10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2008

Commission File Number 333-135533

Hostopia.com Inc.

(Exact name of registrant as specified in its charter)

Delaware	65-1036866
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
110 East Broward Blvd., Suite 1650 Fort Lauderdale, FL (Address of principal executive offices)	33301 (Zip Code)

Registrant’s telephone number, including area code: (954) 463-3080

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes x  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

o Yes x  No

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x  Yes o  No

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K(§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer x

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of September 30, 2007, the last business day of the registrant’s most recently completed second fiscal quarter, was $70,626,168.

As of May 31, 2008, the registrant had 11,642,351 shares of common stock outstanding.

HOSTOPIA.COM INC.

FORM 10-K – ANNUAL REPORT

For the Fiscal Year Ended March 31, 2008

TABLE OF CONTENTS

		PAGE
ITEM 1.	BUSINESS	1
ITEM 1A.	RISK FACTORS	15
ITEM 1B.	UNRESOLVED STAFF COMMENTS	25
ITEM 2.	PROPERTIES	25
ITEM 3.	LEGAL PROCEEDINGS	25
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	25
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	26
ITEM 6.	SELECTED FINANCIAL DATA	28
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION	29
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	42
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	43
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	65
ITEM 9A.	CONTROLS AND PROCEDURES	65
ITEM 9B.	OTHER INFORMATION	66
ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	67
ITEM 11.	EXECUTIVE COMPENSATION	71
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	77
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	78
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	79
ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	81

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PART I

Forward-Looking Statements

This Annual Report on Form 10-K includes “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Any statements in this report about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. This report contains forward-looking statements that are based on management’s beliefs and assumptions and on information currently available to our management. You can identify these forward-looking statements by the use of words or phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions intended to identify forward-looking statements. Among the factors that could cause actual results to differ materially from those indicated in the forward-looking statements are risks and uncertainties inherent in our business including, without limitation, those identified below and other risks described under the heading “Item 1A. Risk Factors” included elsewhere in the Annual Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this report. Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available.

Trademarks

Hostopia®, WebsiteOS®, WebhostOS®, EasyMail® , EasySiteWizard® and SyncSuite® are our registered trademarks in the United States of America and Hostopia® and EasySiteWizard® are registered trademarks in Canada.

Item 1. Business

Overview

Hostopia.com Inc is a provider of Web services that enable small and medium-sized businesses to establish and maintain an Internet presence. Our customers are communication services providers, including telecommunication carriers, cable companies, Internet service providers, domain registrars and web hosting service providers. Our customers purchase our Web services on a wholesale basis and resell these services under their own brands to small and medium-sized businesses. We provide our customers with the technology, infrastructure and support services to enable them to offer Web services, while saving them research and development and capital and operating costs typically associated with the design, development and delivery of Web services. We refer to small and medium-sized businesses which use our Web services as “end-users” or “end-user businesses”. We believe we are a leading provider of such Web services based on the number and size of our customers, the number of end-user websites that we support, the quality of our Web services, and our reputation.

Proposed Merger

On June 19, 2008, Hostopia.com and Deluxe Corporation (NYSE:DLX) announced they had signed a definitive merger agreement, unanimously approved by the boards of both companies, pursuant to which Hostopia would become a wholly-owned subsidiary of Deluxe. If the merger is completed, holders of Hostopia common stock will receive CDN$10.55 in cash for each outstanding Hostopia common share. The transaction is valued at approximately CDN$124 million.

The consummation of the merger agreement is subject to the approval by Hostopia shareholders and certain other customary conditions and is expected to close in late July or August. In respect of the merger Hostopia will be filing a Notice of Special Meeting and Information Circular with the relevant securities commission in Canada and the United States. The Information Circular will be made available to stockholders by mail and will also be available on the SEC website and at www.sedar.com. Before making any voting decision with respect to the proposed transaction the stockholders are urged to read the Information Circular and as well as other relevant materials filed with the relevant securities commissions by the Company because they contain important information about the proposed transaction.

Our Customers

Our customers include Bell Canada Inc., COLT Telecommunications, Covad Communications Company, Register.com, Inc., Rogers Cable Communications Inc., TELUS Communications Company, Idearc Inc. (which acquired

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Verizon Directories Corp.) and British Telecommunications PLC. In addition to our customers, we offer Web services to end-users through small web hosting resellers and directly to end-users.

Our Services

We deliver our Web services via the Internet. Our Web services include:

• Website creation and maintenance applications;

• Managed e-mail with virus and spam protection;

• E-commerce application services;

• Customer communications and Website promotion applications;

• Website hosting and data transfer; and

• SyncSuite® wireless communications services.

Our Strengths

Our competitive strengths include the following factors:

• The quality of our comprehensive suite of Web services that is designed to meet the specific needs of small and medium-sized businesses;

• Our marketing, support, systems and integration services that help our customers sell and deliver our Web services effectively and dependably to their end-users;

• The reliability and scalability of our application delivery platform; and

• The leverage in our distribution model for our Web services, reaching large numbers of end-user businesses through the established brand names and market position of our customers.

Our Strategy

We expect to maintain and enhance our market position as a leading private label, wholesale provider of Web services to the communication services provider market. Key elements of our strategy include the following:

• Acquire new customers — Target the largest communications services providers (in terms of revenues, employees and end-users serviced) in the categories of telecommunications, cable broadband, Internet service providers, hosting service providers, and domain name registrars, to significantly increase our growth.

• Further penetrate our wholesale customers’ existing end-user base — Leverage the brand-name strength of our customers in order to increase the penetration rate for our Web services with their existing end-user base. Based on our research, including information received from our customers, we believe our wholesale customers have a collective end-user base of approximately of 5,000,000 of which approximately 276,000 use our services.

• Grow average revenue per end-user — Increase average revenue per end-user by introducing new Web services that we expect will command higher prices, both as stand alone Web services and as part of a bundled offering involving several Web services.

• Pursue appropriate business acquisitions to accelerate growth — Pursue selective acquisitions of, or investments in, complementary services, technologies and businesses that we believe can accelerate the growth in our customer base, the number of our customers’ end-users, our suite of services, and/or our revenues.

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Development of our business

We have increased our revenues by increasing the size and quality of our customer base. Between March 31, 2003 and March 31, 2008, our end-user base grew from 65,200 end-users to over 309,000 end-users. Approximately 49,000 end-users were added on a net basis in fiscal 2008. Of the total end-users at March 31, 2008, approximately 33,000 are served through our small web hosting resellers and direct end-user operations while 276,000 are end-users of our wholesale customers. Between March 31, 2003 and March 31, 2008, our revenues grew from approximately $5.5 million to approximately $27.8 million, a five year compound annual growth rate of 38%.

Other recent developments in our business include expanding our Web services. During the five fiscal years ended March 31, 2008, we expanded our Web services by launching a sub-domain e-mail service for residential and very small business end-users; enhancing EasySiteWizard® our website building tool; acquiring website templates which are used by end-users to create websites quickly; developing a website creation services business (Website Experts) and introducing our search engine optimization (SEO) software. We believe that these applications have improved or enhanced our Web services. In the last year, we have been developing our wireless product, SyncSuite®, the basic technology of which we purchased in May 2007 and our licensed Fax to Email product.

In 2003, we began to purchase services from Geeksforless.com Inc. (GFL), a related party, with operations located in Nikolayev, Ukraine, for the purpose of expanding our development and support capabilities at a lower cost than is typical in North America.

Industry Overview

The Internet is a global medium for information, communication and commerce and an integral part of everyday life for hundreds of millions of people worldwide. Increasing usage of the Internet is being driven by the ever-increasing variety of content, commerce and applications available online. Many individuals now use the Internet as a primary means to access news and information, communicate and socialize, and purchase goods and services.

The global reach, interactive nature and transactional efficiency of the Internet enables businesses to capitalize on new revenue opportunities by building websites that support e-commerce and other commercial activities. While most large corporations are already operating online, many smaller businesses, including income-generating home-based businesses, have yet to establish an Internet presence or fully exploit the capabilities of their existing Internet presence.. In order to take advantage of new business growth opportunities presented by greater Internet presence and e-commerce, small and medium-sized businesses must create and maintain an Internet presence or enhance the capabilities of their existing Internet presence.

A business seeking to establish an Internet presence may use a variety of Web services such as the following:

Website creation tools and services

More and more small and medium-sized businesses want to establish websites and attract visitors to those websites on the Internet. These businesses increasingly look to third party providers for automated, easy-to-use Web services that require minimal technical expertise, yet still have the necessary range of features to enable them to establish a successful Internet presence. In our opinion, these Web services include: domain name registration; website creation tools; pre-built, customizable website templates; galleries of ready-to-use images; and pre-built website scripts and applications such as customer forms, surveys and appointment scheduling. Our experience has shown that businesses also require website building services that deliver fully built websites that include applications and ready-to-use Web services.

Online communications

Online communications and e-mail in particular, have become an essential means of business communication. Moreover, domain based e-mail addresses that serve as personalized or branded professional identifiers have become increasingly important for businesses. Additionally, service providers are increasingly offering more sophisticated online communication features such as live online chat, blog (Web log) tools, collaboration, fax through e-mail and e-mail marketing services.

E-commerce services

Increasing use of the Internet as a convenient resource for researching and purchasing goods and services is driving rapid growth in e-commerce volume. To be successful with an e-commerce enabled Internet presence, businesses require

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highly reliable, scalable and secure website services such as search engine optimization, online shopping carts, payment processing and security tools.

On-Demand Applications

The wide availability of Internet broadband access and enhanced Web browser functionality has made it possible to deliver sophisticated software tools and services over the Internet as a service. This “Software as a Service” or “SaaS” delivery model enables organizations to outsource the provision and administration of software to third party application service providers that design, host, maintain and update software remotely over the Internet. Outsourced applications offer several advantages to the small and medium-sized business market, including cost-effectiveness, less internal expertise needed to install and maintain, quick deployment, absence of expensive upgrades and avoidance of outdated and unsupported software.

Website hosting

A website’s content is composed of data that must be hosted on a server that Internet users can access. Hosting refers to the housing, serving and maintenance of data for one or more websites on servers that are operated and maintained by the website owner or a third party hosting services provider. In addition to basic website storage and electronic access, many website hosting service providers offer their customers other benefits, including increased connectivity speed and bandwidth, redundancy, backup, security and technical support.

Key Industry Trends

We have identified a number of key industry trends affecting small and medium- sized businesses and large providers of information technology services to these businesses, including the following:

An Internet presence is considered a necessity by many small and medium-sized businesses

We believe small and medium-sized businesses increasingly value more sophisticated applications and services that help their websites generate marketing leads, drive increased customer Web traffic or enable telephone or e-commerce sales orders. We believe that the leading applications and services demanded by small and medium-sized businesses are:

• Website design, creation and enhancement, including pre-built business website templates;

• E-commerce applications and services;

• Email, communication and collaboration services;

• Applications that help sites improve search engine rankings or increase visibility with online advertising and promotion services;

• Business relationship management tools such as online chat, blogging and HTML newsletter services;

• Wireless collaboration tools; and

• Fax-to-email

Small and medium-sized businesses are turning to communication services providers for Internet solutions.

We believe small businesses with websites increasingly prefer to outsource Web services to third party providers, and practice considerably higher levels of outsourcing than larger businesses. We believe this trend is explained by a number of factors, including the lack of financial and human resources that small and medium- sized businesses have to allocate to in-house technical expertise and support for Web services, as well as the reliability, quality and increased back-up or redundancy provided by outsourcing Web services.

We believe established communication services providers are well positioned to serve the small and medium-sized business market due to their trusted brand name recognition and large existing customer bases. These communication services providers have the market reach, sales and marketing capabilities and customer bases to which they can market and sell Web services.

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Communication services providers are seeking outsourced, private label solutions.

Communication services providers seek to offer reliable and scalable Web services which address the evolving needs of the small and medium-sized business market and offer high marginal profit returns. We believe that these communication services providers find it difficult to meet the growing demand for more sophisticated hosted applications and technologies due to the lack of economies of scale required to justify the risk of capital investment and ongoing operating expenditures, as well as the lack of internal expertise focused on Web services technology. As a result, we believe that communication services providers will increasingly look to outsource their Web services to private label wholesale vendors who deliver high-quality, reliable, specialized services that meet and continually adapt to the evolving needs of the small and medium-sized business market.

Strategy

We expect to maintain and enhance our market position as a leading private label wholesale provider of Web services to the communication services provider market. Key elements of our growth strategy include the following:

Acquire new customers

We identify prospective customers based on two sets of criteria. First, we target the largest service providers on the basis of size of revenues, number of employees and the number of end-user businesses they serve. Second, we segment service providers into five service categories: telecommunications; cable broadband; Internet service providers; hosting service providers; and domain name registrars. Our prime target customers are the largest companies in each of these service provider categories who have well-recognized retail brands and significant end-user bases. We estimate there are 1,000 of these communication service providers globally. We currently sell our services to over 50 of these communication service providers. Our continuing focus is to market and sell our services to the remaining largest communication service providers.

Further penetrate our customers’ existing end-user base.

Our customers resell our Web services to approximately 276,000 out of an estimated 5,000,000 small and medium-sized businesses that they currently serve. Our estimated penetration rate is, therefore, approximately 5.5%.

We intend to leverage the brand strength of our customers in order to increase the penetration rate for our Web services with their existing end-users. We expect to continue to provide sales and marketing assistance programs to our existing customers to help them attract additional end-user businesses. These programs include marketing consulting, sales force training, and creation and delivery of marketing materials. We believe that our current strategies for growth through our existing customers are effective because the rates of increase of our customers’ aggregate end-user subscriber numbers and revenues are higher than industry averages.

Grow revenue per end-user.

We intend to increase average revenue per end-user by introducing new Web services that we expect will command higher prices. We will offer these new Web services separately and/or bundled with other Web services. We plan to charge an additional fee for these Web services if purchased separately.

In fiscal 2008, we introduced a number of new web services designed to increase the revenue per user by offering web applications to help SMBs grow their online presence.  These services included Announcer Pro, an HTML newsletter service, EasyBlog Builder Pro, a service that allows users to create a blog right on their own websites, and SyncSuite®, an application that allows users to wirelessly synchronize contact, calendar and notes data between their handheld devices, desktops and webmail.

In fiscal 2009 we will be continuing the strategy of aggressively introducing web services in order to increase revenue per user.  Leveraging our positioning as a leading provider of online tools for SMBs, we will be launching a fax-to-email service that allows users to send and receive faxes directly on their computers.  Users can access this capability anywhere they can access the Internet.  We will also be launching a new SSL Certificate resale service that enables users to configure their SSL certificates directly through their WebsiteOS® interface. 

It is our intention to continue to aggressively launch the Web services that we believe will enjoy the highest demand rates and unit sales, and command the highest per unit monthly revenues.

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Pursue appropriate business acquisitions to accelerate growth.

We believe we can accelerate our growth through the selective acquisition of, or investment in, complementary services, technologies and businesses. We intend to pursue strategic acquisition opportunities that we believe can accelerate our growth by increases in one or more of the following measures: our customer base, the number of our end-users, our suite of services, and our revenues.

Services

We enter into wholesale distribution agreements with our customers to provide them with a suite of user-friendly Web services for resale to small and medium-sized businesses, to assist these businesses in establishing a custom, professional Internet presence. In addition, we provide our customers with a suite of services to assist them with sales and support of these Web services to end-user businesses. The delivery model of our services is as follows:

       

Services for our customers

We offer our customers a range of services and business management systems and tools. These include end-user website migration services, billing and end-user set-up services, sales and marketing support services, domain name registration and technical support services. These services enable our customers to sell and support our suite of Web services to their end-user businesses. Our business management systems and tools include the following:

Service	Description	Benefit
WebhostOS®	WebhostOS® is our proprietary browser-based services management software that appears as an online control panel, and allows our customers to manage and deliver our Web services to end-user businesses under their own brand names. Features include: access to end-user accounts and information, ability to create, edit and remove end-user service features, analytics, set up and process custom e-mail messages to end-users, as well as perform a number of other business administration functions.	User-friendly management of business systems from a single browser based management system.
Ordering & Billing Suite	This application enables customers to sell, deliver and collect payment for Web services that they sell to end-users. Application functions include an online ordering application, end-user transaction management, secure credit card payment (collection) and invoicing modules and other features that enable customers to manage their end-user transactions.	Allows a customer to set-up and launch an e-commerce website to sell our Web services.
Domain Registration	Online domain registration with hosting package selection set-up. We deliver this generic domain registration service for our customers utilizing our	Allows a customer to set up and launch a domain name registration website under

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Service	Description	Benefit
	wholly owned subsidiary Internet Names for Business Inc.	its own brand name.

Provisioning Application Programming Interface A network-based system which connects customers’ systems to our application delivery platform to provision Web services. Automation and integration with existing customer systems.

Our professional services enable our customers to set up and manage a Web services business, and include the following:

Service	Description	Benefit
Sales and Marketing	These services are customized sales and marketing support programs we developed for our customers based on our extensive industry experience.	Our sales and marketing services facilitate our customers’ business growth by recommending and helping implement sales and marketing programs.
End-user Migration	We move customers’ existing hosted end-users from another hosting platform to our applications delivery platform.	Our customers can economically and reliably move large numbers of end-users to our platform.
Billing Integration	Our specialized billing, end-user set-up and management services help our customers replace or integrate their own in-house systems with our system to allow them to set-up and bill end-user Web service plans at minimal cost.	Our customers are often unable to enter the web hosting services business because their in-house billing systems lack the capability to bill end-users for the services. Our services enable them to launch and manage their business.
Customer Care	Our end-user customer care support services are provided via telephone, e-mail and online chat. Our customer care support services are available to our customers’ technical teams and their end-users.	Eliminates the need for our customers to build and manage a 24/7/365 customer care team while at the same time providing industry expert technical support for end-users. Provides additional industry expertise to resolve complex end-user issues with 24/7/365 availability.
Professional Services	Our professional services teams facilitate all aspects of implementing a new customer on our system and as well as servicing ongoing customer operational needs.	Helps ensure customer implementation and operational needs are delivered professionally.

Services for our end-users

We provide a range of services to end-users. The cornerstone of our package for small and medium-sized businesses is WebsiteOS®, our proprietary browser based interface through which end-users access and control their Web services. WebsiteOS® allows access to all the applications required by end-users to create, manage and market their Internet presence. This unified application delivery platform also allows individual end-users to set their language preferences from among English, French, Spanish, German, Italian and Portuguese.

In addition, we have developed several proprietary applications which we believe differentiate our Web services from those of other providers. The following table sets out a list of these proprietary applications, a description of their

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Application	Description	Benefit
EasySiteWizard ®	Template and wizard driven website creation tool which allows end-users to design and publish a Website with no HTML programming knowledge. Features AJAX-based drag and drop functionality.	End-users can create websites easily by choosing a template, adding their content, logos and images.
EasyStoreMaker™	Wizard driven application to enable end-users to set up an online store. Our shopping cart software integrates with many payment processing gateways.	End-users can easily create online stores, add product images and descriptions, set prices and accept credit card payments with multiple currencies, if desired.
EasyMail®	Our proprietary domain-based e-mail service allows end-users to create, edit and delete e-mail accounts. Features include password security, aliases, catch-alls, auto-responders, spam and virus protection. Includes high mail box storage limits with the features and functionality demanded by small and medium-sized businesses.	Intuitive design makes this an easy to use self-service application.
WebMail	This application provides end-users with access to e-mail from a Web browser.	End-users can access e-mail from anywhere using a Web browser.
Virtual Managed Server	A managed hosting, e-mail and applications service platform designed to enable Web developers or other small providers to set up and run a web hosting business.	Enables Web developers to quickly and inexpensively launch and operate web hosting services.
Advanced Template Manager	More than 3,400 professionally designed web templates for end-users. All templates are compatible with HTML graphics editors such as FrontPage®, Macromedia® and Dreamweaver®.	Website templates reduce or eliminate the development required to create the look and feel of a website for end-users, thereby reducing costs while maintaining quality.
EasyBlogBuilder™	Application to create and post blogs on an end-user’s website.	End-users can quickly create, then manage and maintain, a blog with no specialized expertise.
EasyLiveChat™	Application to set up an online chat as a customer service option for website visitors.	Facilitates communication and improved customer service.
Announcer PRO	An email marketing tool that allows end-users to design, distribute and measure template-driven HTML-newsletters.	Allows users to send graphic-driven newsletters via email.
EasySiteOptimizer	A search-engine optimization tool that can help increase website traffic.	Simplifies the complex process of website optimization.
Photo Album	A photo-sharing tool designed to allow users to post and edit their photos online.	Provides a site for users to work with their photos.

Sales and Marketing

Sales

We employ a direct sales staff that targets the largest communication services providers within particular service categories (which are telecommunications, cable broadband, Internet service providers, hosting service providers and domain name registrars), on the basis of revenues, number of employees and number of end-users. We have established a method of

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systematically identifying, approaching and engaging target customers. Our sales representatives are assigned to specific geographic territories and address specific named accounts. As a result, we believe we are generally well informed of new opportunities.

Marketing

Our marketing strategy is to identify and directly target the largest communication services providers primarily in North America and Europe. In order to win new customer contracts, we promote our brand and Web services to prospective clients using print advertising in targeted trade publications, online media properties, our corporate website, participation in industry trade shows, outbound telesales lead generation and seasonal direct response campaigns.

To increase the revenues from our existing customers, we provide sales, marketing and support programs, including sales training, marketing assistance, and promotional programs, in an effort to drive adoption of Web services by more small and medium-size businesses. To increase the average revenue per customer, our marketing team structures new Web service launch programs with our customers to ensure that new, high-demand Web services and features are brought to market in a timely and effective manner. We thereby increase take-up rates of new Web services and increase average revenues per customer.

Customers

As of March 31, 2008, our customers included Bell Canada Inc., COLT Telecommunications, Covad Communications Company, Register.com, Inc., Rogers Cable Communications Inc., TELUS Communications Company, Idearc Inc. (which acquired Verizon Directories Corp.) and British Telecommunications PLC.

For the month ended March 31, 2008, the final month of our most recent fiscal period, we estimate that our largest 20 customers represented approximately 64% of our total monthly revenues and our top three customers represented approximately 28% of our total revenues. The only customer that accounts for more than 10% of our total revenues is Bell Canada (13%). We expect that we will further diversify our customer base and extend our market coverage as we sign new communication services providers throughout the United States, Canada and Western Europe. See “Risk Factors”.

Research and Development

Development of new applications

Since our inception, we have developed the majority of our Web services internally and through our offshore contractors, rather than licensing or acquiring technology from third parties. Our research and development efforts are focused on the design, development and deployment of a breadth of hosted application services that have the functionality to appeal to small and medium-sized businesses and fit the “Software as a Service” delivery model. Our research and development expenditures for fiscal 2008, 2007 and 2006 were approximately $3.8 million, $3.1 million, and $2.1 million, respectively, representing 13.8%, 13.7% and 11.7% of revenues, respectively.

Planned Web services launches

We have launched search engine optimization and website design services and intend to enhance or launch of the following applications:

• Collaborative features and capabilities for our e-mail services; and

• Fax-to-email application

Software as a Service (SaaS) delivery platform

Our application delivery platform is based upon proprietary software that enables us to increase the number of end-users of our Web services, economically and reliably. In our experience, we can scale the number of users on our systems while decreasing our costs of adding each new user due to the automation of our systems. This capability requires constant research and development investment in our application delivery platform to ensure:

• Geographical dispersion;

• Increased redundancy;

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• Increased scalability to support new subscribers;

• Private label customization for customers;

• Increased performance of new and existing Web services;

• Increased systems automation in deployment of Web services; and

• A highly secure systems infrastructure.

We intend to continue to invest in research and development to maintain what we believe is our technological advantage, the quality of our business applications and our application delivery platform.

Operations

Our operating teams are the Professional Services, Customer Care and Small Web Hosting Reseller and Direct to End-User Services Teams. These teams work together to deliver our services effectively to our customers and end-users. In addition, each of these operating teams is supported through outsourced services provided by GFL, a related party contractor.

Professional Services

Our Professional Services Team is responsible for assisting with the implementation of completed sales agreements, including, where requested, the development of customer sign-up servers, the migration of legacy hosting, e-mail and other Web services to our platform. Our Professional Services Team also works closely with our marketing department to provide ongoing sales and marketing initiatives with our customers.

Our Professional Services Team is comprised of the Project Management, Multimedia and Project Administration groups located in Mississauga, Ontario and Fort Lauderdale, Florida and is supported by GFL, a related party by means of common ownership. The Professional Services Group is responsible for setting up and managing all customer projects, coordinating internal resources and acting as primary contact liaison with customers. The Multimedia Group supports implementation activities with Web development, WebsiteOS® and Web-mail control panel branding, and other Web publishing services. Our Project Administration Group performs core project functions typically related to large end user service migrations and other projects.

Customer Care

Our Customer Care Team is located in Mississauga, Ontario and Miramichi, New Brunswick, and is responsible for providing technical support services on behalf of our customers, by live phone support, e-mail support, or live chat support, all of which are available on a 24 hour, 365 day basis. All support calls are answered by our Mississauga and Miramichi customer care teams. Support for live chat and e-mail is provided through GFL.

The Customer Care Team uses state-of-the-art, call center phone systems technology which includes advanced queuing, resource loading, reporting and other professional call center functionalities. In addition, the Customer Care Team uses a problem ticketing system to record, track and ensure resolution of customer or end-user issues. This system is used by all of our call center agents and is available to our customers through a password protected extranet.

Small Web Hosting Reseller and Direct to End-User Hosting Operations

BlueGenesis our wholly owned subsidiary, sells Web services to small web hosting resellers and end-user businesses, focusing on small web hosting resellers. We also sell Web services to end-users referred to us by Fortunecity.com Inc. under the trade name “FortuneCityhosting.com” in accordance with a marketing and license agreement with them. At March 31, 2008 there were approximately 33,000 end-users of which 28,000 are served by BlueGenesis and under the name FortuneCityhosting.com. The remaining 5,000 end-users we acquired on March 28, 2008 from Reliant Web Hosting Inc. and are served under the name Canada Webhosting.com.

Relationship with GFL

In November 2003, we began purchasing services from GFL, a related party by means of common ownership, for the purpose of expanding our development and support capabilities at a lower cost than is typical in North America. We believe this has yielded significant benefits to our business, including access to qualified technical personnel, cost savings,

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increased capacity, reduction in time-to-market, flexibility to respond to growth opportunities, and increased ability to deliver cost-effective custom services to customers. The strategy has contributed to our success as a low-cost, high-quality provider of private label Web services.

GFL employs contractors in Nikolayev, Ukraine. Our agreement with GFL relates to the provision of support services for our business, including software programming services, technical support and technical services, which stipulate a fixed contract price that is adjusted annually based upon the rate of inflation in Ukraine to a maximum of 10% per year. The services agreement is automatically renewed for 12 month periods unless terminated by either party. See “Intellectual Property” and “Certain Relationships and Related Transactions”.

Intellectual Property

Our success and ability to compete is dependent on our ability to develop and maintain the proprietary aspects of our technology without infringing upon the proprietary rights of others. Because technology is changing rapidly, we believe that the improvement of our existing services, development of new services and our reliance upon trade secrets and unpatented proprietary know-how will continue to be our principal source of intellectual property protection.

We currently rely on a combination of copyright, trade secret and trademark laws, confidentiality procedures, contractual provisions, and other similar measures to protect our proprietary information. We do not own any patents; however, we have filed patent applications with the United States Patent and Trademark Office and the Canadian Intellectual Property Office with respect to our Web services technology. We also intend to continue registering service marks and trademarks comprised of some of our product names, slogans and logos in the United States and Canada. We currently have five registered trademarks: (1) Hostopia, which is registered in Canada and the United States and has a duration of 15 years in Canada (expiring May 9, 2017), subject to renewal upon payment of a fee and five years in the United States (expiring September 14, 2009), subject to renewal upon filing of an affidavit of use, (2) WebsiteOS® which is registered in the United States and has a duration of five years (expiring March 21, 2011), subject to renewal upon filing an affidavit of use, (3) WebhostOS®, which is registered in the United States and has a duration of five years (expiring July 18, 2011), subject to renewal upon filing an affidavit of use, (4) EasySiteWizard®, which is registered in Canada and the Untied States and has a duration of 15 years in Canada (expiring April 25, 2021), subject to renewal upon payment of a fee and five years in the United States (expiring January 23, 2012), subject to renewal upon filing of an affidavit of use, (5) EasyMail®, which is registered in the United States (expiring January 23, 2012), subject to renewal upon filing of an affidavit of use. In addition, we currently require all of our employees, contractors and many of those with whom we have business relationships to sign non-disclosure and confidentiality agreements and to assign to us in writing all inventions created on our behalf unless otherwise stipulated.

Some of our products and services include third-party software for which we have obtained license and/or sublicense rights. This software is used to help support the delivery of our Web services. We also use open source software.

We have an image license agreement with ArtToday, Inc., an unrelated third party, under which we access images that are used within end-user websites. The agreement provides that we, along with our customers and our customers’ end-users, have the non-exclusive right to use the images anywhere in the world, provided that the images remain on our hosting platform.

We currently have an intellectual property agreement with Geeksforless.com Inc. (GFL), a related party, with whom we contracted to provide certain outsourced services, as discussed above.. The agreement concerns support services for our business, including software programming services and website template designs. This agreement does not assign or transfer to GFL any ownership rights, or any other rights, in or to the software or services provided by GFL to us in accordance with this agreement.

Effective June 1, 2007, the Company purchased the remaining templates, images and marketing software from Geeksforless.com Inc., a related party, for $232,921 (Cdn$247,000) in cash, which amount was considered to be fair value. Two directors and/or officers of the Company each owned 27.4% of Geeksforless.com. The Company completed transactions with Geeksforless.com, including outsourced services in the normal course of operations. The transactions have been recorded at the exchange amount, representing the amount of consideration established and agreed to by the parties.

On July 17, 2006, we were granted non-exclusive licenses to two patents held by Web.com Inc. (formerly Interland, Inc.) (U.S. Patent numbers 5680152 and 6789103) which broadly cover methods for website building and web hosting control panels. See “— Web.com Inc. License Agreement.”

On July 30, 2007 we entered into a patent license agreement with j2 Global Communications, Inc. Under the agreement Hostopia receives a non-exclusive, worldwide license to j2 Global's digital fax patent portfolio in exchange for an

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upfront payment plus ongoing quarterly royalty payments. The patent license agreement has a 10 year term, which may be renewed thereafter.

Competition

The market for Web services is competitive and constantly evolving. We expect competition to increase from existing competitors and from new market entrants. We estimate that there are approximately 10 to 15 businesses in North America against whom we compete directly for the provision of private label Web services to communication services providers.

Our main competitors in the wholesale market come from four main categories:

• Other private label providers of Web services such as Inquent Technologies Corp. We believe that our competitive strength against such companies lies in our comprehensive suite of services for both end users and our customers and our large base of sizable customers;

• Large retail providers who have established wholesale operations such as Verio Inc. and Web.com, Inc. (formerly, Interland, Inc.). We find that these entities can have significant financial and technical resources as well as higher per end user revenues associated with retail rather than wholesale services. However, we believe we compete effectively with these providers based upon our specialization in the wholesale market and we believe our customers prefer to purchase from a wholesale provider rather than an entity with whom they compete in the retail market for end users;

• Hosting and automation software vendors such as Ensim Corporation, SWsoft, Inc. and Sphera Corporation. Competitively these entities are able to offer similar services to us at lower costs since they do not include the hardware or infrastructure required to operate a Web services business. This offering appeals to certain customers who have their own infrastructure. We believe we compete effectively against this model by offering a complete solution that includes the cost of all hardware and reduces the risks of integrating a software solution with a separately managed hardware platform; and

• Diversified Internet companies such as Google Inc., Microsoft Corporation and Yahoo! Inc. that may offer Web services on a wholesale private label basis in the future. Potential competitors such as these have the advantage of very large resources and brand power enabling them to successfully market services on a global basis. We believe that our specialization in the wholesale market for Web services avoids direct competition with these entities and we also believe that our customers prefer to offer services under their own brand rather than the brand name of a large entity.

The in-house information technology departments of our large cable and telecommunication customers also constitute a form of competition. To win and keep their business we must convince the senior management of these potential and current customers that it is better for them to outsource and then leave their website business with us rather than develop, service and mange it internally.

Our main competitors in the retail Web services market include:

• Domain name registrars who focus on domain name registration supplemented by web hosting services such as Network Solutions, LLC, Melbourne IT Ltd. and Dotster Inc. We believe that few of these entities actually directly compete for the end-users of our customers;

• Web services and hosting companies that focus primarily on retail web hosting services and reseller web hosting services that compete against our wholesale services including 1&1 Internet, Inc., GoDaddy.com, Inc, Affinity Internet, Inc, Web.com, Inc. (formerly, Interland, Inc.) and Verio Inc. Many of these companies have a broad range of attractive Web services combined with sophisticated market knowledge. However, we believe that their ability to market their Web services effectively is less than that of the telecommunications providers through which we sell our Web services. We also believe that the cost of acquiring new end-users for these companies is higher than that of telecommunications providers who largely sell Web services to existing end-user customers. As a result, we believe that their costs are higher than ours;

• Website design firms who build web sites and may offer web hosting services as part of their offering. These companies enjoy an advantage with respect to their in-house website development services which

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tend to attract new end-user customers. However, we do not believe that these organizations possess the experience or physical infrastructure to host their own suite of applications in order to offer a comprehensive range of Web services;

• Internet service providers who offer retail and reseller web hosting services including EarthLink, Inc. and United Online, Inc. The primary advantage we believe these companies have is their direct access to large numbers of existing end-users to whom they can sell Web services, although they often do not have the ability to market a suite of Web services. We believe that our specialization in wholesale Web services allows us to potentially sell our own services to this type of entity; and

• Diversified Internet companies and search engine companies that offer or may potentially offer Web services similar to ours including Google Inc., Microsoft Corporation and Yahoo! Inc. These companies enjoy significant technical and financial resources and market experience as well as brand awareness that could enable them to compete in the market for Web services. In our experience however, these companies focus on their existing end-users and often require their end-users to purchase other services such as software licenses in order to receive Web services. We believe that our focus on branded, local service providers and the fact that we do not require the purchase of other products in order to activate our Web services represents an advantage.

Many of our competitors, and in particular Google Inc., Microsoft Corporation, Yahoo! Inc., Network Solutions and 1&1 Internet, Inc., have greater resources, better brand recognition and consumer awareness, and larger customer bases than we have. We believe the principal competitive factors in the private label wholesale market for Web services include:

• The breadth, quality and ease of use of Web services for small and medium-sized businesses;

• A wholesale distribution model that allows communication services providers to sell Web services economically, under their own brands;

• A comprehensive suite of professional and technical support services that help communication services providers set up and operate a Web services business;

• Reliability and security of service offerings;

• Price;

• Established brand and reputation; and

• Quality and responsiveness of customer support and Web services.

Company Information

Hostopia.com Inc., a Delaware corporation, was incorporated on December 10, 1999. Our principal U.S. executive offices are located at 110 East Broward Blvd., Suite 1650, Fort Lauderdale, Florida 33301. Our principal Canadian executive offices are located at 5915 Airport Road, Suite 1100, Mississauga, Ontario L4V 1T1. Our telephone number is (954) 463-3080 in the United States and (905) 673-7575 in Canada. Our website address is www.hostopia.com. Information contained on our website is not incorporated by reference into this Form 10-K, and you should not consider information on our website as part of this Form 10-K.

We currently have three wholly owned subsidiaries, BlueGenesis.com Corp., a Nova Scotia unlimited liability company, Internet Names for Business Inc., an Ontario corporation and Nexthaus Corporation, a Delaware corporation. BlueGenesis sells Web services directly to small web hosting resellers and end-users. Internet Names for Business Inc. is the entity through which we provide generic domain and billing services to our customers. Nexthaus Corporation sells wireless communications services that synchronize data between computers and mobile devices, such as calendar and contact updates from a desktop to a smart phone.

On May 18, 2006, our stockholders approved a one-for-five reverse stock split, effective April 30, 2006. All references to Hostopia common stock and per share amounts give effect to the reverse stock split.

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Acquisitions

On May 2, 2007, we acquired all of the software assets of Nexthaus, Inc., a US-based developer of software applications for mobile devices. The assets have since been acquired by a wholly-owned subsidiary of our company, called Nexthaus Corporation. The acquired software uses wireless communications to synchronize data between computers and mobile devices, such as calendar and contact updates from a desktop to a smart phone. The information on a user’s mobile phone is also automatically remotely stored, which means that information can easily be transferred to a new phone or recovered if lost. We paid $950,000 cash on closing. An additional $200,000 cash may be payable to the former owners of the assets if certain stipulated revenue targets are achieved by Nexthaus Corporation. In addition, 15% of certain designated revenue earned by Nexthaus Corporation will be payable to the former owners of the assets until May 2, 2010.

On June 1, 2007, we acquired all of the operating assets of TemplateRover.com, a division of Geeksforless.com Inc. (“GFL”). GFL is a related party to Hostopia. The acquired assets include all of the ownership rights to over 3,200 website templates that were jointly owned by Hostopia and GFL, 1,600 additional website templates, more than 30,000 digital images and a software distribution system. Hostopia paid CAD $247,000 cash for the acquired assets.

In January 2006, we acquired certain of the web hosting assets of Fortunecity.com Inc. for $1,132,000. The web hosting assets purchased from Fortunecity.com Inc. consisted of all right, title and interest in paid web hosting contracts and agreements between Fortunecity.com Inc. and each of its end users, as well as customer lists, e-mail addresses, addresses and phone numbers of end-users. The purchase price was adjusted in the amount of $243,468 to account for services that were paid by end users in advance to Fortunecity.com Inc. and for which we assumed the liability to provide services until the next expiry date of each end user.

In March 2008, we acquired certain of the web hosting assets of Reliant Web Hosting Inc. for $470,096. The web hosting assets purchased from Reliant Web Hosting Inc consisted of all right, title and interest in paid web hosting contracts and agreements between Reliant Web Hosting Inc. and each of its end-users, as well as customer lists, e-mail addresses, addresses and phone numbers of end-users. The purchase price was adjusted in the amount of $45,893 to account for services that were paid by end users in advance to Reliant Web Hosting Inc. and for which we assumed the liability to provide services until the next expiry date of each end-user.

In addition to acquiring legal title to webhosting assets we also enter into agreements under which we acquired the right to service and bill the end-users of our customers for a defined period of time, generally three to five years. We call such agreements “co-brand agreements”. Under these co-brand agreements we pay an initial payment upfront to our customer and an on-going monthly payment equal to a percentage of the cash received from related end-user renewals or sign-ups. As we have essentially assumed all the rights and obligations in respect of servicing these end-users we treat the upfront payments as the purchase of an intangible asset and then amortize this amount over the term of the agreement. The on-going monthly payment is treated as a cost of revenue. During fiscal 2008 we made aggregate initial payments in the amount of $332,512 under co-brand agreements

Web.com Inc. License Agreement

On July 17, 2006 we entered into a five year, non-exclusive license agreement with Web.com Inc. which granted us rights to two of Web.com Inc.’s patents (U.S. Patent numbers 5680152 and 6789103) which cover methods for website building and web hosting control panels. We entered into this patent license agreement to potentially enhance certain aspects of our software delivery platform and to mitigate litigation risk to our customers, and ourselves, with respect to Web.com Inc.’s patents and patents pending. Although the term of the license is five years, we and Web.com Inc. have also agreed to mutual covenants not to sue each other or each other’s customers for patent infringement during the life of all existing Web.com Inc. patents (which includes, but is not limited to the two patents we licensed), or the life of patents issued from existing Web.com Inc. patent applications. Pursuant to the terms of the license agreement we agreed to pay Web.com Inc. a one time royalty equal to 10% of our gross annual U.S. retail revenues for the twelve months ended June 30, 2006 multiplied by five. This one time royalty, which amounted to $650,000, was paid in full at signing. In addition, we granted a cross license to Web.com Inc. granting Web.com Inc. non-exclusive perpetual rights to 2,750 of our website templates and a license to certain additional intellectual property.

Employees

As of March 31, 2008 we employed a total of 189 employees, none of whom are members of a labor union. We consider our labor relations to be good. This group is comprised of 174 employees based in Canada and 15 employees based in the United States.

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The departmental breakdown of full time employees includes 27 in Sales and Marketing and 33 in Research and Development. Our Professional Services team of 21employees includes project management, multimedia and project administration. Our Customer Care team employs 77 persons. We also have 14 employees in Finance and Administration. In addition, 17 employees are engaged in sales and marketing for our small web hosting reseller hosting and direct to end-user hosting operations. Our senior executive team is made up of 6 full-time employees. Information concerning our executive team is available under Item 10 of this Form 10-K.

Item 1A. Risk Factors.

If the proposed merger with Deluxe Corporation is not consummated, Hostopia will have incurred substantial costs that may adversely affect Hostopia’s financial results and operations and the market price of Hostopia common stock.

Hostopia has incurred and will incur substantial costs in connection with the proposed merger with Deluxe Corporation. These costs are primarily associated with professional and financial advisory fees. In addition, Hostopia has diverted significant management resources in an effort to complete the merger and is subject to restrictions contained in the merger agreement on the conduct of its business. If the merger is not completed, Hostopia will have incurred significant costs, including the diversion of management resources, for which it will have received little or no benefit. Also, if the merger is not consummated under certain circumstances specified in the merger agreement, Hostopia may be required to pay Deluxe Corporation a termination fee of Cdn$4.3 million. 

In addition, if the merger is not consummated, Hostopia may experience negative reactions from the financial markets, customers and employees. Each of these factors may adversely affect the trading price of Hostopia common stock and Hostopia’s financial results and operations. In particular, if the merger is not completed for any reason, Hostopia’s stock price may decline to the extent that the current market price reflects a market assumption that the merger will be completed or the market’s perceptions as to the reason why the merger was not consummated.

Loss of significant customers could significantly decrease our revenues.

We are dependent on a few customers for a significant portion of our revenues. As of March 31, 2008, 20 of our customers accounted for approximately 64% of our total monthly revenue, ranging individually from 0.6% to 13% of total revenue, and our top three customers accounted for approximately 28% of our total revenue. While we currently have contracts with these customers ranging from one to four years in length, the loss of any one of these 20 customers, or the loss of a portion of their business to competitor services, would significantly decrease our total revenue and would adversely affect our business. We may not be able to reduce our reliance on contracts with a limited number of customers. In addition, a change in the liquidity of any one large customer, or our inability to collect amounts owing to us from any one large customer, could have a material adverse effect on our financial position.

Our revenue and profit depend upon retention and growth of our customer base as well as their end-user base.

To execute our business plan successfully, we must maintain existing relationships with our customers and establish new relationships with additional communications services providers that have strong relationships with small and medium-sized businesses. We depend upon our customers’ relationships with their end-users. Because we provide our Web services primarily on a wholesale basis to customers for retail to end-user businesses, our revenues and profits depend upon our customers adding to their base of end-users and successfully marketing our Web services to their end-users. While we provide services to assist our customers in attracting new end-users and in selling additional Web services, our customers may not be successful in selling our services. If we are unable to diversify and extend our customer relationships, our ability to grow our business may be compromised. In addition, failure of our customers to add new end-users and sell new Web services would decrease our revenues and profits and adversely affect our business.

Our recent profitability may not be sustained.

Although we generated net income for the fiscal years ended March 31, 2005 through 2008, we had not been profitable in any other period since our inception, and may not be profitable in future periods. As of March 31, 2008, we had retained earnings of approximately $2.9 million. We expect that our expenses relating to the sale and marketing of our services, technology improvements, and general and administrative functions, as well as the costs of operating and maintaining our technology infrastructure, will increase in the future. In addition, we may need to incur increased costs to preserve existing customer relationships and obtain new customers. Accordingly, we will need to increase our revenues to be able to maintain our profitability. If we are unable to retain our current customers, obtain new customers, develop and sell new Web services to customers, or increase our prices sufficiently to offset increased operating costs or if we are unable to

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reduce our expenses in a timely manner, the resulting decreased revenue would adversely affect our operating results and our level of profitability.

We may not be able to sustain our average revenue and profitability per customer or end-user.

Given the competitive nature of our industry, we may not be able to maintain our average selling prices at their current levels. We may be required, due to competitive pressures or otherwise, to reduce the prices we charge for our Web services. If we reduced our prices, our margins would decline, which would adversely affect our operating results. Other circumstances may cause a reduction in our average revenue per end user including, without limitation: (1) volume discounts provided to our customers, and (2) customers purchasing lower cost Web services.

We may not be able continue our growth.

Our five-year compound average growth rate to March 31, 2008 was 38% while our revenues grew 24% in fiscal 2008. A substantial portion of this growth was the result of us contracting with a number of large new customers as well as the general strong growth of websites on the Internet as a tool for small and medium-size businesses to grow their own revenues. There can be no assurance we will continue to attract new customers at the rate we did in the past, nor, that the market for website hosting and related applications will continue to grow at the same rate it did over the past five years.

We face intense and growing competition not only from other private-label, wholesale web hosting providers, but also from our customers and our customers’ competitors. If we are unable to compete successfully, our market share will decline and our business will be seriously harmed.

The market for Web services provided to end-user businesses is competitive. As there are relatively low barriers to entry for the provision of basic Web services, we expect competition to increase from both established and emerging companies. In addition to other private-label providers of Web services, our actual and potential competitors include:

• Telecommunications and cable companies;

• Website design, development and hosting service and software companies;

• Internet service providers and application service providers;

• Internet search engine providers, Website domain name providers;

• Other diversified Internet companies.

Some of these entities compete directly with our customers for the provision of a range of services to end-user businesses. If our customers do not compete effectively, our end-user base will decrease and our profitability will suffer. Many potential competitors also have longer operating histories, significantly greater financial, technical, marketing and other resources than we, or our customers do, greater brand recognition and, we believe, some have a larger base of end-users. They may be able to adapt more quickly to new or emerging technologies and changes in end-user requirements. They may also be able to devote greater resources to the promotion and sale of their services than we can. If we and our customers fail to compete successfully against these current and future competitors, our end-users’ demand for our Web services may decline, and our revenues could increase less than anticipated or decline.

Additionally, certain of these competitors may offer Web hosting and related services at significantly lower prices than ours or entirely without charge. This could significantly decrease demand for paid Web hosting and cause us to lower our prices and suffer decreased earnings.

Our customers and potential customers could also choose to create their own proprietary systems to offer Web services to end-users, instead of purchasing our Web services. This would result in termination, or non-renewal of existing agreements, a decrease in our revenues, and a decline in our profitability.

We operate in multiple tax jurisdictions and have recently become taxable in most of them and face the risk of double taxation if one jurisdiction does not acquiesce to the tax claims of another jurisdiction.

We currently operate in the United States and Canada and are subject to income taxes in those countries and the specific states and/or provinces where we operate. In the event one taxing jurisdiction disagrees with another taxing

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jurisdiction, we could experience temporary or permanent double taxation and increased professional fees to resolve taxation matters.

We rely on the reliability, security, and performance of our internally developed systems and operations, and any difficulties in maintaining these systems may result in service interruptions, decreased customer and end-user service, or increased expenditures.

We have experienced system failures or outages in the past, and will likely experience future system failures or outages from time to time that disrupt the operation of our Web services and harm our business. During limited periods of time, some of our Web services did not function or had limited functionality, resulting in additional customer service related expenses and the provision of credits against future invoices to some customers. Our revenue and profit depend in large part on the availability of our Web services. We have a contractual obligation to provide all of our customers credits against future invoices in the event that service disruptions occur. Furthermore, customers may terminate their agreements with us as a result of significant Web service interruptions. If our Web services are unavailable, our revenues and profits could decrease and we could lose customers.

The software and workflow processes that underlie our ability to deliver our Web services have been developed primarily by our own employees. Human error in software could result in the inability to provide services or cause unforeseen technical problems. The reliability and continuous availability of our internal systems are critical to our business, and any interruptions that result in our inability to deliver our Web services, or that materially impact the efficiency or cost with which we provide these Web services, would harm our reputation, profitability and ability to conduct business.

We may not be able to integrate our new hardware and software successfully and our reliability, reputation and revenues could suffer.

We expect that many of the software systems we currently use will need to be enhanced over time or replaced, either of which could entail considerable effort and expense. Our internal systems are comprised of highly customized hardware and software. New software, hardware or networking methodologies must be carefully integrated into our system, which may require adjustments to interconnected systems. Such upgrades and integrations could result in unforeseen technical problems or the inability to provide services for an extended period of time. If we fail to develop and execute reliable policies, procedures and tools to operate our infrastructure, we could face a substantial decrease in workflow efficiency and increased costs, as well as a decline in our revenue and harm to our reputation.

If our security systems are breached we could incur liability, our services may be perceived as not being secure, and our business and reputation could suffer.

Our business involves the storage and transmission of the proprietary information of end-users. Although we employ internal control procedures to protect the security of our customers’ end-users’ data, we cannot guarantee that these measures will be sufficient for this purpose. If our security measures are breached as a result of a third party action, employee error or otherwise, and end-users’ information becomes available to unauthorized parties, we could incur liability and our reputation would be damaged, which could lead to the loss of current and potential customers. Breaches of our security could result in misappropriation of personal information, suspension of website hosting operations or interruptions in our Web services. If we experience any breaches of our network security or sabotage, we might be required to expend significant capital and other resources to remedy, protect against or alleviate these and related problems, and we may not be able to remedy these problems in a timely manner, or at all. Since techniques used by outsiders to obtain unauthorized network access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventive measures.

Our systems are also exposed to computer viruses, denial of service attacks and bulk unsolicited commercial e-mail, or spam. The property and business interruption insurance we carry may not have coverage adequate to compensate us fully for losses that may occur. Such events could cause loss of service and data to customers and end-users, even if the resulting disruption is temporary. We could be required to make significant expenditures if our systems are damaged or destroyed, or if the delivery of our services to our customers and end-users is delayed and our profitability will decline.

In addition, the U.S. Federal Trade Commission and certain state agencies have investigated various Internet companies’ use of their customers’ personal information. Various governments have also enacted laws protecting the privacy of consumers’ non-public personal information. Our failure to comply with existing laws (including those of foreign countries), the adoption of new laws or regulations regarding the use of personal information that require us to change the way we conduct our business or an investigation of our privacy practices could increase the costs of operating our business.

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Our business depends in part on our ability to continue to provide value added services, many of which are dependent upon a single related party contractor, and our business will be harmed if we are unable to provide these services in a cost-effective manner.

We rely upon one primary contractor, Geeksforless.com Inc. (GFL), a related party by means of common ownership, to develop and support many of our Web services. Our continued ability to obtain and provide our Web services at a low cost is central to the success of our business. GFL utilizes the service of programmers and technicians in Ukraine in order to provide competitive outsourcing prices. There are many risks associated with carrying on business in Ukraine, any or all of which may adversely affect GFL’s ability to continue providing services to us, including:

• Social, political and economic instability;

• Unexpected changes in foreign regulatory or tax requirements;

• Difficulties in managing and staffing international operations;

• The burdens of complying with foreign laws and different legal standards; and

• Reduced or varied protection for intellectual property rights.

If GFL is unable or unwilling to provide services to us, we could lose our ability to provide many of our Web services at an attractive price to our customers, which could cause our revenue to decline or our costs to increase.

Most of our Web services are sold by our customers on a month-to-month basis to end-user businesses and, if such businesses are either unable or unwilling to subscribe to our Web services, our revenue may decrease.

Typically, our Web services are sold by our customers to end-user businesses pursuant to month-to-month subscription agreements. End-user businesses can generally cancel their subscriptions at any time with little or no penalty. Subscription renewal rates for end-user businesses may decline due to a variety of factors, including the overall economic environment and its impact on small and medium-sized businesses, the services and prices offered by us and our competitors, and the evolving use of the Internet by small and medium-sized businesses. If renewal rates for end-user businesses are low or decline for any reason, or if end-user businesses demand renewal terms that are less favorable to our customers, who in turn demand renewal terms on our wholesale contracts with them that are less favorable to us, our revenue could decrease.

If economic or other factors negatively affect the small and medium-sized business sector, end-users may become unwilling or unable to purchase our Web services, which could cause our revenue to decline and impair our ability to operate profitably.

The existing and target end-users of our customers include small and medium-sized businesses. These businesses are more likely to be significantly affected by economic downturns than larger, more established businesses. Additionally, these end-user businesses often have limited funds, which they may choose to spend on items other than our Web services. If small and medium-sized businesses experience economic hardship, they may be unwilling or unable to expend resources to develop their Internet presence, which would negatively affect the overall demand for our Web services and could cause our revenue to decline.

We may expand through acquisitions of, or investments in, other companies or technologies, which may result in additional dilution to our stockholders and consume resources that may be necessary to sustain our business.

One of our business strategies is to acquire complementary services, technologies or businesses. In connection with one or more of these transactions, we may:

• Issue additional equity securities that would dilute our stockholders’ ownership position and could adversely affect the market price of Hostopia common stock;

• Use cash that we may need in the future to operate our business; and

• Incur debt that could have terms unfavorable to us or that we might be unable to repay

Any acquisition could involve many risks, including, but not limited to, the following:

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• Integrating acquired business operations, systems, employees, services, technologies and sales channels into our existing business, workforce and services could be complex, time-consuming and expensive;

• An acquisition may disrupt our ongoing business, divert resources, increase our expenses and distract our management;

• We may assume debt or other liabilities, known and unknown, including litigation risk, associated with the acquired services, technology or company;

• To the extent an acquired company has a different corporate culture from ours, we may have difficulty assimilating this organization, which could lead to morale issues, increased turnover and lower productivity than anticipated, and could also have a negative impact on the culture of our existing organization;

• We may be required to record substantial accounting charges; and

• An acquisition may involve entry into geographic or business markets in which we have little or no prior experience.

In addition, we may not realize the anticipated benefits of any acquisition, including securing the services of key employees. Incurring unknown liabilities or the failure to realize the anticipated benefits of an acquisition could seriously harm our business.

Any of the foregoing or other factors could harm our ability to achieve anticipated levels of profitability from acquired services, technologies or businesses, or to realize other anticipated benefits of acquisitions. We may not be able to identify or consummate any future acquisitions on favorable terms, or at all. If we do effect an acquisition, it is possible that the financial markets or investors will view the acquisition negatively. Even if we successfully complete an acquisition, it could adversely affect our business.

Likely fluctuations in our financial results may make it difficult to predict our future performance and may result in volatility in the market price of Hostopia common stock.

Certain factors may contribute to significant fluctuations in our financial results, such as:

• Our ability to retain and increase sales to existing customers, attract new customers, and satisfy our customers’ requirements;

• The additional operating expenses required to implement new customer contracts or to grow and integrate a new acquisition;

• Varying renewal rates for our services;

• The costs of certain marketing initiatives such as participation in trade shows;

• The percentage of higher margin Web services sold;

• The entry of new competitors into our market;

• Changes in our pricing policies or those of our competitors;

• The timing and success of new services introduced by us or our competitors;

• The rate of expansion and effectiveness of our sales force;

• Technical difficulties or interruptions in our services;

• General economic conditions;

• Additional investment in our services or operations; and

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• Regulatory compliance costs.

These factors and others all tend to make the timing and amount of our revenue unpredictable and may lead to continued or greater period-to-period fluctuations in revenue than we have experienced historically. As a result of these factors, we believe that our quarterly revenue and results of operations are likely to vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful. You should not rely on the results of one quarter as an indication of future performance. If our quarterly revenue or results of operations fall below the expectations of investors or securities analysts, the price of Hostopia common stock could decline substantially.

The systems and data centers we use are vulnerable to natural disasters and other unexpected problems that could lead to interruptions, delays, loss of data, or the inability to accept and fulfill end-user subscriptions.

We lease space in data centers, containing servers, located in Miami, Florida and Toronto, Ontario. Our accounting, operations, programming, customer service and sales and marketing departments are located in Toronto, Ontario. Additionally, our U.S. sales office is located in Fort Lauderdale, Florida. Hurricanes, fire, floods, power loss, telecommunications failures, break-ins, computer sabotage and similar events could damage or destroy these systems and facilities and temporarily prevent us from fulfilling existing service orders and from securing new orders. Such events could cause loss of service and data to customers and end-users, even if the resulting disruption is temporary. Our business could be seriously harmed, our revenues could decline, or customers’ confidence in our systems could decrease, and we could be required to make significant expenditures if our systems were damaged or destroyed, or if the delivery of our services to our customers and end-users were delayed or stopped, by any of these occurrences.

We may be unable to respond to the rapid technological changes in our industry and our attempts to respond may require significant capital expenditures.

The Internet and electronic commerce are characterized by rapid technological change. Sudden changes in end-user and customer requirements and preferences, the frequent introduction of new services embodying new technologies and the emergence of new industry standards and practices could make our Web services and systems obsolete. The rapid evolution of Internet-based applications and services will require that we continually improve the performance, features and reliability of our Web services. Our success will depend, in part, on our ability:

• To develop new Web services and technologies that address the increasingly sophisticated and varied needs of our current and prospective customers and end-users; and

• To respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.

We have elected to develop a substantial portion of all of our Web services internally, rather than by licensing or acquiring technology from third-party vendors. The development of new Web services is complex, and we may not be able to complete development in a timely manner, or at all. Our internal development teams may be unable to keep pace with new technological developments that affect the marketplace for our Web services. If relevant technological developments or changes in the market outpace our ability to develop Web services demanded by current and prospective customers and their end-users, our existing Web services may be rendered obsolete, and we may be forced to license or acquire software and other technology from third parties, or we may lose existing customers and fail to attract new customers. If we are forced to shift our strategy toward licensing our core technology from third parties, it could prove to be more costly than internal development and adversely affect our operating results.

The development of Web services and other proprietary technology involves significant technological and business risks and requires substantial expenditures and lead-time. We may be unable to use new technologies effectively or to adapt our internally developed technologies and Web services to customer requirements or emerging industry standards. In addition, as we offer new Web services and functionality, we will need to ensure that any new Web services and functionality are well integrated with our current Web services, particularly as we offer an increasing number of our Web services as part of bundled suites. To the extent that any of our new Web services do not integrate well with our existing Web services, our ability to market and sell those new Web services would be adversely affected and our revenue level and ability to achieve and sustain profitability may be harmed.

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The provision of Web services to small and medium- sized businesses which are designed to allow them to establish and maintain an Internet presence is a new and emerging market; if this market fails to develop, we will not be able to grow our business.

Our success depends on a significant number of small and medium-sized businesses outsourcing website hosting and management, as well as adopting other online business services. The market for our Web services resold by our customers is relatively new and untested. If small or medium-sized businesses determine that Internet presence is not giving their businesses an advantage, they will be less likely to purchase our Web services through our customers. Alternatively, as technology advances, small and medium-sized businesses may establish the capacity to host their own applications and thereby have no need for our hosting services. If the market for our Web services fails to grow or grows more slowly than we currently anticipate, or if our Web services fail to achieve widespread acceptance by end-users, demand for our services will decline and our revenue will suffer.

We may be unable to protect our intellectual property adequately or cost-effectively, which may cause us to lose market share or force us to reduce our prices.

To establish and protect our intellectual property rights, we rely on a combination of copyright, trade secret and trademark laws, confidentiality procedures, contractual provisions, and other similar measures to protect our proprietary information, all of which offer only limited protection. We currently have no issued patents, and existing patent applications may not result in issued and valid patents. Any future issued patents or registered trademarks or service marks might not be enforceable or provide adequate protection for our proprietary rights.

We enter into confidentiality and proprietary inventions agreements with our employees, and confidentiality or license agreements with consultants, third-party developers and customers. A large number of third-party developers under contract with us reside in Ukraine and, although we generally have agreements with these third party contractors, Ukraine is an emerging democracy and we cannot assure you that the terms of these agreements would be adequately enforced under the current legal system in that country.

Because of the global nature of the Internet, websites can be viewed worldwide, but we do not have intellectual property protection in every jurisdiction. Furthermore, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which our services become available over the Internet. In addition, the legal standards relating to the validity, enforceability and scope of protection of intellectual property rights in our industry are uncertain and still evolving.

The steps we have taken to protect our intellectual property may not prevent the misappropriation of proprietary rights or the reverse engineering of our technology. Moreover, others may independently develop technologies that are competitive with or superior to ours or that infringe our intellectual property. The enforcement of our intellectual property rights may depend on our taking legal action against such infringing parties, and we cannot be sure that these actions will be successful, even when our rights have been infringed. Enforcing our rights to our technology could be costly, time-consuming and distracting. Any significant failure or inability to adequately protect our proprietary assets will harm our business and reduce our ability to compete.

We are dependent on our executive officers and our specialized workforce, and the loss of any key member of this team may compromise our ability to manage our business and pursue our growth strategy successfully.

Our future performance depends largely on the continuing service of our executive officers, senior management team and programming personnel, in particular, Colin Campbell, William Campbell, Peter Kostandenou, Michael Mugan, Paul Engels and Dirk Bhagat. While certain members of our management team, including the key employees referred to in the preceding sentence, have employment agreements with us, there can be no assurance that one or more of our key employees will not terminate their employment with us and go to work for a competitor after the expiration of any applicable non-compete period. The loss of one or more of our key employees could make it more difficult for us to advance our services and pursue our business goals, and could seriously harm our business. Our ability to recruit executive officers, senior management, programmers and other qualified personnel is crucial to our ability to develop market, sell and support our Web services. We cannot guarantee that we will be able to recruit qualified candidates and fill important roles within our organization in a timely manner.

Our growth will be adversely affected if we cannot successfully retain, hire, train and manage our key employees, particularly in the sales and customer service areas.

Our ability to successfully pursue our growth strategy will depend on our continued ability to attract, retain, and motivate key employees throughout our business. Some key employees throughout our organization may leave to work for a

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competitor at any time. In particular, we are substantially dependent on our sales and customer service employees to obtain and service new customers and end-users. Competition for such personnel and others can be intense, and there can be no assurance that we will be able to attract, integrate or retain additional highly qualified personnel in the future. In addition, our ability to achieve significant growth in revenue will depend, in large part, on our success in effectively training sufficient personnel in these two areas. New hires require significant training before they achieve full productivity. Our recent and planned hires may not be as productive as we would like, and we may be unable to hire sufficient numbers of qualified individuals. If we are not successful in retaining our existing employees, or hiring, training and integrating new employees, or if our current or future employees perform poorly, growth in the sales of our services may not materialize and our business will suffer.

Changes in pricing of bandwidth could have an adverse effect on margins.

Bandwidth is the most significant element in our cost of sales. An increase in the price of bandwidth could have an adverse effect on gross margins since we may not be able to increase our prices to compensate. We believe that the ability to access bandwidth is more important than the price. We have therefore entered into arrangements with several bandwidth providers and have entered into long-term contracts with some of them. If the price of bandwidth were to decrease, our contractual commitment to pay higher prices would cause us to be less competitive and our business would suffer.

In addition, since we purchase additional bandwidth based on anticipated growth, our bandwidth expenses are sometimes larger than necessary for our existing needs. Larger than necessary bandwidth expenses will also increase relative to our needs if our projected growth is delayed or does not occur. This would cause us to be less competitive and less profitable as our costs would outpace our revenues.

If agreements with third party suppliers, including bandwidth and software suppliers, are terminated or materially altered, we may not be able to offer our Web services profitably.

We provide some of our Web services through arrangements with third parties, and our continued ability to obtain and provide these Web services is central to the success of our business. Examples of such services and their respective providers include, but are not limited to, certain software licenses from Microsoft Corporation, anti-virus software from Frisk Software International, e-commerce applications from eBay Inc. and Miva, Inc., and bandwidth and/or data center services from TELUS Communications Company and NAP of the Americas, Inc. Some of these agreements may be terminated on short notice and, if any of these third parties were to terminate their relationships with us or modify the economic terms of these arrangements, we could lose our ability to provide these Web services at a cost-effective price to our customers, which could cause our revenue to decline or our costs to increase.

We license third party software to deliver our Web services. In the event that any of these third party software suppliers dramatically alters the terms under which we are permitted to use its software, this may have a detrimental effect on our ability to deliver Web services to end-users. This will have a corresponding negative effect on our revenue and profitability.

We incorporate third party software as part of our Web services to the majority of our customers. Any radical change to the configuration, distribution or pricing of this third party software could negatively affect the profitability of providing these Web services.

Our Web services are dependent upon open source software which exposes us to uncertainty and potential liability.

We incorporate “open source” software components into our service offerings. These components are typically available without cost but are developed by third parties over whom we have no control. We have no assurance that these components do not infringe upon the intellectual property rights of others. We could be exposed to infringement claims and liability in connection with the use of these open source software components. The developers of open source software are under no obligation to maintain or update these software components, and we may be forced to replace these components with internally developed or commercially licensed software. Certain open source software licenses provide that any software that makes use of or incorporates components distributed under that license will itself become subject to the same general distribution rights and other terms of that license. As a result, there is a risk that third parties, including our competitors, could have the right to use and distribute certain elements of our Web services. Any disputes which result in a change in intellectual property rights for Linux could cause additional expenses or loss of revenue because our system relies heavily on Linux and Apache, which are currently open-source and free-of-charge.

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Currency fluctuations may adversely affect our revenue and profitability.

We do not currently actively manage the United States – Canadian dollar exchange rate risk using financial instruments. We earn significant revenue and pay significant expenses in Canada while our financial statements are reported in U.S. dollars. Substantially all of our employees are located in Canada and are paid in Canadian dollars. Accordingly, if the Canadian dollar appreciates against the United States dollar our revenues and expenses, when translated into U.S. dollars, will rise more than if we transacted only in U.S. dollars. Conversely, if the Canadian dollar depreciates against the U.S. dollar our revenue and expenses will fall more that than if we transacted only in U.S. dollars.

The success of our business depends on the continued growth of the Internet as a business tool for small and medium-sized businesses.

Expansion in the sales of our Web services will depend on the continued acceptance of the Internet as a communications and commerce platform for small and medium-sized businesses. The use of the Internet as a business tool could be adversely affected by delays in the development or adoption of new standards and protocols to handle increased demands of Internet activity, security, reliability, cost, ease-of-use, accessibility, and quality of service. The performance of the Internet and its acceptance as a business tool has been harmed in the past by viruses, worms, and similar malicious programs, and the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure. If for any reason the Internet does not remain a widespread communications medium and commercial platform, or businesses do not continue to become Internet- enabled and maintain an online presence, the demand by our customers for our services would be significantly reduced.

We could become subject to litigation regarding intellectual property brought by other parties, which could divert management’s attention, increase our legal expenses and prevent us from using or selling the challenged technology.

In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. This litigation is particularly prevalent in the technology industry. In addition, there has been an increase in the filing of suits alleging infringement of intellectual property rights. Regardless of the merits of these suits, many defendants are entering into settlement arrangements quickly to dispose of such suits and thus to avoid publicity and the costs of defending the suits. Other companies or individuals may pursue litigation against us with respect to intellectual property-based claims. The results of any litigation are inherently uncertain. As currently pending patent applications are not publicly available, we cannot anticipate all such claims or know with certainty whether our technology infringes the intellectual property rights of third parties. We expect that the number of infringement claims will increase as the number of services and competitors in our industry grows. In the event of an adverse result in any future litigation with respect to intellectual property rights relevant to our services, we could be required to:

• Enter into royalty or licensing agreements with respect to the infringing technology, which might not be available on acceptable terms or at all;

• Pay substantial damages under applicable law or expend significant resources to develop non-infringing technology; or

• Cease the development, use and sale of services found to be infringing; or

Our insurance may not cover potential claims or may not be adequate to indemnify us for damages we incur. Also, litigation frequently involves substantial expenditures and can require significant management attention, even if we ultimately prevail. If a claim were made against us, regardless of the merits or success, our business could be adversely affected.

Governmental regulation involving the transmission of information over the Internet is evolving, and we may face liability in connection with the information that is transmitted using our Web services.

The legal framework that applies to the Internet is continually evolving. Laws have been, and likely will continue to be, enacted that address issues of privacy, security, pricing, taxation, quality and substance of services, and other issues. Because our Web services allow customers to transmit information over the Internet on their own websites, we may be found to be liable for any improper information that our end-users transmit. We may face liability for defamation, negligence, copyright, patent or trademark infringement, and other claims based on the nature and content of the materials being transmitted by way of our Web services. Although we retain discretion to cancel the Web services being provided to end-users if we learn such content is being transmitted, there can be no guarantee that our end-users will refrain from such transmission or that we will not be held responsible for the content being transmitted or hosted using our Web services or

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infrastructure. Government regulations also could affect the cost of communicating on the Internet and could negatively affect the demand for our Web services, and our business could thereby be harmed.

Any legislation making Web service providers specifically responsible for the content of end-users’ websites and e-mail messages located on their infrastructures could result in our responsibility for all content on our servers, as our customers would be using our infrastructure for providing services to their end-users. As our infrastructure contains content for all of our customers’ end-users, monitoring the content would represent an enormous and possibly untenable responsibility.

Any legislation of foreign jurisdictions restricting companies from making use of our Web services based on geographic location of data centers or original location of incorporation or any attempts to halt outsourcing in major markets will have an impact on our business and financial condition.

Governments may in the future levy taxes on Internet access and electronic commerce transactions, which could result in a decrease in the attractiveness of the Internet to our customers and potential customers, and could reduce demand for our Web services.

Various levels of government in the United States and Canada are grappling with the problem of how to charge income and use taxes on e-commerce transactions. There is no assurance that various levels of taxing authorities will not promulgate tax laws that could result in new forms of taxation of Internet access and electronic commerce transactions. An imposition of or increase in taxes may make electronic commerce transactions less attractive for merchants and businesses, which could result in a decrease in the level of demand for our services.

Our management has limited experience in managing and operating a public company. Any failure to comply or adequately comply with federal securities laws, rules or regulations could subject us to fines or regulatory actions, which may materially adversely affect our business, results of operations and financial condition.

Although our present Chief Executive Officer, Mr. Colin Campbell, has extensive experience in technology companies, he has limited experience managing and operating a public company. In addition, the other members of our current senior management have only engaged in operating a private organization since 1999 and prior to it becoming a public company in November 2006. In this capacity they developed a general understanding of the administrative and regulatory environment in which public companies operate. However, our senior management lacks practical experience operating a public company and relies in many instances on the professional experience and advice of third parties including its consultants, attorneys and accountants. Failure to comply or adequately comply with any laws, rules, or regulations applicable to our business may result in fines or regulatory actions, which may materially adversely affect our business, results of operation, or financial condition.

Our former Chairman controls a significant portion of our outstanding common stock and he has indicted his intentions to reduce his holdings which could cause our share price to decline..

As of March 31, 2008, Mr. John Nemanic, our former Chairman, beneficially owned approximately 11.2% of Hostopia common stock compared to 13.3% as of March 31, 2007. Mr. Nemanic has indicated he intends to sell a portion or all of his holdings which may depress the price of our shares.

Limited liquidity in our common shares could result in a lower price

Our shares have been listed for trading on the TSX since November 10, 2006. The volume of trading has been limited, generally to less than 5,000 shares per day. Accordingly, there is risk that should a large number of investors or an investor with a large number of shares decide to sell, the price of our shares may be adversely affected.

We are exposed to potential risks from recent legislation requiring public companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.

We are subject to various regulatory requirements, including Section 302 and Section 404 of the Sarbanes-Oxley Act of 2002. We are a non-accelerated filer and consequently have not as yet been required to have our systems of internal control attested to by our auditors. If we become an accelerated filer during this fiscal year we will be required at March 31, 2009 to have our external auditors report on the effectiveness of our internal controls. We expect to devote the necessary resources, including additional internal and supplemental external resources, to support our external auditors assessment. If, in the future, we identify one or more material weaknesses, or our external auditors are unable to express an opinion on the effectiveness of our internal controls, this could result in a loss of investor confidence in our financial reports or jeopardize

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our listing on the TSX and have an adverse effect on our stock price and/or subject us to sanctions or investigation by regulatory authorities.

We are exposed to credit risk in respect of our short term investment in money market funds.

At March 31, 2008, we had a total of $23.6 million invested in two AAA rated money market funds. Approximately $15.5 million was invested is in a money market fund with that had an approximate 0.5% exposure to structured investment vehicles (“SIVs”).The remaining $8.1million was invested in a fund that had no exposure to SIVs. While these funds are AAA rated, as these funds are not insured by the FDIC or any other agency, they accordingly involve investment risk, including the possible loss of principal amount invested.

Item 1B. Unresolved Staff Comments.

Not Applicable.

Item 2. Properties.

We lease office facilities and data center facilities. These facilities are adequate for our current needs and we are productively utilizing substantially all of our leased space. If we require additional space, either office or data center, we believe that we can obtain that space on commercially reasonable terms. Further information on our lease commitments can be found in Note 12to our consolidated financial statements included in Item 8 of this report.

In 2008, we acquired land and buildings in Miramichi, New Brunswick to house our customer care operations and provide for future expansion of our operations.  The facilities have a combined total of 70,000 square feet on 7.5 acres of land.

Office Facilities

We lease office facilities totaling 17,828 square feet located at 5915 Airport Road, Mississauga, Ontario L4V 1T1 under a lease that expires on October 31, 2009. In the United States, we lease an office facility of 5,966 square feet located at 110 East Broward Blvd, Fort Lauderdale, Florida 33301 under a lease that expires on July 31, 2011. In May, 2007, in conjunction with our purchase of the Nexthaus, Inc. technology, we began to lease 1,500 square feet of office space in Raleigh, North Carolina, the agreement for which will expire on November 30, 2009.

Data Center Facilities

We currently co-locate in four data centers with high levels of security, power and connectivity redundancy. We co-locate in these facilities under service agreements that range from one to three years. We lease space in three data center facilities in Toronto, Ontario and one in Miami, Florida. 

Item 3. Legal Proceedings.

We are not currently involved in any material legal proceedings.

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

No matters were submitted to a vote of our security holders during the quarter ended March 31, 2008.

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Hostopia common stock commenced trading on the Toronto Stock Exchange on November 10, 2006 under the symbol “H.” The following table sets forth the high and low sales prices of Hostopia common stock in Canadian dollars as reported on the Toronto Stock Exchange for the periods indicated.

	High	Low
Third Quarter (ended December 31, 2007)	CDN $ 6.80	CDN $ 6.00
Fourth Quarter (ended March 31, 2007)	CDN $ 6.50	CDN $ 5.50
First Quarter (ended June 30, 2007)	CDN $ 6.75	CDN $ 5.50
Second Quarter (ended September 30, 2007)	CDN $ 6.37	CDN $ 5.76
Third Quarter (ended December 31, 2007)	CDN $ 6.20	CDN $ 5.51
Fourth Quarter (ended March, 31, 2008)	CDN $ 6.00	CDN $ 4.00

The closing price for Hostopia common stock as reported by the Toronto Stock Exchange March 31, 2008 was $4.72 (CDN$ 4.85) per share.

Holders

As of May 31, 2008, there were 34 holders of record of Hostopia common stock. This figure does not reflect persons or entities that hold their stock in nominee or “street name” through various brokerage firms

Dividend Policy

We have never declared or paid dividends on Hostopia common stock. We intend to retain our earnings for use in our business and therefore we do not anticipate declaring or paying any cash dividends in the foreseeable future.

Securities Authorized for Issuance under Equity Compensation Plans

The description of equity compensation plans required by Regulation S-K, Item 201(d) is incorporated herein by reference to Part III, Item 12 of this Form 10-K.

Performance Graph

The following graph compares the percentage change in our cumulative total stockholder return on Hostopia common stock during a period commencing on November 10, 2006, the date our shares began trading on the Toronto Stock Exchange following our initial public offering, and ending on March 31, 2008 (as measured by dividing (A) the difference between our share price at the end and the beginning of the measurement period by (B) our share price at the beginning of the measurement period) with the cumulative total return of the Toronto Stock Exchange Small Cap Index and the Toronto Stock Exchange Information Tech Index during such period.

The graph assumes that $100 was invested on November 10, 2006 in Hostopia common stock, the TSX Small Cap Index and the TSX Information Tech Index and assumes reinvestment of any dividends. We have not paid any dividends on Hostopia common stock, and we do not include dividends in the representation of our performance. The stock price performance on the graph below does not necessarily indicate future price performance.

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	11/11/2006	3/31/2007	3/31/2008
Hostopia.com Inc.	100	100	82
TSX Small Cap Index	100	111	102
TSX Information Tech Index	100	113	110

The above performance graph and related material is not “soliciting material,” is not deemed “filed” with the SEC and shall not be deemed incorporated by reference by any general statement incorporating by reference this Form 10-K into any filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under such acts.

Recent Sales of Unregistered Securities

None

Recent Purchases of Equity Securities

None.

Use of Proceeds from Sale of Registered Shares

On November 3, 2006, our registration statement on Form S-1 (Registration No. 333-135533), registering 4,200,000 shares of Hostopia common stock, $0.0001 par value, for sale by us was declared effective by the Securities and Exchange Commission. The net proceeds from the initial offering of $18.9 million and the underwriters’ over-allotment option of $3.1 million were initially invested in a money market fund that invests in high quality money market instruments. To March 31, 2008 we had used an estimated $6.5 million of the total net proceeds of $22.0 million to purchase property, equipment, intellectual property and customer contracts/lists.

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Item 6.Selected Financial Data.

The following selected financial data for the fiscal years ended March 31, 2008, 2007, 2006, 2005and 2004 are derived from our financial statements which have been audited by KPMG, LLP our independent registered public accounting firms. The data should be read in conjunction with our financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

	2008(2)	2007(2)	2006	2005(3)	2004
	(in thousands of dollars, except per share data)
Summary of Operations Data
Revenues
Webhosting and applications services	$26,511	$21,624	$17,295	$13,351	$8,269
Other services	1,267	846	662	953	621
Total revenues	27,778	22,470	17,957	14,304	8,890
Cost of revenues	3,620	2,920	2,003	2,343	1,826
Gross profit	24,158	19,550	15,954	11,962	7,064
Operating expenses
Sales and marketing	5,957	4,776	3,899	3,012	2,269
Research and development	3,840	3,070	2,108	2,168	1,380
Professional services	2,074	1,716	1,393	827	585
Customer care	3,868	3,006	2,258	1,518	784
General and administrative	2,718	1,907	1,451	1,150	1,277
Amortization	3,394	2,600	1,796	1,234	891
Total operating expenses	21,851	17,075	12,905	9,909	7,186
Operating income (loss)	2,307	2,475	3,049	2,053	(122)
Interest expense (income), net	(1,161)	(517)	(23)	15	22
Income (loss) before income taxes	3,468	2,992	3,072	2,038	(144)
Income taxes (recovery)	1,260	1,128	1,069	(1,178)	–
Net income (loss)	$ 2,208	$ 1,864	$ 2,003	$ 3,216	$ (144)
Net income (loss) per share(1)
Basic	$0.19	$0.27	$0.47	$0.77	$(0.06)
Diluted	$0.19	$0.23	$0.28	$0.47	$(0.06)

(1) The per share amounts have been adjusted to reflect the 1-for-5 reverse stock split effective May 18, 2006.

(2) The Company adopted SFAS No. 123R using the modified prospective transaction method on April 1, 2006 and as such began accounting for share-based compensation under the fair value method (see Note 1 of Notes to Consolidated Financial Statements).

(3) The Company recorded a tax recovery in fiscal 2005 when it became more likely than not it would be able to utilize its deferred tax assets and accordingly no further valuation allowance was required.

	Year Ended March31,
	2008	2007	2006	2005	2004
	(in thousands of dollars)
Consolidated Balance Sheet Data
Cash and cash equivalents	$26,200	$27,368	$ 3,038	$ 1,897	$ 1,420
Working capital (1)	28,138	26,658	2,731	1,491	439
Total assets	38,778	34,957	10,282	6,920	4,069
Deferred web hosting revenue	836	983	923	589	474
Series A redeemable convertible preferred shares	–	–	5,170	5,056	4,943
Retained earnings (deficit)	2,883	675	(1,189)	(3,192)	(6,408)
Total shareholders’ equity (deficit)	$36,369	$31,903	$ 2,342	$ 433	$(2,694)

(1) Working capital is a financial metric which represents the amount of day-to-day operating liquidity available to a business. It is calculated by deducting current liabilities from current assets.

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The information contained in the tables above should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. Results of operations for periods presented are not necessarily indicative of results of operations for future periods.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

Safe Harbor

The following discussion and analysis contains forward-looking statements. These statements are based on our current expectations, assumptions, estimates and projections about our business and our industry, and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s results, levels of activity, performance or achievement to be materially different from any future results, levels of activity, performance or achievements expressed or implied in or contemplated by the forward-looking statements. Words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may,” “should,” “estimate,” “predict,” “guidance,” “potential,” “continue” or the negative of such terms or other similar expressions, identify forward-looking statements. Our actual results and the timing of events may differ significantly from those discussed in the forward-looking statements as a result of various factors, including but not limited to, those discussed in Item 1A of this Form 10-K under the caption “Risk Factors” and those discussed elsewhere in this Annual Report and in our other filings with the Securities and Exchange Commission. Hostopia.com Inc .undertakes no obligation to update any forward-looking statement to reflect events after the date of this report.

The following “Overview” section is a brief summary of the significant issues addressed in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”). Investors should read the relevant sections of the MD&A for a complete discussion of the issues summarized below. The entire MD&A should be read in conjunction with, and is qualified in its entirety by reference to, Item 6. Selected Financial Data and Item 8 Financial Statements and Supplementary Data, including related notes there to, appearing elsewhere in this Form 10-K.

Overview

Hostopia is a provider of Web services that enable small and medium- sized businesses to establish and maintain an Internet presence. We believe we are a leading provider of such Web services based on the number and size of our customers, the number of end-user web sites that we support, the quality of our Web services, and our reputation. Our customers in the United States, Canada and the United Kingdom, which include telecommunication carriers, cable companies, Internet service providers, domain registrars and web hosting service providers furnished us with approximately 309,000 end-users as of March 31, 2008. These communication services providers purchase our Web services on a wholesale basis and resell these services under their own brands to small and medium- sized businesses. We refer to small and medium- sized businesses which use our Web services as “end-users” or “end-user businesses”. In addition we sell our Web services to small Web hosting resellers and directly to end-users. Our Web services include website creation and maintenance applications, managed e-mail with virus and spam protection, e-commerce application services, customer communications and website promotion applications, and website hosting and data transfer. Revenue derived from our Web services is recorded as web hosting and application revenue in our financial statements.

Proposed Merger

On June 19, 2008, Hostopia.com and Deluxe Corporation (NYSE:DLX) announced they had signed a definitive merger agreement, unanimously approved by the boards of both companies, pursuant to which Hostopia would become a wholly-owned subsidiary of Deluxe. If the merger is completed, holders of Hostopia common stock will receive CDN$10.55 in cash for each outstanding Hostopia common share. The transaction is valued at approximately CDN$124 million. The consummation of the merger agreement is subject to the approval by Hostopia shareholders and certain other customary conditions and is expected to close in late July or August. In respect of the merger Hostopia will be filing a Notice of Special Meeting and Information Circular with the relevant securities commission in Canada and the United States. The Information Circular will be made available to stockholders by mail and will also be available on the SEC website and at www.sedar.com. Before making any voting decision with respect to the proposed transaction the stockholders are urged to read the Information Circular and as well as other relevant materials filed with the relevant securities commissions by the Company because they contain important information about the proposed transaction.

Our revenues are primarily derived from the sale of Web services to our customers who in turn resell them to their end-user businesses. Over the past five fiscal years, our revenue growth has been primarily driven by increasing the number of our customers and their respective end-users who purchase our Web services on a recurring subscription basis. Between March 31, 2003 and March 31, 2008, our end-users grew from 65,200 to approximately 309,000, a compound average growth rate of 36.5%. During the same period our revenues increased from approximately $5.5 million to approximately

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$27.8 million, a compound average growth rate of 38.0%. During the year ended March 31, 2008 our end-user base grew by approximately 49,000 or 18.8% while our revenue grew by $5.3 million or 23.5%.

We have grown our business primarily by convincing large telecommunication and cable companies that we should provide their end-users with our web services.

This strategy has been highly successful in Canada evidenced by the fact that Bell Canada, TELUS Communications Company and Rogers Cable Communications Inc. are all now our customers. We have expanded geographically into the United States and in August 2005 we entered into an agreement with Verizon Directories Corp. (subsequently acquired by Idearc Inc.) our first large U.S. telecommunications company. In fiscal 2007, we also began marketing our service in the United Kingdom and in November 2006 British Telecommunications PLC became a customer.

Our business growth is dependent primarily on two processes. First, acquiring new customers with large end-user bases and second, helping our current customers grow their web hosting businesses by providing them with marketing assistance and by providing their end-users with a suite of web services.

We track our success in two ways. First, we count the number of end-users we add through the sign-up of new customers in the latest twelve months, both large and small. Second, we track the number of end-users our customers of more than twelve months (existing customers) have added to their web hosting business.

To support the acquisition of new customers we have 8 sales personnel focused on acquiring new business in Canada, the U.S. and now the U.K. To assist them in their sales efforts, and to potentially increase our revenue per end-user, we continue to invest in developing new software for end-users. We have 16 technical professionals currently involved in product development.

When we acquire a new customer, we must migrate their end-users to our platform effectively and efficiently. This essential function is carried out by our Professional Services team presently consisting of 21 personnel.

We also recognize the need for prompt and professional service to our end-users to maintain and grow our end-user count. Accordingly we employ a customer care staff of approximately 77customer care professionals to deal promptly 24 hours a day with any questions our end-users have in respect of our service. To provide our end-users, who are often smaller businesses, with an easy method of establishing a Web presence, we have developed and continue to develop easily self-customized website templates. We currently have over 5,000 templates in our library, the majority of which were developed in the past two years.

In fiscal 2008, we continued to build the capability to provide our end-users with turnkey customized websites with a higher degree of functionality under the trade name Website Experts. As of March 31, 2008, Website Experts had developed a selling relationship with some of our larger customers that we expect to result in revenue growth from website design over the next several years. We also believe the ability to provide economic website design will prove to be a compelling feature of our services as we prospect for new customers.

In May 2007, we acquired the wireless syncing technology of Nexthaus, Inc., headquartered in North Carolina in an all cash transaction of $950,000 plus performance incentives and earn outs of up to $200,000, plus 15% of revenues from the acquired assets for 3 years.. This technology facilitates easy and efficient syncing of calendars and tasks from a mobile phone such as a Blackberry®.

In August 2007, we entered into a patent licensing agreement with j2 Global Communications, Inc. Under the agreement we received a non-exclusive worldwide license to j2 Global’s digital fax patent portfolio in exchange for an upfront payment plus ongoing quarterly royalty payments. The patent license agreement has a 10 year term, which may be renewed thereafter. We believe this agreement will allow us to successfully market a fax-to-email services to our significant communication service provider customer base. A number of our customers are testing our fax-to-mail service. We expect to launch our fax-to-email service to all our customers on July 1, 2008.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses together with disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we

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believe to be reasonable under the circumstances. Actual results may differ from these estimates and estimates may differ under different assumptions or conditions. We believe the following accounting policies, described in greater detail in Note 1 to our consolidated financial statements included in this Form 10-K, to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

Web hosting and applications services

We recognize revenue derived from Web hosting and applications services on a monthly basis as services are performed. The majority of our revenue is derived from our customers that are invoiced the first day of the month during which our Web services will be provided to them. Set-up fees received in advance from our customers are deferred and recognized as revenue on a straight-line basis over the term of the underlying service contract commencing with the delivery of service.

We also receive a portion of our revenue directly from end-user businesses and small web hosting resellers on a monthly, quarterly, semi-annually or annual basis. We defer recognition of revenue that will be earned in a subsequent period and for which an end-user has paid in advance. The portion of web hosting and application services revenue directly received from these end-users and small web hosting resellers is recognized as deferred revenue in the accompanying consolidated balance sheets. As services are performed, we recognize this revenue on a straight line basis over the applicable service period.

Other services

As a domain name reseller, as opposed to a registrar, we recognize domain name registration revenue when we receive payment from customers and end-users since we have no obligation to maintain a domain registry following a sale. Professional service revenue is recorded based upon the extent to which all of the contracted professional services have been provided.

Allowance for Doubtful Accounts

In accordance with our revenue recognition policy, our accounts receivable are based on customers whose payment is reasonably assured. We monitor collections from our customers and maintain an allowance for estimated credit losses for 100% of all customers’ accounts deemed uncollectible. For those accounts receivable not specifically identified as uncollectible, an allowance is maintained for a specific percentage of those receivables based on aging accounts, historical collection experience and current economic expectations. Credit losses have historically been within our expectations and the provisions established in our financial statements, but we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Because we have several large customers, a change in liquidity of any one customer or our inability to collect from one of these customers could have a material adverse effect on our consolidated financial position.

We record an allowance for estimated credit losses once a contract has been legally terminated with a customer who has ceased to pay for services. While losses from these items have historically been minimal, we cannot guarantee that we will continue to experience the same loss rates that we have in the past.

Accounting for Stock Based Compensation

On April 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment,” (SFAS No. 123R”) which requires the measurement and recognition of compensation expense for all share-based payments made to employees and directors based on the estimated fair value of the grant on the grant date. Prior to the adoption of SFAS No. 123R, we had elected to apply the disclosure-only provision of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148 in respect of all option grants to employees or directors. Accordingly, with the exception of stock option awards made to consultants, we accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25 and related interpretations. Compensation expense for stock options issued to employees was measured as the excess, if any, of the estimated fair value of Hostopia common stock at the date of grant over the stock option exercise price. As all stock options granted to employees were made with an exercise price equal to the estimated fair value of Hostopia common stock no compensation expense for employee stock options was recognized.

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We have adopted SFAS No. 123R using the modified prospective transition method. Under this method prior periods are not revised; however, starting in fiscal 2007 new grants and modified grants of stock options are accounted for in accordance with the fair value method under SFAS No. 123R and awards granted in earlier fiscal years that had not vested at March 31, 2006 are accounted for in accordance with the fair value model of SFAS No. 123. Accordingly, under the modified prospective transition method we recognized stock-based compensation expense that we previously reported only in our pro-forma disclosure.

Stock-based compensation expense recognized in our Consolidated Statement of Operations for fiscal years 2008 and 2007 includes compensation expense for share-based awards granted prior to, but not yet vested as of March 31, 2006, as well as compensation expense for the share-based payment awards granted subsequent to March 31, 2006. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. The fair value of the option grant, net of expected forfeitures, is then recognized as compensation expense using the straight-line amortization method over the graded vesting period of the options, which is generally three years. In subsequent periods, if actual forfeitures differ from our estimates the calculation of compensation expense will be adjusted to reflect the actual forfeiture experience.

Also, as now required under SFAS No. 123R, any excess income tax benefit booked when an option is exercised will be reported as a financing cash flow rather than an operating cash flow in our Condensed Consolidated Statement of Cash Flows.

See Note 9 in the Consolidated Financial Statements in this Annual Report on Form 10-K for further information regarding our stock-based compensation plans

Accounting for Goodwill, Intangible Assets and Property and Equipment

Since our inception we have fully allocated the purchase price of acquisitions to intangible assets. Other intangible assets including website templates and electronic images are amortized using the straight-line method over their estimated useful life, which has typically been three years. We test for the impairment of intangible assets annually, and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the intangible asset below its carrying amount. Similarly, we annually review the condition and revenue generating potential of our property and equipment to determine whether our amortization policies are satisfactory in the circumstances.

Accounting for Income Taxes

We provide for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. A valuation allowance is recorded to reduce deferred income tax assets to an amount that in the opinion of management is more likely than not to be realized. We consider factors, such as the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax asset, tax planning strategies and other factors in the determination of the valuation allowance. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the year that includes the enactment date. As of March 31, 2008, we did not have any net operating losses or other tax attributes subject to valuation allowances.

In June 2006, the FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB statement No. 109” (“FIN 48”). We adopted the provisions of FIN 48 effective April 1, 2007. Under FIN 48, we recognize the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained, assuming examination by tax authorities. The amount to be recognized is the amount that represents the largest amount of tax benefit that is greater than 50% likely of being ultimately realized. For tax positions that are not more likely than not to be sustained upon audit, we will not recognize any portion of the benefit in its consolidated financial statements. A liability will be recognized by the Company for any benefit claimed, or expected to be claimed, in a tax return in excess of the benefit recorded in the financial statements, along with any interest and penalty (if applicable) on the excess. We will also disclose the amount of any uncertain tax positions where it is reasonably possible that the estimate of the tax benefit will change significantly in the next 12 months.

Upon adoption of FIN 48, we had no unrecognized tax benefits or liabilities and no liability in respect of either penalties or interest. Interest or penalties in respect of income taxes, if any, subsequently recognized will be recognized as an income tax expense. There is significant judgment used in determining the likelihood of the Company’s tax positions being sustained upon audit. In future periods, we will adjust any unrecognized tax benefits, as well as the related interest and penalties, in light of changing facts and circumstances. In future periods, favorable resolutions of uncertain tax positions will

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be recognized as a reduction to its effective income tax rate while any unfavorable resolutions, in excess of the amount of any unrecognized tax benefit, will result in an increase in income tax expense and higher effective tax rate.

Results of Operations

The following table presents our selected consolidated statement of operations data expressed as a percentage of our total revenue for the periods indicated:

	Year Ended March31,
	2008	2007	2006
Revenues
Web hosting and application services	95%	96%	96%
Other services	5	4	4
Total revenues	100	100	100
Cost of revenues
Web hosting and application services	12	11	10
Other service	1	2	1
Total cost of revenues	13	13	11
Gross profit	87	87	89
Operating expenses
Sales and marketing	21	21	22
Research and development	14	14	12
Professional services	8	8	8
Customer care	14	13	12
General and administrative	10	8	8
Amortization of property and equipment, other assets and customer list	12	12	10
Total operating expenses	79	76	72
Operating income	8	11	17
Interest income, net	4	2	-
Income before income taxes	12	13	17
Income taxes	4	5	6
Net income	8%	8%	11%

Comparison of fiscal years ended March 31, 2008 and 2007

Revenues

	Year Ended March 31,
	2008	2007
Revenues
Web hosting and applications services	$ 26,511,461	$ 21,624,337
Other services	1,266,987	845,327
Total revenue	$ 27,778,448	$ 22,469,664
End-users at end of period	309,000	260,000
Increase in end-users over comparable prior period – percent	18.9%
Increase in revenue over prior year	$ 5,308,784
Increase in revenue over prior year - percent	23.6%

Total revenues increased by $5.3 million or 23.6% to $27.8 million in fiscal 2008 from $22.5 million in fiscal 2007. U.S. revenues increased by 11.5% to $13.7 million. Canadian revenues rose by 27.7% to $12.5 million while U.K. revenue rose to $1.5 million.

During fiscal 2008, the average value of the Canadian dollar appreciated by 10.3% against the U.S. dollar. If this appreciation had not occurred our revenue would have increased by $4.1 million or 18.4%.

Web hosting and application services revenue increased by $4.9 million or 23% to $26.5 million. Our revenue growth was due primarily to a 19% increase in end-users year over year and in part due to the increase in the value of the Canadian dollar. We had approximately 309,000 end-users on our system as of March 31, 2008. New customers added approximately net 46,000 end-users, representing an 18% increase over the number of end-users at the beginning of the year.

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Our customer base in place at March 31, 2007 added approximately net 3,000 end-users during fiscal 2008, representing a 1% increase in the number of end-users year over year.

We currently believe we can continue to grow our revenue from existing customers as more and. more small and medium- size business, who are currently clients of our customers, establish websites. In addition we believe our business model and marketing efforts will, as they have in the past, result in us acquiring new small, medium and large customers. This combination of growth from existing customers, acquisitions of smaller website businesses and growth in our customer base is expected to allow as to grow revenues at a rate of between 20 to 24% in fiscal 2009.

Other service revenue, including domain name registration and professional services revenue, increased by $422,000 or 50% to $1.3 million from $845,000. The increase reflects a combination of revenue generated by our Website Experts division and the contribution from our acquisition of Nexthaus in May 2007. Domain name revenue declined modestly due to aggressive pricing.

Cost of Revenues

	Year Ended March 31,
	2008	2007
Cost of Revenues
Web hosting and applications services	$ 3,304,899	$ 2,563,605
Other services	315,451	356,636
Total revenue	$ 3,620,350	$ 2,920,241
Percent of revenues	13.0%	13.0%
Increase over prior year	$ 700,109
Increase over prior year – percent	24.0%

Total cost of revenues increased by $700,000 or 24% to $3.6 million in fiscal 2008 from $2.9 million in fiscal 2007.

Cost of Web hosting and application services revenues increased by $741,000 or 29% to $3.3 million in fiscal 2008 from $2.6 million in fiscal 2007. These expenses include bandwidth expense, data center costs, software license fees, hardware maintenance fees, referral payments and credit card collection fees. Bandwidth and data center costs increased by approximately $272,000 or 20% due in large part to our 19% increase in end-users as well as additional bandwidth and leased data center space acquired in anticipation of additional growth from acquired business. We did benefit from the favorable resolution of a bandwidth expense adjustment of $112,000 in the final quarter, of which $40,000 related to this fiscal year and the balance to the previous fiscal year. Software licenses fees, hardware maintenance fees and referral payments increased by approximately $465,000 or 52% due to a combination of increased software and hardware maintenance and increased referral payments due to increased revenue. Credit card collection fees increased by approximately $4,000.

We currently believe that our cost of Web hosting and application services revenue will increase in fiscal 2009 compared to fiscal 2008 in line with the expected expansion of our bandwidth requirements and storage facilities to accommodate our anticipated customer growth. We are not anticipating any significant price change in these costs and accordingly expect these costs will remain in a range of between 13% and 14% of revenues.

Cost of other services revenues declined in fiscal 2008 by 12% to $315,000 from $357,000. Other services expense includes the purchase of domain name rights that we resell to end-users. Other services expense decreased as a percentage of domain name revenue due to a change in product mix and the increase in value of the Canadian dollar.

We currently believe the cost of other services revenues will increase in absolute dollar terms in line with increases in other services revenues in 2008 and will continue to be in a range between 1% and 2% of revenues.

Operating Expenses

Total operating expenses increased by 28% to $21.9 million in fiscal 2008 compared to $17.1 million in fiscal 2007. Total operating expenses were 78.7% of total revenues in 2008 compared to 76.0% in 2007.

The 1.7% increase in operating expenses as a percentage of revenue was primarily due to a combination of factors including:

• Increased personnel to handle our business growth,

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• Increased sales commissions related to new revenue generated during the year

• Higher customer care costs incurred during the transition to our Miramichi call center

• Higher amortization expenses related to the acquisition of licensed technology and customer lists,

• Increased R&D expenses related to the development of new web services including SyncSuite® and Fax to Email, and

• Increased public company expenses in our first full year as a public company.

Sales and Marketing

	Year Ended March 31,
	2008	2007
Sales and marketing	$ 5,956,610	$ 4,776,483
Percent of revenues	21.4%	21.3%
Increase over prior year	$ 1,180,127
Increase over prior year – percent	24.7%

Sales and marketing expenses increased by 25% in fiscal 2008 to $6.0 million from $4.8 million in fiscal 2007. Salaries, wages and benefits including stock option benefits increased by $799,000 or 25%. Personnel count remained constant year over year. Wage increases and higher variable commission expense related to contracts signed in fiscal 2007 accounted for the increase. Trade show expenses increased by $96,000 or 27% while we continued to reduce the advertising portion of our marketing effort with a $74,000 or 88% reduction as we continue to emphasize direct customer contact. Allocated expenses including rent, office, telecommunications, travel and contracted expenses in Ukraine increased by $359,000 or 33% due to increased travel and communications. We believe a significant portion of our sales and marketing expenses to be investments in building recurring revenue that will have a greater effect on future years’ revenue than the current year.

We currently believe that sales and marketing expense will increase in absolute dollars in fiscal 2009 compared to 2008, as we continue to grow and expand our customer base and revenues. As a percentage of revenues, sales and marketing expense is expected to decline modestly from fiscal 2008 as the fixed costs related to certain marketing and sales costs are absorbed over a larger revenue base.

Research and Development

	Year Ended March 31,
	2008	2007
Research and development	$ 3,840,198	$ 3,069,528
Percent of revenues	13.8%	13.7%
Increase over prior year	$ 770,670
Increase over prior year – percent	25.1%

Research and development expenses increased by $771,000 or 25% to $3.8 million in fiscal 2008 from $3.1 million in fiscal 2007. Employee compensation including stock based compensation, increased by $643,000 or 27% compared to 2007. Personnel count decreased by 15% as lower cost employees were replaced with higher wage personnel. A significant portion of the wage increase is related to the Nexthaus operation that we acquired in May 2007. We added 3 professionals associated with that business to our development team. Allocated expenses including rent, office, hardware, telecommunications, travel and contracted expenses in Ukraine increased by $128,000 or 17% due to the increase in personnel. Our research and development expense was reduced by the receipt of $60,000 of refundable tax credits from Ontario in the fourth quarter of fiscal 2008.

We currently expect that research and development expenses will increase in absolute dollars in fiscal 2009 compared to fiscal 2008, as we believe continued investment in product development, particularly our wireless syncing technology associated with the Nexthaus acquisition and our Fax to Email development, is required to remain competitive and to develop applications that can maintain or increase our average revenue per customer. As a percentage of revenues, research and development is expected to modestly decline in fiscal 2009 from the 14% in fiscal 2008.

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Professional Services

	Year Ended March 31,
	2008	2007
Professional services	$ 2,073,850	$ 1,715,568
Percent of revenues	7.5%	7.6%
Increase over prior year	$ 358,282
Increase over prior year – percent	20.9%

Professional services expenses increased by $358,000 or 21% to $2.1 million in fiscal 2008 from $1.7 million in fiscal 2007. Compensation, including stock option benefits increased by $143,000 or 14% compared to fiscal 2007. Our personnel count in this function remained stable while wage increases contributed to the increase. Allocated expenses including rent, office, telecommunications, travel and contracted expenses in Ukraine increased by $215,000 or 32% due to the increase in end-users migrated to our system.

We currently believe that professional services expenses will increase in absolute dollars in fiscal 2009 compared to 2008, as we continue to acquire and migrate new customers onto our system. However, we expect that the professional services expense ratio will decline modestly from its 8% of revenues in fiscal 2008 as our revenue base continues to grow.

Customer Care

	Year Ended March 31,
	2008	2007
Customer care	$ 3,867,920	$ 3,005,801
Percent of revenues	13.9%	13.4%
Increase over prior year	$ 862,119
Increase over prior year – percent	28.7%

Customer care expenses increased by 29% to $3.9 million in fiscal 2008 from $3.0 million in fiscal 2007. Compensation expense increased by $654,000 or 28%. Personnel count declined by 6, or 7% year over year although it peaked at a higher level during Q2 and Q3 as we transitioned to the Miramichi call center and the continuing increase in business activity. Allocated expenses including rent, office, telecommunications, travel and contracted expenses in Ukraine increased by $208,000 or 31% due to the increase in end-users migrated to our system and a related increase in the number of contractors in Ukraine that assist in handling our written and live chat technical support.

We currently believe that customer care expenses will increase in absolute dollars in fiscal 2009 compared to 2008, as we continue to grow our end user base through existing and new customers. We also expect customer care expenses will grow in line with end-user growth and therefore will remain in the 13% of revenue range now that the Miramichi transition has been completed.

General and Administrative

	Year Ended March 31,
	2008	2007
General and administrative	$ 2,718,303	$ 1,906,903
Percent of revenues	9.8%	8.5%
Increase over prior year	$ 811,400
Increase over prior year – percent	42.6%

General and administrative expenses increased by $811,000 or 31% to $2.7 million in fiscal 2008 from $1.9 million in fiscal 2007. Compensation expense including stock based compensation increased by $86,000 or 7%. The number of administrative personnel remained unchanged year over year. Professional fees increased $121,000 in fiscal 2008 and public company expenses increased by $480,000 both of which were the result of Hostopia being a public company for the entire fiscal year compared to our public company status for approximately five months in fiscal 2007. Bad debt expense increased $49,000 during the year. In fiscal 2008, foreign currency expense increased by $20,000 compared to fiscal 2007. Allocated expenses including rent, office, telecommunications and travel increased by $54,000 or 29 % due to ongoing business growth.

We currently believe that general and administrative expenses will increase in absolute dollar terms in fiscal 2009 compared to 2008 as the continued growth in our business will necessitate some additional personnel to cope with the higher

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volume of transactions and customers. We also anticipate increases in professional fees related to Sarbanes Oxley Act compliance and higher insurance expenses as well as higher costs, including consulting costs, associated with the implementation of a new accounting software package. Accordingly, while economies of scale will in the longer term offer some modest reduction in the ratio of general and administration expense as a percentage of revenues, it is likely, excluding the costs associated with the proposed merger with Deluxe Corporation. to remain in the 9% - 10% range in fiscal 2009.

Hostopia has incurred and will incur substantial costs in connection with the proposed merger with Deluxe Corporation in its first and second quarter. These costs are primarily associated with professional and financial advisory fees.

Amortization

	Year Ended March 31,
	2008	2007
Amortization	$ 3,394,364	$ 2,600,455
Percent of revenues	12.2%	11.6%
Increase over prior year	$ 793,909
Increase over prior year – percent	30.5%

Amortization expense increased by 31% to $3.4 million in fiscal 2008 from $2.6 million in fiscal 2007. The $794,000 increase was attributable to increased amortization of property and equipment ($275,000), customer lists ($40,000), templates ($118,000) and patents ($361,000).

We currently believe that our amortization expense will increase in absolute dollars in 2009 as we continue to invest in our infrastructure to support a larger end-user base. For example, just prior year end, we signed a definitive agreement to acquire the shared service end-users of Reliant Webhosting Inc. Subsequent to year end we signed two more definitive agreements to acquire the shared service end-users of Luxmovera, LLC and Tucows Inc. These acquisitions will increase the amortization expense of intangible assets in fiscal 2009 by an estimated $1.0 million. Any further acquisitions of complementary businesses would result in additional amortization expense related potentially to both tangible and intangible assets.

Interest income increased to $631,000 in fiscal 2008 from $534,000 in 2007 due to the significant increase in average short-term investments as a result of the net proceeds of approximately $22 million received from our initial public offering in November, 2006. These funds were invested for 12 months in fiscal 2008 compared to approximately 4.5 months in fiscal 2007.

We currently believe interest income will decrease in fiscal 2009 despite our continuing positive cash flow from operations because of a decline in short term interest rates and our investment in long lived assets both tangible and intangible.

Interest expense of $4,206 in fiscal 2008 compares to $16,824 in the prior year and relates to the imputed interest on the non-interest bearing note payable issued on the purchase of a customer’s web hosting business in January 2006. This note payable was fully paid in July 2007.

Income tax expense in fiscal 2008 increased by $132,000 from fiscal 2007 to $1.3 million as higher income before income taxes was offset by a small decrease in the effective tax rate. The 36.3% effective tax rate on fiscal 2008 pre-tax income was 1.4% lower than the 37.7% rate in the previous year.

We currently believe that based on our tax filings for our fiscal 2007 tax year our effective income tax rate of 36.3% in fiscal 2008 is fairly representative of our on-going tax rate in 2009. However, this expectation is subject to changes in the corporate tax rate in the U.S. or a significant expansion of our business outside of North America.

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Comparison of fiscal years ended March 31, 2007 and 2006

Revenues

	Year Ended March 31,
	2007	2006
Revenues
Web hosting and applications services	$ 21,624,337	$ 17,295,329
Other services	845,327	661,578
Total revenue	$ 22,469,664	$ 17,956,907
End-users at end of period	260,000	210,000
Increase in end-users over comparable prior period – percent	23.8%
Increase over prior year	$ 4,512,757
Increase over prior year – percent	25.1%

Total revenues increased by $4.5 million or 25.1% to $22.5 million in fiscal 2007 from $18.0 million in fiscal 2006. U.S. revenues increased by 31.5% to $12.3 million. Canadian revenues rose by 14.8% to $9.8 million while U.K. revenue rose to $0.4 million.

During fiscal 2007, the average value of the Canadian dollar appreciated by 4.8% against the U.S. dollar. If this appreciation had not occurred our revenue would have increased by $4.1 million or 22.8%.

Web hosting and application services revenue increased by $4.3 million or 25% to $21.6 million. Our revenue growth was due primarily to a 24% increase in end-users year over year. We had approximately 260,000 end-users on our system as of March 31, 2007. The end-user growth was due to a combination of new customers added in fiscal 2007 and increase in the end-users of our existing customer base. New customers added approximately 25,000 end-users, representing a 12% increase over the number of end-users at the beginning of the year. Our customer base in place at March 31, 2006 added approximately 25,000 end-users during fiscal 2007, representing a 12% increase in the number of end-users year over year.

Other service revenue, including domain name registration and professional services revenue, increased by $183,000 or 28% to $845,000 from $662,000. The primary reason for the increase was the sale of more domain names related to the acquisition of the Web business of a former customer in January 2006 and the sale of 2,500 template licenses in the final quarter of 2007.

Cost of Revenues

	Year Ended March 31,
	2007	2006
Cost of Revenues
Web hosting and applications services	$ 2,563,605	$ 1,756,263
Other services	356,636	246,353
Total revenue	$ 2,920,241	$ 2,002,616
Percent of revenues	13.0%	11.2%
Increase over prior year	$ 917,625
Increase over prior year – percent	45.8%

Total cost of revenues increased by $918,000 or 45.8% to $2.9 million in fiscal 2007 from $2.0 million in fiscal 2006.

Cost of Web hosting and application services revenues increased by $807,000 or 46% to $2.6 million in fiscal 2007 from $1.8 million in fiscal 2006. These expenses include bandwidth expense, data center costs, software license fees, hardware maintenance fees, referral payments and credit card collection fees. Bandwidth and data center costs increased by approximately $303,000 or 28% due in large part to our 24% increase in end-users as well as additional bandwidth and leased data center space acquired in anticipation of additional end-users expected from several large contracts that were signed but not implemented as of yearend. Software licenses fees, hardware maintenance fees and referral payments increased by approximately $381,000 or 75% due to a combination of increased software and hardware maintenance and increased referral payments due to increased revenue. Credit card collection fees increased by approximately $123,000 or 73% primarily

38

because of the acquisition of a customer’s end-users in January 2006 and the start up of a new customer in September 2007 for whom we provide billing support and directly incur the gateway account processing costs associated with the end-users.

Cost of other services revenues increased in fiscal 2007 by 45% to $357,000 from $246,000. Other services expense includes the purchase of domain name rights that we resell to end-users. Other services expense increased due in part to the 21% increase in other revenue relating to the sale of domain names to the end-users of the business we acquired from a former customer in January 2006.

Operating Expenses

Total operating expenses increased by 32.3% to $17.1 million in fiscal 2007 compared to $12.9 million in fiscal 2006. Total operating expenses were 76.0% of total revenues in 2007 compared to 71.9% in 2006.

The 4.1% increase in operating expense ratio was primarily due to a combination of factors including:

• Increased personnel to handle new revenue opportunities that have not yet fully developed,

• Higher amortization expenses related to the acquisition of licensed technology,

• Increased R&D expenses related to the development of new web services and enhanced software and service offering,

• The adoption SFAS No. 123R in respect of fair value share based compensation accounting, and

• Increased public company expenses following our IPO.

Sales and Marketing

	Year Ended March 31,
	2007	2006
Sales and marketing	$ 4,776,483	$ 3,898,904
Percent of revenues	21.3%	21.7%
Increase over prior year	$ 877,579
Increase over prior year – percent	22.5%

Sales and marketing expenses increased by 23% in fiscal 2007 to $4.8 million from $3.9 million in fiscal 2006. Salaries, wages and benefits including stock option benefits increased by $840,000 or 35%. Personnel count increased by 38% due in part to the requirement to staff inbound sales associates to handle the Web hosting business of a former customer and the hiring of our new Website Experts group that will focus on the burgeoning website design demand that we believe exists in the small business sector. Employee compensation also increased by $109,000 this year as we began expensing share-based compensation under SFAS No. 123R. Trade show expenses declined by $109,000 or 23% while advertising declined by approximately $124,000 or 60% as we decided to reallocate marketing dollars to our direct sales effort. Allocated expenses including rent, office, telecommunications, travel and contracted expenses in Ukraine increased by $270,000 or 34% as we hired sales support personnel to service our expanding customer base. We believe a significant portion of our sales and marketing expenses to be investments in building recurring revenue that will have a greater effect on the future years’ revenue than the current year.

Research and Development

	Year Ended March 31,
	2007	2006
Research and development	$ 3,069,528	$ 2,107,626
Percent of revenues	13.7%	11.7%
Increase over prior year	$ 961,902
Increase over prior year – percent	45.6%

Research and development expenses increased by $962,000 or 46% to $3.1 million in fiscal 2007 from $2.1 million in fiscal 2006. Employee compensation increased by $839,000 or 57% compared to 2006. Personnel count increased by 22% as we continued to invest in enhancing our product offerings and expanding our business. Employee compensation also increased by $21,000 this year as we began expensing share-based compensation under SFAS No. 123R.

39

Allocated expenses including rent, office, hardware, telecommunications, travel and contracted expenses in Ukraine increased by $123,000 or 20% due to the increase in personnel.

Professional Services

	Year Ended March 31,
	2007	2006
Professional services	$ 1,715,568	$ 1,393,215
Percent of revenues	7.6%	7.8%
Increase over prior year	$ 322,352
Increase over prior year – percent	23.1%

Professional services expenses increased by $322,000 or 23% to $1.7 million in fiscal 2007 from $1.4 million in fiscal 2006. Compensation, including stock option benefits increased by $114,000 or 12% compared to the prior year’s comparable quarter. A personnel count increase of 5 % and wage increases contributed to the increase. Employee compensation also increased by $19,000 as we began expensing share-based compensation under SFAS No. 123R. Allocated expenses including rent, office, telecommunications, travel and contracted expenses in Ukraine increased by $208,000 or 46% due to the increase in end-users migrated to our system.

Customer Care

	Year Ended March 31,
	2007	2006
Customer care	$ 3,005,801	$ 2,258,511
Percent of revenues	13.4%	12.6%
Increase over prior year	$ 747,290
Increase over prior year – percent	33.1%

Customer care expenses increased by 33% to $3.0 million in fiscal 2007 from $2.3 million in fiscal 2006. Compensation expense increased by $467,000 or 25%. Personnel count increased by 20 or 32% to support the increase in our end-users and prepare for anticipated increases in end-users from new customers that have not yet been migrated onto our platform. Employee compensation also increased by $18,000 this year as we began expensing share-based compensation under SFAS No. 123R. Allocated expenses including rent, office, telecommunications, travel and contracted expenses in Ukraine increased by $281,000 or 70% due to the increase in end-users migrated to our system and a related increase in the number of contractors in Ukraine that assist in handling our written and live chat technical support.

General and Administrative

	Year Ended March 31,
	2007	2006
General and administrative	$ 1,906,903	$ 1,451,251
Percent of revenues	8.5%	8.1%
Increase over prior year	$ 455,652
Increase over prior year – percent	31.4%

General and administrative expenses increased by $456,000 or 31% to $1.9 million in fiscal 2007 from $1.5 million in fiscal 2006. Compensation expense increased by $189,000 or 19%. The number of administrative personnel remained unchanged year over year. Employee compensation also increased by $18,000 this year as we began expensing share-based compensation under SFAS No. 123R. Professional fees increased $2,000 in fiscal 2007, while bad debt expense increased by $45,000. In fiscal 2007, foreign currency expense increased by $23,000 compared to fiscal 2006. We also incurred the usual and ongoing expenses related to a public company in the amount of $152,000. We did not incur this type of expense as a private company in the previous year. Allocated expenses including rent, office, telecommunications and travel increased by $13,000 or 7 % due to ongoing business growth.

40

Amortization

	Year Ended March 31,
	2007	2006
Amortization	$ 2,600,455	$ 1,795,732
Percent of revenues	11.6%	10.0%
Increase over prior year	$ 804,723
Increase over prior year – percent	44.8%

Amortization expense increased by 45% to $2.6 million in fiscal 2007 from $1.8 million in fiscal 2006. The $805,000 increase was attributable to increased amortization of property and equipment ($385,000), customer lists ($298,000), templates ($34,000) and patents ($88,000).

Interest income increased to $534,000 in fiscal 2007 from $28,000 in 2006 due to the significant increase in average short-term investments as a result of the net proceeds of approximately $22 million received from our initial public offering in November, 2006.

Interest expense of $16,824 related to the imputed interest on the non-interest paying note payable issued on the purchase of a customer’s web hosting business in January 2006.

Income tax expense of $1.1 million in fiscal 2007 increased by $59,000 from 2006 as an increase in non deductible expenses more than offset the reduction in pre-tax income. The effective tax rate of 37.7% of pre-tax income is higher than the 34.8% in 2006 primarily due to the increase in non-deductible items.

Liquidity and Capital Resources

As of March 31, 2008, we had $26.2 million of cash and cash equivalents and $28.1 million in working capital, as compared to $27.4 million of cash and cash equivalents and $26.6 million in working capital as of March 31, 2007. Our primary source of liquidity is currently cash and cash equivalents while our cash flow from operations is expected to provide an on-going source of funding.

At March 31, 2008, we had a total of $23.6 million invested in two AAA rated money market funds. Approximately $15.5 million was invested is in a money market fund with that had an approximate 0.5% exposure to structured investment vehicles (“SIVs”).The remaining $8.1million was invested in a fund that had no exposure to SIVs. While these funds are AAA rated as these funds are not insured by the FDIC or any other agency they accordingly involve investment risk, including the possible loss of principal amount invested.

Net cash provided by operations in fiscal 2008 decreased to $2.8 million from $4.6 million in 2007. Net income and items which do not involve cash increased by $1.2 million compared to fiscal 2007 primarily as a result of $339,000 higher net income and $800,000 higher amortization expense. However changes in operating assets and liabilities used $2.2 million of cash in fiscal 2008 compared to providing $641,000 of cash in fiscal 2007. This year over year change was primarily the result of a significant increase in accounts receivable and increased tax payments/installments in both Canada and the United States in fiscal 2008. We currently expect cash flows from operations to continue to grow in fiscal 2009 as our business continues its profitable growth trend.

Net cash provided by financing activities was $1.5 million in fiscal 2008 as we received $1.5 million from employees who exercised their stock options. The $369,000 payment in respect of our long term liability related to an acquisition made in January 2006 was largely offset by the excess tax benefit booked in respect of employee stock options exercised in fiscal 2008. Other than a modest amount of cash we expect to receive from the exercise of employee stock options, we do not believe that financing activities will be a significant source or use of cash in fiscal 2009.

Net cash used in investing activities in fiscal 2008 was $5.6 million compared to $2.4 million in 2007. In fiscal 2008, we purchased $3.3 million of capital assets including approximately $616,000 for a building, furniture and fixtures and equipment to establish a customer care center in Miramichi, New Brunswick. We also invested $2.3 million on licensing of patents and purchasing web design templates and customer lists. We intend to continue investing to maintain and expand our physical and intellectual infrastructure. Accordingly, we anticipate our use of cash for property, equipment and website templates will exceed $3.0 million in fiscal 2009. This amount could increase significantly if we locate an appropriate acquisition candidate or candidates.

41

Based on our current commitments, plans and projected cash flows we believe that we have sufficient liquidity in the form of cash equivalents as well as cash flows from operations to finance our business growth, including sales and marketing expenses, research and development expenses and capital expenditures in both the short and longer term without the need for additional financing. Our current liquidity should also allow us to make additional investments in our application delivery platform, expand our portfolio of web service, expand further into the UK marketplace and make strategic investments of up to $20 million in complementary businesses, services, products and technologies that we determine are appropriate without the need for additional financing. Acquisitions, if any, in excess of $20 million would most likely require additional equity financing which may not be available at all or at a reasonable cost.

Contractual Obligations

The following summarizes our contractual obligations as of March 31, 2008:

	Total	Less than 1 Year	1-3 Years	3-5 Years	More than 5 Years
Operating lease obligations(1)	$ 1,691	$ 764	$ 927	$ –	$ –
Bandwidth and data center purchase obligations	4,251	1,600	2,651	–	–
Patent and License obligations	635	96	228	169	142
Other purchase obligations	59	30	29	–	–
Total	$ 6,636	$ 2,490	$ 3,835	$ 169	$ 142

(1) Our operating lease obligations consist of commitments under office space leases.

The commitment amounts set out in the preceding table are associated with agreements that are enforceable and legally binding and that specify all significant terms, including fixed or minimum services to be used; fixed minimum or variable price provisions; and the approximate timing of the expenditures. Obligations under contract that we can cancel without a significant penalty are not included in the preceding table. During the course of the next fiscal year we expect to negotiate renewals for bandwidth and data center utilization that could result in higher operating expenses than the amounts implied in the preceding table. 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Foreign Currency Exchange Risk

The operating results and cash flows that we generate through our revenue activities are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the relationship of the Canadian dollar to the U.S. dollar and to a significantly lesser extent U.K. pounds. We have not entered into any hedging arrangements but we review our currency exposure periodically to ensure that our revenues in non-U.S. currencies are reasonably matched by expenses in those currencies. In fiscal 2008 revenue from customers outside the United States were approximately $12.5 million in Canada and $1.5 million in the U.K. Accordingly, in fiscal 2008, a 5% decrease in the average Canadian dollar and U.K. pound exchange rate would have resulted in a $625.000 and $75,000 decrease in revenues respectively. In fiscal 2008, the average value of the Canadian dollar was $0.9688, a 10.3% increase over its value in our fiscal 2007. In fiscal 2008, the average value of a U.K. pound was $2.0084, a 6.0% increase over its value in our fiscal 2007.

Interest Rate Sensitivity

We had investments in short term bank deposits, bank certificates of deposit and money market funds amounting to $24.4 million at March 31, 2008. We currently do not have any interest bearing debt obligations. Due to the short term nature of our investments, we believe that we do not have any material exposure to changes in the fair value of our short term investments as a result of changes in interest rates. However, we estimate, based on the level of short term interest bearing investments at March 31, 2008, that on an annualized basis a 1% fluctuation in short term interest rates would raise or lower our net income by approximately $0.01 per share.

42

Item 8.Financial Statements and Supplementary Data.

INDEX TO FINANCIAL STATEMENTS

Hostopia.com Inc.	Page
Report of Independent Registered Public Accountants	44

Consolidated Balance Sheets as at March 31, 2008 and 2007 45

Consolidated Statements of Operations for the years ended March 31, 2008, 2007, and 2006 46

Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2008, 2007 and 2006 47

Consolidated Statements of Cash Flows for the years ended March 31, 2008, 2007 and 2006 48

Notes to Consolidated Financial Statements 49

43

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Hostopia.com Inc.

We have audited the accompanying consolidated balance sheets of Hostopia.com Inc. as of March 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hostopia.com Inc. as of March 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 2008, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1(l) to the consolidated financial statements, the Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes as of April 1, 2007.

(signed) KPMG LLP

Chartered Accountants, Licensed Public Accountants

Toronto, Ontario

June 24, 2008

44

HOSTOPIA.COM INC.

Consolidated Balance Sheets

(Expressed in U.S. dollars)

March 31,		2008		2007
Assets
Current assets:
Cash and cash equivalents	$	26,199,954	$	27,367,667
Trade accounts receivable, net of allowance for doubtful accounts of $211,410 (2007 - $114,755)		2,574,356		1,320,422
Deferred tax assets (note 7)		140,000		117,000
Prepaid expense		397,807		377,242
Income taxes recoverable		1,072,257
Total current assets		30,384,374		29,182,331
Property and equipment, net of accumulated amortization of $7,287,593 (2007- $5,163,911) (note 3)		4,102,484		2,922,677
Intangible assets, net of accumulated amortization of $2,815,900 (2007 - $1,594,348) (note 4)		2,700,861		1,690,284
Deferred tax assets (note 7)		1,526,000		1,101,000
Other assets		63,972		60,997
Total assets	$	38,777,691	$	34,957,289
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	452,376	$	380,040
Accrued liabilities		854,871		705,229
Payroll and other taxes payable		22,496		34,956
Income taxes payable		–		269,020
Current portion of deferred lease inducements (note 11)		79,900		79,900
Deferred revenue		836,254		983,299
Current portion of long-term liabilities (note 2 (d))		–		72,000
Total current liabilities		2,245,897		2,524,444
Deferred lease inducements (note 11)		163,157		237,035
Long-term liabilities (note 2 (d))		–		292,957
Total liabilities		2,409,054		3,054,436
Stockholders’ equity:
Capital stock (note 8):
Authorized: 30,000,000 common shares, par value $0.0001
Issued and outstanding: 11,636,631 (2007:11,097,251)      common shares		217,122		217,069
Additional paid-in capital		33,312,757		31,054,703
Accumulated other comprehensive loss		(43,881)		(43,881)
Retained earnings		2,882,639		674,962
Total stockholders’ equity		36,368,637		31,902,853
Commitments, contingencies and guarantees (note 12)
Subsequent events (note 14)
Total liabilities and stockholders’ equity	$	38,777,691	$	34,957,289

See accompanying notes to consolidated financial statements.

45

HOSTOPIA.COM INC.

Consolidated Statements of Operations

(Expressed in U.S. dollars)

Year Ended March 31,		2008		2007		2006
Revenues:
Web hosting and applications services	$	26,511,461	$	21,624,337	$	17,295,329
Other services		1,266,987		845,327		661,578
Total revenues		27,778,448		22,469,664		17,956,907
Cost of revenues:
Web hosting and application services		3,304,899		2,563,605		1,756,263
Other services		315,451		356,636		246,353
Total cost of revenues		3,620,350		2,920,241		2,002,616
Gross Profit		24,158,098		19,549,423		15,954,291
Expenses:
Sales and marketing(1)		5,956,610		4,776,483		3,898,904
Research and development(1)		3,840,198		3,069,528		2,107,626
Professional services(1)		2,073,850		1,715,568		1,393,215
Customer care(1)		3,867,920		3,005,801		2,258,511
General and administrative(1)		2,718,303		1,906,903		1,451,251
Amortization of intangible assets		1,270,682		752,076		332,242
Amortization of property and equipment		2,123,682		1,848,379		1,463,490
		21,851,245		17,074,738		12,905,239
Operating income		2,306,853		2,474,685		3,049,052
Interest income		1,165,030		534,027		27,566
Interest expense		(4,206)		(16,824)		(4,566)
Income before income taxes		3,467,677		2,991,888		3,072,052
Income taxes (recovery) (note 7):
Current		1,708,000		1,632,000		455,000
Deferred		(448,000)		(504,000)		614,000
		1,260,000		1,128,000		1,069,000
Net income and comprehensive income	$	2,207,677	$	1,863,888	$	2,003,052
Net income per share (note 10):
Basic	$	0.19	$	0.27	$	0.47
Diluted		0.19		0.23		0.28
Weighted average number of common shares   outstanding:
Basic		11,510,957		6,714,560		4,032,336
Diluted		11,605,476		8,237,754		6,683,836
(1)      Stock-based compensation is included in      operating expenses as follows:
Sales and marketing	$	125,507	$	129,042	$	19,956
Research and development		138,975		21,095		–
Professional services		16,147		18,713		–
Customer care		19,524		17,530		–
General and administrative		86,430		17,778		–
	$	386,583	$	204,158	$	19,956

See accompanying notes to consolidated financial statements.

46

HOSTOPIA.COM INC.

Consolidated Statements of Stockholders’ Equity

(Expressed in U.S. dollars)

	Capital Stock		Additional paid-in capital	Deferred stock- based compen- sation	Accumulated other comprehen-sive loss	Retained Earnings (Deficit)	Total Stockholders’ equity
	Number	Amount
Balance, March 31, 2005	4,032,336	$216,362	$ 3,499,131	$(46,135)	$(43,881)	$(3,191,978)	$ 433,499
Amortization of stock-based compensation	–	–	–	19,956	–	–	19,956
Present value of future dividends on preferred shares (note 8)	–	–	(114,792)	–	–	–	(114,792)
Net income	–	–	–	–	–	2,003,052	2,003,052
Balance, March 31, 2006	4,032,336	216,362	3,384,339	(26,179)	(43,881)	(1,188,926)	2,341,715
Stock-based compensation adjustment SFAS No. 123R	–	–	(26,179)	26,179	–	–	–
Amortization of stock-based compensation	–	–	204,158	–	–	–	204,158
Present value of future dividends on preferred shares (note 8)	–	–	(71,034)	–	–	–	(71,034)
Issuance of common shares on exercise of options	47,257	5	130,490	–	–	–	130,495
Issuance of common shares on exercise of warrants	60,000	6	191,994	–	–	–	192,000
Issuance of common shares pursuant to Initial Public Offering	4,830,000	483	21,951,035	–	–	–	21,951,518
Excess tax benefits from stock-based compensation	–	–	48,631	–	–	–	48,631
Conversion of preferred shares	2,127,658	213	5,241,269	–	–	–	5,241,482
Net income	–	–	–	–	–	1,863,888	1,863,888
Balance, March 31, 2007	11,097,251	$217,069	$31,054,703	–	$(43,881)	$674,962	$31,902,853
Amortization of stock-based compensation	–	–	386,583	–	–	–	386,583
Issuance of common shares on exercise of options	539,380	53	1,486,613	–	–	–	1,486,666
Excess tax benefits from stock-based compensation	–	–	350,000	–	–	–	350,000
Adjustment of share issuance costs	–	–	34,858	–	–	–	34,858
Net income	–	–	–	–	–	2,207,677	2,207,677
Balance, March 31, 2008	11,636,631	$217,122	$33,312,757	–	$(43,881)	$2,882,639	$36,368,637

See accompanying notes to consolidated financial statements.

47

HOSTOPIA.COM INC.

Consolidated Statements of Cash Flows

(Expressed in U.S. dollars)

Year Ended March 31,		2008		2007		2006
Operating activities:
Net income	$	2,207,677	$	1,863,888	$	2,003,052
Items which do not involve cash:
Amortization		3,394,364		2,600,455		1,795,732
Stock-based compensation		386,583		204,158		19,956
Excess tax benefits from stock-based compensation		(350,000)		(48,631)		–
Non-cash interest		4,206		16,824		–
Deferred income taxes		(448,000)		(654,000)		614,000
Deferred lease inducements		(73,878)		(61,503)		63,492
Change in operating assets and liabilities:
Trade accounts receivable		(1,190,913)		254,034		(1,098,741)
Prepaid expenses		(1,047)		(106,979)		(17,821)
Other assets		–		–		(36,542)
Accounts payable		38,066		105,093		(17,259)
Accrued liabilities		88,238		192,322		108,412
Payroll taxes and other taxes payable		(17,894)		6,638		(10,535)
Income taxes payable		(991,277)		162,651		155,000
Deferred revenue		(208,871)		57,365		78,163
Net cash provided by operating activities		2,837,254		4,592,315		3,656,909
Financing activities:
Proceeds from exercise of stock options		1,486,666		130,495		–
Proceeds from exercise of warrants		–		192,000		–
Stock issuance on initial public offering, net of costs		34,858		21,951,518		–
Repayment of long-term liabilities		(369,163)		(155,506)		(38,864)
Excess tax benefits from stock-based compensation		350,000		48,631		–
Net cash from (used in) financing activities		1,502,361		22,167,138		(38,864)
Investing activities:
Acquisition of property and equipment		(3,303,489)		(1,597,341)		(2,080,937)
Acquisition of customer lists (note 2)		(809,608)		–		(151,400)
Acquisition of intellectual property (note 2 and 6)		(1,471,651)		(833,755)		(240,454)
Net cash used in investing activities		(5,584,748)		(2,431,096)		(2,472,791)
Effect of currency translation on cash balances		77,420		1,093		(4,267)
Increase in cash and cash equivalents		(1,167,713)		24,329,450		1,140,987
Cash and cash equivalents, beginning of year		27,367,667		3,038,217		1,897,230
Cash and cash equivalents, end of year	$	26,199,954	$	27,367,667	$	3,038,217
Supplemental cash flow information:
Interest paid	$	4,206	$	16,824	$	4,566
Income taxes paid		2,835,712		1,619,350		300,000

See accompanying notes to consolidated financial statements.

48

HOSTOPIA.COM INC.

Notes to Consolidated Financial Statements

(Expressed in U.S. dollars)

Years ended March 31, 2008, 2007 and 2006

Hostopia.com Inc. (the “Company”) was incorporated in the State of Delaware and has developed application software for web hosting and applications services, e-mail and e-commerce that is marketed to users via the Internet.

1. Significant accounting policies:

(a) Basis of presentation:

These consolidated financial statements include the accounts of the Company and its subsidiaries, BlueGenesis.com Corp., Internet Names for Business Inc. and Nexthaus Corporation, which are wholly owned. All intercompany accounts and transactions and balances have been eliminated.

These consolidated financial statements are stated in U.S. dollars. They have been prepared in accordance with accounting principles generally accepted in the United States of America.

(b) Revenue recognition:

The Company’s revenue is derived from web hosting and applications services, Internet private label domain name registration and other services.

Web hosting and applications services revenue consists of fixed fees earned and recognized on a monthly basis by leasing server space and Web services to companies and individuals wishing to have a Web or e-commerce presence. Incremental fees for excess bandwidth usage or data storage are billed and recognized as revenue in the period customers utilize such services. Up-front set-up fees are deferred and recognized in income on a straight-line basis over the term of the underlying service contract.

Other services revenue consists of registration fees and other service income including professional services, revenue from template licensing and other services that is not expected to recur on a monthly basis.

Registration fees charged to end-users for domain name registration services are recognized upon registration of the domain name. End-users typically pay for domain registrations with credit cards. A provision for chargebacks from credit card carriers is included in accrued liabilities and deducted from gross registration fees. Service revenue is earned and recognized as revenue on a time and materials basis as the services are provided.

Fees that have been paid but do not yet qualify for recognition as revenue under the Company’s revenue recognition policy are presented as deferred revenue on the Company’s consolidated balance sheets.

(c) Cash and cash equivalents:

Cash and cash equivalents include highly liquid instruments with an original maturity of less than 90 days. The carrying amount of cash equivalents is stated at cost which approximates its fair value.

(d) Allowance for doubtful accounts:

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make payments. The Company conducts on-going credit evaluations of its customers’ payment history and current credit worthiness. The allowance is maintained for 100% of all accounts deemed to be uncollectible and, for those receivables not specifically identified as uncollectible, an allowance is maintained for a specific per percentage of those receivables based upon the aging accounts, the Company’s historical collection experience and current economic expectations.

(e) Property and equipment:

Property and equipment are recorded at cost less accumulated amortization. Amortization is recorded on a straight-line basis over the following estimated useful lives:

49

HOSTOPIA.COM INC.

Notes to Consolidated Financial Statements

(Expressed in U.S. dollars)

Years ended March 31, 2008, 2008 and 2006

1. Significant accounting policies (continued):

Computer hardware and software 3 years

Furniture and fixtures 3 - 5 years

Buildings 20 years

Leasehold improvements lesser of lease term or estimated useful life

(f) Intangible assets:

Intangible assets are recorded at cost and are amortized on a straight-line basis over their estimated useful lives as follows:

Customer lists, customer relationships and in-place contracts 3 - 5 years

Intellectual property 3 years

Patents and licenses 3 - 5 years

(g) Impairment of long-lived assets:

Long-lived assets, including property and equipment and intangible assets with finite lives, are amortized over their useful lives. The Company periodically reviews the useful lives and the carrying values of its long-lived assets for continued appropriateness. The Company performs an impairment assessment of long-lived assets held for use whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows from the use and eventual disposition of the asset group is less than its carrying amount, it is considered to be impaired. An impairment loss is measured as the amount by which the carrying amount of the asset group exceeds its fair value, which is estimated as the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset.

(h) Lease inducements:

Lease inducements are deferred and amortized against rent expense on a straight-line basis over the term of the applicable lease.

(i) Functional currency:

The U.S. dollar is the functional currency of the Company and of its subsidiaries as the majority of their revenues and non -wage expenditures are denominated in U.S. dollars. Exchange gains and losses resulting from transactions denominated in currencies other than U.S. dollars are included in the result of operations in the year in which they are incurred.

(j) Research and development costs:

Costs related to research, design and development of software products are charged to research and development expenses as incurred. Software development costs are capitalized beginning when a product’s technological feasibility has been established, which generally occurs upon completion of a working model, and ending when a product is available for general release to customers. To date, completing a working model of the Company’s product and the general release of the product have substantially coincided. As a result, the Company has not capitalized any software development costs since such costs have not been significant.

50

HOSTOPIA.COM INC.

Notes to Consolidated Financial Statements

(Expressed in U.S. dollars)

Years ended March 31, 2008, 2007 and 2006

1. Significant accounting policies (continued):

(k) Share-based payments:

On April 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS No. 123R”) which requires the measurement and recognition of compensation expense for all share-based payments made to employees and directors in respect of our stock option plans based on estimated fair values. SFAS No. 123R supersedes our previous accounting under Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”.

Prior to the adoption of SFAS 123R, we had elected to apply the disclosure-only provision of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148. Accordingly, in respect of stock option grants to employees we accounted for stock-based compensation using the intrinsic value method prescribed in APB 25 and related interpretations. Under APB 25, compensation expense for stock options was measured as the excess, if any, of the fair value of Hostopia common stock at the date of grant over the stock option exercise price and therefore, prior to April 1, 2006, we recognized no compensation expense for stock options issued to employees.

The table below sets out the pro forma amounts of net income per share that would have resulted in the year ended March 31, 2006 if the Company had accounted for its employee stock plans under the fair value recognition provisions of Statement 123.

		2006
Net income as reported	$	2,003,052
Cumulative dividends on redeemable,
convertible preferred shares		(114,792)
Basic and diluted net income		1,888,260
Stock-based compensation expense		(126,506)
Pro forma income	$	1,761,754
Net income per share - basic:
As reported	$	0.47
Pro forma		0.44
Net income per share - diluted:
As reported		0.28
Pro forma		0.26

Under SFAS No. 123, the estimated fair value of options for the pro forma calculation was determined using the Black-Scholes option pricing model with the following assumptions:

	2006
Risk-free rate	2.75% - 3.75%
Expected option life	7 years
Dividend yield	–
Volatility factor	75%
Weighted average grant date fair value of option granted	$ 6.40

The pro forma amount was amortized over the vesting period on a straight line basis.

51

HOSTOPIA.COM INC.

Notes to Consolidated Financial Statements

(Expressed in U.S. dollars)

Years ended March 31, 2008, 2007 and 2006

1. Significant accounting policies (continued):

The risk-free interest rate was based on the currently available rate on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option. The volatility of stock options was based on an average of historical volatility of a peer group of companies comparable to the Company. The expected life of the Company’s options was based on the contract term as the Company was private and it was expected the options would be held for their contracted term. The dividend yield reflected the fact that the Company has never declared or paid any cash dividends and did not anticipate paying cash dividends in the future. Under SFAS No. 123 no forfeiture rate was estimated. Rather, the expense was adjusted as forfeitures occurred.

We adopted SFAS No. 123R using the modified prospective transition method. Under the modified prospective method stock-based compensation expense recognized in our Consolidated Statement of Operations for fiscal 2008 includes compensation expense for share-based awards granted prior to, but not yet vested, as of March 31, 2006 as well as compensation expense for the share-based payment awards granted subsequent to March 31, 2006.

Under SFAS No. 123R, we estimate the fair value of each stock option grant on the date of grant using the Black-Scholes-Merton option pricing model based on assumptions in respect of: (1) the expected term of the share option, (2) the expected volatility of the stock during the expected term of the share option, (3) the dividend rate during the expected term of the share option, and (4) the risk-free rate during the expected term of the share option. We then recognize share-based compensation by amortizing the aggregate grant date fair values, less estimated forfeitures, over the vesting period on a straight-line basis. As stock-based compensation expense recognized in our Consolidated Statement of Operations for fiscal 2008 is based on awards ultimately expected to vest, the expense has been reduced for estimated forfeitures at the time of grant. We will adjust this estimate up or down to reflect actual forfeitures, and, finally the actual number of awards that vest.

Under SFAS No. 123R the benefit of tax deductions in excess of those previously recognized are recognized as additional paid in capital. Such a benefit is recognized as a financing cash flow in our Consolidated Statement of Cash Flows. Any tax deficiency is first offset against existing additional paid-in capital that resulted from previously realized excess tax benefits, with any remaining deficiency being recognized as a charge to tax expense.

See Note 9 in these Consolidated Financial Statements for further information regarding our stock-based compensation plans.

(l) Income taxes:

The Company provides for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. A valuation allowance is recorded to reduce deferred income tax assets to an amount, in the opinion of management that is more likely than not to be realized. Management considers factors, such as the reversal of deferred income tax liabilities, projected future taxable income, the character of the income tax asset, tax planning strategies and other factors in the determination of the valuation allowance. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of operations in the year that includes the enactment date.

Effective April 1, 2007, the Company implemented FASB issued Interpretation No. 48 “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB statement No. 109” (“FIN 48”). FIN 48 requires companies to recognize the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained, assuming examination by tax authorities. The amount to be recognized is the amount that represents the largest amount of tax benefit that is greater than 50% likely of being ultimately realized. A liability is recognized for any benefit claimed, or expected to be claimed, in a tax return in excess of the benefit recorded in the financial statements, along with any interest and penalty (if applicable) on the excess. Disclosure is also required for those uncertain tax positions where it is reasonably possible that the estimate of the tax benefit will change significantly in the next 12 months. The implementation of FIN 48 had no material effect on the Company’s opening retained earnings.

52

(m) Financial instruments and concentration of credit risk:

The carrying values of cash and cash equivalents, trade accounts receivable, accounts payable, accrued liabilities and payroll and other taxes payable approximate their fair values due to their short-term nature.

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company performs periodic credit evaluations of the financial condition of its customers. Allowances are maintained for potential credit losses consistent with the credit risk of specific customers. As at March 31, 2008, three customers had a balance greater than 10% of the Company’s total accounts receivable, totaling 49%. As at March 31, 2007, three customers had a balance greater than 10% of the Company’s total accounts receivable totaling 59%.

(n) Use of estimates:

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Significant items subject to such estimates and assumptions include the carrying amount and useful lives of property and equipment, intangible assets, valuation of allowances for accounts receivable and deferred income taxes. Actual results could differ from those estimates.

(o) Asset retirement obligations:

The Company accounts for asset retirement obligations in accordance with FASB Statement No. 143, Accounting for Asset Retirement Obligations, which requires that the fair value of an asset retirement obligation be recorded as a liability in the period in which the Company incurs the obligation. The Company did not have any asset retirement obligations in 2008, 2007 or 2006.

(p) Guarantees:

The Company accounts for guarantees in accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others, which requires certain disclosures of obligations under guarantees and the recognition of a liability by a guarantor at the inception of certain guarantees entered into or modified after December 31, 2002, based on the fair value of the guarantee. The Company did not provide any guarantees in 2008, 2007 or 2006.

(q) Consolidation of variable interest entities:

The Company accounts for variable interest entities in accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest Entities Revised (“FIN 46R”). FIN 46R addresses the consolidation of certain entities that are subject to control on a basis other than ownership of voting interests. The Company held no interest in any entities subject to control on a basis other than ownership of voting interests in 2008, 2007 or 2006.

(r) Comprehensive income:

Comprehensive income includes all changes in equity (net assets) during a period from non-owner sources. During each of the years in the three-year period ended March 31, 2008, comprehensive income was equal to the net income.

(s) Recent accounting pronouncement not yet adopted:

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 also establishes a fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability. SFAS No. 157 will be effective for the Company beginning in fiscal 2009. In February 2008, the FASB deferred the implementation of SFAS No. 157 for certain non-financial assets and liabilities for fiscal years beginning after November 15, 2008. The Company is assessing the potential effect that the adoption of SFAS No. 157 will have on its consolidated financial condition, results of operations or cash flows.

53

HOSTOPIA.COM INC.

Notes to Consolidated Financial Statements

(Expressed in U.S. dollars)

Years ended March 31, 2008, 2007 and 2006

1. Significant accounting policies (continued):

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment to SFAS No. 115”, (“SFAS 159”). SFAS 159 allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the potential effect of SFAS 159 on its financial position and results of operations.

In December 2007, the FASB issued Statement No. 141 (revised 2007), ‘‘Business Combinations’’ (‘‘SFAS 141(R)’’), which applies to all transactions or other events in which an entity (the acquirer) obtains control of one or more businesses. SFAS 141(R) establishes principles and requirements for how the acquirer recognizes and measures in its financial statements the assets, liabilities, non-controlling interest and goodwill related to a business combination. SFAS 141(R) also establishes what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009 and will affect the Company with respect to future business combinations entered into on or after January 1, 2009.

In December 2007, the FASB issued Statement No. 160, ‘‘Non-controlling Interests in Consolidated Financial Statements—an amendment of ARB No. 51’’ (‘‘SFAS 160’’), which establishes accounting and reporting standards for entities that have an outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary. A non-controlling interest is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. SFAS 160 is effective for the Company’s fiscal year beginning January 1, 2009 and will affect the Company with respect to future business combinations entered into on or after January 1, 2009 to the extent the Company does not acquire 100% of an entity.

2. Asset acquisitions:

(a) On May 2, 2007, the Company acquired certain intellectual property for cash from Nexthaus, Inc. a US-based developer of leading-edge software applications for mobile devices. The acquired software uses wireless communications to synchronize data between computers and mobile devices, such as calendar and contact updates from a desktop to a smart phone. $950,000 was paid on closing. An additional $200,000 is payable on the first anniversary of the agreement on achievement of stipulated revenue targets. In addition, 15% of certain designated revenue will be payable on a reseller basis until May 2, 2010. No accrual was made as of March 31, 2008.

(b) On March 28, 2008, the Company completed the purchase of a customer list, customer relationships and in-place contracts in an arm’s length transaction in the amount of Cdn$478,615 (US$470,096) less an amount ascribed to a liability for providing services to acquired customers under their prepaid contracts and a 10% holdback pending completion of all aspects of the website migration. On closing, the Company paid Cdn$388,702 (US $381,783) in cash. The customer list will be amortized on a straight-line basis over its three-year estimated useful life.

Purchase price:
Customer list, customer relationships and in-place contracts	$	470,096
Liability for future services		( 45,893)
	$	424,203
Consideration given:
Cash	$	381,783
Accrued liabilities		42,420
	$	424,203

54

(c) During fiscal 2008 the Company entered into agreements under which it acquired the right to service and bill the end-users of some of its wholesale customers for a defined period of time, generally three to five years. Under these agreements the Company made an initial upfront payment of $332,572 which was recorded as an intangible asset that is amortized over the term of the arrangement. The Company also pays a monthly commission based on the cash received from the arrangement. These monthly commission payments are expensed as incurred as a cost of revenues.

(d) On January 31, 2006, the Company entered into an agreement to purchase a customer list, customer relationships and in-place contracts from one of its customers for $1,132,000 less $243,468 for assuming a liability for providing services to the acquired customers under their prepaid contracts. After deducting the $166,599 the vendor owed the Company at that time, the Company paid $151,400 on closing with the remaining amount owed of $570,333 to be paid out based on a payment schedule as follows:        37.5% of revenue collected from acquired customers during the first six months following closing, 25.0% of revenue collected for the following six months, and 12.5% of the revenue collected thereafter, until such time as the total payments equaled $570,333.

The non interest bearing liability of $570,533 was discounted at the rate of 5% per annum. Accordingly, the value of the customer list and the long-term liability was reduced by $28,030, being the estimated imputed interest expense over the expected two-year term of the liability. This $28,030 amount was charged to interest expense. The long-term liability under the agreement was paid off in July 2007.

The customer list is amortized on a straight-line basis over its three-year estimated useful life commencing February 1, 2006.

Purchase price:
Customer list, customer relationships and in-place contracts	$	1,103,970
Liability for future services		(243,468)
	$	860,502
Consideration given:
Cash	$	151,400
Trade receivable extinguished		166,599
Long-term liability		542,503
	$	860,502

3. Property and equipment:

2008		Cost		Accumulated amortization		Net book value
Land and buildings	$	468,307	$	15,610	$	452,697
Computer hardware and software		9,791,366		6,518,454		3,272,912
Furniture and fixtures		641,480		426,149		215,331
Leasehold improvements		488,924		327,380		161,544
	$	11,390,077	$	7,287,593	$	4,102,484
2007		Cost		Accumulated amortization		Net book value
Computer hardware and software	$	7,088,272	$	4,576,422	$	2,511,850
Furniture and fixtures		518,931		334,983		183,948
Leasehold improvements		479,385		252,506		226,879
	$	8,086,588	$	5,163,911	$	2,922,677

55

HOSTOPIA.COM INC.

Notes to Consolidated Financial Statements

(Expressed in U.S. dollars)

Years ended March 31, 2008, 2007 and 2006

4. Intangible assets:

2008		Cost		Accumulated amortization		Net book value
Customer lists, customer relationships and in-place contracts	$	2,847,476	$	1,758,690	$	1,088,786
Patents and licenses		1,724,925		537,290		1,187,635
Intellectual property		944,360		519,920		424,440
	$	5,516,761	$	2,815,900	$	2,700,861
2007		Cost		Accumulated amortization		Net book value
Customer lists, customer relationships and in-place contracts	$	2,037,868	$	1,198,039	$	839,829
Patents		661,925		88,256		573,669
Intellectual property		584,839		308,053		276,786
	$	3,284,632	$	1,594,348	$	1,690,284

The weighted average amortization period for customer lists, patents and licenses, and intellectual property is 2.0 years, 2.1 years and 1.6 years respectively. The weighted average amortization period for all intangible assets is 1.8 years.

The following table shows the estimated amortization expense for each of the next five years, assuming no further additions to acquired intangible assets are made:

2009	$	1,234,037
2010		872,092
2011		429,901
2012		106,170
2013		43,068
	$	2,685,268

5. Credit facility:

The Company has obtained a revolving demand operating line of credit of Cdn. $1,000,000, bearing interest at Canadian prime from a Canadian chartered bank. This facility is secured by a General Security Agreement on the assets of the Company and is subject to certain financial and non-financial covenants, the most significant of which include current ratio, tangible net worth and leverage ratio. There are no borrowings under this facility at March 31, 2008.

6. Related party transactions:

The Company completed transactions, including web hosting and applications service revenue, bandwidth and telephone services, with one of its stockholders, TELUS, in the normal course of operations. The transactions have been recorded at the exchange amount, representing the amount of consideration established and agreed to by the related parties as set out below. In addition, the Company has a commitment to purchase future services from the stockholder, as described in note 13.

Effective June 1, 2007, the Company purchased the remaining templates, images and marketing software from Geeksforless.com Inc., a related party, for $232,921 (Cdn$247,000) in cash, which amount was considered to be fair value. Two directors and/or officers of the Company each owned 27.4% of Geeksforless.com. The Company completed transactions with Geeksforless.com, including outsourced services in the normal course of operations. The transactions have been recorded at the exchange amount, representing the amount of consideration established and agreed to by the parties as set out below.

56

HOSTOPIA.COM INC.

Notes to Consolidated Financial Statements

(Expressed in U.S. dollars)

Years ended March 31, 2008, 2007 and 2006

6. Related party transactions (continued):

Aggregate related party transactions and balances are as follows:

		2008		2007
Balance sheets
Accounts receivable	$	5,377	$	7,107
Accounts payable		(19,075)		125,780

		2008		2007		2006
Statements of operations
Web hosting and applications
services revenue	$	2,851,114	$	2,205,678	$	1,890,339
Bandwidth		696,839		733,245		592,996
Outsourced services		1,829,731		1,407,709		890,152
Telephone services		213,985		202,447		119,980

7. Income taxes:

The provision for income taxes differs from the amount computed by applying the statutory income tax rates to net income before income taxes. The sources and tax effects of the differences are as follows:

		2008		2007		2006
Income before provision for
income taxes	$	3,467,677	$	2,991,888	$	3,072,052
Basic U.S. federal rate applied to income
before provision for income taxes	$	1,179,010	$	1,017,242	$	1,044,606
State taxes, net of federal benefit		79,886		48,872		44,606
Non-deductible amounts		34,083		1,802		24,259
Increase (decrease) in valuation allowance		–		–		–
Other		(32,979)		60,084		(44,363)
Total income taxes	$	1,260,000	$	1,128,000	$	1,069,000

Income tax expense attributable to income from continuing operations consists of:

		Current		Deferred		Total
Year ended March 31, 2008:
U.S. federal	$	613,500	$	(299,700)	$	313,800
State and local		121,600		(41,800)		79,200
International		973,500		(106,500)		867,000
	$	1,708,000	$	(448,000)	$	1,260,000
Year ended March 31, 2007:
U.S. federal	$	474,400	$	(307,035)	$	167,365
State and local		198,600		(73,965)		124,635
International		959,000		(123,000)		836,000
	$	1,632,000	$	(504,000)	$	1,128,000

57

HOSTOPIA.COM INC.

Notes to Consolidated Financial Statements

(Expressed in U.S. dollars)

Years ended March 31, 2008, 2007 and 2006

7. Income taxes (continued):

		Current		Deferred		Total
Year ended December 31, 2006:
U.S. federal	$	408,000	$	550,578	$	958,578
State and local		47,000		63,422		110,422
International		–		–		–
	$	455,000	$	614,000	$	1,069,000

Pre-tax income from foreign operations was $2,486,829, $2,656,924 and $1,877,635 for the years ended March 31, 2008, 2007 and 2006, respectively.

Significant components of the Company’s deferred tax assets are as follows:

		2008		2007
Property and equipment	$	646,000	$	520,000
Intellectual property		706,000		426,000
Stock-based compensation		140,000		117,000
Other		174,000		155,000
Deferred tax assets	$	1,666,000	$	1,218,000

In assessing the reliability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers projected future taxable income, uncertainties related to the industry in which the Company operates and tax planning strategies in making this assessment. In order to fully realize the net deferred tax assets recognized at March 31, 2008, the Company will need to realize approximately $4,300,000 in tax expenses in excess of amounts currently expensed by the Company for accounting purposes. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances.

Upon adoption of FIN 48, the Company had no unrecognized tax benefits liability and no liability in respect of either penalties or interest.

Interest or penalties in respect of income taxes is recognized as an income tax expense. During the years ended March 31, 2008, 2007, and 2006, the Company recognized $2,391, $26,292, $272 in interest and penalties.

There is significant judgment used in determining the likelihood of the Company’s tax positions being sustained upon audit. In future the Company will adjust any unrecognized tax benefits, as well as the related interest and penalties, in light of changing facts and circumstances. In future favorable resolution of uncertain tax positions will be recognized as a reduction to its effective income tax rate while any unfavorable resolution, in excess of the amount of unrecognized tax benefit liability, will result in an increase in income tax expense and higher effective tax rate.

Hostopia and its subsidiaries have filed income tax returns in the U.S. federal jurisdiction, Florida, Canada and the province of Ontario in respect of previous fiscal period. In respect of the current fiscal period Hostopia will also be filing income tax return in North Carolina in addition to the previously cited jurisdiction. Hostopia may be subject to reassessment in all of these jurisdictions, with the exception of North Carolina, for years beginning in 2000. The Internal Revenue Service contacted the Company in March 2008 and indicated it intends to commence an audit of the Company’s year ended March 31, 2007.

58

HOSTOPIA.COM INC.

Notes to Consolidated Financial Statements

(Expressed in U.S. dollars)

8. Capital stock:

All common share amounts have been restated to give effect to the one-for-five share consolidation approved at a special stockholders’ meeting held on May 18, 2006.

		2008		2007
Authorized:
30,000,000 common shares, par value $0.0001
Issued:
11,636,631 common shares; (2007: 11,097,251 common shares)	$	217,122	$	217,069

(a) On November 10, 2006, the Company completed its initial public offering (“IPO”) in which it sold 4,200,000 common shares at a price of $5.30 (Cdn$6.00) per share. A total of $22,283,137 (Cdn$25,200,000) in gross proceeds was raised in the IPO. After deducting the underwriters’ commission and offering expenses of $3,422,680, net proceeds of the IPO were $18,860,457. All 2,127,658 outstanding shares of the Company’s Series A redeemable, convertible preferred shares were converted into shares of common stock, on a one-for-one basis, at the closing of the IPO with a par value of $212.77.

On December 7, 2006, the underwriters exercised their option to purchase an additional 15% of the common shares issued in the IPO or 630,000 shares at a price of Cdn$6.00 per share. A total of $3,091,352 (Cdn$3,553,200) was raised after deducting the underwriters’ commission.

(b) On December 21, 2006, the Company issued 60,000 common shares pursuant to the exercise of warrants for proceeds of $192,000.

(c) During the year ended March 31, 2007, the Company issued 47,257 common shares pursuant to the exercise of stock options for proceeds of $130,495.

(d) During the year ended March 31, 2008, the Company issued 539,380 common shares pursuant to the exercise of stock options for proceeds of $1,486,666.

9. Share-based payments and related stock option plans:

2000 Stock Option Plan:

All common share amounts have been restated to give effect to the one-for-five share on May 18, 2006. Under the terms of the Company’s 2000 Stock Option Plan the Board of Directors of the Company were able to grant options to its employees, non-employees and officers for up to 900,000 common shares. The exercise price of each option equaled a price that was not less than the price of the Company’s stock on the date of grant and an option’s maximum term was seven years. Options vested over a three-year period from the date of grant.

2006 Stock Option Plan

On June 26, 2006, the Company’s Board of Directors approved, for presentation to the shareholders, the termination and replacement of the Company’s 2000 Stock Option Plan with the 2006 Stock Option Plan. At the Company’s Annual General Meeting the shareholders approved the 2006 Stock Option Plan and the termination of the 2000 Stock Option Plan. Under the terms of the 2006 Stock Option Plan, the Company is permitted to issue stock options and stock appreciation rights to eligible participants for up to 10% of the total outstanding shares of common stock. The exercise price of each option must equal a price that is not less than the five day volume weighted price of the Company’s stock on the date of grant. The maximum contract term of an option is seven years. Options vest on a graded basis over a three year period from the date of grant.

At March 31, 2008 a total of 1,163,663 common shares were reserved for issuance under the 2000 and 2006 Stock Option Plans.

During the current fiscal year, the Company granted 312,500 options on June 8, 2007, and 50,000 options on February 22, 2008 with exercise prices of $5.87 and $5.34 respectively, being the fair value of the common shares on those dates.

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HOSTOPIA.COM INC.

Notes to Consolidated Financial Statements

(Expressed in U.S. dollars)

Years ended March 31, 2008, 2007 and 2006

9. Share-based payments and related stock option plans (continued):

The estimated fair value of option on the grant days were determined using the Black-Scholes-Merton option pricing model based on the following assumptions:

	2008	2007	2006
Risk-free rate	2.90-4.54%	4.65% - 4.77%	2.75% - 3.75%
Expected option life	5 years	5 years	7 years
Dividend yields	Nil	Nil	Nil
Volatility factor	55%	67%	75%
Weighted average grant date fair value of option granted	$3.01	$4.01	$6.40

The risk-free interest rate was based on the currently available rate on U.S. Treasury zero-coupon bonds with a remaining term equal to the expected term of the option. The expected volatility of stock options was based on the average volatility of a group of peer companies because of to the short term nature of the Company’s historical data. The expected life of the Company’s options was based on the “simplified method” as provided for by the SEC Staff Accounting Bulletin SAB 110 for companies with limited historical exercise experience. Under the “simplified method” the expected term is equal to the mean of the vesting term and the term to expiry. The dividend yield reflects the fact that the Company has never declared or paid any cash dividends and does not currently anticipate paying cash dividends in the future.

The total compensation expense related to all share-based compensation plans was $386,583, $204,158 and $19,956 for the years ended March 31, 2008, 2007 and 2006, respectively. The income tax benefit related to share-based compensation was $93,678, $10,305 and nil for the years ended March 31, 2008, 2007 and 2006, respectively. Excess tax benefits of $350,000 related to the exercise of options in fiscal 2008 was booked to additional paid in capital and recognized as cash flow from financing.

As of March 31, 2008, there was $799,614 of total unrecognized compensation cost related to unvested option awards. This cost is expected to be recognized over a weighted-average period of 2.1 years.

In fiscal 2008, the intrinsic value of the 539,380 stock options exercised was $1,496,237 and cash received on exercise totaled $1,486,666. In fiscal 2007 the intrinsic value of the 47,257 stock options exercised was $129,236 and cash received on exercise totaled $130,495. No options were exercised in fiscal 2006. It is our policy to issue new shares from treasury to satisfy share option exercises.

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HOSTOPIA.COM INC.

Notes to Consolidated Financial Statements

(Expressed in U.S. dollars)

Years ended March 31, 2008, 2007 and 2006

9. Share-based payments and related stock option plans (continued):

The following table summarizes the stock option activity in fiscal, 2008, 2007 and 2006.

	Number of common shares under stock option plan		Weighted average exercise price per share	Weighted average term to maturity		Total intrinsic value
Outstanding, March 31, 2005	818,400	$	3.15
Granted	58,040		8.87
Forfeited	(37,160)		5.25
Outstanding, March 31, 2006	839,280		3.45
Granted	42,500		6.71
Exercised	(47,257)		2.76
Forfeited	(24,203)		6.12
Outstanding, March 31, 2007	810,320		3.58
Granted	362,500		5.80
Exercised	(539,380)		2.76
Forfeited	(39,750)		6.05
Outstanding, March 31, 2008	593,690	$	5.52	4.9	$	201,426
Exercisable, March 31, 2008	208,340	$	4.75	2.5	$	201,426

The following table summarizes the options outstanding and vested by range of exercise price as at March 31, 2008.

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HOSTOPIA.COM INC.

Notes to Consolidated Financial Statements

(Expressed in U.S. dollars)

Years ended March 31, 2008, 2007 and 2006

10. Net income per share:

The following table sets forth the computation of net income per share:

		2008		2007		2006
Basic and diluted net income per share:
Diluted net income attributable to common stockholders	$	2,207,677	$	1,863,888	$	2,003,052
Cumulative dividends on redeemable, convertible
preferred shares		–		(71,034)		(114,792)
Basic net income attributable to common stockholders	$	2,207,677	$	1,792,854	$	1,888,260
Basic net income per share	$	0.19	$	0.27	$	0.47
Diluted net income per share	$	0.19	$	0.23	$	0.28
Weighted average number of shares outstanding:
Basic		11,510,597		6,714,560		4,032,336
Effect of dilutive securities:
Series A redeemable, convertible
preferred shares		–		1,299,912		2,127,658
Stock options		94,519		205,889		487,993
Warrants		–		17,393		35,849
Diluted		11,605,476		8,237,754		6,683,836

During 2008, 2007 and 2006, the calculation did not include 454,230, 117,295 and 32,560 options, respectively, as the effect would have been anti-dilutive.

Concurrent with the Company’s Initial Public Offering on November 10, 2006, the Series A preferred shares were converted into common shares on a one for one basis.

11. Deferred lease inducements:

In 2006, the Company entered into a long-term lease agreement for office space that included certain lease inducements. These inducements included leasehold improvements funded by the lessor in the amount of $180,000 and a rent-free period of six months.

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HOSTOPIA.COM INC.

Notes to Consolidated Financial Statements

(Expressed in U.S. dollars)

Years ended March 31, 2008, 2007 and 2006

12. Commitments and contingencies:

The Company is committed to payments under operating leases for its premises through August 2012 and certain minimum payments with respect to its lease of data centre space, the purchase of bandwidth and certain revenue contracts. Annual payments for the fiscal years ending March 31 are as follows:

2009	$	2,490,000
2010		2,187,000
2011		1,482,000
2012		167,000
2013		60,000
2014		54,000
	$	6,440,000

Rent expense recorded in 2008 was $664,577 (2007 - $529,430; 2006 - $487,782).

In the ordinary course of business, and included in the above commitment schedule, the Company has entered into an agreement with one of its stockholders to acquire bandwidth and data centre services from December 2007 to November 2010. The remaining aggregate minimum payment obligation amounts to Cdn$1,902,696.

In the normal course of its operations, the Company may be subject to litigation and claims from time to time. Management believes that adequate provisions have been recorded in the accounts where required. Although it is not possible to estimate the extent of potential costs, if any, management believes that the ultimate resolution of such contingencies would not have a material adverse effect on the Company’s results of operations, financial position or on its liquidity.

13. Enterprise wide information:

The Company operates in a single reportable operating segment, that is, the development of application software for web hosting and applications services, e-mail and e-commerce that is marketed to users via the Internet. The single reportable operating segment primarily derives its revenue from the provision of web hosting and applications services, domain name registrations and services. As at March 31, 2008, 14% (2007 - 11%; 2006 - 35%) of all assets related to the Company’s operations were located in Canada and the remainder located in the U.S. As at March 31, 2008, 65% (2007 - 69%; 2006 - 70%) of all long-lived assets related to the Company’s operations were located in Canada and the remainder located in the U.S. Revenue attributable to geographic location is based on the location of the customer and was as follows:

		2008		2007		2006
Canada	$	12,520,938	$	9,804,969	$	8,534,493
United States		13,711,909		12,296,483		9,348,410
United Kingdom		1,545,601		368,212		74,004
	$	27,778,448	$	22,469,664	$	17,596,907

For the year ended March 31, 2008, revenue greater than 10% was derived from one customer in the amount of $3,654,721.

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HOSTOPIA.COM INC.

Notes to Consolidated Financial Statements

(Expressed in U.S. dollars)

Years ended March 31, 2008, 2007 and 2006

14. Subsequent events:

1) On April 25, 2008, the Company entered into an agreement to acquire the webhosting business, including the customer list operating under the brand name uplinkearth from Luxmovera, LLC. The Company paid a deposit of $300,006. The acquisition is expected to close on June 30, 2008. Additional payments on closing and following account migration are expected to total approximately $1.2 million.

2) On May 5, 2008, the Company entered into an agreement to acquire certain shared hosting customer assets, including 14,000 Domain Direct, NetIdentity and ItsYourDomain (IYD) customer accounts from Tucows Inc. The Company paid $320,000 on May 5 and an additional amount of $1,133,615 on May 16. The amount paid is subject to a purchase price adjustment following the completion of the account migration.

3) On June 19, 2008, Hostopia.com and Deluxe Corporation (NYSE:DLX) announced they had signed a definitive merger agreement, unanimously approved by the boards of both companies, pursuant to which Hostopia would become a wholly-owned subsidiary of Deluxe. If the merger is completed, holders of Hostopia common stock will receive CDN$10.55 in cash for each outstanding Hostopia common share. The transaction is valued at approximately CDN$124 million. The consummation of the merger agreement is subject to the approval by Hostopia shareholders and certain other customary conditions and is expected to close in late July or August.

15. Supplementary information:

		Balance at beginning of year		Charged to (recovered) costs and expenses		Write-offs during year		Balance at end of year
Allowance for doubtful accounts
2008	$	114,755	$	129,020	$	(32,365)	$	211,410
2007		48,650		72,105		(6,000)		114,755
2006		54,316		27,848		(33,514)		48,650

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Quarterly Results of Operations

The following table sets forth the selected unaudited quarterly consolidated statements of operations data for the eight quarters ended March 31, 2008. The information for each of these quarters has been prepared on the same basis as the audited consolidated financial statements included in this form 10-K and, in the opinion of management, includes all adjustments necessary for the fair presentation of the results of operations for such periods. This data should be read in conjunction with the audited consolidated financial statements and the related notes included in this form 10-K. These quarterly operating results are not necessarily indicative of our operating results for any future period.

	Three Months Ended,
	Mar.31, 2008	Dec. 31, 2007	Sept.30, 2007	June30, 2007		Mar.31, 2007	Dec. 31, 2006	Sept.30, 2006	June30, 2006
	(unaudited) (in thousands, except per share data)
Total revenues	$7,423	$7,289	$6,803	$6,263	$5,865		$5,617	$5,586	$5,402
Cost of revenues	908	960	903	849	840		710	723	648
Gross profit	6,515	6,329	5,900	5,414	5,025		4,907	4,863	4,754
Operating expenses
Sales and marketing	1,605	1,498	1,467	1,387	1,170		1,259	1,145	1,202
Research and development	901	1,084	970	885	800		774	783	712
Professional services	489	517	538	530	468		408	423	417
Customer care	1005	985	964	914	751		782	794	679
General and administration	747	737	652	582	543		541	432	391
Amortization	963	864	836	731	719		689	636	557
Total expenses	5,710	5,685	5,427	5,029	4,451		4,453	4,213	3,958
Income before the undernoted	805	644	473	385	574		454	650	796
Interest, net.	211	306	323	321	310		176	14	17
Income before income taxes	1,016	950	796	706	884		630	664	813
Income taxes	292	335	340	293	312		257	224	335
Net income	$ 724	$ 615	$ 456	$ 413	$ 572		$ 373	$ 440	$ 478
Per share data:
Basic	$0.06	$0.05	$0.04	$0.04	$0.05		$0.05	$0.10	$0.11
Diluted	$0.06	$0.05	$0.04	$0.04	$0.05		$0.04	$0.07	$0.07

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not Applicable

Item 9A. Controls and Procedures.

Evaluation of disclosure controls and procedures.

Based on their evaluation as of March 31, 2008, our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective to ensure that the information required to be disclosed by us in this Annual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Evaluation of internal controls over financial reporting

Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of our consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our Chief Executive Officer and Chief Financial Officer assessed the effectiveness of our internal control over financial reporting as of March 31, 2008. In making this assessment, they used the criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring

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Organizations of the Treadway Commission (COSO). Based on this assessment, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2008, our internal control over financial reporting is effective based on those criteria. Notwithstanding the foregoing, all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report. 

Changes in internal controls.

There were no changes in our internal controls over financial reporting during the year ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Limitations on the effectiveness of controls.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, a control can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Item 9B. Other Information.

Not applicable.

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PART III

 

Item 10. Directors and Executive Officers of the Registrant.

The table and information that follow set forth the names, ages and positions of our directors and executive officers as at May 31, 2008:

Name and Municipality of Residence	Age	Current Position	Principal Occupation	Director Since
Colin Campbell Fort Lauderdale, Florida, USA	37	Chief Executive Officer and Director	Chief Executive Officer of Hostopia.com	December 10, 1999
William Campbell Toronto, Ontario, Canada	42	President and Director	President of Hostopia.com	December 10, 1999
Peter Kostandenou Toronto, Ontario, Canada	37	Chief Operating Officer	Chief Operating Officer of Hostopia.com
Michael Mugan Pickering, Ontario, Canada	58	Chief Financial Officer	Chief Financial Officer of Hostopia.com	n/a
Paul D. Engels North York, Ontario, Canada	50	Executive Vice President, Chief Marketing Officer	Executive Vice President and Chief Marketing Officer of Hostopia.com	n/a
Dirk Bhagat Toronto, Ontario, Canada	30	Chief Technology Officer	Chief Technology Officer of Hostopia.com	n/a
Michael Cytrynbaum(2)(3) West Vancouver, British Columbia, Canada	66	Director	President of First Fiscal Management Ltd.	August 14, 2003
Mathew George(1) Vancouver, British Columbia, Canada	37	Director	Vice President of TELUS Ventures (a division of TELUS Corporation)	December 27, 2001
Robert Kidd(1)(3) Mississauga, Ontario, Canada	63	Director	President of Location Research Company of Canada Limited	May 15, 2000
Christopher Scatliff(1)(2)(3) Oakville, Ontario, Canada	64	Director	Chief Executive Officer of KORE Wireless Group Inc.	May 15, 2000
Randall Bast(2) Fort Lauderdale, Florida, USA	46	Director	Managing Partner of 20/20 Capital Partners	September 6, 2007

(1) Member of Audit Committee.

(2) Member of Compensation Committee

(3) Member of Nominating and Corporate Governance Committee.

Our directors hold office until the next annual meeting of the stockholders and the election and qualification of their successors, or until their resignation or removal. Officers are appointed by the board of directors and serve at the discretion of the board.

The Company has a separately-designated audit committee. The audit committee currently consists of Messrs. Kidd (chairman), George and Scatliff, each of whom is an independent director under the Canadian Securities Administrator’s (“CSA”) and NASDAQ Stock Market Inc.’s qualification standards. Our board of directors has determined that Mr. Kidd qualifies as an “audit committee financial expert,” as defined by the CSA and SEC rules and regulations.

We have adopted a written code of ethics that applies to our senior officers including our principal executive officer, principal financial officer and principal accounting officer, or persons performing similar functions. The code of ethics is posted on our website at www.hostopia.com. The code of ethics for senior officers may be found as follows:

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1. From our website home page left clicking on “Investors” on the tool bar at the top of the page,

2. Next, left click on “Corporate Governance” on the drop down menu, and

3. Finally, left click on “Senior Officers – Code of Ethics” located on the Corporate Governance web page.

Amendments to, and waivers from, the code of ethics that applies to any of these officers, or persons performing similar functions, and that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K, will be disclosed at the website address provided above and, to the extent required by applicable regulations, on a Current Report on Form 8-K.

The Company does not have a formal policy regarding the attendance of its directors at annual or special meetings of stockholders, but the Company encourages directors to attend such meetings. Five independent directors attended our last annual general meeting of shareholders held on September 6, 2007.

Executive Officers

The following is a description of the business background of the executive officers of Hostopia.com:

Colin Campbell, our Chief Executive Officer, has served in that capacity since April 2006. In addition, he was our Chief Operating Officer from April 2006 to February 2008. He was Chief Operating Officer from January 2001 to November 2005. He was President and Chief Operating Officer from November 2005 to April 2006. From November 1999 to December 2000, Mr. Campbell held the position of Senior Vice President, Internet Services at Look Communications Inc., a communications service provider, where he was responsible for leading the Internet team, guiding Internet product and services development, and for mergers and acquisitions in that product area. Mr. Campbell was a founding member of the Canadian Internet Registration Authority and served as a board member from June 2001 to January 2003. Mr. Campbell was Chief Operating Officer of TUCOWS Interactive Inc., a web services and online software delivery services provider, from 1997 to 1999 and was Chief Operating Officer of Internet Direct, an Internet service provider which later merged with I.D. Internet Direct Inc., an Internet service provider from 1994 to 1999. Mr. Campbell has a Bachelor of Arts in Commerce from the University of Toronto.

William Campbell has served as our President since April 2006. Mr. Campbell was our Chief Executive Officer from August 2001 until April 2006, and was Chief Technology Officer from August 2001 until June 2005. Mr. Campbell held the position of Chief Technology Officer in TUCOWS Interactive Inc., a web services and online software delivery services provider, from 1997 to 1999 and the position of Chief Technology Officer in Internet Direct, an Internet service provider which later merged with I.D. Internet Direct Inc., an Internet service provider from 1994 to 1999. Mr. Campbell has a diploma from Control Data Institute.

Peter Kostandenou has served as our Chief Operating Officer since February 2008. Mr. Kostandenou was our Vice President of Customer Care from December 2006 and was Director of Customer Care from November 2005 to December 2006. From June 2003 until November 2005, he was a private investor.  During the time period September 2000 until June 2003, he founded and was president of 1567550 Ontario Inc. (o/a OpenBox Liquidations).  Prior to that, he was the Senior Customer Care Manager for Enbridge, a large Canadian public company utility. Mr. Kostandenou holds a Bachelor of Arts from York University, and is currently enrolled in the MBA program through the Edinburgh Business School.

Michael Mugan has served as our Chief Financial Officer since May 2000. Mr. Mugan has extensive experience with public companies in several sectors of the economy. Mr. Mugan was with a predecessor firm of KPMG LLP, an accounting firm, from 1972 to 1981. He obtained his Chartered Accountant’s degree in 1974 and progressed to Senior Manager. In 1981, he joined the Resource Group of George Weston Limited, a food processing and distribution company and became Vice President, Finance of that Group in 1985. In 1998, he formed a consulting business involved in various assignments within the high technology and agribusiness industries. After completing an initial assignment with us early in 2000, he joined Hostopia.com and took on the responsibilities of Chief Financial Officer. Mr. Mugan has a Bachelor of Commerce (Honours) Degree from the University of Windsor.

Paul D. Engels has served as our Executive Vice President and Chief Marketing Officer since November 2005. Mr. Engels was also our Vice President, Marketing and Sales from January 2004 to November 2005 and Vice President, Marketing and Business Development from January 2002 to January 2004. Mr. Engels has a 20-year background in senior sales, marketing and product management roles in leading technology and Internet related businesses. He served as Director, Software Products at Pitney Bowes of Canada Ltd., a business services company, from 1990 to 1992, as Vice President, Marketing at Internet Direct /Look from 1998 to 2000, and as Vice President Marketing, Enterprise Solutions at Sprint

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Canada, a telecommunications services provider, from 2000 to 2001. Mr. Engels has a Bachelor of Arts (Honours, Joint Specialist in Political Economy) from the University of Toronto.

Dirk Bhagat joined Hostopia.com in April 2000 and has served as our Chief Technology Officer since June 2005. Mr. Bhagat was also our Vice President of Research and Development from November 2003 to June 2005. Prior to this, Mr. Bhagat served as Director of Technology from February 2002 to November 2003. Mr. Bhagat has extensive experience in systems and software development and engineering, including public-key encryption infrastructure, computational complexity theory and Internet security. Mr. Bhagat has a Bachelor of Science in Software Engineering from the University of Toronto.

Non-Executive Directors

Michael Cytrynbaum is President of First Fiscal Management Ltd. a private consulting company specializing in financial reorganizations, mergers and acquisitions, strategic planning and negotiation. Mr. Cytrynbaum also serves as chairman of Look Communications Inc., a communications service provider and Ignition Point Technologies Corp., a broadband communication provider, both publicly traded companies. In addition, he is a director of two junior resource companies, Callinan Mines Limited and Central Minera Corp., as well as being a director of Peer 1 Network Enterprises, Inc., a provider of high-performance Internet bandwidth. Mr. Cytrynbaum was a founding director of Microcell Telecommunications Inc. and remained on the board of that company for ten years. Mr. Cytrynbaum has a Bachelor of Arts and a Bachelor of Common Law from McGill University.

Mathew George is Vice President of TELUS Ventures, the strategic venture investment arm of TELUS Corporation. TELUS Ventures manages a venture capital fund that invests in emerging U.S. and Canadian technology companies. Mr. George joined Telus Ventures in June 2001 from the Abu Dhabi Investment Authority where he worked from 1999 to 2001 and was responsible for the global co investment and direct private equity investment activities of Abu Dhabi Investment Authority’s Private Equity group. Mr. George has also worked in the Mergers & Acquisitions Group at Warburg Dillon Read from 1996 to 1998 and Barclays de Zoete Wedd from 1995 to 1996, both in London and New York. In addition to serving on our board, Mr. George is a director of Apparent Networks, Inc., Vision Critical Communications Inc. and the Arts Club Theatre Company. Mr. George is a Chartered Financial Analyst and a member of the Chartered Financial Analysts Institute and the Vancouver Society of Financial Analysts. Mr. George holds a Masters of Business Management from the Ecole des Hautes Etudes Commerciales in Paris, with specialization in Analytical Finance from the University of Chicago’s Graduate School of Business. His Bachelor of Technology (Honours) degree in Electrical & Electronics Engineering is from the Regional Engineering College in Calicut, India.

Robert H. Kidd is Vice Chairman of Appleby College Foundation and was until its sale in January 2008 a director of Genesis Microchip Inc.. Mr. Kidd is President of Location Research Company of Canada Limited. Mr. Kidd served as Chief Financial Officer of Technology Convergence Inc. from 2000 to 2002, of Lions Gate Entertainment Corp. from 1997 to 1998, and of InContext Systems Inc. from 1995 to 1996. He served as Senior Vice President, Chief Financial Officer and director of George Weston Limited from 1981 to 1995, as a partner of a predecessor firm of KPMG LLP, from 1973 to 1981 and as a Lecturer in Finance, Faculty of Management Studies, University of Toronto, from 1971 to 1981. Mr. Kidd has served on several professional committees, including the Toronto Stock Exchange Investors & Issuers Advisory Committee from 1993 to 1998, the Canadian Institute of Chartered Accountants Emerging Issues Committee from 1992 to 1997 and the Canadian Securities Administrators Committee on Conflicts of Interest in Underwriting from 1994 to 1996. Mr. Kidd has a Bachelor of Commerce from the University of Toronto and a Masters of Business Administration from York University. Mr. Kidd is a Fellow of the Institute of Chartered Accountants of Ontario.

Christopher Scatliff is founder and Chief Executive Officer of KORE Wireless Group Inc., a Virginia based mobile virtual network operator specializing in machine-to-machine wireless communications. From 2000 to 2001 he was Executive Vice President of Itemus Inc. From 1996 until 2000, he was President and Chief Executive Officer of UUNET Canada (now MCI Canada). Mr. Scatliff was also a member of UUNET’s International Management Board from 1998 to 2000 with executive responsibility for Latin America. Mr. Scatliff served on the Canadian Government Ministerial Advisory Group for the 1998 OECD Conference in Ottawa. Previously, Mr. Scatliff was Vice President and Managing Director from 1993 to 1996 for Europe, Middle East, and Africa for Computer Sciences Corporation based in London, England. He has a Bachelor of Science degree in Physics from the University of Manitoba.

Randall Bast was elected a director of Hostopia.com in September 2007. He is the Managing Partner of 20/20 Capital Partners, a boutique investment and advisory services firm. From 2000 – 2002, Mr. Bast was a Vice President at Citrix Systems, Inc. (Nasdaq: CTXS). Prior to that time, Mr. Bast was the founder and former Chief Executive Officer of Innovex Group, Inc. a technology consulting company with numerous Fortune 1000 and emerging growth clients, which was acquired by Citrix Systems, Inc. in 2000. Mr. Bast has served on the board of the South Florida Chapter of Young Entrepreneur's Organization (YEO), the University of Florida MBA Advisory

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Board, the University School of Nova Southeastern University (NSU), and the Young Entrepreneur's Council for the Wayne Huizenga School of Business at Nova Southeastern University. He has both a Bachelor of Science (Finance) and a Masters of Business Administration from the University of Florida.

Michael Cytrynbaum is President of First Fiscal Management Ltd. a private consulting company specializing in financial reorganizations, mergers and acquisitions, strategic planning and negotiation. Mr. Cytrynbaum also serves as chairman of Look Communications Inc., a communications service provider and Ignition Point Technologies Corp., a broadband communication provider, both publicly traded companies. In addition, he is a director of two junior resource companies, Callinan Mines Limited and Central Minera Corp., as well as being a director of Peer 1 Network Enterprises, Inc., a provider of high-performance Internet bandwidth. Mr. Cytrynbaum was a founding director of Microcell Telecommunications Inc. and remained on the board of that company for ten years. Mr. Cytrynbaum has a Bachelor of Arts and a Bachelor of Common Law from McGill University.

Mathew George is Vice President of TELUS Ventures, the strategic venture investment arm of TELUS Corporation. TELUS Ventures manages a venture capital fund that invests in emerging U.S. and Canadian technology companies. Mr. George joined Telus Ventures in June 2001 from the Abu Dhabi Investment Authority where he worked from 1999 to 2001 and was responsible for the global co-investment and direct private equity investment activities of Abu Dhabi Investment Authority's Private Equity group. Mr. George has also worked in the Mergers & Acquisitions Group at Warburg Dillon Read from 1996 to 1998 and Barclays de Zoete Wedd from 1995 to 1996, both in London and New York. In addition to serving on our board, Mr. George is a director of Apparent Networks, Inc., Vision Critical Communications Inc. and the Arts Club Theatre Company. Mr. George is a Chartered Financial Analyst and a member of the Chartered Financial Analysts Institute and the Vancouver Society of Financial Analysts. Mr. George holds a Masters of Business Management from the Ecole des Hautes Etudes Commerciales in Paris, with specialization in Analytical Finance from the University of Chicago Graduate School of Business. His Bachelor of Technology (Honours) degree in Electrical & Electronics Engineering is from the Regional Engineering College in Calicut, India.

Robert H. Kidd is a director of Genesis Microchip Inc. and Vice Chairman Appleby College Foundation. Mr. Kidd is President of Location Research Company of Canada Limited. Mr. Kidd served as Chief Financial Officer of Technology Convergence Inc. from 2000 to 2002, of Lions Gate Entertainment Corp. from 1997 to 1998, and of InContext Systems Inc. from 1995 to 1996. He served as Senior Vice President, Chief Financial Officer and director of George Weston Limited from 1981 to 1995, as a partner of a predecessor firm of KPMG LLP, from 1973 to 1981 and as a Lecturer in Finance, Faculty of Management Studies, University of Toronto, from 1971 to 1981. Mr. Kidd has served on several professional committees, including the Toronto Stock Exchange Investors & Issuers Advisory Committee from 1993 to 1998, the Canadian Institute of Chartered Accountants Emerging Issues Committee from 1992 to 1997 and the Canadian Securities Administrators Committee on Conflicts of Interest in Underwriting from 1994 to 1996. Mr. Kidd has a Bachelor of Commerce from the University of Toronto and a Masters of Business Administration from York University. Mr. Kidd is a Fellow of the Institute of Chartered Accountants of Ontario.

Christopher Scatliff is founder and Chief Executive Officer of KORE Wireless Group Inc., a Virginia-based mobile virtual network operator specializing in machine-to-machine wireless communications. From 2000 to 2001 he was Executive Vice President of Itemus Inc. From 1996 until 2000, he was President and Chief Executive Officer of UUNET Canada (now MCI Canada). Mr. Scatliff was also a member of UUNET's International Management Board from 1998 to 2000 with executive responsibility for Latin America. Mr. Scatliff served on the Canadian Government Ministerial Advisory Group for the 1998 OECD Conference in Ottawa. Previously, Mr. Scatliff was Vice President and Managing Director from 1993 to 1996 for Europe, Middle East, and Africa for Computer Sciences Corporation based in London, England. He has a Bachelor of Science degree in Physics from the University of Manitoba.

Corporate Cease Trade Orders or Bankruptcies

Mr. Cytrynbaum has been a director and the Chairman of the Board of Look since May 1996 and Mr. Colin Campbell was Senior Vice-President of Internet Services from November 1999 to December 2000 and a director of Look from November 1999 to March 2003. On September 4, 2001, Look was granted protection from its creditors under the Companies’ Creditors Arrangement Act (Canada) (CCAA), pursuant to a court order issued by the Superior Court of the Province of Ontario. Under the terms of the court order, Look was required to present to the court a Plan of Arrangement and Compromise setting out the terms of the restructuring of its debt and other obligations. The Plan of Arrangement and Compromise was filed with the court on November 14, 2001, received creditor approval on December 14, 2001, final court approval on December 21, 2001, and was implemented on February 11, 2002.

Mr. Cytrynbaum was a director of Microcell Telecommunications Inc. (Microcell) from December 1993 to May 2003. Microcell elected to restructure its operations under the CCAA and filed for and received an initial order for protection

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under the CCAA on January 3, 2003 from the Superior Court of the Province of Quebec. On March 17, 2003, Microcell’s Plan of Reorganization and of Compromise and Arrangement was voted upon and approved by secured and affected unsecured creditors. On March 18, 2003, the court issued an order sanctioning the Plan of Reorganization and of Compromise and Arrangement, and it became effective on May 1, 2003.

Central Minera Corp. is a reporting issuer in British Columbia. The British Columbia Securities Commission issued a cease trade order against this company on November 6, 2007, for failure to file within the prescribed time period comparative financial statements and Form 51-102F1 - Management’s Discussion and Analysis (the “Required Records”) for its financial year ended June 30, 2007, as required under Part 5 of National Instrument 51-102 – Continuous Disclosure Obligations. Central Minera Corp. filed the Required Records on December 24, 2007 and the cease trade order was revoked by the British Columbia Securities Commission on December 27, 2007. Michael Cytrynbaum was at the time of issuance of the cease trade order, and is as of June 25, 2008, a director and the President of this company.

Mr. Scatliff was appointed Executive Vice President and an officer of Vengold Inc. (Vengold) on April 4, 2000 as part of Vengold’s acquisition of his private company Exceleration.net Inc. Vengold subsequently changed its name to Itemus Inc. (Itemus). Mr. Scatliff resigned from Itemus effective April 5, 2001. Subsequent to Mr. Scatliff’s involvement, Itemus filed for bankruptcy on July 31, 2001, and a cease trade order was issued on November 15, 2001 by the Ontario Securities Commission. Itemus was dissolved on September 19, 2005.

To the best of our knowledge, other than as disclosed above, none of our directors, officers or stockholders holding a sufficient number of securities to affect materially the control of Hostopia.com, is, or within the last ten years to the date of this Form 10-K has been, a director or officer of any other issuer that, while that person was acting in the capacity of a director or officer of that issuer, was the subject of a cease trade order or similar order, or any order that denied the issuer access to any statutory exemptions under securities legislation for a period of more than 30 consecutive days, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold the assets of that issuer.

Penalties or Sanctions

To the best of our knowledge, none of our directors, officers or stockholders holding a sufficient number of securities to affect materially the control of Hostopia.com, has been subject to any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority or been subject to any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor making an investment decision.

Personal Bankruptcies

To the best of our knowledge, none of our directors, officers or stockholders holding a sufficient number of securities to affect materially the control of Hostopia.com, nor any personal holding company of any such person has, within the ten years before the date of this Form 10-K, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or been subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of that person.

Indebtedness of Directors and Executive Officers

As at the date of this Form 10-K, no amount was owed to us or any of our subsidiaries by any director or executive officer.

Item 11. Executive Compensation

The Board of Directors has delegated the power and authority to review, modify and approve compensation policies and practices and to administer the Company’s stock option plan to the Compensation Committee. The Compensation Committee annually evaluates and establishes the compensation policies for the Chief Executive Officer and other named executive officers. Messrs. Scatliff, Cytrynbaum, and Bast comprise the Compensation Committee and are non-employees and independent as defined by the relevant Canadian and U.S. securities regulations.

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Compensation Philosophy

Our philosophy is to design and maintain a straight-forward and simple compensation structure designed based on the role that each of our “named executives” plays within our organization. While the weighting of components differs for each executive, our goal is that the total value of each named executive’s compensation package approximate the median value of total compensation received by executives with similar responsibilities at comparable companies. To meet this goal the Compensation Committee commissioned a compensation study and report from AON Corporation.

We believe compensation packages should provide a reasonable core salary as well as a combination of short and long term incentives to motivate the executives to grow the company profitably now and into the future. Accordingly, for fiscal 2009, compensation for our named executive officers consists of a base salary and, with the exception of our Chief Financial Officer (CFO), targeted incentive cash bonuses based on the executive’s overall performance and individual contribution as well as our success in meeting our annual financial targets. In addition, each of the named executives is motivated to align their decision making with the long term success of the Company through their on-going participation in the Company’s 2000 and 2006 Stock Option Plans. None of the named executives’ compensation package contains any deferred compensation component related to retirement nor do the packages contain any perquisites.

Elements of the Executive Compensation Program

Base Salary. The Compensation Committee recognizes the importance of maintaining base cash compensation levels that are competitive with companies in similar businesses and with similar characteristics such as revenue and capitalization. The base salary for each executive officer was initially established through negotiation at the time the officer was hired, taking into account such officer’s qualifications, experience, prior salary and competitive salary information at that time. Year-to-year adjustments to each executive officer’s base salary are determined by an assessment of their sustained performance against his or her individual job responsibilities including, where appropriate, how such performance influences our business results as well as the individual’s experience and potential for advancement. Base salary is targeted at between 45% and 80 % of total compensation.

Annual Incentive Bonuses. The compensation packages for all named executives, with the exception of the CFO, provide for target bonus amounts, intended to motivate the executives to achieve certain bookings, revenue and profitability goals as determined by the CEO and the Compensation Committee. The CFO may receive a bonus based on his meeting certain operational and functional goals and responsibilities. However, his bonus is not tied to the achievement of financial results to prevent any conflict or perceived conflict of interest in the preparation of our financial results. Use of financial goals establishes a direct link between the executive’s pay and our short term success. Payouts of bonuses are based upon the Compensation Committee’s review and analysis as to the extent that both the Company and the individual operating objectives have been achieved. The Compensation Committee may modify goals and criteria if circumstances change during the year. The annual incentive bonus is targeted at between 10% and 45% of total compensation.

Long-Term Incentives. All named executives also receive long-term incentive compensation through grants of stock options, previously under our 2000 plan and going forward under our 2006 plan. We believe these grant programs provide our executive officers with the opportunity to purchase and maintain an equity interest in Hostopia and to share in the appreciation of the value of Hostopia common stock. We believe that these grants directly motivate an executive to maximize long-term stockholder value and align the financial interests of the executives and other employees with those of the stockholders. The grants also utilize a graded vesting period (generally over three years) that encourages these key executives to continue in our employ. The Compensation Committee and then our Board of Directors, consider each grant subjectively, considering factors such as the individual performance of the executive officer and the anticipated contribution of the executive officer to the attainment of our long-term strategic performance goals. Options granted in prior years are also taken into consideration. The vesting of options to the named executives may be tied to the Company meeting certain profitability targets.. The long term incentive component is targeted at between 10 and 20% of total compensation.

CEO Compensation

Mr. Colin Campbell’s base salary for fiscal 2008 of $195,000 was established based on a compensation study and report we commissioned from the AON Corporation in respect of executive and director’s compensation. Mr. Campbell’s compensation for fiscal 2008 also provides for a target bonus of 45% of his base salary if the Company achieves its planned level of profitability. Mr. Campbell has the potential of receiving a bonus of up to 100% of his base salary if the Company achieves a level of profitability well in excess of its targeted level of profitability. In June 2007, Mr. Campbell was granted 50,000 stock options with a strike price equal to the market price of the Company’s shares on the Toronto Stock Exchange at the time of the grant. 25,000 of these options were subject to forfeiture had the Company not achieved a defined level of profitability in fiscal 2008.

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The Compensation Committee intends to review the Chief Executive Officer’s compensation arrangement annually. His compensation will then be determined based on industry comparables, his individual performance for the fiscal year under review, as well as our company’s performance. The Compensation Committee believes Mr. Campbell’s total compensation is at a median level when compared with chief executive officer’s compensation of companies of similar size within the Web hosting and application service provider industry.

Section 162(m) Compliance

All compensation paid to executive officers of Hostopia is deductible under Internal Revenue Code 162(m).

Executive Compensation Summary

The following table shows information regarding the compensation earned by our principal executive officer, our principal financial officer and our other three most highly compensated executive officers, collectively referred to as the “named executive officers”, during the years ended March 31, 2006, 2007 and 2008. In accordance with the rules of the SEC, this table does not include perquisites and other personal benefits, if any, received by the named executive officers that do not exceed in aggregate $10,000.

Summary Compensation Table

Name and Principal Position	Year		Salary ($)		Bonus ($)		Option Awards ($) (2)		All Other ($) (1)			Total ($) (3)
Colin Campbell		2008	$	194,850	$	10,000	$	42,473	$	590	$		247,913
Chief Executive Officer		2007		190,025		—		—		590			190,615
		2006		148,400		—		—		—			148,400
William Campbell		2008		218,043		10,000		42,473		289			270,805
President		2007		201,271		—		—		250			201,521
		2006		155,449		—		—		—			155,449
Michael Mugan		2008		205,445		—		43,358		274			249,077
Chief Financial Officer		2007		165,883		26,348		—		209			192,440
		2006		140,365		1,676		—		—			142,041
Paul Engels		2008		164,744		75,974		56,580		225			297,523
Executive Vice President,		2007		140,523		48,247		12,630		180			201,580
Chief Marketing Officer		2006		122,862		22,356		—		—			145,218
Dirk Bhagat		2008		137,583		11,531		63,112		192			212,418
Chief Technology Officer		2007		119,313		—		18,945		162			138,420
		2006		103,702		—		—		—			103,702

(1) Premiums on life insurance

(2) The amount shown in this column represents stock options awarded under our 2000 and 2006 Stock Option Plans. See Exhibits 10.1 and 10.2 respectively incorporated by reference in this Form 10-K. This column reflects the dollar amount recognized for financial statement reporting purposes, disregarding the effect of the estimate of forfeitures related to service-based vesting conditions, for fiscal yeas ended March 31, 2008, in accordance with SFAS 123R and thus includes amounts from awards granted prior to fiscal 2007. Assumptions used in the calculation of this amount are included in note 9 to the Company’s audited financial statements for the fiscal year ended March 31, 2008 included in Item 8 on this Form 10-K.

(3) The total amount reported herein represents compensation for the individual’s services as an executive officer.

Grants of Plan-Based Awards in Last Fiscal Year

During the year ended March 31, 2008, we granted options to purchase an aggregate of 362,500 shares of Hostopia common stock, of which 250,000 were granted to named executives as outlined in the table below. All options were granted at the fair market value of Hostopia common stock as of the date of grant.

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Grant of Plan–Based Awards

			Estimated Future Payouts Under Equity Incentive Plan Awards
Name	Grant Date		Threshold (#)		Target (#)		Maximum (#)		Exercise Price of Option Awards ($/Sh)			Grant Date Fair Value of Stock and Option Awards
Colin Campbell		June 8		25,000		50,000		50,000		$5.87	$		153,000
William Campbell		June 8		25,000		50,000		50,000		$5.87	$		153,000
Michael Mugan		June 8		25,000		50,000		50,000		$5.87	$		153,000
Paul Engels		June 8		25,000		50,000		50,000		$5.87	$		153,000
Dirk Bhagat		June 8		25,000		50,000		50,000		$5.87	$		153,000

Each of the named executives received an award of 50,000 options in fiscal 2008 of which 25,000 were subject to forfeiture if the Company did not meet a profitability target established by the Compensation Committee for fiscal 2008. This performance target was met so the maximum 50,000 options granted will vest on a graded basis over three years with one-third vesting on each of December 8, 2008, June 8, 2009 and June 8, 2010 subject to the named executive meeting the requisite service requirement under the 2006 Stock Option Plan

Outstanding Equity Awards at Fiscal Year-End

The following table sets forth specified information concerning stock options held as of March 31, 2007 by each of the named executive officers.

Outstanding Equity Awards at Fiscal Year-End

Name		Number of Securities Underlying Unexercised Options # Exercisable	Number of Securities Underlying Unexercised Options # Unexercisable		Option Exercise Price ($)	Option Expiration Date
Colin Campbell	(3)	—	50,000	$	5.87	6/08/2014
William Campbell	(3)	—	50,000		5.87	6/08/2014
Michael J. Mugan	(3)	—	50,000		5.87	6/08/2014
Paul Engels	(1)	28,000	—		2.75	1/31/2009
	(1)	6,000	—		3.05	11/30/2009
	(1)	10,000	—		3.35	6/30/2010
	(2)	4,000	2,000		8.75	11/30/2012
	(3)	—	50,000		5.87	6/08/2014
Dirk Bhagat	(1)	2,400	—		2.75	6/30/2008
	(1)	8,400	—		2.75	8/30/2009
	(1)	3,600	—		5.00	11/30/2010
	(2)	6,000	3,000		8.75	11/30/2012
	(3)	—	50,000		5.87	6/08/2014

(1) All amounts are fully vested.

(2) The unvested shares vest on November 30, 2008.

(3) Of the total amount, one-third vest on December 8, 2008, one-third vest on June 8, 2009 and the remaining one-third vest on June 8, 2010.

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Option exercises

The following table sets forth specified information in respect of stock options exercised by each of the named executive officers during the year ended March 31, 2008.

                                                              Option Exercises

		Value Realized
	Shares Acquired Upon Exercise	On Exercise
Name	(#)	($)
Colin Campbell	—	—
William Campbell	19,800	61,578
Michael J. Mugan	84,000	250,774
Paul Engels	—	—
Dirk Bhagat	9,600	29,939

Employment Contracts and Termination of Employment and Change-in-Control Contracts

We are party to employment contracts providing for an annual salary of Cdn$225,000 to Mr. William Campbell, Cdn$225,000 to Mr. Colin Campbell, Cdn$200,000 to Mr. Mugan, Cdn$160,000 to Mr. Engels and Cdn$137,800 to Mr. Bhagat. The employment contacts for Mr. William Campbell and Mr. Colin Campbell expire on March 31, 2009 and the employment contracts for Mr. Mugan, Mr. Engels and Mr. Bhagat continue for an indefinite term. Mr. Engels is eligible to receive bonuses based upon both sales and earnings goals established by our board of directors. Mr. Bhagat is eligible, based on his performance, to receive annual bonuses not to exceed 20% of his annual base salary. Messrs. W. Campbell and C. Campbell are each eligible, based on performance, to receive an annual bonus up to 100% of their annual salary, with the bonus targeted to 50% of their annual salary.

Pursuant to our agreements with each of Messrs. W. Campbell and C. Campbell, we may terminate the agreement without cause, by paying an amount equal to two weeks’ salary multiplied by the number of years the executive was employed by us. With respect to our agreement with Mr. Mugan we may terminate this agreement without cause and without notice, provided that we pay an amount equal to six months’ salary plus one month’s salary for each year or partial year of his employment. With respect to our agreement with Mr. Engels we may terminate this agreement without cause and without notice, provided that we pay an amount equal to not less than six months’ salary plus an amount equal to two weeks of salary for each year of employment. Mr. Engels is also entitled to commissions earned up to the date of termination, in the event we terminate the agreement. With respect to Mr. Bhagat in the event we terminate the agreement without cause, he shall be entitled to receive a payment equal to the greater of (i) 26 weeks’ salary, and (ii) two weeks’ salary multiplied by the number of years he was employed by us.

Other than the payment of directors’ fees as described below, we have no service contracts with any director or officer. There are no arrangements or agreements made or proposed to be made between us and any of our named executive officers pursuant to which a payment or other benefit is to be made or given by way of compensation in the event of that officer’s resignation, retirement or other termination of employment, or in the event of a change of control of us or a change in the named executive officer’s responsibilities following such change in control.

Compensation of Directors

Each independent director is eligible to receive a retainer of Cdn$17,000 per year, and Cdn$250 for attending each meeting of the board or any committee of the board. If board and committee meetings are held on the same day, then no additional compensation will be paid for attendance at the committee meetings. Committee chairs receive an additional Cdn$8,000 per year. All our directors are compensated for reasonable out-of-pocket expenses in connection with attending meetings of our board or its committees.

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The following table summarizes the compensation received by our non-executive directors for the year ended March 31, 2008.

Director Compensation
Name		Fees Paid in Cash	Option Awards (4)	All Other Compensation (1)		Total
Michael Cytrynbaum ( 1)	$	58,260			$	58,260
Matthew George	$	24,833			$	24,833
Robert. Kidd (2)	$	28,910			$	28,910
Chris Scatliff (3)	$	29,000			$	29,000
Randall Bast	$	6,666			$	6,666

(1) Mr. Cytrynbaum held 25,000 stock options at March 31, 2008.

(2) Mr. Kidd held 4,400 stock options at March 31, 2008.

(3) Mr. Scatliff held 4,800 stock options at March 31, 2008.

(4) No option grants were made to Directors in fiscal 2008. The amount shown in this column represents stock options awarded under our 2000 Stock Option Plan. See Exhibit 10.1 incorporated by reference in this Form 10-K. This column reflects the dollar amount recognized for financial statement reporting purposes, disregarding the effect of the estimate of forfeitures related to service-based vesting conditions, for fiscal the year ended March 31, 2008, in accordance with SFAS 123R and thus includes amounts from awards granted prior to fiscal 2007. Assumptions used in the calculation of this amount are included in footnote 10 to the Company’s audited financial statements for the fiscal year ended March 31, 2008 included in Item 8 on this Form 10-K.

Compensation Committee Interlocks and Insider Participation

During the year ended March 31, 2008, Mr. Chris Scatliff, Mr. Michael Cytrynbaum, and Mr. David McMahon, while still a director and Mr. Randall Bast after becoming a director, served as members of the Compensation Committee. All members of the Compensation Committee were independent.

During the year ended March 31, 2008:

• None of the members of the Compensation Committee entered into (or agreed to enter into) any transaction or series of transactions with us or any of our subsidiaries in which the amount involved exceeded $60,000 in which he had or will have a direct or indirect material interest;

• None of our executive officers was a director or Compensation Committee member of another entity, an executive officer of which served on our Compensation Committee; and

• None of our executive officers served on the Compensation Committee (or another board committee with similar functions) of another entity, an executive officer of which served as a director on our board of directors.

Compensation Committee Report

This report of the compensation committee is not “soliciting material,” is not deemed “filed” with the SEC and shall not be deemed incorporated by reference by any general statement incorporating by reference this Form 10-K into any filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under such acts.

The Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Form 10-K report for the fiscal year ended March 31, 2007.

Compensation Committee

Chris Scatliff, Chair

Michael Cytrynbaum

Randall Bast

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth information, as of the date of this Form 10-K, regarding the beneficial ownership of Hostopia common stock by:

• Each person that is a beneficial owner of more than 5% of our outstanding common stock;

• Each of our named executive officers;

• Each of our directors; and

• All directors and named executive officers as a group.

Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power over securities. Except in cases where community property laws apply or as indicated in the footnotes to this table, we believe that each stockholder identified in the table possesses sole voting and investment power over all shares of common stock shown as beneficially owned by the stockholder. Percentage of beneficial ownership is based on 11,636,631 shares of Hostopia common stock outstanding as of March 31, 2008. Shares of common stock subject to options that are currently exercisable or exercisable within 60 days of the date of this Form 10-K are considered outstanding and beneficially owned by the person holding the options for the purposes of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Other than as specifically noted otherwise, the address of each individual listed in the table is c/o Hostopia.com Inc., 5915 Airport Road, 11th Floor, Mississauga, Ontario L4V 1T1.

	Number of Shares Beneficially Owned at March 31, 2008
Name	Number	%(1)
Burgundy Asset Management Ltd.(13) 181 Bay Street, Suite 4510, Toronto, ON M5J 2T3	2,192,400	18.8
Colin Campbell(2)(3) 110 East Broward Blvd., Suite 1650, Fort Lauderdale, Florida 33301	1,391,453	12.0
William Campbell(2)(4)	1,450,827	12.5
John Nemanic(2)(5)	1,307,627	11.2
CCM Master Qualified Fund, Ltd.(14) One North Wacker Drive, Suite 4350, Chicago, Illinois 60606	1,173,000	10.1
TELUS Corporation(6) 12 - 3777 Kingsway Burnaby, British Columbia, V5H 3Z7	851,063	7.3
Michael Cytrynbaum(7)	25,000	*
Mathew George(6)	—	—
Robert Kidd(8)	87,900	*
Christopher Scatliff(9)	87,900	*
Randall Bast	25,000	*
Peter Kostandenou(10)	4,000	*
Michael Mugan	96,000	*
Paul Engels(11)	49,800	*
Dirk Bhagat(12)	30,400	*
All directors and executive officers as a group (11 persons)	3,248,280	27.9

* Represents beneficial ownership of less than one percent.

(1) Shares issuable pursuant to the exercise of stock options and warrants exercisable within 60 days are deemed outstanding and held by the holder of such shares but are not deemed outstanding for computing the percentage of outstanding common stock beneficially owned by any other person.

(2) Messrs. Nemanic, Colin Campbell and William Campbell control 1555706 Ontario Limited which owns 851,063 shares of common stock. 1555706 Ontario Limited is owned 32.55% by Mr. Nemanic, 27.90% by Mr. Colin Campbell, 32.55% by Mr. William Campbell and 7.0% by Ms. Lillian Campbell, the mother of Mr. Colin Campbell and Mr. William Campbell.

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(3) Includes 1,154,006 shares of common stock and also includes 237,447 shares of common stock held by 1555706 Ontario Limited based on Mr. Campbell’s proportionate interest in 1555706 Ontario Limited.

(4) Includes 850,006 shares of common stock, 264,000 shares of common stock owned by The 1999 William Campbell Family Trust and 40,000 common shares owned by Mr. Campbell’s spouse, Marie Campbell. Also includes 277,021 shares of common stock held by 1555706 Ontario Limited based on Mr. Campbell’s proportionate interest in 1555706 Ontario Limited.

(5) Includes 1,030,606 shares of common stock and also includes 277,021 shares of common stock held by 1555706 Ontario Limited based on Mr. Nemanic’s proportionate interest in 1555706 Ontario Limited.

(6) Mr. Mathew George represents TELUS Corporation on our board of directors. TELUS Communications Company is a wholly owned subsidiary of TELUS Corporation.

(7) Includes 25,000 shares of common stock issuable upon exercise of options.

(8) Includes 4,400 shares of common stock issuable upon exercise of options. Also includes 43,500 shares of common stock owned by Location Research Company of Canada Limited, which is wholly owned by Mr. Kidd and his spouse, Elizabeth Kidd.

(9) Includes 4,800 shares of common stock issuable upon exercise of options.

(10) Includes 4,000 shares of common stock issuable upon exercise of options.

(11) Includes 48,000 shares of common stock issuable upon exercise of options.

(12) Includes 20,400 shares of common stock issuable upon exercise of options.

(13) Based on information reported by Burgundy Asset Management Ltd., an eligible institutional investor, on November 30, 2006 pursuant to Part 4 of National Instrument 62-103.

(14) Based on information reported by CCM Master Qualified Fund, Ltd., an eligible institutional investor, on March 10, 2008 pursuant to Part 4 of National Instrument 62-103.

Securities Authorized for Issuance under Equity Compensation Plans

The following table summarizes equity compensation plan information as at March 31, 2007.

Equity Compensation Plan Information
	Number of securities to be issued upon exercise of outstanding options	Weighted average exercise price of outstanding options	Number of securities remaining available for future issuance
Plan Category	(a)	(b)	(c)
Equity compensation plans approved by security holders	593,690	$5.52	569,973 (1)
Equity compensation plans not approved by security holders	Nil	Nil	Nil
Total	593,690	$5.52	569,973

(1) The Company is permitted to issue stock options and stock appreciation rights to eligible participants for up to 10% of total outstanding shares of common stock.

 

Item 13. Certain Relationships and Related Transactions.

We currently have an agreement as detailed below with Geeksforless.com Inc (GFL). Mr. Colin Campbell and Mr. William Campbell (each of whom was a director and/or officer of Hostopia.com during all of fiscal 2008 and each of whom are holders of more than 5% of our outstanding shares of common stock) each hold 27.4% of the outstanding shares of GFL. The total amount expensed with respect to this contract in fiscal 2008 was $1,829,731.

In July 2005, we entered into a services agreement with GFL, for software programming services, technical support and technical services. Under this services agreement, we retain all intellectual property rights in or to the software or services provided by GFL, and GFL and its contractors agree to enter into intellectual property rights agreements in favor of Hostopia.com, regarding the treatment of confidential information, the ownership of intellectual property and the assignment of rights, prior to undertaking any work under the agreement. The initial term of the agreement was one year, and it automatically renews for additional one year terms unless terminated. The agreement may be terminated by us at any time upon 30 days’ written notice, by GFL at any time after June 30, 2010 upon 12 months’ written notice, and by either party upon 21 days’ written notice in the event of an uncured breach by the other party of its obligations under the agreement. This agreement with GFL stipulates fixed prices that will increase in 2008 and 2009 based upon the rate of inflation in Ukraine to

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a maximum of 10% per year. We believe that the terms of this agreement are equivalent to terms we would have received in an agreement with an arm’s length party.

All right, title and interest in another agreement that we had previously entered into with GFL, concerning website templates jointly owned with GFL, was acquired by us on June 1, 2007 for $232,921 in cash.

We have entered into an agreement with TELUS Communications Company (TELUS) to provide web hosting and related services. We also have a number of service agreements with TELUS for the purchase of bandwidth, data center space and telephony services as described below. Prior to our initial public offering, TELUS Corporation, the parent of TELUS, held 40% of the issued and outstanding shares of our Series A redeemable convertible preferred stock, which automatically converted to shares of common stock on a one-for-one basis upon the closing of this offering. Consequently, TELUS Corporation currently holds 851,063 shares or 7.3% of Hostopia common stock as of March 31, 2008. One of our directors, Mr. Mathew George is an employee of TELUS or its affiliates.

In December 2007, we renewed services agreements for three years with TELUS whereby we agreed to purchase or lease bandwidth, data centre space, and telephone line services. These agreements expire in December 2007. The total amount expensed with respect to these contracts in fiscal 2008 was $910,824

In August 2001 we entered into a services agreement with TELUS with an initial term of three years whereby we agreed to provide them with web hosting, electronic commerce, and e-mail solutions and other related services. Upon the expiry of the initial term, the agreement automatically renewed and will continue until notice of termination is provided. The agreement may be terminated by TELUS upon 30 days’ notice, subject to payment by TELUS of an amount equal to one half of the average monthly billings for the prior six months multiplied by the number of months remaining in the term. The agreement may also be terminated by either party upon 60 days’ notice at the end of the initial term or any renewal term. In addition, either party may terminate the agreement upon 30 days’ written notice in the event of an uncured breach by the other party of its obligations under the agreement, or in the case of bankruptcy or insolvency proceedings being instituted with respect to the other party. The Company recognized $2,851,114 of revenues in respect of this service agreement in fiscal 2008.

The Nominating and Corporate Governance Committee is responsible for evaluating and confirming to the Board the fairness of any non-routine transaction involving the Company and a related party. 

Item 14. Principal Accounting Fees and Services.

The aggregate fees billed to our company by KPMG LLP, our independent registered public accounting firm, for the indicated services were as follows:

	Fiscal 2008			Fiscal 2007
Audit Fees(1)		$	241,573		$	569,210
Audit-Related Fees		$	—		$	5,380
Tax Fees(2)		$	49,634		$	44,410
All Other Fees		$	—		$	—

(1) Audit Fees consist of fees billed for professional services performed by KPMG LLP for the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q, and in fiscal 2007 services that are normally provided in connection with a Form S-1 filing and its related translation into French as well as a Form S-8 filing.

(2) Tax Fees consist of fees billed in the indicated year for professional services performed by KPMG LLP with respect to tax compliance, tax advice and tax planning.

The Audit Committee has considered whether the provision of non-audit services is compatible with maintaining the independence of KPMG LLP, and has concluded that the provision of such services is compatible with maintaining the independence of our auditors.

Audit Committee Policy Regarding Pre-Approval of Audit and Permissible Non-Audit Services by Our Independent Registered Public Accounting Firm

Our audit committee has established a policy that all audit and permissible non-audit services provided by our independent audit firm will be pre-approved by the audit committee. These services may include audit services, audit-related services, tax services and other services. The audit committee considers whether the provision of each non-audit service is

79

compatible with maintaining the independence of our auditors. Pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. Our independent audit firm and management are required to periodically report to the audit committee regarding the extent of services provided by the independent audit firm in accordance with this pre-approval, and the fees for the services performed to date. All of the audit, audit-related and tax fees described above were pre-approved by our audit committee. The audit committee may delegate to one or more designated members of the audit committee the authority to grant the required pre-approvals, provided that such approvals are presented to the audit committee at a subsequent meeting.

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PART IV

 

Item 15. Exhibits and Financial Statement Schedules.

The following documents are filed as part of this Annual Report on Form 10-K:

1. Financial Statements

Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements

Consolidated Statements of Income for the Fiscal Years ended March 31, 2006, 2007, and 2008

Consolidated Balance Sheets as of March 31, 2007 and 2008

Consolidated Statements of Changes in Stockholders’ Equity for the Fiscal Years ended March 31, 2006, 2007, and 2008

Consolidated Statements of Cash Flows for the Fiscal Years ended March 31, 2006, 2007, and 2008

2. Financial Statement Schedules

All schedules are omitted because they are either not applicable or the required information is provided in the financial statements or related notes.

3. Exhibits.

The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the Securities and Exchange Commission:

Exhibit No.	Description of Document
3.1(1)	Amended and Restated Certificate of Incorporation of Hostopia.com Inc.
3.2(2)	Amended and Restated Bylaws of Hostopia.com Inc.
4.1(1)	Registration Rights Agreement dated December 27, 2001
4.2(3)	Specimen Stock Certificate.
10.1(1)	2000 Stock option Plan and forms of related agreements.
10.2(2)	2006 Stock Option Plan and forms of related agreements.
10.3(1)	Employment Agreement of William Campbell, dated June 1, 2006.+
10.4(1)	Employment Agreement of Colin Campbell, dated June 1, 2006.+
10.5(1)	Employment Agreement of Michael Mugan, dated April 1, 2006.+
10.6(1)	Employment Agreement of Paul Engels, dated April 1, 2006.+
10.7(1)	Employment Agreement with Dirk Bhagat, dated June 1, 2006.+
10.8(5)	Form of Indemnification Agreement between registrant and each of its directors and executive officers.
10.9(1)	Asset purchase agreement between the registrant and FortuneCity.com Inc., dated January 31, 2006.
10.10(1)	Services agreement between registrant and Geeksforless.com Inc., dated July 1, 2005.
10.11(1)	Lease between Badenhurst-Airway Centre Ltd. And the registrant dated September 30, 2002, as amended.
10.12(1)	Revolving Line of Credit Facility.
10.13(5)	Employment Agreement with Peter Kostandenou, dated April 1, 2008.+
10.14(5)	Template Purchase Agreement between registrant and Geeksforless.com Inc., dated June 1, 2007.
10.15(4)	Agreement and Plan of Merger, dated as of June 18, 2008, among Deluxe Corporation, Deluxe Business Operations, Inc., Helix Merger Corp. and Hostopia.com Inc

81

Exhibit No.	Description of Document
21.1(1)	Subsidiaries of the registrant.
23.1(5)	Consent of KPMG LLP, Independent Registered Public Accounting Firm.
31.1(5)	CEO Certification required by Rule 13a-14(a) or Rule 15d-14(a).
31.2(5)	CFO Certification required by Rule 13a-14(a) or Rule 15d-14(a).
32.1(5)	Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).
32.2(5)	Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).

(1) Filed as an Exhibit to the Registrant’s registration statement on Form S-1 (No. 333-135533), filed with the SEC on June 30, 2006 and incorporated herein by reference.

(2) Filed as an Exhibit to Registrant’s registration statement on Form S-1A (No. 333-13533), filed with the SEC on August 11, 2006 and incorporated herein by reference.

(3) Filed as an Exhibit to Registrant’s registration statement on Form S-1A (No. 333-13533), filed with the SEC on October 5, 2006 and incorporated herein by reference.

(4) Filed as an Exhibit to Registrant’s current report Form 8-K, filed with the SEC on June 18,2008

(5) Filed as an exhibit with this Form 10-K

+ Indicates management contract or compensatory plan.

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SIGNATURES

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

	Hostopia.com Inc. __________________________________________________ (Registrant)
June 26, 2008 __________________________________________________ Date	/s/ Michael J. Mugan __________________________________________________ Michael J. Mugan Chief Financial Officer (Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the date indicated:

Name	Title	Date
/s/ Colin Campbell	Chief Executive Officer and Director	June 25, 2008
Colin Campbell
/s/ Michael J. Mugan	Chief Financial Officer (Principal Financial and Accounting Officer)	June 25, 2008
Michael J. Mugan
/s/ Robert H. Kidd	Director	June 25, 2008
Robert H. Kidd
/s/ Christopher Scatliff	Director	June 25, 2008
Christopher Scatliff
/s/ Matthew George	Director	June 25, 2008
Matthew George
/s/ William Campbell	President and Director	June 25, 2008
William Campbell
/s/ Michael Cytrynbaum	Chairman and Director	June 25, 2008
Michael Cytrynbaum
/s/ Randall Bast	Director	June 25 2008
Randall Bast

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EX-10.8

Exhibit 10.8

INDEMNIFICATION AGREEMENT

This Indemnification Agreement (“Agreement”) is made as of this ____ day of ____________________, 20___ by and between Hostopia.com Inc., a Delaware corporation (the “Corporation”), and ________________________ (the “Indemnitee”).

BACKGROUND:

A. The Corporation and Indemnitee recognize the increasing difficulty in obtaining adequate directors’ and officers’ liability insurance, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance.

B. The Corporation and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting officers, directors, employees, agents and consultants to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited.

C. Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and other officers, directors, employees, agents and/or consultants of the Corporation may not be willing to continue to serve as officers, directors, employees, agents and/or consultants without additional protection.

D. The Corporation desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as officers, directors, employees and/or consultants of the Corporation and to indemnify its officers, directors, employees, agents and/or consultants so as to provide them with the maximum protection permitted by law.

TERMS OF AGREEMENT:

NOW, THEREFORE, the Corporation and Indemnitee, for $10 now paid by Indemnitee to the Corporation and other good and valuable consideration (the receipt and sufficiency of which the Corporation hereby acknowledges), hereby agree as follows:

1. Indemnification.

(a) Third-Party Proceedings. The Corporation shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to, or in good faith believes he will, be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, whether formal or informal (other than an action by or in the right of the Corporation) by reason of:

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(i)	the fact that Indemnitee is or was a director, officer, employee, consultant or agent of the Corporation, or any subsidiary of the Corporation,
(ii)	any action or inaction on the part of Indemnitee while an officer, director, employee, consultant or agent of the Corporation or
(iii)	the fact that Indemnitee is or was serving at the request of the Corporation as a director, officer, employee, consultant or agent of another corporation, partnership, joint venture, trust or other enterprise,

against expenses (including legal fees and other costs of investigation and defence), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Corporation, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal or administrative action or proceeding that is enforced by monetary penalty, if Indemnitee had reasonable grounds for believing Indemnitee’s conduct was lawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of no contest or its equivalent, shall not, of itself, create a presumption that (A) Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation, or (B) with respect to any criminal or administrative action or proceeding that is enforced by monetary penalty, Indemnitee did not have reasonable grounds for believing that Indemnitee’s conduct was lawful.

(b) Proceedings By or in the Right of the Corporation. The Corporation shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation or any subsidiary of the Corporation to procure a judgment in its favor by reason of:

(i)	the fact that Indemnitee is or was a director, officer, employee, consultant or agent of the Corporation, or any subsidiary of the Corporation,
(ii)	any action or inaction on the part of Indemnitee while an officer, director, employee, consultant or agent of the Corporation, or
(iii)	the fact that Indemnitee is or was serving at the request of the Corporation as a director, officer, employee, consultant or agent of

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another corporation, partnership, joint venture, trust or other enterprise,

against expenses (including legal fees and other costs of defence) and judgments, fines and amounts paid in settlement, in each case to the extent actually and reasonably incurred by Indemnitee in connection with such action or suit if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation.

(c) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made to Indemnitee by the Corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee, consultant or agent is proper in the circumstances because Indemnitee has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made, with respect to Indemnitee (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the shareholders.

(d) Tax Gross-Up. If Indemnitee is required by law to pay any tax on account of receipt of any amount under this Agreement, the Corporation shall increase the amount payable to Indemnitee such that the amount received by Indemnitee, after deduction of all applicable taxes, is equal to the amount that Indemnitee would have received under this Agreement had such tax not been payable, provided that Indemnitee takes all reasonable steps to minimize the amount of such tax and provides the Corporation with evidence satisfactory to the Corporation, acting reasonably, that such steps have been taken.

2. Expenses; Indemnification Procedure.

(a) Advancement of Expenses. The Corporation shall advance all expenses incurred by Indemnitee in connection with the investigation, defence, settlement or appeal of any civil or criminal action or proceeding referenced in Section 1(a) or (b) hereof. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined by a court of competent jurisdiction from which no further right of appeal exists that Indemnitee is not entitled to be indemnified by the Corporation as authorized hereby. Indemnitee’s obligation to repay such advanced amounts shall be unsecured and no interest shall be charged thereon. The advances to be made hereunder shall be paid by the Corporation to Indemnitee (or, if requested by the

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Indemnitee, shall pay the expenses directly) within 10 days following delivery of a written request therefor (accompanied by written evidence of the expense claimed) by Indemnitee to the Corporation.

(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to his right to be indemnified under this Agreement, give the Corporation notice in writing as soon as practicable of any claim in writing made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Corporation shall be directed to the Chief Executive Officer, Chief Financial Officer or Chairman of the Corporation at the address shown on the signature page of this Agreement (or such other address as the Corporation shall designate in writing to Indemnitee). Notice shall be deemed received 3 business days after the date postmarked if sent by registered mail, properly addressed; otherwise notice shall be deemed received when such notice shall actually be received by the Corporation. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require and as shall be within Indemnitee’s power.

(c) Procedure. Notwithstanding any other provision contained herein, any indemnification provided for in Section 1 shall be made no later than 20 days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Corporation’s Articles or By-laws providing for indemnification, is not paid in full by the Corporation within 20 days after a written request for payment thereof has first been received by the Corporation, Indemnitee may, but need not, at any time thereafter bring an action against the Corporation to recover the unpaid amount of the claim and, subject to Section 18 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including legal fees) of bringing such action. If and only if the Corporation has paid the full amount of the indemnification requested within 5 days of the date of commencement of such action, it shall be a defence to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Corporation to indemnify Indemnitee for the amount claimed but the burden of proving such defence shall be on the Corporation, and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Subsection 2(a) unless and until such defence may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties’ intention that the Indemnitee shall be fully indemnified promptly for claims that are the subject matter of this Agreement, and the Corporation may claim back all or some portion of the funds so paid by it if and to the extent that the defence described in this Section 2(c) proves successful.

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(d) Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 2(b) hereof, the Corporation has director and officer liability insurance in effect, the Corporation shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Corporation shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

(e) Selection of Counsel. In the event the Corporation shall be obligated under Section 2(a) hereof to pay the expenses of any proceeding against Indemnitee, the Corporation, if appropriate, shall be entitled to assume the defence of such proceeding, with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Corporation, the Corporation will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that:

(i)	Indemnitee shall have the right to employ his counsel in any such proceeding at Indemnitee’s expense; and
(ii)	if:

A.	the employment of counsel by Indemnitee has been previously authorized by the Corporation, or
B.	Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Corporation and Indemnitee in the conduct of any such defence, or
C.	the Corporation shall not, in fact, have employed counsel to assume the defence of such proceeding,

then the fees and expenses of Indemnitee’s counsel shall be at the expense of the Corporation.

3. Additional Indemnification Rights; Nonexclusivity.

(a) Scope. Notwithstanding any other provision of this Agreement, the Corporation hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Corporation’s Articles or By-laws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute or rule which expands the right of this Corporation to indemnify a member of

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its board of directors, an officer, employee, consultant or other corporate agent, such changes shall be within the purview of Indemnitee’s rights and Corporation’s obligations under this Agreement. In the event of any change in any applicable law, statute, or rule which narrows the right of this Corporation to indemnify a member of its Board of Directors, an officer, employee, consultant or other corporate agent, such changes, to the extent not otherwise required by such law, statute, or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties’ rights and obligations hereunder.

(b) Nonexclusivity. The indemnification and advancement of expenses provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may be entitled under the Corporation’s By-laws, any agreement, any vote of shareholders or disinterested directors, applicable corporate law, or otherwise, both as to action in Indemnitee’s official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he may have ceased to serve in such capacity at the time of any action or other covered proceeding.

4. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred by him in the investigation, defence, appeal or settlement of any civil or criminal action or proceeding, but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled.

5. Directors’ and Officers’ Liability Insurance. The Corporation shall obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers, employees, consultants, agents and directors of the Corporation with coverage that ensures the Corporation’s performance of its indemnification obligations under this Agreement, for the duration of Indemnitee’s service in such capacity and thereafter for so long as Indemnitee is subject to any pending or possible claim or other matter that is the subject of this Agreement. In all policies of directors’ and officers’ liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Corporation’s directors, if Indemnitee is a director; or of the Corporation’s officers, if Indemnitee is not a director of the Corporation but is an officer; or of the Corporation’s key employees, if Indemnitee is not an officer or director but is a key employee; or of the Corporation’s consultants or agents, if Indemnitee is not an officer or director but is a consultant or agent. The Corporation shall require and cause any successor (whether direct or indirect by purchase, merger, amalgamation, arrangement, consolidation or otherwise) to all, substantially all, or a substantial part, of the business and/or assets of the

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Corporation ( the “Change of Control”), by written agreement, to cause to be maintained in effect policies of liability insurance providing coverage for directors, officers, employees, consultants and agents of the Corporation that are at least substantially comparable in scope and coverage to that provided by the Corporation’s policies of directors’ and officers’ liability insurance in effect prior to the Change in Control and for the period in respect of which insurance is required to be maintained by the Corporation pursuant to the first sentence of this Section.

6. Severability. The Corporation’s inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 6. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms.

7. Exceptions. The Corporation shall not be obligated pursuant to the terms of this Agreement:

(a)

Excluded Acts. To indemnify Indemnitee for any acts or omissions or transactions from which a director may not be relieved of liability under applicable corporate law; or

(b)

Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defence, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any law, but such indemnification or advancement of expenses may be provided by the Corporation in specific cases if the Board of Directors has approved the initiation or bringing of such suit; or

(c) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction from which no further right of appeal exists determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or

(d) Insured Claims. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, taxes or penalties, and amounts paid in settlement) which have been paid directly to Indemnitee by an insurance carrier under a policy of directors’ and officers’ liability insurance maintained by the Corporation.

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8. Presumptions/Knowledge. For purposes of any determination hereunder, the Corporation will have the burden of establishing the failure of the Indemnitee to satisfy any standard of conduct required for indemnification hereunder and the applicability of any exception under Section 7. The termination of any civil, criminal, administrative, investigative or other proceeding by any judgment, order, settlement or conviction will not, of itself, create a presumption either that the Indemnitee did not act in good faith and/or in the best interests of the Corporation or that, in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, the Indemnitee did not have reasonable grounds for believing that the Indemnitee’s conduct was lawful. The knowledge and/or actions, or failure to act, of any other director, officer, agent, consultant or employee of the Corporation or any other entity will not be imputed to the Indemnitee for purposes of determining the right to indemnification under this Agreement. The Corporation will have the burden of establishing that any amount claimed by the Indemnitee hereunder that it wishes to challenge is not reasonable.

9. Witnesses. Notwithstanding any other provision of this Agreement, to the extent that the Indemnitee is a witness or participant other than as a named party in a proceeding relating, directly or indirectly, to the Corporation, the Corporation will pay to the Indemnitee all out-of-pocket expenses actually and reasonably incurred by the Indemnitee or on the Indemnitee’s behalf in connection therewith. The Indemnitee will also be compensated by the Corporation at the rate of US$1,000 per day (or partial day) provided that the Indemnitee will not be entitled to the per diem if he/she is employed as an officer of the Corporation when co-operation is sought.

10. Effectiveness of Agreement. This Agreement shall be effective as of the date set forth on the first page and shall apply to acts or omissions of Indemnitee which occurred prior to such date if Indemnitee was an officer, director, consultant, employee or other agent of the Corporation, or was serving at the request of the Corporation as a director, officer, employee, consultant or agent of another corporation, partnership, joint venture, trust or other enterprise, at the time such act or omission occurred. All of the Corporation’s obligations under this Agreement will continue as long as Indemnitee is subject to any actual or possible matter which is the subject of this Agreement, notwithstanding Indemnitee’s termination of service as a director, officer, employee, consultant or agent of the Corporation or of a partnership, joint venture, trust or other enterprise or corporation in respect of which Indemnitee was serving in such capacity at the request of the Corporation.

11. No Restrictions. The rights and remedies of Indemnitee under this Agreement shall not be deemed to exclude or impair any other rights or remedies to which Indemnitee may be entitled under the Corporation’s By-laws or Articles, or under any other agreement, provision of law or otherwise, nor shall anything contained herein restrict the right of the Corporation to indemnify Indemnitee in any proper case even though not specifically provided for in this Agreement, nor shall

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anything contained herein restrict Indemnitee’s right to contribution as may be available under applicable law.

12. Further Assurances. The parties will do, execute and deliver, or will cause to be done, executed and delivered, all such further acts, documents and things as may be reasonably required for the purpose of giving effect to this Agreement.

13. Acknowledgment. The Corporation expressly acknowledges that it has entered into this Agreement and assumed the obligations imposed on the Corporation hereunder in order to induce Indemnitee to serve or to continue to serve as a director, officer, consultant, employee or agent of the Corporation, and acknowledges that Indemnitee is relying on this Agreement in serving or continuing to serve in such capacity.

14. Period of Limitations. No legal action shall be brought, and no cause of action arising out of or related to the parties’ respective rights and obligations under this Agreement shall be asserted, by or on behalf of the Corporation or any affiliate of the Corporation against Indemnitee, Indemnitee’s spouse, heirs, executors or personal or legal representatives after the expiration of one year from the date the Corporation knows that such cause of action has accrued. Any claim or cause of action of the Corporation or its affiliate shall be extinguished and deemed released unless asserted by the timely filing and notice of a legal action within such period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, the shorter period shall govern.

15. Construction of Certain Phrases.

(a) For purposes of this Agreement, references to the “Corporation” shall also include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, consultant or agents, so that if Indemnitee is or was a director, officer, employee, consultant or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, consultant or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued.

(b) For purposes of this Agreement, references to “serving at the request of the Corporation” shall include any service as a director, officer, employee, consultant or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee, consultant or agent with respect to an employee benefit plan, its participants, or beneficiaries.

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16. Counterparts. This Agreement may be executed in one or more counterparts, which together shall constitute one agreement.

17. Successors and Assigns. This Agreement shall be binding upon the Corporation and its successors and assigns, and shall enure to the benefit of Indemnitee and Indemnitee’s estate, heirs, legal representatives and assigns.

18. Legal Fees. In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all costs and expenses, including reasonable legal fees, incurred by Indemnitee with respect to such action, unless as a part of such action, a court of competent jurisdiction from which no further right of appeal exists determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Corporation under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all costs and expenses, including reasonable legal fees, incurred by Indemnitee in defence of such action (including with respect to Indemnitee’s counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee’s material defences to such action were made in bad faith or were frivolous and such determination is not overturned by a court of competent jurisdiction from which no further right of appeal exists.

19. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given:

(a) if delivered by hand and receipted for by the party addressee, on the date of such receipt, or

(b) if mailed by registered mail with postage prepaid, on the third business day after the date postmarked.

Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice.

20. Consent to Jurisdiction. The Corporation and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the Province of Ontario for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the courts of the Province of Ontario.

21. Choice of Law. The provisions of this Agreement shall be construed in accordance with the laws of the Province of Ontario. Nothing in this Agreement is intended to require or shall be construed as requiring the Corporation to do or fail to do any act in violation of applicable law.

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22. Termination of Prior Agreement. The parties hereby agree that upon execution of this Agreement by the Corporation and Indemnitee, any prior indemnification agreement between the parties shall be terminated and be of no further force and effect.

THE PARTIES, intending to be contractually bound, have executed this Indemnification Agreement as of the date set out on the first page.

HOSTOPIA.COM INC.

By:

___________________________

Name: •Colin Campbell

Title: •Chief Executive Officer

Address: •110 East Broward Boulevard, Ste. 1650

Ft. Lauderdale, FL, 33301

AGREED TO AND ACCEPTED:

INDEMNITEE:

____________________________

•Name of Officer or Director

Address:     •_____________________
                         •_____________________
                         •_____________________

EX-10.13

Exhibit 10.13

EMPLOYMENT AGREEMENT

THIS AGREEMENT is made and entered into as of the 1^st day of April, 2008 by and between Hostopia.com Inc. (the “Company”) and Peter Kostandenou (the “Employee”).

WHEREAS the Company wishes to employ Employee and desires to enter into an agreement (the “Agreement”) embodying the terms of such employment;

AND WHEREAS Employee has accepted such employment on the basis of the terms and conditions set forth I this Agreement;

IN CONSIDERATION of the recitals and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows:

1. Employment:

(a) The company hereby employs Employee and Employee hereby accepts employment wit the Company for the term of this Agreement set forth in Section 2 below, in a position and with the duties and responsibilities set forth in Section 3 below, and upon all other terms and conditions in this Agreement set forth.

(b) Employee shall be headquartered in Toronto, Canada provided that Employee shall render such services within and outside of Canada, including frequent visits to the Company’s offices in United States and Europe, as shall from time to time be necessary for the performance of his duties hereunder.

2. Term:

(a) The term of Employee’s employment pursuant to this Agreement (the “term”) shall be for a period of 3 years, and shall begin on April 1, 2008 and shall continue until April 1^st, 20011, subject to the provisions of this Agreement providing for earlier termination of Employee’s employment in certain circumstances.

(b) The term shall automatically be extended for an additional period of 12 months from April 1^st, 2011 (“Renewal Date”) and on each subsequent anniversary of the Renewal Date, unless terminated by either the Company of Employee by written notice to the other given at least 180 days prior to the Renewal Date or each subsequent anniversary of the Renewal Date.

3. Position, Responsibilities:

(a) It is intended that all times during the term of this Agreement, Employee shall serve as the Chief Operation Officer of the Company with responsibility for

performing such duties for the Company and its subsidiaries as Employee shall reasonably by directed to perform the Company’s board of directors.

(b) Throughout the term of this Agreement, Employee shall devote on average, no less than 40 hours per week to the business and affairs of the Company, except for vacations and except for illness or incapacity. In addition, nothing in this Agreement shall preclude Employee from devoting reasonable periods required for serving, as appropriate, on boards of directors of other corporations, from engaging in charitable and public service activities, and from managing his personal investments, provided such activities do not materially interfere with the performance of his duties and responsibilities under this Agreement.

4. Salary/Options: For services rendered by Employee during the term of this Agreement, Employee shall be paid a base salary payable monthly, at an annual rate of $100,000 from April 1^st, 2008 – July 1^st, 2008 and $120,000 from July 1^st, 2008 subject to, during the second and the third years of the term and subsequent years, if any, to annual review and increase of salary and options at the sole discretion of the CEO and board of directors of the Company, taking into account, among other things, individual performance and general business conditions. The base salary shall be payable in Canadian dollars. In addition, the Employee will receive an executive bonus plan to be set at the sole discretion of the CEO and board of directors.

5. Business Expenses: Employee will be reimbursed for all reasonable expenses incurred by him in connection with the conduct of the Company’s business upon presentation of sufficient evidence of such expenditures provided such expenditures are deductible to the Company for tax purposes or are authorized expenditures pursuant to policies adopted by the board of directors of the Company from time to time.

6. Benefits and Vacation:

(a) Employee will be entitled to participate in all employee benefit programs of the Company from time to time in effect under the terms and conditions of such programs, including, but not limited to, pension and other retirement plans, group life insurance, hospitalization and surgical and major medical coverage, dental insurance, sick leave, including salary continuation arrangements, long-term disability, and such other fringe benefits as are or may be available from time to time to employees of the Company.

(b) The Company may obtain a key-man life insurance policy covering Employee for the benefit of Employee or the company in such amount as the Company considers appropriate, and Employee hereby agrees to take all necessary actions to facilitate the issuance and maintenance of such insurance policy.

(c) Employee shall be entitled to all usual public holidays and, in addition, to three weeks paid vacation during each year of Employee’s employment for the first 3 years of employment and 4 weeks hereafter. Such vacation shall be utilized by Employee at such time or times as do not materially interfere with the ongoing conduct of the Company’s business and operations and can not be carried over from year to year.

7. Termination of Employment:

(a) Death. In the event of the death of Employee during the term of this Agreement, Employee’s salary will be paid to Employee’s designated beneficiary, and in the absence of such designation, to the estate in which death occurs. Rights and benefits of Employee under employee benefit plans and programs of the Company, including life insurance, will be determined in accordance with the terms and conditions of such plans and programs.

(b) Disability. Employee’s employment shall terminate automatically upon written notice from the Company in the event of Employee’s absence or inability to render the services required hereunder due to disability, illness, and incapacity or otherwise for an aggregate of 60 days during any one year period. In the event of any such absence or inability, Employee shall be entitled to receive the compensation provided for herein for the first 30 days thereof, whereafter Employee shall be entitled to receive compensation in accordance with the Company’s long-term disability plan together with such compensation, if any, as may be determined by the board of directors of the Company.

(c) Termination by the Company Other Than for Cause. In the event of termination by the Company of Employee employment hereunder other than for cause, Employee shall be entitled to continued salary payments, payable monthly, for a period equal to 4 weeks multiplied by the number of years employed by the Company (“Severance Period”), following such termination (notwithstanding that the balance of the term of this Agreement may exceed the Severance Period) at the rate in effect immediately prior to such termination. Any rights and benefits of Employee under employee benefit plans and programs of the Company will be determined in accordance with the terms of such plans and programs.

(d) Termination by the Company for Cause. In the event of a termination for cause, there will be no continued salary payments by the Company to Employee and any rights and benefits of Employee under employee benefit plans and programs of the Company will be determined in accordance with the terms of such plans and programs. For purposes of this Section 7(d) and of Employees employment with the Company, “cause” shall mean that:

(i) Employee has committed a felony or indictable offence or has improperly enriched himself at the expense of the Company or has committed an act evidencing dishonesty or moral turpitude including without limitation an act of theft; or

(ii) Employee, in carrying out his duties hereunder, (i) has been willfully and grossly negligent, or (ii) has committed willful and gross misconduct or, (iii) has failed to comply with an instruction or directive from the board of directors of the Company;

(iii) Employee has breached a material term of this Agreement;

(iv) Employee becomes bankrupt or in the event a receiving order (or any analogous order under any applicable law) is made against Employee or in the event Employee makes any general disposition or assignment for the benefit of his creditors; or

(v) Employee commits any other act giving the Company cause to terminate Employee’s employment, including, but not limited to, chronic alcoholism or drug addition, material malfeasance or nonfeasance with respect to Employee’s duties hereunder.

Prior to any termination of Employee for cause due to any occurrence described in subparagraphs 7(a)(ii),(iii) and (v) above, the Company shall notify Employee in writing of the particulars of the occurrence upon which termination would be based and shall in such notice advise Employee as to whether in the Company’s sole discretion the default of Employee occasioned by such occurrence is capable of being cured or rectified in full without loss or damage to the Company, in which case the Company shall afford Employee a reasonable period of not less than five business days in which to cure or rectify such default. In such event and provided Employee cures or rectifies such default in full without loss or damage to the Company, Employee’s employment shall not be terminated on the basis of such occurrence.

8. Non-Competition: Employee agrees that during the period of Employee’s employment with the Company for a period of 18 months from the last payment of compensation to Employee by the Company, Employee shall not engage in or participate in any business activity that competes, directly or indirectly, with business of the Company, or its subsidiaries or affiliates, provided that Employee shall not be precluded from competing with the business of the Company in the event of a termination of Employee’s employment as a result of a material breach by the Company of the provisions of this Agreement or in the event that Employee’s employment is terminated by the Company other than for cause.

For purpose of this Section 8, Employee shall be deemed to “compete, directly or indirectly: with the businesses of the Company, or its subsidiaries or affiliates if Employee is or becomes engaged, otherwise than at the request of the Company, as an officer, director or employee of, or is or becomes associated in a management or ownership, consultant or agent, capacity with, any corporation, partnership or other enterprise or venture the business of which includes wholesale, private label web hosting and email services in Canada or United States, during the 18 month period immediately preceding Employee’s termination. Employee shall not be deemed to “compete, directly or indirectly: with businesses of the Company, or its subsidiaries of affiliates if he becomes associated in a management or ownership, consultant or agent, capacity with, any corporation, partnership or other enterprise or venture, the business of which is competitive to the Company, prior to the date that the businesses of the Company becomes competitive with the business so such corporation, partnership or other enterprise or venture.

Notwithstanding anything to the contrary contained herein Employee many, without being deemed to compete, directly or indirectly, with business of the Company or its subsidiaries or affiliates own not more than 5% of any class of the outstanding securities of any such corporation listed on a national securities exchange or traded in the over-the-counter market.

It is the desire and the intent of the parties that the provisions of this Section 8 shall be enforceable to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular portion of this Section 8 is adjudicated unenforceable in any jurisdiction, such adjudication shall apply only in that particular jurisdiction in which such adjudication is made.

The parties recognize that the Company will have no adequate remedy at law for the breach by Employee of the covenants provided in this Section 8, and, in the event of such breach, the Company and Employee hereby agree that the Company will be entitled to any injunction, a decree of specific performance, mandamus or other appropriate remedy to enforce such covenants.

9. Non-Solicitations: Employee agrees that for a period of 24 months following the last payment of salary to Employee, Employee will not, whether as principal, agent, employee, employer, director, officer, shareholder or in any other individual or representative capacity, solicit or attempt to retain in any way whatsoever any of the employees of the Company or its subsidiaries of affiliates.

10. Confidential Information:

(a) Employee agrees not to disclose either while the Company’s employ or at any time thereafter to any person not employed by the Company or not engaged to render

services to the Company, any trade secrets or confidential information of or relating to the Company or its subsidiaries and affiliates or its business obtained by Employee while in the employ of the Company; provided, however, that this provision shall not preclude Employee from the sue of disclosure of information known generally to the public (other than that which Employee may have disclosed in breach of this Agreement) or of information not generally considered confidential or from disclosure required by law or court order in the proper conduct of the Company’s business.

(b) Employee also agrees that upon leaving the Company’s employ, Employee will not take, without the prior written consent of the board of directors of the Company, any document, whether in paper or electronic form, of the Company or its subsidiaries, affiliates and divisions, which is of a confidential nature relating to the Company of its subsidiaries, affiliates and divisions.

(c) The parties recognize that the Company will have no adequate remedy at law for breach by Employee of the covenants provided in this Section 10, and in the event of such breach, the Company and Employee hereby agree that the Company shall be entitled to an injunction, a decree of specific performance, mandamus or other appropriate remedy to enforce such covenants.

11. Ownership of Trade Secrets: All results of services performed by Employee hereunder including without limitation all ideas, copyrights, trade secrets or otherwise, shall be owned by and be the sole and exclusive property of the Company. Employee hereby transfers and assigns all right, title and interest of every nature and kind whatsoever therein to the Company and agrees to execute and deliver such further documents and instruments as may be necessary to fully and effectually give effect thereto.

12. Withholding: Anything to the contrary notwithstanding, all payments required to be made by the Company hereunder to Employee or his estate or beneficiaries, shall be subject to the withholding of such amounts relating to taxes as the Company may reasonably determine, after consultation with Employee, it should withhold pursuant to any applicable law or regulation. In lieu of withholding such amounts, in whole or in part, the Company may, in its sole discretion, accept other provisions for payment of taxes and withholdings as required by law, provided the Company is satisfied that all requirements of law affecting the Company’s responsibilities to withhold have been complied with.

13. Notices: Any notices, requests, demands or other communications provided for by this Agreement shall be in writing and shall be sufficiently given when and if sent by personal delivery, overnight courier or by facsimile to the party entitled thereto at the address stated below or at such other address as the addresses may have given similar notice:

To the Company:

Hostopia.com Inc.

5915 Airport Road, 11^th Floor

Mississauga, Ontario L4V 1T1

Attention: Secretary

Fax No.: 1 800 979-9587

To Employee:

Peter Konstandenou

(416) 499-8996

Any such notice shall be deemed delivered if given by means of personal delivery on the day of delivery thereof or if given by means of overnight courier of facsimile transmission on the first business day following the dispatch thereof.

14. Entire Agreement: This Agreement contains the entire agreement between the parties hereto with respect to matters herein and supersedes all prior agreements and understandings, oral or written, between the parties hereto relating to such matters.

15. Assignment: Except as herein expressly provided, the respective rights and obligations of Employee and the Company under this Agreement shall not be assignable by either party without written consent of other party and shall endure to the benefit of and be binding upon Employee and the Company and their permitted successors or assigns, including, in the case of the Company, any other corporation or entity with which the Company may be merged or otherwise combined or which may acquire the Company or its assets in whole or substantial part, and, in the case of Employee, his estate or other legal representatives. Nothing herein expressed or implied is intended to confer on any person other than the parties hereto any rights, remedies, obligations or liabilities under or by reason of this Agreement.

16. Legal Fees: In the event of any dispute or legal proceeding arising out of or in connection with this Agreement, the party succeeding in such action, whether by judicial decision or settlement, shall be reimbursed by the other party for all legal fees and expenses incurred by the successful party with respect to such dispute or proceeding.

17. Applicable Law: This Agreement shall be deemed a contract under, and for all purposes shall be governed by and construed in accordance with, the laws of the Province of Ontario without regard to the conflict of laws rules thereof. The Company and Employee hereby each irrevocably consent and at torn to the jurisdiction of the courts of the Province of Ontario with respect to any dispute or proceeding arising in connection with this Agreement.

18. Amendment or Modification; Waiver: No provision of this Agreement may be amended or waiver unless such amendment or waiver is authorized by the Company (including any authorized officer or committee or by the board of directors) and is in a writing signed by Employee and by a duly authorized officer of the Company. Except as otherwise specifically provided in this Agreement, no waiver by either party hereto of any breach by the other party of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of a similar or dissimilar breach, condition or provision at the same time or at any prior or subsequent time.

19. Resignation: Employee hereby agrees that, upon termination of his employment for any reason whatsoever, Employee shall thereupon be deemed, upon the request of the Company, to have immediately resigned any position Employee may have as an offices and/or director or otherwise which Employee may hold with any of the Company’s subsidiaries or related entities in connection with or arising from the performance of Employee’s duties of employment under this Agreement. In such event, Employee shall, at the reasonable request of the Company, forthwith execute any and all documents appropriate to evidence such resignations which are consistent with the terms of this Agreement.

20. Damages: In the event that Employee is awarded any damages as compensation for any breach of this Agreement, a breach of any covenant contained in this Agreement (whether express or implied by either law or fact), or any other cause of action based in whole or in part on a breach of any provision of this Agreement or related in any way to Employee’s employment hereunder, such damages shall be limited to contractual damages and shall exclude punitive damages and any other type of tort damages resulting from any such breach of any such term, covenant or condition of the Agreement.

21. Provisions Surviving Termination: It is expressly agreed that notwithstanding termination of Employee’s employment with and by the Company for any reason or cause or in any circumstances whatsoever, such termination shall be without prejudice to the rights and obligations of Employee and the Company, respectively, in relation to or arising up to the time of and including the date of termination, and the provisions of Sections 8,9,10,11,12,16,17,19,20,21, and 21 of this Agreement, all of which shall remain and continue in full force and effect unless and until the board of directors of the Company at its absolute discretion resolves otherwise and so notifies Employee in writing.

22. Indemnity: The Company hereby indemnifies Employee and agrees to hold Employee safe, harmless, defended and indemnified (to the maximum extent permissible under applicable law, as now exists or as may be hereafter amended) against all claims and liabilities incurred by Employee relative to his lawful and authorized performance of the services under this Agreement, except where such claims and liabilities arise because of

Employee’s intentional default or malfeasance, gross negligence, habitual neglect, unlawful conduct or breach of the terms, covenants or conditions of this Agreement.

23. Severability: In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions and portions of this Agreement shall be unaffect4ed thereby and shall remain in full force and effect to the fullest extent permitted by law.

24. Counterparts: This Agreement may be executed in counterparts, each of which shall be an original, but all of which together shall constitute one and the same instruments.

25. References: Om the event of Employee’s death or a judicial determination of his incompetency, reference in this Agreement to Employee shall be deemed, where appropriate, to refer to his legal representatives, or, where appropriate, to refer to his beneficiary or beneficiaries.

26. Captions: Captions to the Sections of this Agreement are solely for convenience and no provision of this Agreement is to be construed by reference to the captions of that Section.

IN WITNESS WHEREOF this Agreement has been executed by a duly authorized officer of the Company and Employee as of the day and year first above written.

     

 ____________________
Witness HOSTOPIA.COM INC.     By:___________________          ____________________      Peter Konstandenou

EX-10.14

Exhibit 10.14

ASSET PURCHASE AGREEMENT

B E T W E E N:

HOSTOPIA.COM INC., a corporation incorporated under the laws of Delaware

(hereinafter called the “Purchaser”)

OF THE FIRST PART

- and –

GEEKSFORLESS INC., a corporation incorporated under the laws of Ontario

(hereinafter called the “Vendor”)

OF THE SECOND PART

- and –

IGOR NIKOLAICHUK, a Canadian citizen residing in 3 Galina Petrova Street Suite 128, Nikolaev, Ukraine (hereinafter called “Igor”)

OF THE THIRD PART

WHEREAS the Vendor is a creator of website templates and media content, and the Vendor and Purchaser had entered into the Website Template License Agreement (as defined below), which granted rights to the website templates to both the Vendor and Purchaser;

AND WHEREAS the Purchaser wishes to purchase from the Vendor, and the Vendor wishes to sell, all of the website templates used by the Business (as defined below), including without limitation the website templates licensed to the Purchaser by the Vendor in the Website Template License Agreement

AND WHEREAS the Vendor has agreed to indemnify the Purchaser from and against any and all claims, actions, damages or liabilities arising from the sale of the Purchased Assets (as hereinafter defined) or breach of any term of this agreement by the Vendor.

NOW THEREFORE, the Purchaser agrees to purchase from the Vendor, and the Vendor agrees to sell to the Purchaser, the Purchased Assets on the following terms and conditions:

1. Defined Terms

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In this Agreement and in the schedules hereto the following terms and expressions will have the following meanings:

(a) “Benefit Plans” has the meaning ascribed thereto in Section 10(t);

(b) “Business” means the website template business carried on by the Vendor under various trade names and at various websites, whereby the Vendor licenses the Templates to third parties;

(c) “Closing Date” has the meaning ascribed thereto in Section 9;

(d) “Contractors” means the Ukrainian contractors that are contracted by the Vendor to create web site templates, which were resold to the Purchaser by the Vendor.

(e) “Domain Names” means the domain names owned or controlled by the Vendor or Igor essential to the operation of the Business as more fully described in Schedule A;

(f) “Employees” means any employee or contractor of the Vendor;

(g) “Encumbrances” means all mortgages, charges, pledges, security interests, liens, encumbrances, actions, claims, demands and equities of any nature whatsoever or howsoever arising and any rights or privileges capable of becoming any of the foregoing;

(h) “Excluded Assets” has the meaning ascribed thereto in Section 3;

(i) “Governmental Charges” means all taxes, customs duties, rates, levies, assessments, reassessments and other charges, together with all penalties, interest and fines with respect thereto, payable to any federal, provincial, municipal, local or other government or governmental agency, authority, board, bureau or commission, domestic or foreign;

(j) “Images and Media” means all still photographs, digital images, cartoons, drawings, video, graphics, text, sound, Flash applications, original work or images in any media or form, essential to the Business, including without limitation the 7,500 digital images, and all Intellectual Property incorporated therein as described in Schedule A.

(k) “Intellectual Property” shall mean all intellectual property that Vendor owns or uses with respect to the Business including, but not limited to all, (i) trademarks, trade names, service marks, product labels, telephone numbers, graphics and logos, and other trade designations, including common-law rights, goodwill, registrations and applications therefor; (ii) copyrights currently owned, in whole or in part, by Vendor, including, the right to create derivative works thereof and common-law rights, registrations and applications therefor (ii) patents currently owned, in whole or in part, by Vendor, including, registrations and applications

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therefor (iii) trade secrets, schematics, technology, know-how, and (iv) Software, and all licenses, royalties, assignments and other similar agreements relating to the foregoing to which Vendor is a party, as described in Schedule A;

(l) “Interim Period” has the meaning ascribed thereto in Section 11;

(m) “Purchased Assets” has the meaning ascribed thereto in Section 2 of this Agreement;

(n) “Purchase Price” has the meaning ascribed thereto in Section 4.

(o) “Software” means all computer software programs, applications, tools, libraries, interfaces and APIs, in source code, object code and other forms owned or licensed by Vendor and employed in the Business.

(p) “Template Rover Websites and System” means the look and feel of the websites located at the Domain Names, including without limitation the sales and provisioning software used by the Business, and all Intellectual Property incorporated therein, as described in Schedule A.

(q) “Website Templates” means all website templates created by or for the Vendor, including without limitation the website templates created in accordance with the Website Template License Agreement and 1,597 additional web site templates, and all Intellectual Property that is incorporated therein, as described in Schedule A.

(r) “Website Template License Agreement” means the Template Purchase Agreement entered into by the Vendor and the Purchaser on February 1, 2005.

2. Purchased Assets

The Purchaser shall receive all right, title, and interest in, and to, the following assets (collectively, the “Purchased Assets”), upon the Closing:

(a) The Website Templates;

(b) The Template Rover Websites and System;

(c) The Images and Media;

(d) The Domain Names;

(e) The Intellectual Property;

(f) The Vendor’s goodwill in connection with the Business, together with the exclusive right of the Purchaser to hold itself out as carrying on the Business in succession to the Vendor;

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(g) Any marketing intelligence or strategies relating to the Business; and

(h) All of the Vendor’s contractual rights and obligations relating to the Business which the Purchaser agrees to assume.

3. Excluded Assets

Any other assets not specified herein shall be excluded (the “Excluded Assets”) including, without limitation, the following assets:

(a) The Vendor’s computer programming contractor for hire business;

(b) The Vendor’s furniture, fixtures, equipment leases, computer equipment and telephone systems; and

(c) real property leases or other rights granted to the Vendor by its landlord with respect to use and occupation of any leased premises.

4. Purchase Price

The purchase price (“Purchase Price”) for the Purchased Assets shall be an amount equal to CDN$247,000, plus GST payable to the Vendor by Purchaser’s company cheque, at the time of Closing, or as otherwise mutually agreed by the parties. The Vendor and Purchase agree that the Purchase Price is allocated in accordance with the following:

(a)         The Website Templates;	$240,000.00
(b)        The Template Rover Websites and System;	$1,000.00
(c)         The Images and Media;	$1,000.00
(d)        The Domain Names;	$1,000.00
(e)         The Intellectual Property;	$1,000.00
(f)         The Vendor’s goodwill in connection with the Business, together with the exclusive right of the Purchaser to hold itself out as carrying on the Business in succession to the Vendor;	$1,000.00
(g)        Any marketing intelligence or strategies relating to the Business; and	$1,000.00

(h)        All of the Vendor’s contractual rights and obligations relating to the $1,000.00

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              Business which the Purchaser agrees to assume.

5. Purchase Price Set-Off

The Purchaser shall deduct from the Purchase Price Any amount owing to the Purchaser by the Vendor prior to or following the Closing Date.

6. Liabilities

The Vendor shall be responsible for all expenses and liabilities incurred inthe running of the Business up to the Closing Date, and the Purchaser shall not be responsible for assuming any liabilities.

7. Non-Competition/Non-Solicitation

The Vendor and Igor agree that they will not during the five (5) year period following the Closing Date, directly or indirectly:

(a) Be engaged in any business or undertaking which is competitive with the Business;

(b) Solicit any of the Purchaser’s employees;

(c) Solicit the customers or clients of the Business and the Purchaser; or

(d) Attempt to sell, or sell, directly or indirectly, any services in competition with the services of the Business hereunder;

unless approved by the Purchaser, in writing in advance which approval may be arbitrarily withheld. For the purposes of this Agreement “Solicit” means to contact for any purpose, directly or indirectly.

8. Conditions Precedent to Closing

The closing of this transaction (“Closing”) is subject to the following conditions precedent in favour of the Purchaser, which conditions may be waived by the Purchaser in its sole discretion:

(a) The Board of Directors of the Purchaser approving the purchase of the Business by the Purchaser from the Vendor;

(b) The Vendor shall have delivered a copy of a resolution of the shareholders and Board of Directors of the Vendor approving the purchase of the Business by the Purchaser from the Vendor;

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(c) The Vendor shall have entered into an agreement with the Purchaser to assign the Website Template License Agreement, whereby all rights of the Vendor shall be sold, assigned and transferred to Purchaser;

(d) The Contractors shall have entered into the agreement attached hereto as Schedule B with regard to additional website templates;

(e) Igor shall have entered into an agreement with the Purchaser to act as an independent contractor, for total consideration of $1.00, during the 90 day period following the Closing Date, to assist with the Purchaser with regard to its reasonable requests related to the Business. The agreement shall be in a form prepared by Purchaser and shall contain such terms and conditions as the Purchaser deems appropriate, acting reasonably;

(f) Search results of the public records of Ontario confirming the absence of security interests, judgments, tax liens and bankruptcy proceedings which affect or could affect the Purchased Assets;

(g) All requisite governmental and regulatory approvals of, exemptions from and consents required to consummate this Agreement shall have been obtained and all waiting periods prescribed by law shall have expired;

(h) The Vendor shall have obtained all consents and approvals to the transfer of any contracts, licenses and other instruments being transferred which the Purchaser considers material to the Business;

(i) All right, title, interest in, and to, the Purchased Assets shall have been sold, assigned and transferred to the Purchaser free and clear of all Encumbrances;

(j) The Purchaser shall be satisfied with its due diligence investigations;

(k) The Vendor shall have delivered all agreements or obligations forming part of the Purchased Assets;

(l) The Vendor shall have delivered all records of the Business and all of the schedules attached hereto, shall have been completed and updated, to the Purchaser’s satisfaction;

(m) An officer’s certificate shall be signed and delivered to the Purchaser with respect to the veracity and accuracy of the representations and warranties as at the Closing Date in a form satisfactory to the Purchaser; and

(n) Closing certificates, a bill of sale and other usual closing documentation shall have been delivered.

9. Closing

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The parties intend that the Closing will occur on June 1, 2007 (the “Closing Date”) or another date mutually satisfactory to both Purchaser and Vendor after the fulfilment of all of the aforesaid conditions precedent, which date shall be no more than ten (10) days after the fulfilment of the last of the aforesaid conditions precedent.

10. Representations and Warranties

Each of the Vendor and Igor hereby jointly and severally represents and warrants to the Purchaser (which representations and warranties shall survive for a period that begins on the date this Agreement is signed and ends three (3) years following the Closing Date), as follows, and confirms that the Purchaser is relying upon the accuracy of each of such representations and warranties in connection with the purchase of the Purchased Assets and the completion of the other transactions contemplated hereunder:

(a) Corporate Authority and Binding Obligation. The Vendor has good right, full corporate power and absolute authority to enter into this Agreement and to sell, assign and transfer the Purchased Assets to the Purchaser in the manner contemplated herein and to perform all of the Vendor’s obligations under this Agreement. The Vendor and its respective shareholders and board of directors have taken all necessary or desirable actions, steps and corporate and other proceedings to approve or authorize, validly and effectively, the entering into, and the execution, delivery and performance of, this Agreement and the sale and transfer of the Purchased Assets by the Vendor to the Purchaser. This Agreement is a legal, valid and binding obligation of the Vendor, enforceable against each of the Vendor and Igor in accordance with its terms subject to (i) bankruptcy, insolvency, moratorium, reorganization and other laws relating to or affecting the enforcement of creditors' rights generally, and (ii) the fact that equitable remedies, including the remedies of specific performance and injunction, may only be granted in the discretion of a court.

(b) No Other Purchase Agreements. No person or entity has any agreement, option, understanding or commitment, or any right or privilege (whether by law, pre-emptive or contractual) capable of becoming an agreement, option or commitment, for the purchase or other acquisition from the Vendor of any of the Purchased Assets, or any rights or interest therein.

(c) Contractual and Regulatory Approvals. The Vendor is not under any material obligation, contractual or otherwise, to request or obtain the consent of any person, and no permits, licences, certifications, authorizations or approvals of, or notifications to, any federal, provincial, municipal or local government or governmental agency, board, commission or authority are required to be obtained by the Vendor:

(i) in connection with the execution, delivery or performance by the Vendor of this Agreement or the completion of any of the transactions contemplated herein;

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(ii) to avoid the loss of any material permit, licence, certification or other authorization relating to the Business; or

(iii) in order that the authority of the Purchaser to carry on the Business in all material respects in the ordinary course and in the same manner as presently conducted remains in good standing and in full force and effect as of and following the closing of the transactions contemplated hereunder.

(d) Status and Governmental Licences

(i) The Vendor is a corporation duly incorporated and validly subsisting in all respects under the laws of its jurisdiction of incorporation. The Vendor has all necessary corporate power to own its properties and to carry on its business as it is now being conducted.

(ii) The Vendor holds all necessary licences, registrations and qualifications to carry on the Business in each jurisdiction in which:

(A) it owns any of the Purchased Assets; or

(B) the nature or conduct of the Business or any part thereof, or the nature of the Purchased Assets or any part thereof, makes such qualification necessary to enable the Business to be carried on as now conducted or to enable the Purchased Assets to be owned and operated.

(e) Compliance with Constating Documents, Agreements and Laws. The execution, delivery and performance of this Agreement and the completion of the transactions contemplated herein, will not constitute or result in a violation, breach or default, under:

(i) any term or provision of any of the articles, by-laws or other constating documents of the Vendor; or

(ii) the terms of any indenture, agreement (written or oral), instrument or understanding or other obligation or restriction to which the Vendor is a party or by which it is bound.

(f) Financial Records. All material financial transactions of the Business have been recorded in the information provided to the Purchaser in accordance with good business practice and such information:

(i) accurately reflects, in all material respects, the basis for the financial condition and the revenues, expenses and results of operations of the Business; and

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(ii) together with all disclosures made in this Agreement or in the schedules hereto, present fairly, in all material respects, revenues and expenses of the Business as of and to the date hereof.

No information, records or systems pertaining to the operation or administration of the Business are in the possession of, recorded, stored, maintained by or otherwise dependent upon any other person.

(g) All Material Liabilities. There are no liabilities (contingent or otherwise) of the Vendor of any kind whatsoever in respect of which the Purchaser may become liable on or after the consummation of the transactions contemplated by this Agreement.

(h) Absence of Certain Changes or Events. Since April 1, 2007 the Vendor has:

(i) operated the Business only in the ordinary course thereof, consistent with past practices;

(ii) not created any Encumbrance upon any of the Purchased Assets;

(iii) not made any material change in the method of billing customers or the credit terms made available by the Business to customers;

(iv) not made any material change with respect to any method of management, operation or accounting in respect of the Business;

(v) not suffered any damage, destruction or loss (whether or not covered by insurance) relating to the Business which has materially adversely affected or could materially adversely affect the Business;

(vi) not entered into or amended any material agreement relating to the Business;

(vii) not suffered any extraordinary loss relating to the Business;

(viii) not made or incurred any material change in, or become aware of any event or condition which is likely to result in a material change in, the Business or its relationships with its customers, suppliers or Employees; or

(ix) not authorized, agreed or otherwise become committed to do any of the foregoing.

(i) Tax Matters. The Vendor has paid all Governmental Charges which are due and payable by it on or before the date hereof. There are no actions, suits, proceedings, investigations, enquiries or claims now pending or made or threatened against the Vendor in respect of Governmental Charges. The Vendor has withheld from each amount paid or credited to any person or entity the

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amount of Governmental Charges required to be withheld therefrom and has remitted such Governmental Charges to the proper tax or other receiving authorities within the time required under applicable legislation.

(j) Litigation. There are no actions, suits or proceedings, judicial or administrative (whether or not purportedly on behalf of the Vendor) threatened or pending against, or, by or against or affecting the Vendor which relate to the Business, at law or in equity, or before or by any court or any federal, provincial, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign.

(k) Leased Premises. There are no leases or agreements to lease under which the Vendor leases real property relating solely to the Business.

(l) Title to Assets. The Vendor is the owner of and has good and marketable title to all of the Purchased Assets, free and clear of Encumbrances. No other person owns or has any Encumbrance against any assets which are being used in the Business.

(m) Website Templates, Template Rover Websites and System, Images and Media, Domain Names and Intellectual Property;

(i) Schedule A lists and contains a description of the

(A) Website Templates;

(B) Template Rover Websites and System;

(C) Images and Media;

(D) Domain Names; and

(E) Intellectual Property;

(ii) No royalty or other fee is required to be paid by the Vendor to any other person in respect of the use of any of the Website Templates, Template Rover Websites and System, Images and Media, Domain Names and Intellectual Property.

(iii) The conduct of the Business and the use of the Website Templates, Template Rover Websites and System, Images and Media, Domain Names and Intellectual Property does not infringe, and the Vendor has not received any notice, complaint, threat or claim alleging infringement of, any patent, trade mark, trade name, copyright, industrial design, trade secret or propriety right of any other person or entity, and the conduct of the Business does not include any activity which may constitute passing off.

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(n) Partnerships or Joint Ventures. The Vendor is not, in relation to any part of the Business, a partner or participant in any partnership, joint venture, profit-sharing arrangement or other association of any kind and is not party to any agreement under which the Vendor agrees to carry on any part of the Business in such manner or by which the Vendor agrees to share any revenue or profit of the Business with any other person or entity.

(o) Restrictions on Doing Business. The Vendor is not subject to any judgment, order or requirement of any court or governmental authority which is not of general application to persons carrying on a business similar to the Business.

(p) Outstanding Agreements. The Vendor is not a party to or bound by any outstanding or executory agreement, contract or commitment, whether written or oral, relating to the Business;

(q) Good Standing of Agreements. The Vendor is not in material default or breach of any of its obligations under any one or more of the agreements or obligations forming part of the Purchased Assets, and there exists no state of facts which, after notice or lapse of time or both, would constitute such a default or breach. All of the agreements or obligations forming part of the Purchased Assets, are now in good standing and in full force and effect without amendment thereto, the Vendor is entitled to all benefits thereunder and the other parties to such contracts, agreements, commitments, indentures and other instruments are not in default or breach of any of their material obligations thereunder. There are no contracts, agreements, commitments, indentures or other instruments relating to the Business under which the Vendor’s rights or the performance of its respective obligations are dependent upon or supported by the guarantee of or any security provided by any other person.

(r) Employment Agreements. The Vendor is not a party to any written or oral employment, service or consulting agreement relating to any Employees, having any special arrangements or commitments with respect to the continuation of employment or payment of any particular amount upon termination of employment.

(s) Labour Matters and Employment Standards.

(i) The Vendor is not subject to any agreement with any labour union or employee association with respect to the Employees, has not made any commitment to or conducted negotiations with any labour union or employee association with respect to any future agreement with respect to the Employees and there is no current attempt to organize, certify or establish any labour union or employee association, in relation to any of the Employees.

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(ii) There are no existing or, threatened, labour strikes or labour disputes, grievances, controversies or other labour troubles affecting the Business.

(iii) The Vendor has complied in all material respects with all applicable laws, rules, regulations and orders relating to employment in the Business, including those relating to wages, hours, occupational health and safety, workers' hazardous materials, employment standards, pay equity and workers' compensation. There are no outstanding charges or complaints against the Vendor relating to unfair labour practices or discrimination under any legislation relating to Employees. The Vendor has paid in full all amounts owing under the Workers' Compensation Act, R.S.O. 1990, C. W.11 (Ontario) or comparable provincial legislation, and the workers' compensation claims experience of the Vendor would not permit a penalty reassessment under such legislation.

(t) Employee Benefit and Pension Plans.

(i) The Vendor does not have, and is not subject to any present or future obligation or liability under, any pension plan, deferred compensation plan, retirement income plan, stock option or stock purchase plan, profit sharing plan, bonus plan or policy, employee group insurance plan, hospitalization plan, disability plan or other employee benefit plan, program, policy or practice, formal or informal, with respect to any of the Employees, other than the Canada Pension Plan, R.S.C. 1985, c. C-8, and the Health Insurance Act, R.S.O. 1990, c. H.6 (Ontario) and other similar health plans established pursuant to statute (collectively, “Benefit Plans”). Complete and correct copies of all documentation establishing or relating to any Benefit Plans or, where such Benefit Plans are oral commitments, written summaries of the terms thereof, have been provided to the Purchaser.

(ii) The Vendor does not have any existing pension plans in respect of the Employees, and is under no obligation to provide or establish any pension plans or benefits to any of the Employees.

(iii) There are no pending claims by any Employee or by any other person which allege a breach of fiduciary duties or violation of governing law or which may result in liability to the employer and there is no basis for such a claim.

(u) Compliance with Laws. In relation to the Business, the Vendor is not in violation in any material respect of any federal, provincial or other law, regulation or order of any government or governmental or regulatory authority, domestic or foreign.

(v) Complete Conveyance. The assets included in the Purchased Assets constitute all of the material assets of the Vendor used in carrying on the Business. The

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Purchased Assets include all rights, properties, interests, assets (both tangible and intangible) and agreements necessary to enable the Purchaser to carry on the Business in the same manner and to the same extent as it has been carried on by the Vendor prior to the date hereof.

(w) Vendor’s Residency. The Vendor is not a non-resident of Canada within the meaning of the Income Tax Act, S.C. 1970-71-72, c. 63 (Canada).

(x) The terms of the form of agreement set out in Schedule B, contain the same or better terms and conditions that the Vendor enjoyed with the Contractors, including without limitation fees payable for each web site template.

(y) The Vendor and Igor have not received, and shall not receive, any remuneration from the Contractors with regard to the creation of web site templates for the Purchaser.

(z) Copies of Documents. Complete and correct copies (including all amendments) of all contracts, leases and other documents referred to in this Agreement or any schedule hereto or required to be disclosed hereby have been delivered to the Purchaser.

(aa) The Vendor shall ensure that all trade creditors of the Vendor, as defined in the Bulk Sales Act, R.S.O. 1990, B. 14, and amendments thereto, shall be satisfied without any claim against the Purchaser.

11. Covenants

Each of the Vendor and Igor jointly and severally covenants to the Purchaser that he or it will do or cause to be done the following during the period beginning on the date this Agreement was signed and ending on the Closing Date (“Interim Period”):

(a) Investigation of Business and Examination of Documents. The Vendor will provide access to and will permit the Purchaser, through its representatives, to make such investigation of the operations, properties, assets and records of the Business and of its financial and legal condition as the Purchaser deems necessary or advisable to familiarize itself with such operations, properties, assets, records and other matters and to facilitate the transfer of the Purchased Assets. Such investigations and inspections shall not mitigate or affect the representations and warranties of the Vendors hereunder, which shall continue in full force and effect.  

(b) Conduct of Business. Except as contemplated by this Agreement or with the prior written consent of the Purchaser, the Vendor or Igor will:  

(i) promptly advise the Purchaser of any facts that come to their attention which would cause any of the Vendor’s representations and warranties herein contained to be untrue in any respect;

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(ii) promptly advise the Purchaser in writing of any material adverse change in the Business;

(iii) not create, incur or assume any Encumbrance upon, or dispose of, any of the Purchased Assets;

(iv) not terminate or waive any right of value of the Business;

(v) not enter into or amend any material agreement relating to the Business; and

(vi) not increase, in any manner, the compensation or employee benefits of any of the employees of the Business, or pay or agree to pay to any of them any pension, severance or termination amount or other employee benefit not required by the Benefit Plans or the Employment Standards Act, RSO 1990, c. E.14.

(c) Transfer of Purchased Assets. On or before the Closing Date, the Vendors will cause all necessary steps and corporate proceedings to be taken in order to permit the Purchased Assets to be duly and properly transferred to the Purchaser.

(d) General Conveyance. On the Closing Date, the Vendor will deliver to the Purchaser good and marketable title to and exclusive possession of the Purchased Assets, free and clear of any and all Encumbrances. On the Closing Date, the Vendor will execute and deliver to the Purchaser one or more forms of general conveyance or bills of sale in respect of the assignment, conveyance, transfer and delivery of the Purchased Assets to the Purchaser in form acceptable to the Purchaser.

(e) Retail Sales Tax. The Vendor shall deliver to the Purchaser a duplicate copy of a certificate issued pursuant to s.6 of the Retail Sales Tax Act, R.S.O. 1990, c. R. 31, (Ontario) or evidence satisfactory to the Purchaser that all retail sales taxes required to be paid by the Vendor have been paid, no later than two weeks following the Closing Date.

(f) Transfer of Agreements. On the Closing Date, the Vendor will deliver to the Purchaser consents to the assignment of any contract under which consent is required executed by all persons whose consent is required in form acceptable to the Purchaser; and

(g) Exclusivity. The Vendor agrees that, notwithstanding the earlier termination of this agreement, prior to Closing it will not, directly or through its representatives or agents, solicit any offer, entertain any offer or otherwise discuss or deal with any party other than the Purchaser with respect to any competing transaction, the sale of the Vendor’s assets or the sale of the shares of the Vendor.

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12. Indemnities

The Vendor will indemnify the Purchaser from and against, all obligations, damages, commitments and liabilities of, and claims against, the Purchaser arising from the transactions contemplated herein or breach of any of the terms of this Agreement by the Vendor or Igor. Without limiting the generality of the foregoing, it is agreed that the Purchaser will have no liability for any of the following:

(a) all liabilities in respect of all indebtedness of the Vendor to all persons;

(b) all liability claims relating to any agreements relating to the Business and incurred prior to the Closing Date;

(c) all liability claims relating to any service performed prior to the Closing Date;

(d) all liabilities for all taxes, duties, levies, assessments and other such charges, including any penalties, interests and fines with respect thereto, payable by the Vendor to any federal, provincial, municipal or other government or governmental agency, authority, board, bureau or commission, domestic or foreign, including, without limitation, any taxes in respect of the Retail Sales Tax Act, R.S.O. 1990, c. R. 31, (Ontario) or any taxes in respect of or measured by the sale, consumption or performance by the Vendors of any product or service prior to the Closing Date and any tax pursuant to the Employer Health Tax Act, R.S.O. 1990, c. E. 11 (Ontario) or any similar legislation in respect of all remuneration payable to all persons employed in the Business prior to the Closing Date;

(e) any and all claims of unsecured trade creditors or secured trade creditors of the Vendor existing at the time of the Closing Date or any action or proceeding to set aside the sale of the Purchased Assets or to have the sale declared void for non-compliance with the Bulk Sales Act, RSO 1990, c. B.14;

(f) all liabilities for salary, bonus, vacation pay and other compensation and all liabilities under Benefit Plans of the Vendor relating to employment of all persons in the Business prior to the Closing Date;

(g) all liabilities for claims for injury, disability, death or workers' compensation arising from or related to employment in the Business prior to the Closing Date; and

(h) all severance payments, damages for wrongful dismissal and all related costs in respect of the termination by the Vendor of the employment of any Employee.

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13. Confidentiality

Each of the Vendor and the Purchaser, and our respective servants and professional advisers, are to keep confidential the terms of this Agreement, and the books and records of the Vendor. This agreement of confidentiality shall remain binding on the aforesaid parties, whether or not this transaction is consummated. Each party shall be responsible for its own professional fees and other expenses arising in connection with this Agreement, any approvals, consents or investigations in connection herewith, and the negotiation and completion of this transaction.

14. Termination of this Agreement

(a) This Agreement shall be at an end if any of the conditions precedent listed in Section 8 are not completed, unless waived by the Purchaser in its sole discretion, on or before June 1, 2007.

(b) In the event of termination of this Agreement, the confidentiality obligations set out in Section 13 hereof shall continue to be binding on the parties hereto.

15. Entire Agreement

This Agreement constitutes the entire agreement between the parties relating to the subject matter hereof, and there are no other representations, understandings or agreements between the parties relating to the subject matter hereof.

16. Amendments

No amendment to, or change or discharge of, any provision of this Agreement shall be valid unless in writing and signed by authorized representatives of each party.

17. Legal Advice

The Vendor’s duly authorized representatives and Igor hereby acknowledge that (i) they have reviewed and fully understand the terms and binding effect of this Agreement, (ii) they accept the terms herein voluntarily and without duress or compulsion, and (iii) each has been advised of the right to obtain independent legal and other advice in connection with the execution of this Agreement, and has either obtained or hereby waives the obtaining of such advice.

18. Waiver

No party will be deemed to have waived the exercise of any right that it holds under this Agreement unless such waiver is made in writing. No waiver made with respect to any instance involving the exercise of any such right will be deemed to be a waiver with respect to any other instance involving the exercise of the right or with respect to any other such right.

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19. Counterparts

This Agreement may be executed in any number of counterparts, and all such counterparts taken together shall be deemed to constitute one and the same instrument. Any party delivering an executed counterpart by facsimile shall also deliver a manually executed counterpart of this Agreement.

20. Severability

If any provision of this Agreement or the application of such provision to any party or person or circumstance shall be held illegal, invalid, or unenforceable, the remainder of this Agreement, or the application of such provision to a party or person or circumstance other than those as to which it is held illegal, invalid, or unenforceable shall not be affected thereby. Each provision of this Agreement is intended to be severable, and if any provision is illegal, invalid or unenforceable in any jurisdiction, this will not affect the legality, validity or enforceability of such provision in any other jurisdiction or the validity of the remainder of this Agreement.

21. Currency

Except where otherwise expressly provided, all amounts in this Agreement are stated and will be paid in the lawful currency of Canada.

22. Governing Law

This Agreement will be interpreted and enforced in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.

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IN WITNESS WHEREOF the parties hereto have signed this Agreement as of the 31^st day of May, 2007.

HOSTOPIA.COM INC.
Per:
	Paul Engels Chief Marketing Officer and Executive Vice President
Per:
	Michael Mugan Chief Financial Officer and Secretary

GEEKSFORLESS INC.
Per:
	Igor Nikolaichuk Chief Executive Officer

Witness: Igor Nikolaichuk

SCHEDULE A
PURCHASED ASSETS

Website Templates

Attached CD ROM

Template Rover Websites and System

Attached CD ROM

Images and Media

Attached CD ROM

Domain Names

1. flashtemplatesdirect.com 3/23/2008	11. templateroverclub.com 2/16/2008
2. freetemplatesdirect.com 3/23/2008	12. templaterovereurope.com 5/30/2008
3. templateprocenter.com 2/20/2008	13. templaterovers.ca 4/12/2007
4. templateprocentrcom 2/20/2008	14. templaterovers.com 4/12/2007
5. templaterover.biz 8/4/2007	15. templatesrover.ca 4/12/2007
6. templaterover.ca 2/11/2008	16. templatesrover.com 4/12/2007
7. templaterover.co.uk 11/1/2008	17. templatesrovers.ca 4/12/2007
8. templaterover.com 8/5/2008	18. templatesrovers.com 4/12/2007
9. templaterover.net 8/5/2007	19. templaterover.ru 3/22/2008
10. templaterover.org 8/5/2007

Intellectual Property

i) registered trademarks - NONE

ii) trade names - “TEMPLATEROVER” and “TEMPLATE ROVER”

iii) registered service marks - NONE

iv) product labels

v) telephone numbers - 1-888-442-3030

vi) graphics and logos

vii) other trade designations - NONE

viii) registered copyrights - NONE

ix) patent registrations and applications - NONE

x) All trade secrets, schematics, technology, know-how

xi) Software, and all licenses, royalties, assignments and other similar agreements -

SCHEDULE B

FORM OF AGREEMENT - TEMPLATES

[See attached]

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors

Hostopia.com Inc.

We consent to the incorporation by reference in the registration statement (No. 333-139859) on Form S-8 of Hostopia.com Inc. of our report dated June 24, 2008, with respect to the consolidated balance sheets of Hostopia.com Inc. as of March 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2008 which report appears in the March 31, 2008 annual report on Form 10-K of Hostopia.com Inc. Our report refers to a change in accounting for income tax uncertainties.

/s/ KPMG LLP

Chartered Accountants, Licensed Public Accountants

Toronto, Canada

June 24, 2008

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Colin Campbell, certify that:

1. I have reviewed this annual report on Form 10-K of Hostopia.com Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 25, 2008

By: /s/ Colin Campbell                                

Colin Campbell

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Michael J. Mugan, certify that:

1. I have reviewed this annual report on Form 10-K of Hostopia.com Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: June 25, 2008

By: /s/ Michael J. Mugan                                                

Michael J. Mugan

Chief Financial Officer

(Principal Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350), Colin Campbell, Chief Executive Officer of Hostopia.com Inc., a Delaware corporation (the “Company”) hereby certifies that, to the best of his knowledge, as follows:

The Company’s Annual Report on Form 10-K for the year ended March 31, 2008, to which this Certification is attached as Exhibit 32.1 (the “Annual Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

IN WITNESS WHEREOF, the undersigned has set his hand hereto as of this 25th day of June , 2008.

A signed original of this written statement required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350), has been provided to Hostopia.com Inc. and will be retained by Hostopia.com, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Hostopia.com Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.

By: /s/ Colin Campbell                                 

Colin Campbell

Chief Executive Officer

(Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350), Michael J. Mugan, Chief Financial Officer of Hostopia.com Inc., a Delaware corporation (the “Company”) hereby certifies that, to the best of his knowledge, as follows:

The Company’s Annual Report on Form 10-K for the year ended March 31, 2008, to which this Certification is attached as Exhibit 32.2 (the “Annual Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, and that the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

IN WITNESS WHEREOF, the undersigned has set his hand hereto as of this 25th day of June, 2008.

A signed original of this written statement required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350), has been provided to Hostopia.com Inc. and will be retained by Hostopia.com Inc. and furnished to the Securities and Exchange Commission or its staff upon request. This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Hostopia.com Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.

By: /s/ Michael J. Mugan                                        

Michael J. Mugan

Chief Financial Officer

(Principal Financial and Accounting Officer)