Summary of EASYLINK SERVICES INTERNATIONAL CORP

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All statements, trend analyses and other information, other than statements of historical facts, contained in the following discussion related to our financial position, business strategy and plans and objectives of management for future operations are forward-looking statements. These forward-looking statements are based on the beliefs of management, as well as assumptions made by and information currently available to management. When used in this quarterly report, the words "anticipate," "believe," "estimate," "expect," "may," "will," "continue" and "intend," and words or phrases of similar import, as they relate to our financial position, business strategy and plans, or objectives of management, are intended to identify forward-looking statements. These statements reflect our current view with respect to future events and are subject to risks, uncertainties and assumptions related to various factors, including, without limitation, those described in Item 1A of Part II of this quarterly report under the heading "Risk Factors" and in our registration statements and periodic reports filed with the SEC under the Exchange Act and the Securities Act of 1933, as amended (the "Securities Act").
Although we believe our expectations are reasonable, we cannot assure you that our expectations will prove to be correct. Should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described in this quarterly report as anticipated, believed, estimated, expected or intended. Critical Accounting Policies and Significant Use of Estimates in Financial Statements
The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses. We consider certain accounting policies related to revenue recognition, valuation of acquired intangibles and impairment of long-lived assets, including goodwill, and valuation of investments to be critical policies due to the estimation process involved in each. Management discusses its estimates and judgments with the Audit Committee of our Board of Directors.
We discuss our critical accounting policies in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended July 31, 2008. There have been no significant changes in our critical accounting policies since July 13, 2008.

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Three Months Ended October 31, 2008 Compared with the Three Months Ended
October 31, 2007
Results of Operations
The following table reflects consolidated operating data by reported segment.
All significant intersegment activity has been eliminated. Accordingly, the
segment results below exclude the effect of transactions with our subsidiaries.

                                                   Three Months Ended October 31,
                                               2008             2007           Variance
 Revenue:
 Supply Chain Messaging
 EDI Services                              $  8,920,358     $  9,059,153     $   (138,795 )
 Telex Services                               2,694,716        2,461,082          233,634

 Total Supply Chain Messaging                11,615,074       11,520,235           94,839


 On Demand Messaging
 Fax Services                                 9,113,505        7,457,460        1,656,045
 DCM Services                                   743,529          674,107           69,422
 Other Services                               1,342,838        1,334,065            8,773

 Total On Demand Messaging                   11,199,872        9,465,632        1,734,240


 Total Revenue:                              22,814,946       20,985,867        1,829,079


 Cost of Revenue:
 Supply Chain Messaging                       3,140,629        2,982,154          158,475
 On Demand Messaging                          3,578,516        3,022,748          555,768

 Total Cost of Revenue                        6,719,145        6,004,902          714,243


 Gross Margin:
 Supply Chain Messaging                       8,474,445        8,538,081          (63,636 )
 On Demand Messaging                          7,621,356        6,442,884        1,178,472

 Total Gross Margin                          16,095,801       14,980,965        1,114,836


 Product Development and Enhancement          2,122,465        2,032,681           89,784
 Selling and Marketing                        3,565,644        2,382,618        1,183,026
 General and Administrative                   9,358,027        7,201,107        2,156,920

 Total product, selling and G&A expenses     15,046,136       11,616,406        3,429,730


 Other (expense) income                      (4,925,947 )     (5,548,462 )        622,515

 Income (loss) before income taxes         $ (3,876,282 )   $ (2,183,903 )   $ (1,692,379 )

Revenue - Total revenue for the three months ended October 31, 2008 was $22.8 million, an increase of $1.8 million as compared to the three-month period ended October 31, 2007. This increase in revenues is primarily due to the inclusion of a full month of August revenue for ESC in fiscal 2009, as opposed to the period beginning August 20, 2007 in the first quarter of fiscal 2008 resulting from the acquisition of ESC as of that date. The effect of the acquisition on the comparative revenue was partially offset by reduced revenues from service volume reductions experienced during the first quarter of 2009 of approximately $530,000, as well as revenue reductions from fluctuations in exchange rates of approximately $800,000.
The Supply Chain Messaging segment grew $95,000 from the three-month period ended October 31, 2007 as compared to the three-month period ended October 31, 2008, due mainly to $234,000 in increased Telex services revenues primarily resulting from the inclusion of a full month of August revenue during the first fiscal quarter of 2009 offset by a reduction of $139,000 in EDI services over the comparable quarters due mainly to reduced volume and unfavorable foreign exchange rates.

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The On Demand Messaging segment grew $1.7 million from the three-month period ended October 31, 2007 as compared to the three-month period ended October 31, 2008, due mainly to increased fax services revenue that resulted from the inclusion of a full month of August revenue during fiscal 2009 as well as increased customer volume. DCM and other services, increased $69,000 and $9,000 respectively due to the inclusion of a full three months of revenue during 2009. Cost of Revenue - Total cost of revenue increased $714,000 from the three-month period ended October 31, 2007 compared to the three-month period ended October 31, 2008 due primarily to the inclusion of a full month of August cost in fiscal 2009 as compared to the inclusion of only the costs incurred after the ESC acquisition for fiscal 2008. Cost of revenue consists mainly of telecommunication costs, which include interconnect, data line and telephone costs, and network operating costs, which includes salaries, benefits, depreciation, rent, utilities and other operating costs. For the period ended October 31, 2008, telecommunication costs increased $646,000 from the period ended October 31, 2007 and network operating costs increased $68,000 from the same period ended in 2007.
Product Development - Product development costs increased $90,000 from the three-month period ended October 31, 2007 compared to the three-month period ended October 31, 2008, due mainly to increased costs that were the result of the ESC acquisition. The increased costs consisted mainly of $55,000 in labor and benefits costs, $21,000 in equipment expense and $22,000 in telecom costs. Selling and Marketing - Selling and marketing expenses increased $1.2 million from the three month period ended October 31, 2007 to the three month period ended October 31, 2008, due mainly to increased labor and benefit costs of $1 million and increased travel expenses of $138,000. These increased expenses are the result of a focused effort to enhance and expand our sales and marketing activities.
General and Administrative - General and administrative expenses increased $2.2 million from the three month period ended October 31, 2007 to the three month period ended October 31, 2008, due mainly to increased bad debt expense of $300,000 and the expensing of $1.5 million incurred with respect to a potential acquisition. These acquisition costs were previously capitalized on the balance sheet, but were expensed during the three months ended October 31, 2008 as we determined that the potential acquisition would not close in the near term, if at all.
Other Expense - Other expenses for the three-month period ended October 31, 2008 consists mainly of interest expense of $5.1 million, which included $2.2 million in non-cash interest for accretion of the debt discount, $1.7 million for a penalty on a principal prepayment made on our Notes, and $1.2 million in interest expense on the Notes, for the fiscal quarter. Liquidity and Capital Resources
Our principal source of liquidity consists of cash and cash equivalents generated from operations. Cash and cash equivalents decreased approximately $12.6 million to a total balance of approximately $19.4 million as of October 31, 2008 from approximately $32.1 million as of July 31, 2008. This decrease in cash was primarily caused by a $6.8 million prepayment of principal on the Notes, a prepayment penalty of $1.7 million on the Notes, $1.3 million in purchases of treasury stock and $1.9 million of fixed asset purchases for infrastructure upgrades. We also used $2.5 million in cash to reduce accounts payable and accrual expenses. We are required to offer to prepay approximately $2.2 million during the second quarter of fiscal 2009 to York for the Excess Cash Flow for the period ended October 31, 2008 as defined in our Notes. We do not know if York will accept our offer or not. Beginning in February of 2009, we will begin to repay the Notes in thirty equal installments of the then outstanding balances. We believe our cash resources will provide us with sufficient liquidity to continue in operation for at least the next four fiscal quarters.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.

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Tabular Disclosure of Contractual Obligations We enter into many contractual and commercial undertakings during the ordinary course of business. The following table summarizes information about certain of our obligations at October 31, 2008. The table should be read together with the Notes to the Interim Consolidated Financial Statements beginning on page 4 of this Quarterly Report.

                                                             Payment due by period
                                                  Less than            1-3               3-5           More than
Contractual Obligations           Total             1 year            years             years           5 years
Operating Lease Obligations    $ 14,369,519      $  2,992,866      $  5,493,988      $ 4,182,884      $ 1,699,781
Telecomm commitments              3,616,750         1,905,150         1,711,600                -                -
Series A and B Notes             63,296,571        18,988,971        44,307,600                -                -

Total                          $ 81,282,840      $ 23,886,987      $ 51,513,188      $ 4,182,884      $ 1,699,781