aggregate intrinsic value in the table above represents total
pretax intrinsic value (the difference between iLinc's closing stock price on
June 30, 2007 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, 2007. This amount changes based on
the fair market value of iLinc's stock. No options were exercised in the three

months ended June 30, 2007. The Company issues new shares of common stock upon
the exercise of stock options. At June 30, 2007, 1,670,231 shares were available
for future grants under the Company's 1997 Stock Compensation Plan. At June 30,
2007, the Company had approximately $180,000 of total unrecognized compensation
expense, net of estimated forfeitures, related to stock option plans that will
be recognized over the weighted average period of 2.6 years.

The following table summarizes information about stock options
outstanding at June 30, 2007:

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

$ 0.24 - $ 0.36 378,665 $ 0.25 8.3 231,959 $ 0.25
$ 0.39 - $ 0.59 1,420,910 $ 0.46 6.4 1,081,435 $ 0.48
$ 0.60 - $ 0.90 695,750 $ 0.72 7.2 469,228 $ 0.73
$ 0.92 - $ 1.38 103,833 $ 1.02 6.1 101,958 $ 1.02
$ 1.94 - $ 2.91 490,000 $ 2.18 2.0 490,000 $ 2.18
$ 6.13 - $ 9.19 89,973 $ 7.71 1.2 89,973 $ 7.71
---------- ----------
3,179,131 2,464,553
========== ==========

WARRANTS

The following table summarizes information about stock purchase
warrants outstanding at June 30, 2007:

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

$ 0.32 - $ 0.32 50,000 $ 0.32 1.8 50,000 $ 0.32
$ 0.40 - $ 0.40 50,000 $ 0.40 1.8 50,000 $ 0.40
$ 0.42 - $ 0.42 543,182 $ 0.42 3.9 543,182 $ 0.42
$ 0.44 - $ 0.44 132,972 $ 0.44 3.2 132,972 $ 0.44
$ 0.50 - $ 0.50 700,000 $ 0.50 1.3 700,000 $ 0.50
$ 0.55 - $ 0.55 50,000 $ 0.55 1.8 50,000 $ 0.55
$ 0.66 - $ 0.66 150,000 $ 0.66 2.6 150,000 $ 0.66
$ 1.50 - $ 1.50 171,510 $ 1.50 3.6 171,510 $ 1.50
---------- ----------
1,847,664 1,847,664
========== ==========

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 to
Dr. John D. Rhodes, III. The loan was guaranteed by Dr. Rhodes. The warrant was
set to expire in January 2007. The fair value of the warrant of $8,000 was
estimated 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 and his continuing personal guarantee, the Company
issued an additional warrant for 50,000 shares to Dr. Rhodes with an exercise
price of $0.32. The warrant was set to expire in June 2007. The fair value of
the warrant of $6,500 was estimated 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 in connection with the restructuring of the payments and his continuing
personal guarantee, the Company issued an additional warrant to Dr. Rhodes 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 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%. In April 2006, the expiration dates of the warrants
that had been issued in 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. On April 1, 2007 in connection with the

restructuring of the payments and his continuing personal guarantee, the Company
issued an additional warrant for 50,000 shares to Dr. Rhodes with an exercise
price of $0.66. The warrant expires in April 2010. The fair value of the warrant
of $21,000 was estimated using the Black-Scholes pricing model with the
following assumptions: contractual and expected life of three years, volatility
of 101%, dividend yield of 0% and a risk-free rate of 4.54%.

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 an agent of the Company 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 achieved through the agent and certain value added resellers over a five
year period. As of June 30, 2007, none of the revenue targets had been achieved.
Therefore, no expense was recorded in the three moths ended June 30, 2007. In
accordance with EITF 96-18, ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO
OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS AND
SERVICES, the Company recorded a prepaid asset and corresponding additional
paid-in capital of $466,000 as the fair value of the 1,000,000 shares at June
30, 2007 using the Black-Scholes pricing model with the following assumptions:
contractual and expected life of 4.01 years, volatility of 94.8%, dividend yield
of 0% and a risk-free rate of 4.92%.

9. COMMITMENTS AND CONTINGENCIES

The Company is subject to various commitments and contingencies as
described in Note 13 to the consolidated financial statements in the Company's
Annual Report on Form 10-K as of and for the year ended March 31, 2007. During
the three-month period ended June 30, 2007, the following changes occurred with
respect to certain of the Company's commitments and contingencies:

LEASE COMMITMENTS

The Company used operating and capital leases to finance property and
equipment acquisitions. Currently, the Company has capital leases for computer
hardware and software ranging in terms from 3 to 5 years. The capital leases
bear interest at varying rates ranging from 10.0% to 14.0% and require monthly
payments. The Company's operating leases primarily consist of premise leases for
the Phoenix, New York and Utah locations.

Assets recorded under capital leases, at June 30, 2007, consisted of
the following (IN THOUSANDS):

Cost ........................................................ $ 337
Less: accumulated amortization .............................. (33)
-----
Total ....................................................... $ 304
=====

Future minimum lease payments under capital leases and non-cancelable
operating leases with initial or remaining terms of one or more years consisted
of the following at June 30, 2007 (IN THOUSANDS):

CAPITAL OPERATING
--------- ----------
2008............................................ $ 103 $ 503
2009............................................ 113 395
2010............................................ 102 347
2011............................................ 44 353
2012............................................ 42 235
Thereafter...................................... 7 --
--------- ----------
Total minimum obligations....................... 411 $ 1,833
==========
Less: amount representing interest.............. (81)
---------
Present value of minimum obligations............ 330
Less: current portion........................... (73)
---------
Long-term obligation at June 30, 2007........... $ 257
=========

The Company's lease on its Phoenix, Arizona location expires on
February 28, 2012. The Phoenix lease requires a monthly rent and operating
expense of approximately $25,000.

The Company's lease on its New York location expires on June 30, 2009
and requires a monthly rent and operating expenses of approximately $4,000.

The lease related to the Utah location expires on January 2, 2008 and
requires a monthly rent and operating expenses of approximately $15,000.

SUBCONTRACTOR AGREEMENT

The Company has an agreement with its custom content subcontractor,
Interactive Alchemy, that provides for the provision of custom content services
to the Company's customers. The subcontractor agreement has a non-cancelable
two-year term and expires on May 1, 2008. Under the agreement, its subcontractor
provides custom content development services to the Company in exchange for a
fixed percentage of the Company's custom content revenue. The amount to be paid
under the agreement is limited to a cap of $450,000 in Fiscal 2008. The Company
records gross custom content revenue for its customers with a corresponding
fixed percentage commission due to its subcontractor as a cost of sale.

ROYALTY AGREEMENTS

In conjunction with the acquisition of certain assets from Mentergy,
Inc., 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. On October 10, 2005, Mentergy and the
Company executed a payment agreement. Through June 30, 2007, the Company had
paid in full all amounts due to Mentergy under the agreement in accordance with
the royalty and payment agreement and the royalty and payment agreements
terminated.

10. 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, 2007 and 2006,
the Company had net income from discontinued operations of $0 and $11,000,
respectively.

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. 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 SERVICES, THE STATUS OF
THE OVERALL ECONOMY, THE STRENGTH OF COMPETITIVE OFFERINGS, THE PRICING
PRESSURES CREATED BY MARKET FORCES, AND THE OTHER RISKS DISCUSSED HEREIN. 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. OUR
REPORTS ARE AVAILABLE FREE OF CHARGE AS SOON AS REASONABLY PRACTICABLE AFTER WE
FILE THEM WITH THE SEC AND MAY BE OBTAINED THROUGH OUR WEB SITE.

COMPANY OVERVIEW

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 a distribution channel consisting of agents, distributors, value
added resellers and OEM partners. We allow customers to choose between
purchasing a perpetual license and subscribing to a term license, thereby
providing flexibility in pricing and payment methods. Our revenues are derived
from a mixture of sales of licenses of software, monthly recurring revenues from
annual maintenance, hosting and support agreements and from audio conferencing
products and services.

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 a periodic basis on
either a per-seat, per-month or per-minute basis (the "Subscription Model").
Should the customer choose to acquire the software using the Purchase Model,
then it may either elect to host our software behind its own firewall or it may
choose to have iLinc host it for the customer, depending upon the customer's
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 and software upgrade services, by entering into
a support and maintenance contract with a term from one to five years. The
annual maintenance and support fee charged is initially based upon a percentage
of the purchase price that varies between 12% and 18% of the license fee paid
for the perpetual licenses, with the percentage depending upon the contractual
length and the timing of payment of the annual maintenance and support
agreement. If a customer chooses to have iLinc host its Purchase Model licenses,
then the customer is also charged an annual hosting fee equal to 10% of the
Purchase Model 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, as well as a named-user model
that permits a host to subscribe for a limited use room. 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 price or upon an associated 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 Subscription Model pay a fee 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.

In addition to the Web conferencing and audio conferencing products and
services, we offer custom content development services through a subcontractor
relationship and an off-the-shelf online library of content that includes an
online mini-MBA program co-developed with the Tuck School of Business at
Dartmouth College. These other services are a small portion of our overall
revenue base and will likely phase out as an offered service over the next three
years.

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
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.

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.

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 audio conferencing
services, we offer to our customers custom content development services through
a subcontractor relationship and an off-the-shelf online library of content that
includes an online mini-MBA program co-developed with the Tuck School of
Business at Dartmouth College. These other services are a small portion of our
overall revenue base and will likely phase out as an offered service over the
next three years.

SALES AND MARKETING FOCUS

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.

Marketing has developed a plan that incorporates public relations,
tradeshows, Web events, Web marketing initiatives and direct marketing (mail and
email) efforts messaged in campaigns that speak to the needs of our specific
target markets. The goal of our marketing strategy is to drive new business into
our customer base and then cross sell our synergistic Web, audio and event
product and drive usage of all products to increase the propensity for our
customers to make additional purchases.

The direct sales team is organized by geographic territory and is
broken down into distinct groups: Direct Sales sells to organizations that are
not yet iLinc customers; Enterprise Sales sells into large existing accounts;
and our Event Sales team sells our High-Touch Event Services offering to all
sizes of organizations. All of these groups focus their outbound activity on our
specific vertical markets of financial services, high technology and
professional service organizations. We believe that the target vertical markets
have a commonality of meeting four criteria: we have an established customer
base in the market; our product feature set is specifically appropriate to the
needs of the market; analysts have identified a need within that market for
increasing use of Web and audio conferencing; and we believe that we have the
potential to capture a portion of the share of such markets.

iLinc has formed relationships with organizations that market and sell
our products and services through their sales distribution channels. The
relationships can be categorized into those that act as agents which sell on
behalf of iLinc and value added resellers (VAR's) that actively sell our
products and provide product support typically to their own existing customer
base. As of June 30, 2007, we had over 35 organizations selling our products
providing indirect sales in the United States and in countries outside the
United States, including Canada, the United Kingdom, The Netherlands, France,
Germany, Colombia, Mexico, India, Greece, Chile and Japan. Our value added
resellers execute agreements to resell our products to their customers through
direct sales and in some cases through integration of our products into their
products or service offerings. Our distribution agreements typically have terms
of one to three years and are automatically renewed for an additional like term
unless either party terminates the agreement for breach or other financial
reasons. In most of these agreements, the VAR licenses the product from us and
resells the product to its customers. Under those VAR agreements, we record only
the amount paid to us by the VAR as revenue and recognize revenue when all
revenue recognition criteria have been met.

PERFORMANCE MEASURES AND INDICATORS

In evaluating our operating performance, we consider levels of
revenues, gross profit, operating income and net income to be important
indicators. Over the past three fiscal years, we have succeeded in increasing
revenues at a faster rate than our cost of revenues and operating expenses.
Therefore, while revenues, cost of revenues and operating expenses all have
increased during this period, total cost of revenues as a percentage of revenues
and operating expenses as a percentage of revenues each have decreased over the
past three fiscal years. Our goal is for this trend to continue as we seek to
manage increases in expenses at the same time we seek to increase revenues.

In evaluating our liquidity, we evaluate levels of current assets,
current liabilities and accounts receivable, aging of accounts receivable and
maturities of debt and obligations under long term leases. Our levels of current
assets, including accounts receivable, at June 30, 2007 were approximately
$536,000 higher than our levels of current assets at March 31, 2007. Our current
liabilities at June 30, 2007 were approximately $528,000 higher than our level
of current liabilities at March 31, 2007, $241,000 of the increase related to an
increase in deferred revenue. As a result, we had working capital of $920,000 at
June 30, 2007 compared to working capital of $912,000 at March 31, 2007. Our
accounts receivable, net of allowance for doubtful accounts, were $3.0 million
and $2.5 million at June 30, 2007 and March 31, 2007, respectively. Accounts
receivable increased, which was consistent with increased revenues when
comparing the first quarter of fiscal 2008 to the fourth quarter of fiscal 2007.
The aging of receivables has remained consistent when comparing June 30, 2007 to
March 31, 2007, with accounts receivable under 30 days making up 89% and 87% of
the total receivable balance, respectively. As indicated below, in the table
under the caption "Contractual Obligations" at June 30, 2007 long term debt due
in less than one year, capital lease obligations due in less than one year,
interest expense for the coming year and operating lease obligations for the
coming year aggregated $130,000, $73,000, $1.0 million and $503,000
respectively. We anticipate that cash flow from operations should be sufficient
to allow us to meet these obligations without raising additional capital.

As indicators of future financial performance, our management evaluates
current number of seats (concurrent license) sold, average sales price per
transaction, average sales cycle, quota achievement by the direct sales staff,
the number of current transactions, the average sales amount per transaction,
the percentage each product sold contributes to total revenue and the trends
indicated by these factors.

External factors that our management considers in analyzing our
performance include projected growth rates for our industry, rates of
penetration of use of our product categories in the corporate sector and
telecommunications growth and rate structures. We consider these factors
important since they permit us to better project capital needs and growth trends
that support our assertions of profitability and cash flow. Analysis of these
trends indicates that we are having increasing success from our direct sales
staff, which with that success is likely to translate into increasing revenue
and an increasing bottom line should overhead trends remain consistent with
historical patterns. We expect overhead to remain relatively flat, except for
incremental increases in sales and marketing costs associated and in proportion
to revenue growth. We see increasing demand for audio conferencing and Web
conferencing usage in the business, education and government sectors alike, and
we expect these trends to continue over the next three years.

The following table shows certain items from our income statement as a
percentage of revenues:

THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2007 JUNE 30, 2006
------------------------ ------------------------
Revenues
Software licenses......................... $ 1,152 27.9% $ 1,234 34.2%
Subscription and audio services........... 2,324 56.4% 1,768 49.1%
Maintenance and professional services..... 648 15.7% 603 16.7%
------------------------ ------------------------
Total revenues.......................... 4,124 100.0% 3,605 100.0%
------------------------ ------------------------

Cost of revenues
Software licenses......................... 67 1.6% 45 1.2%
Subscription and audio services........... 1,002 24.3% 976 27.1%
Maintenance and professional services..... 184 4.5% 170 4.7%
Amortization of acquired and developed
software................................ 45 1.1% 67 1.9%
------------------------ ------------------------
Total cost of revenues.................. 1,298 31.5% 1,258 34.9%
------------------------ ------------------------

Gross profit 2,826 68.5% 2,347 65.1%
------------------------ ------------------------

Operating expenses
Research and development.................. 385 9.3% 304 8.4%
Sales and marketing....................... 1,252 30.4% 858 23.8%
General and administrative................ 712 17.3% 634 17.6%
------------------------ ------------------------
Total operating expenses................ 2,349 57.0% 1,796 49.8%
------------------------ ------------------------
Income from operations....................... $ 477 11.6% $ 551 15.3%
------------------------ ------------------------

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, 2007 and 2006 were $4.1 million and $3.6 million,
respectively, an increase of $519,000 or 14%. Software license revenues
decreased $82,000 or 7% from $1.2 million in the three months ended June 30,
2006 to $1.1 million in the three months ended June 30, 2007. The decrease was
the result of a decrease in OEM and channel sales of $104,000 based on
agreements with OEM and channel sales of $166,000 in the quarter ended June 30,
2006 as compared to sales of $62,000 in the quarter ended June 30, 2007. The
decrease in OEM and channel sales was partially offset by an increase in direct
sales of $15,000. Subscription and audio services revenues increased $556,000 or
31% from $1.8 million in the quarter ended June 30, 2006 to $2.3 million in the
quarter ended June 30, 2007, as the result of increased audio per minute usage
of $488,000 and an increase in hosting revenues of $58,000, which are driven by
increases in license sales year on year and sustaining the customer base.
Maintenance and professional services revenues increased $45,000 or 7% from
$603,000 in the three months ended June 30, 2006 to $648,000 in the three months
ended June 30, 2007, as the result of an increase in maintenance fees of $59,000
from renewals as the customer base continues to grow. In addition, we recognized
an increase in training, storage and recording revenues of $51,000. The
increases were partially offset by a decrease in our custom content revenues of
$44,000. This is a variable component of our revenues related to work performed
by our subcontractor, Interactive Alchemy. For the three months ended June 30,
2007, software license revenues were 28% of total revenue, subscription and
audio services revenues were 56% of total revenue and maintenance and
professional services revenues were 16% of total revenue, as compared to 34%,
49% and 17%, respectively, for the three months ended June 30, 2006. We expect
software license revenues and indirect subscription license revenue to continue
to become a larger percentage of total revenues as total revenues increase given
our focus on the software Purchase Model and indirect sales model. We expect
sales from custom content services and off-the-shelf license sales to decline.

COST OF REVENUES FROM CONTINUING OPERATIONS

Cost of software license revenues is driven by the types of software
licenses sold. It consists of royalty fees paid on certain off-the-shelf
products, if any, sold, and sales rebates to distribution partners on the sale
of certain software products. Cost of software license revenues for the three
months ended June 30, 2007 and 2006 were $67,000 and $45,000, respectively, an
increase of $22,000 or 49%. The increase was related to costs associated with
one license sale as part of a specific arrangement with the customer. Cost of
software license revenue was approximately 2% of total revenues in the quarter
ended June 30, 2007 and approximately 1% of total revenues in the quarter ended
June 30, 2006. We expect the cost of software license revenues to remain a very
small percentage of total license revenue, which will arise only from royalties
which may be due from the sale of off-the-shelf courseware or specific
arrangements with customers. We expect the cost of revenue for license sales to
remain a very small fraction of license revenue that is not likely to exceed 2%.

Cost of subscription 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
subscription and audio services for the three months ended June 30, 2007 and
2006 were $1.0 million and $976,000, respectively, an increase of $26,000 or 3%.
The increase was primarily a result of an increase in salaries and benefits
expense of $127,000, an increase in telecommunications costs of $22,000 and an
increase in office expense of $17,000. The increase was partially offset by
decreases in depreciation expense of $117,000 as a result of the complete
depreciation in May 2006 of certain audio conferencing and computer equipment,
which resulted in a decrease in depreciation expense in the three months ended
June 30, 2007 as compared to the three months ended June 30, 2006. Overall, we
expect the cost of audio conferencing services to rise with increases in audio
conferencing revenue and the percentage to remain relatively consistent. Cost of
subscription and audio conferencing revenue was approximately 24% of total
revenues in the three months ended June 30, 2007 and approximately 27% of total
revenues in the three months ended June 30, 2006.

Cost of maintenance and professional services revenue includes an
allocation of technical support personnel and facilities costs allocable to
those services revenues consisting primarily of a portion of our facilities
costs, communications and depreciation expenses. However, by far the largest and
most variable component of the cost of maintenance and professional services
arises from the amount due to our third-party subcontractor which is a fixed
proportion of the custom content revenue earned. The cost of maintenance and
professional services for the three months ended June 30, 2007 and 2006 was
$184,000 and $170,000, respectively, an increase of $14,000 or 8%. Cost of
maintenance was slightly higher as maintenance revenues continue to increase
period over period. Cost of maintenance and professional services revenue was
approximately 5% of total revenues in each of the three months ended June 30,
2007 and 2006. We expect that the increase in cost of maintenance and
professional services revenue will vary proportionately and directly with the
amount of professional services revenue earned in a quarter.

Amortization of acquired and developed software consists of
amortization of acquired software technology and other assets acquired in the
Mentergy, Glyphics and Quisic acquisitions. Amortization of acquired and
developed software for the three months ended June 30, 2007 and 2006 was $45,000
and $67,000, respectively, a decrease of $22,000 which is related to the full
amortization in May 2007 of the software technology from the Glyphics
acquisition.

GROSS PROFIT

As a result of the foregoing, the Company's gross profit (total
revenues less total cost of revenues) increased from $2.3 million for the three
months ended June 30, 2006 to $2.8 million for the three months ended June 30,
2007. We expect to see gross profit increase as revenues increase in dollar
amount and as a percentage as revenues rise since most of the cost of sales are
either fixed (amortization) or are associated only with audio conferencing and
custom-content revenue.

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 operating expenses of $2.3 million in the three months ended June 30,
2007, an increase of $553,000 or 31% from $1.8 million in the three months ended
June 30, 2006. This increase is due to increases in research and development
expense of $81,000, in sales and marketing expenses of $394,000 and in general
and administrative expenses of $78,000. Total operating expenses were 57% and
50% of total revenues in the three months ended June 30, 2007 and 2006,
respectively.

Research and development expenses represent expenses incurred in
connection with the continued development and enhancement of our software
products and new versions of our software. 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 for the three months ended June 30, 2007 and
2006 were $385,000 and $304,000, respectively, an increase of $81,000 or 27%.
During the first quarter of fiscal 2007, 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 have continued to capitalize those
direct costs through June 2007 when the new software product was released for
distribution and sale to our customers. We will amortize these software
development costs over a three year period beginning in July 2007. The increase
in research and development costs is primarily related to an increase in office
expense of $59,000 as a result of an annual quality assurance service contract
accounted for as a prepaid asset, that began to be amortized in the fourth
quarter of fiscal 2007, as well as other new annual subscription software
contracts during the period. Salary and benefit expense attributable to research
and development expense in the three months ended June 30, 2007 increased by
$18,000 as headcount increased. Taking into account the release of version 9.0
in June and thus the completion of capitalizing those particular software
development costs and the increase in expense anticipated from amortization of
those costs in fiscal 2008, accompanied by an increase in salary and benefit
expense since a portion of that expense had been capitalized in fiscal 2007, we
expect cost of sales and research and development costs to increase in fiscal
2008. Research and development expense was approximately 9% of total revenues in
the three months ended June 30, 2007 and approximately 8% of total revenues in
the three months ended June 30, 2006.

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 were $1.3 million and $858,000 for the three months ended June 30, 2007
and 2006, respectively, an increase of $394,000 or 46%. The increase was a
result of planned increases in expenses in advertising and marketing of $178,000
related to lead generation, in salaries expense of $176,000 associated with
increased headcount and compensation structure, in professional services of

$12,000 and in indirect commissions and rebates of $19,000. Sales and marketing
expenses were 30% of total revenue in the three months ended June 30, 2007 and
24% of total revenue in the three months ended June 30, 2006. We expect sales
and marketing expenses to increase in amount as revenues increase, but expect
the percentage of sales and marketing expenses incurred in relation to total
revenue to remain consistent.

General and administrative expenses consist of company-wide expenses
that are not directly related to research and development or sales and marketing
activities, with the bulk of those general and administrative expenses comprised
of salaries, rent and the costs directly associated with being a public company,
including accounting costs, legal costs and fees. During the three months ended
June 30, 2007 and 2006, general and administrative expenses from continuing
operations were $712,000 and $634,000, respectively, an increase of $78,000 or
12%. The increase is primarily a result of increased office expenses of $46,000
resulting from investments in annual software subscriptions for a new accounting
general ledger package, an equity administration package and a human resources
package, originally recorded as prepaid assets and amortized to office expense.
General and administrative expenses also consisted of increased salaries and
benefits of $47,000, an increase in other taxes of $25,000 as we paid the State
of Utah sales tax due related to the Glyphics acquisition, increased
professional services of $15,000, increased legal fees of $11,000 and increased
board and investor relations fees of $11,000. These increases were partially
offset by a decrease in bad debt expense of $37,000, decreased insurance expense
of $19,000, decreased accounting fees of $15,000 and decreased
telecommunications expenses of $5,000. General and administrative expenses from
continuing operations were 17% of total revenues in the three months ended June
30, 2007 and 18% of total revenues in the three months ended June 30, 2006.

EARNINGS FROM OPERATIONS

For the three months ended June 30, 2007, we reported earnings from
operations of $477,000 as compared to earnings from operations of $551,000 for
the three months ended June 30, 2006, a decrease of $74,000, or 13%. We expect
to increase earnings from operations in fiscal 2008 by increasing revenues at a
faster rate than our increases in expenses.

INTEREST EXPENSE FROM CONTINUING OPERATIONS

Interest expense from continuing operations paid on outstanding debt
instruments for the three months ended June 30, 2007 and June 30, 2006 was
$270,000 and $251,000, respectively, an increase of $19,000 or 8%. This increase
resulted from an increase in the interest rate payable on our senior unsecured
notes due 2010 ("Senior Notes") from 10% to 12% beginning in January 2007.
Non-cash interest expense, arising from the beneficial conversion feature of our
debt, for the three months ended June 30, 2007 and June 30, 2006 was $81,000 and
$150,000, respectively, a decrease of $69,000 or 46%. This decrease resulted
from an acceleration of the beneficial conversion feature in the third quarter
of fiscal 2007 based on the extension of the Senior Notes being accounted for as
a debt extinguishment.

We expect interest expense from continuing operations to increase
slightly in fiscal 2008 as the result of the increased interest rate accruing on
our Senior Notes due 2010 from 10% to 12% per annum (which began in January
2007) in connection with the agreement of the holders of those Senior Notes to
extend the Senior Notes' maturity from July 15, 2007 to July 15, 2010. We expect
non-cash interest expense resulting from the beneficial conversion feature of
our debt to remain consistent in fiscal 2008, because the amortization is
straight-line. Should there be any debt conversions in fiscal 2008, the interest
will increase in order to accelerate the beneficial conversion feature related
to the proportion of debt converted.

INCOME TAX EXPENSE FROM CONTINUING OPERATIONS

We recorded tax expense of $21,000 for the three months ended June 30,
2007. The expense resulted from the recognition of the deferred income tax
liability related to the tax deductible goodwill recognized on the Company's
purchase of Quisic and LearnLinc. We have recorded a valuation allowance for our
deferred tax assets due to the lack of profitable operating history. Based on
the financial results for the year ending March 31, 2007 and the three months
ended June 30, 2007, we have exhibited the ability to produce a taxable income.
As a result, we will continue to analyze the deferred tax asset and the
valuation allowance associated with that deferred tax asset. We believe that we
will begin to recognize a portion of that deferred tax asset as we continue to
earn taxable income with recognition likely in this fiscal year. In the event
that we determine that we would be able to realize our deferred tax assets in
the future, an adjustment to the deferred tax asset would increase net income
through a tax benefit in the period such a determination was made that we have
met the more likely than not threshold for such recognition.

We recorded no tax expense for the three months ended June 30, 2006
because we had net operating loss carry-forwards to reduce taxable income.

LIQUIDITY AND CAPITAL RESOURCES

Historically, we have generated cash from capital raising activities
and from cash flow from operations. We have used cash to fund our operations and
for research and development activities. In June 2006, we raised $2.0 million of
gross proceeds in a private placement our common stock.

At June 30, 2007, we had a working capital surplus of $920,000 compared
to a working capital surplus of $912,000 at March 31, 2007. Total current assets
were $5.4 million at June 30, 2007 compared to $4.9 million at March 31, 2007.
The increase in total current assets was due to an increase of approximately
$440,000 in accounts receivable which resulted from increased levels of sales.
In addition, cash and cash equivalents increased by $117,000. Our accounts
receivable, net of allowance for doubtful accounts were $3.0 million and $2.5
million at June 30, 2007 and March 31, 2007, respectively. The increase in
receivables is consistent with an increase in revenues quarter on quarter. The
aging of receivables has remained consistent at June 30, 2007 when compared to
March 31, 2007, with accounts under 30 days comprising 89% and 87% of the total
receivable balance, respectively. Total current liabilities were $4.5 million at
June 30, 2007 compared to $4.0 million at March 31, 2007. Contributing to the
increase in current liabilities were a $241,000 in deferred revenue from $1.5
million at March 31, 2007 to $1.7 million at June 30, 2007 as the result of
increased license sales and renewals based on sustaining our customer base.
Accounts payable and accrued liabilities increased by $272,000 from $2.3 million
at March 31, 2007 to $2.6 millions at June 30, 2007 primarily related to accrued
salaries and benefits relating to increased headcount and accrued bonuses.

CONTRACTUAL OBLIGATIONS

The following schedule details all of the Company's indebtedness and
the required payments related to such obligations at June 30, 2007 (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* ................. $ 8,511 $ 130 $ 74 $ 80 $ 8,227 $ --
Capital lease obligations* ...... 330 73 86 88 76 7
Interest expense ................ 4,147 1,032 1,011 997 1,107 --
Operating lease obligations ..... 1,833 503 395 347 588 --
Insurance premiums .............. 67 67 -- -- -- --
Base salary commitments under
employment agreements ........ 990 575 415 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Total contractual obligations ... $ 15,878 $ 2,380 $ 1,981 $ 1,512 $ 9,998 $ 7
============ ============ ============ ============ ============ ============
*Excludes interest.

We plan to continue to focus on managing overhead while increasing
revenue in an effort to maintain profitability and improve cash flow. We believe
that we will have sufficient working capital and liquidity to meet our operating
needs, fund our planned research and development activities and to satisfy our
contractual obligations in the next 12 months without the need to raise
additional capital.

RESULTS OF DISCONTINUED OPERATIONS

Effective January 1, 2004, we discontinued our dental practice
management services. Results of operations from this segment are presented as
discontinued for the three months ended June 30, 2007 and 2006 in accordance
with SFAS 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OF DISPOSAL ACTIVITIES.
Income from discontinued operations was $0 and $11,000 for the three months
ended June 30, 2007 and 2006, respectively. We do not expect to recognize
further income or incur further expenses related to our discontinued legacy
practice management business.

CASH FLOWS FROM CONTINUING OPERATIONS

Cash provided by operating activities was $484,000 for the three months
ended June 30, 2007 and cash used in operating activities was $138,000 for the
three months ended June 30, 2006. In the three months ended June 30, 2007, cash
provided by operating activities was primarily attributable to non-cash expenses
of depreciation and amortization of $192,000, non-cash accretion of debt
discount to interest expense of $51,000, income from continuing operations of
$78,000, non-cash stock option expense of $36,000, non-cash warrant expense of
$21,000, provision for bad debts of $3,000, a decrease in prepaid expenses and
other current assets of $12,000, deferred income tax expense of $21,000, an
increase in accounts payable and accrued expenses of $272,000 and an increase of
$242,000 in deferred revenue. These items were offset by increases in accounts
receivable of $444,000.

Cash used in operating activities from continuing operations was
$138,000 during the three months ended June 30, 2006. 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, provision for bad debts of $40,000, depreciation and amortization of
$330,000, non-cash accretion of debt discount to interest expense of $110,000,
stock compensation expense of $27,000 and warrant expense of $15,000.

CASH FLOWS FROM INVESTING ACTIVITIES

Cash used in investing activities was $294,000, and $1.1 million in the
three months ended June 30, 2007 and 2006, respectively. Cash used in investing
activities during the three months ended June 30, 2007 was primarily due to
$38,000 in capital expenditures, $264,000 in capitalized software development
and $6,000 in investments in certificates of deposit. These items were partially
offset by a $14,000 repayment of a note receivable. Cash used in investing
activities during the three months ended June 30, 2006 was primarily due to
investments of $1.0 million in certificates of deposit, capital expenditures of
$17,000 and capitalized software development costs of $82,000.

CASH PROVIDED BY FINANCING ACTIVITIES

Cash used in financing activities was $73,000 during the three months
ended June 30, 2007. Cash provided by financing activities was $1.7 million
during the three months ended June 30, 2006. Cash used in financing activities
in the three months ended June 30, 2007 was attributable to payment of Series A
and B preferred stock dividends of $35,000, repayment of long-term debt of
$31,000 and repayment of capital lease liabilities of $7,000. Cash provided by
financing activities for the three months ended June 30, 2006 was attributable
to $2.0 million in gross proceeds from the issuance of common stock in a private
placement and additional proceeds from the exercise of stock options of $3,000,
partially offset by stock issuance expenses of $160,000, repayment of $62,000 in
long-term debt and capital leases and payment of $39,000 in preferred dividends.

OUTSTANDING INDEBTEDNESS AND PREFERRED STOCK

The Company currently has outstanding unsecured subordinated
convertible notes of $5,100,000 due March 29, 2012, 115,000 issued and
outstanding shares of Series A Convertible Preferred Stock and 59,500 issued and
outstanding shares of Series B Convertible Preferred Stock, together with
$2,962,000 in principal amount of Senior Notes due July 15, 2010. All of the
foregoing securities were issued in connection with the Company's capital
raising activities. A detailed discussion of the terms of these securities and
the impact of issuance of and certain events surrounding these securities on our
financial statements follows.

Outstanding Indebtedness

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.
These 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 the 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 ten 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 years 2004, 2005 and
2006, holders with a principal balance totaling $675,000 converted their notes
into 2,121,088 shares of the Company's common stock at prices from $0.25 to
$0.30 per share. No conversion of debt or acceleration of amortization of costs
occurred during the year ended March 31, 2007 or for the three months ended June
30, 2007.

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 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 originally bore
an interest rate of 10% per annum and accrued interest is due and payable on a
quarterly basis, 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 originally 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
original term of the notes which was thirty-nine 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. No conversion of debt to equity or acceleration of amortization
of costs related to such conversions occurred during the year ended March 31,
2007. In December, 2006, the Company negotiated a modification of the terms of
the senior notes to extend the maturity date from July 15, 2007 to July 15,
2010. In exchange for the extension, the interest rate increased from 10% per
annum to 12% per annum, with the new increased interest rate to begin to accrue
under the amendment on January 16, 2007, and continue thereafter at that rate
until maturity or the senior notes are fully paid. All other terms and
provisions of the senior notes remained unchanged. The direct expenses of the
note amendment was $101,000 and the estimated fair value of the warrant issued
to the placement agent of $42,000 were recorded as a deferred offering cost and
both will be amortized as a component of interest expense over the term of the
senior notes.

Preferred Stock

On September 16, 2003, the Company completed its private placement of
Series A convertible preferred stock with detachable warrants to purchase
750,000 shares of common stock, providing $1,500,000 in gross proceeds. The
Company originally issued 150,000 shares of Series A Preferred Stock that
converts to 3,000,000 shares of common stock, if all converted. The warrants
were immediately exercisable at a price of $1.50 per share and expired on
September 16, 2006. 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 were considered a deemed dividend in the calculation of loss per share.
During fiscal year 2005 and 2006, holders of 35,000 shares converted to 700,000
shares of common stock. The underlying common stock that would be issued upon
conversion of the preferred stock and upon exercise of the associated warrants
has been registered with the SEC and may be sold pursuant to a resale
prospectus.

On September 30, 2005, the Company completed its private placement of
Series B convertible preferred stock, with detachable warrants. The Company
originally issued 70,000 shares of Series B Preferred Stock that converts to
2,800,000 shares of common stock, if all converted and warrants to purchase
700,000 shares of common stock. The Series B Preferred Stock bears an 8%
dividend. The dividend is cumulative and the Series B Preferred Stock is
non-voting and non-participating. The shares of Series B 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 Warrants that
are exercisable at an exercise price equal to $0.50 per share expire on
September 30, 2008. The aggregate value of the warrants of $55,000 is considered
a deemed dividend in the calculation of earnings/loss per share. During the 2007
fiscal year, holders of 10,500 shares of Series B Preferred Stock converted
those shares into 420,000 shares of the Company's common stock. The underlying
common stock that would be issued upon conversion of the preferred stock and
upon exercise of the associated warrants has been registered with the SEC and
may be sold pursuant to a resale prospectus.

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.

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.

The Company considers an accounting policy to be critical if it
requires an accounting estimate that requires the Company to make assumptions
about matters that are highly uncertain at the time the accounting estimate is
made. In addition, different estimates that the Company reasonably could have
used for the accounting estimate in the current period, or changes in the
accounting estimate that are reasonably likely to occur from period to period
would have a material impact on the presentation of the Company's financial
condition, changes in financial condition or results of operations. The Company
believes there are a number of accounting policies that are critical to
understanding our historical and future performance. The critical accounting
policies include revenue recognition, sales reserves, allowance for doubtful
accounts, software development costs, intangible assets, income taxes and
stock-based compensation.

Our critical accounting policies and estimates are included in the
Company's annual report on Form 10-K for the year ended March 31, 2007 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 the Company's investment activity is to
preserve principal while at the same time maximizing yields without
significantly increasing risk. To achieve this objective, the Company maintains
its portfolio of cash equivalents in a variety of money market funds.

As of June 30, 2007, the carrying value of our outstanding convertible
redeemable subordinated notes and unsecured senior notes was approximately $8.1
million at a fixed interest rate of 12%. In certain circumstances, we may redeem
this long-term debt. Our other components of indebtedness of $449,000 bear
interest rates of 6% to 10.25%. 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.

During the first quarter ended June 30, 2007, 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 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 dependence upon software purchase license sales
as opposed to the more ratable subscription model, 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.

We have limited financial resources at our disposal. We have long-term
obligations that are due in 2010 and 2012 that we may not be able to satisfy
from existing working capital. If we are unable to remain profitable, we will
face increasing demands for capital. We may not be successful in raising
additional debt or equity capital. As a result, we may not have sufficient
financial resources to satisfy our obligations as they come due in the short
term.

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

On June 30, 2007, 33,585,431 shares of our common stock were issued and
outstanding, net of treasury shares. An additional 16,209,295 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.

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
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 subscription 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 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.

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

With our focus on our Web and audio conferencing products and services,
our growth depends on our ability to continue to develop new features, products
and services around that software and product line including the ability to
operate our software in non-Windows based operating systems (e.g., MAC and
Linux). 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 ending after December 15, 2007 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 for fiscal years ending after December 15, 2008.
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.

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

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

(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
10.17(7) Asset Purchase Agreement by and among the Company, and
Mentergy, Inc.
10.18(16) Subcontractor Agreement between the Company and Interactive
Alchemy, Inc. with Amendments
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, as amended
10.25(16) Securities Purchase Agreements effective June 9, 2006
10.26(16) Registration Rights Agreements effective June 9, 2006
10.27(17) Amendment to Unit Purchase and Agency Agreement
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

----------------
(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 January 24,
2007.
(9) Previously filed as an exhibit to iLinc's Quarterly Report on Form 10-Q
for the fiscal quarter ended December 31, 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 December 31, 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.
(17) Previously filed as an exhibit to iLinc's Form 8-K filed December 12,
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

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 9, 2007

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

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