form10qsba1.htm

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB AMENDMENT NUMBER 1

T QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

OF 1934

For the quarterly period ended June 30, 2007

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

Commission file number: 000-22711

BLUEGATE CORPORATION

(Exact name of registrant as specified in its charter)

Nevada	76-0640970
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

701 North Post Oak, Road, Suite 600, Houston, Texas 77024

(Address of Principal Executive Office)

(713) 686-1100

(Issuer’s Telephone Number, Including Area Code)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings requirements for the past 90 days. Yes T No £

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each the issuer's classes of common equity, as of the latest practicable date: 14,288,669 common shares outstanding as of July 31, 2007.

Transitional Small Business Disclosure Format (Check One): Yes £ No T

EXPLANATORY NOTE

The registrant is filing this Amendment No. 1 on Form 10-QSB/A to its second quarter report on Form 10-QSB for the period ended June 30, 2007, originally filed August 1, 2007 for the new Exhibits 31.1 and 31.2.

BLUEGATE CORPORATION

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

	Unaudited Consolidated Financial Statements	F-1

	Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006	F-1

	Consolidated Statements of Operations for the three months and six months ended June 30, 2007 and 2006	F-2

	Consolidated Statement of Stockholders’ Deficit for the six months ended June 30, 2007	F-3

	Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006	F-4

	Notes to Consolidated Financial Statements	F-5

ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS	I-1

ITEM 3.	CONTROLS AND PROCEDURES	I-6

PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	II-1

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	II-1

ITEM 5.	OTHER INFORMATION	II-1

ITEM 6.	EXHIBITS	II-1

	SIGNATURES	II-2

	CERTIFICATIONS	II-3

Table of Contents

ITEM 1.

FINANCIAL STATEMENTS

BLUEGATE CORPORATION
CONSOLIDATED BALANCE SHEETS
UNAUDITED


	June 30,			December 31,
	2007			2006
ASSETS
Current assets:
Cash and cash equivalents	$	19,378		$	256,121
Accounts receivable, net		459,387			280,353
Inventory		-			15,652
Prepaid expenses and other		18,902			33,295
Total current assets		497,667			585,421
Property and equipment, net		89,853			92,033
Intangibles, net		11,561			12,301
Total assets	$	599,081		$	689,755

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	403,860		$	256,567
Accounts payable to related party		111,525			40,000
Accrued liabilities		136,960			85,626
Notes payable		327,800			12,800
Notes payable to related parties		172,857			122,174
Bank line of credit payable		44,723			44,590
Deferred revenue		669,179			1,189,236
Total current liabilities		1,866,904			1,750,993

Commitments and contingencies

Stockholders’ deficit:
Undesignated preferred stock, $.001 par value, 9,999,952 shares authorized, none issued and outstanding
Series C Convertible Non-Redeemable Preferred stock, $.001 par value, 48 shares authorized, 48 and -0- shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively; $12,500 per share liquidation preference ($600,000 aggregate liquidation preference at June 30, 2007)		-			-
Common stock, $.001 par value, 50,000,000 shares authorized, 13,688,669 and 12,130,311 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively		13,689			12,130
Additional paid-in capital		23,082,255			19,627,159
Subscription receivable		(500,000	)		-
Accumulated deficit		(23,863,767	)		(20,700,527	)
Total stockholders’ deficit		(1,267,823	)		(1,061,238	)
Total liabilities and stockholders’ deficit	$	599,081		$	689,755

See accompanying notes to consolidated financial statements

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BLUEGATE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Service revenue	$	1,807,255		$	814,846		$	3,168,322		$	1,750,495
Cost of services		1,009,975			344,151			1,743,487			766,891
Gross profit		797,280			470,695			1,424,835			983,604
Selling, general and administrative expenses		413,685			393,870			1,281,144			871,769
Compensation expense		1,462,358			1,236,168			3,259,483			2,024,542
Loss from operations		(1,078,763	)		(1,159,343	)		(3,115,792	)		(1,912,707	)
Interest expense		(8,337	)		(217,863	)		(47,514	)		(481,248	)
Other income		66			3,369			66			7,582
Net loss		(1,087,034	)		(1,373,837	)		(3,163,240	)		(2,386,373	)

Deemed dividend on preferred stock		(600,000	)		-			(600,000	)		-
Net loss attributable to common shareholders	$	(1,687,034	)	$	(1,373,837	)	$	(3,763,240	)	$	(2,386,373	)

Net loss attributable to common shareholders per common share - basic and diluted	$	(0.12	)	$	(0.17	)	$	(0.29	)	$	(0.32	)

Basic and diluted weighted average shares outstanding		13,650,035			8,226,115			13,181,331			7,561,039

See accompanying notes to consolidated financial statements

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BLUEGATE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
SIX MONTHS ENDED JUNE 30, 2007
UNAUDITED

									ADDITIONAL
	COMMON STOCK				PREFERRED STOCK				PAID-IN			SUBSCRIPTION			ACCUMULATED
	SHARES		CAPITAL		SHARES		CAPITAL		CAPITAL			RECEIVABLE			DEFICIT			TOTAL

Balance at December 31, 2006		12,130,311	$	12,130		-	$	-	$	19,627,159		$	-		$	(20,700,527	)	$	(1,061,238	)
Issuance of common stock and warrants for cash		800,000		800						399,200									400,000
Issuance of common stock for employee compensation		150,000		150						142,350									142,500
Issuance of common stock for outside services		421,773		422						329,103									329,525
Issuance of preferred stock and common stock warrants for cash						48		-		600,000			(500,000	)					100,000
Beneficial conversion feature embedded in preferred stock										600,000									600,000
Deemed dividend on preferred stock										(600,000	)								(600,000	)
Common stock options issued for employee services										1,767,530									1,767,530
Issuance of common stock for delay in filing a registration statement		36,585		37						29,213									29,250
Issuance of common stock and warrants for:																			-
- accounts payable		30,000		30						14,970									15,000
- services		120,000		120						172,730									172,850
Net loss																(3,163,240	)		(3,163,240	)
Balance at June 30, 2007		13,688,669	$	13,689		48	$	-	$	23,082,255		$	(500,000	)	$	(23,863,767	)	$	(1,267,823	)

See accompanying notes to consolidated financial statements

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BLUEGATE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED

	Six Months Ended
	June 30,
	2007			2006
Cash flows from operating activities:
Net loss	$	(3,163,240	)	$	(2,386,373	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount		-			242,316
Depreciation and amortization		32,019			42,959
Common stock and warrants issued for registration rights extension		-			350,743
Common stock issued for services		329,525			84,220
Common stock options issued for services		1,767,530			-
Issuance of common stock for delay in filing a registration statement		29,250			-
Common stock warrants issued for extension of note repayment		-			177,735
Impairment of subscription receivable		-			15,007
Common stock issued for compensation		142,500			-
Common stock and warrants issued for services		172,850			570,927
Changes in operating assets and liabilities:
Accounts receivable		(179,034	)		58,865
Prepaid expenses and other current assets		30,045			(3,041	)
Accounts payable and accrued liabilities		213,627			(21,029	)
Accounts payable to related party		71,525			-
Deferred revenue		(520,055	)		(15,959	)
Net cash used in operating activities		(1,073,458	)		(883,630	)

Cash flows from investing activities:
Payment received on note receivable		-			32,000
Purchase of property and equipment		(29,101	)		(8,978	)

Net cash (used in) provided by investing activities		(29,101	)		23,022


Cash flows from financing activities:
Change in bank overdraft		-			35,177
Proceeds from related party short term debt		428,934			730,330
Payments on related party short term debt		(378,250	)		(331,611	)
Net change in bank line of credit		132			45,507
Proceeds from note payable from individual		315,000			-
Common stock and warrants issued for cash		400,000			375,000
Preferred stock and common stock warrants issued for cash		100,000			-

Net cash provided by financing activities		865,816			854,403


Net (decrease) in cash and cash equivalents		(236,743	)		(6,205	)

Cash and cash equivalents at beginning of period		256,121			27,791
Cash and cash equivalents at end of period	$	19,378		$	21,586

Non Cash Transactions:
Deemed dividend from beneficial conversion feature on preferred stock	$	600,000		$	-
Subscription receivable		500,000			-
Issuance of common stock and warrants for conversion of accounts payable		15,000			-
Conversion of preferred stock for common stock		-			1,419
Supplemental information:
Cash paid for interest		47,514			40,228

See accompanying notes to consolidated financial statements

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BLUEGATE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

1.	BASIS OF PRESENTATION

The accompanying unaudited interim financial statements of Bluegate Corporation, have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in Bluegate's Annual Report filed with the SEC on Form 10-KSB. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which substantially duplicate the disclosure contained in the audited financial statements for fiscal 2006 as reported in the Form 10-KSB have been omitted.

EMBEDDED CONVERSION FEATURES

Bluegate evaluates embedded conversion features within convertible debt and convertible preferred stock under paragraph 12 of SFAS 133 and EITF 00-19 to determine whether the embedded conversion feature should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under SFAS 133 and EITF 00-19, the instrument is evaluated under EITF 98-5 and EITF 00-27 for consideration of any beneficial conversion feature.

RECLASSIFICATIONS

We have reclassified certain prior-year amounts to conform to the current year’s presentation.

2.	GOING CONCERN CONSIDERATIONS

During the six months ended June 30, 2007 and 2006, Bluegate has been unable to generate cash flows sufficient to support its operations and has been dependent on debt and equity raised from qualified individual investors. In addition to negative cash flow from operations, Bluegate has experienced recurring net losses, and has a negative working capital and shareholders’ deficit.

These factors raise substantial doubt about Bluegate’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary if Bluegate is unable to continue as a going concern.

3.	NOTES PAYABLE


Notes payable at June 30, 2007 and December 31, 2006 are summarized below:	6/30/2007		12/31/2006

Secured note payable: On March 8, 2007, we borrowed $315,000 and issued a note payable secured by Bluegate’s accounts receivable. The $315,000 note plus $31,500 was due on May 15, 2007 and the $31,500 was recorded as interest expense for the quarter ending March 31, 2007. On May 15, 2007 we paid the $31,500 and extended the payment of the $315,000 plus an additional $4,025 interest amount until June 30, 2007. The $4,025 was recorded as interest expense for the quarter ending June 30, 2007. On July 2, 2007 the note and accrued interest totaling $319,025 was paid in full.	$	315,000	$	-

Unsecured notes payable: 10% note payable due upon demand		12,800		12,800
	$	327,800	$	12,800
Unsecured notes payable to related parties: During 2006, the Company entered into a line of credit agreement with each of two related parties, Manfred Sternberg, Chief Strategy Officer and William Koehler, President and COO, for Bluegate to borrow up to $500,000 each. During the six months ended June 30, 2007, we borrowed $428,934 from related parties, with interest rates ranging from 7.35% to 29.99% on their underlying credit cards. During the same period, we made payments of $378,250 on related party notes.

Notes payable to William Koehler due on demand	$	51,470	$	41,910
Notes payable to Manfred Sternberg due on demand		121,387		80,264
	$	172,857	$	122,174
Unsecured bank line of credit: The Company has a bank line of credit to borrow up to $50,000. As of June 30, 2007, the Company had an outstanding payable balance of $44,723 and an available balance to borrow of $5,277. The interest rate was 11% as of June 30, 2007. In July 2007, the line of credit balance and accrued interest totaling $44,723 was paid in full.	$	44,723	$	44,590

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4.	EQUITY TRANSACTIONS

During the six months ended June 30, 2007, Bluegate completed the following equity transactions:

PREFERRED STOCK:

In June 2007 Bluegate's board of directors approved the issuance of 48 shares of Series C voting convertible non-redeemable preferred stock with a par value of $0.001 per share and a liquidation value of $12,500 per share. Each share of Series C convertible preferred stock may be converted, at the option of the shareholder, into 25,000 shares of common stock or a total of 1,200,000 shares of common stock. Each share of preferred stock has 15 times the number of votes its conversion-equivalent number of shares of common stock, or 375,000 votes per share of preferred stock. The 48 shares of preferred stock will have an aggregate of 18 million votes.

Effective June 28, 2007, we sold 8 shares of Series C preferred stock for $100,000 in cash to SAI Corporation ("SAI"), a corporation controlled by Stephen Sperco ("Sperco"). We also granted to SAI warrants to purchase up to 1,000,000 shares of our common stock at an exercise price of $0.17 per share expiring in June 2012. On the same day we sold 40 shares of Series C preferred stock for $500,000 in cash to Sperco. We also granted to Sperco warrants to purchase up to 5,000,000 shares of our common stock at an exercise price of $0.17 per share expiring in June 2012. Mr. Sperco is our CEO and a director.

Based upon the $600,000 investment in Series C preferred stock, we allocated the relative fair value of $100,000 to preferred stock and $500,000 to the warrants.

In accordance with EITF 00-27, Application of Issue No. 98-5 Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, which provides guidance on the calculation of a beneficial conversion feature on a convertible instrument, Bluegate has determined that the Series C shares issued had an aggregate beneficial conversion feature of $600,000 as of the date of issuance. Bluegate recorded this beneficial conversion feature as a deemed dividend upon issuance.

Bluegate analyzed the conversion feature associated with the preferred stock for derivative accounting consideration under SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities and EITF 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock. Bluegate determined the conversion feature met the criteria for classification in equity and did not require derivative treatment under SFAS 133 and EITF 00-19.

The warrants issued in this transaction are subject to a registration rights agreement which requires Bluegate to register the underlying shares by September 28, 2007 or pay liquidated damages of 1.5% of the purchase price of the investment each month the shares are not registered. As of June 30, 2007 there is no liability related to the registration rights agreements. As of June 30, 2007 if the shares remain unregistered for the remainder of the months applicable to these investments, Bluegate may be required pay total liquidated damages of $189,000 in the form of common stock.

As a result of this transaction, net operating losses accumulated up through the change in control will be limited by Internal Revenue Code Section 382 due to the change in control.

COMMON STOCK:

Issuance of common stock and warrants for cash:

(1) During the quarter ended March 31, 2007, we issued 800,000 shares of common stock, warrants for 800,000 shares of our common stock at an exercise price of $0.75 per share and warrants for 400,000 shares of our common stock at an exercise price of $1.00 per share, for $400,000 in connection with a private placement of our securities. The relative fair value of the stock and warrants in these transactions were $108,576 and $291,424, respectively.

The warrants issued in the transactions recorded in the period from July 1, 2006 through March 31, 2007 are subject to a registration rights agreement which required Bluegate to register the underlying shares by June 30, 2007 or pay liquidated damages of 1.5% of the purchase price of the investment each month the shares are not registered. As of June 30, 2007 there is no liability related to the registration rights agreements recorded in the period July 1, 2006 through March 31, 2007. As of June 30, 2007 if the shares remain unregistered for the remainder of the months applicable to these investments, Bluegate may be required pay total liquidated damages of $464,655 in the form of common stock.

Issuance of common stock for compensation:

(2) In January 2007, we issued 150,000 shares of common stock to an employee for compensation. The common stock had a market value of $142,500 based on the closing price of the stock on the date of grant. We expensed $142,500 in quarter ending March 31, 2007 related to this transaction.

Issuance of common stock for services:

(3) In January 2007, we issued 300,000 shares of common stock to a consultant for services rendered. The common stock had a market value of $225,000 based on the closing price of the stock on the date of grant. We expensed $225,000 in the quarter ending March 31, 2007 related to this transaction.

(4) In February and March 2007, we issued 21,773 shares of common stock valued at $19,525 based on the closing price of the stock on the date of grant as payment to a consultant and two vendors for services rendered. We expensed $19,525 in the quarter ending March 31, 2007 related to this transaction.

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(5) In March 2007, we issued 100,000 shares of common stock to a consultant for services rendered. The common stock had a market value of $85,000 based on the closing price of the stock on the date of grant. We expensed $85,000 in quarter ending March 31, 2007 related to this transaction.

Issuance of common stock for delay in filing a registration statement:

(6) The warrants issued in the transactions recorded in the period January 1, 2006 through June 30, 2006 are subject to registration rights agreements which required Bluegate to register the underlying shares by November 30, 2006 or pay liquidated damages of 1.5% of the purchase price of the investment each month the shares are not registered. In May 2007, we paid liquidated damages of $29,250 ($325,000 investment x 1.5% x 6 months) by issuing 36,585 restricted shares of common stock covering the period from December 1, 2006 through May 31, 2007 as consideration for the delay in filing the registration statement beyond the November 30, 2006 date.

As of June 30, 2007 the liability related to the registration rights agreements covering the period from January 1, 2006 through June 30, 2006 was $4,875 ($325,000 x 1.5% x 1 month) and recorded in these financial statements. As of June 30, 2007 if the shares remain unregistered for the remainder of the months applicable to these investments, Bluegate may be required pay total liquidated damages of $44,250 in the form of common stock.

Issuance of common stock and warrants for services and accounts payable:

(7) In February 2007, we issued 90,000 shares of our common stock, warrants to purchase 90,000 shares of our common stock at an exercise price of $0.75 per share and warrants to purchase 45,000 shares of our common stock at an exercise price of $1.00 per share. The fair value of the shares and warrants issued was $146,145 based upon the closing price of the stock on the date of grant and the Black-Scholes valuation of the warrants. $15,000 of common stock and warrants was issued to settle prior year accounts payable and $131,145 was expensed in the current year. The warrants vest immediately and expire in February 2012.

(8) In May 2007, we issued 60,000 shares of our common stock, warrants to purchase 60,000 shares of our common stock at an exercise price of $0.75 per share and warrants to purchase 30,000 shares of our common stock at an exercise price of $1.00 per share. The fair value of the shares and warrants issued was $41,705 based upon the closing price of the stock on the date of grant and the Black-Scholes valuation of the warrants. The warrants vest immediately and expire in May 2012.

Stock options issued for services:

(9) During the six months ended June 30, 2007, Bluegate expensed $1,505,821 related to previously issued stock options that vested during the period.

(10) The following table summarizes stock options issued to employees during the six months ended June 30, 2007:

		Exercise		Market		Expiration	Vesting	2007
Options		Price		Value		Date	Period	Expense
	50,000	$	0.80	$	35,858	1/15/2012	Through 12/08	$	8,964
	75,000		0.75		50,426	2/2/2012	Through 1/08		21,010
	100,000		0.75		67,234	2/5/2012	Immediately		67,234
	50,000		0.86		38,548	2/19/2012	Immediately		38,548
	50,000		0.82		36,755	3/19/2012	Immediately		36,755
	50,000		0.80		35,858	4/16/2012	Through 1/08		10,758
	150,000		0.50		67,234	6/25/2012	Immediately		67,234
	25,000		0.50		11,206	6/29/2012	Immediately		11,206
	550,000			$	343,119			$	261,709

Bluegate used the Black-Scholes option pricing model to value stock options and warrants using the following assumptions: number of options as set forth in the option agreements; no expected dividend yield; expected volatility of 202%; risk-free interest rates of 5.0%; and the average of the option terms as set forth in the options agreements.

5.	SUBSEQUENT EVENT

In July 2007, we issued 600,000 shares of common stock and warrants for 1,500,000 shares of our common stock at an exercise price of $0.17 per share for $300,000 in connection with a private sale of our securities to two officers of Bluegate, Manfred Sternberg, Chief Strategy Officer and William Koehler, President and COO and one other investor. The fair value of the warrants was $553,805 on the date of issuance. Because the warrants were granted to related parties and the exercise price on the grant date was below the market price of our stock, we expensed $553,805 in July 2007 related to these transactions.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS

FORWARD LOOKING STATEMENT

This Management's Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2007 and for the six months then ended, should be read in conjunction with the audited financial statements and notes thereto set forth in our annual report on Form 10-KSB for 2006.

Certain statements contained in this report, including, without limitation, statements containing the words, "likely", "forecast", "project", "believe", "anticipate", "expect", and other words of similar meaning, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such factors or to announce publicly the results of any revision of the forward-looking statements contained or incorporated by reference herein to reflect future events or developments. In addition to the forward-looking statements contained in this Form 10-QSB, the following forward-looking factors could cause our future results to differ materially from our forward-looking statements: competition, capital resources, credit resources, funding, government compliance and market acceptance of our products and services.

ABOUT US

Bluegate provides the nation's only Medical Grade Network® that allows hospitals and physicians to achieve physician and clinical integration by communicating in a secure private environment, improving patient care. As a leader in the healthcare industry of outsourced IT solutions and remote management services, Bluegate provides hospitals and physicians with a single source solution for all clinical integration and IT needs. Additionally Bluegate provides IT consulting through its professional services division and HIPAA-compliant, turnkey managed security services and interoperability solutions across its Medical Grade Network® for hospitals, physicians and other healthcare facilities.

CONSULTING PRACTICE

Health care institutions have very unique requirements not found in a typical commercial environment. Our consulting practice works with medium to large medical facilities and systems on evaluation, procurement and implementation of voice, data, video, infrastructure and applications for the health care environment. Our applications group also performs specific applications development, enhancement, coding and integration work for these projects when requested by our customers.

OUTSOURCING

Our outsourcing offering includes help desk support and break-fix arrangements as well as acquisition and special financing of equipment and services. It also can include provisions for technology refresh, change management and level of service agreements. Our target market for such services consists of private-practice physicians whose office staffs typically lack the in-house technical expertise to support mission-critical computer systems and associated hardware. In many cases, these private-practice physicians are affiliated with our larger medical facility clients, creating a logical foundation for Bluegate to establish and maintain long-term business relationships.

SYSTEMS INTEGRATION AND MANAGED SECURITY SOLUTIONS

Our systems integration and managed security group enables secure, HIPAA-compliant data communication between hospitals, medical facilities and physician practices from all locations via our Bluegate Medical Grade Network® - ultimately enhancing patient care. We also provide affordable access to compatible medical-focused content and applications over the infrastructure to improve practice efficiency and service. We extend IT best practices to the edge of the health care network ensuring every access point for the physician and health care location is as secure as the hospital itself.

TWO-FOLD MARKET OPPORTUNITY

HIPAA COMPLIANCE FOR PHYSICIAN PRACTICES

The Administrative Simplification provisions of Title II of HIPAA require the United States Department of Health and Human Services to establish national standards for electronic health care transactions and national identifiers for providers, health plans, and employers. It also addresses the security and privacy of health data. Adopting these standards will improve the efficiency and effectiveness of the nation's health care system by encouraging the widespread use of electronic data interchange in health care. There is rapidly increasing demand for our networks, technologies, remote management and professional IT services, largely as the result of increasing pressure for health care providers to adopt electronic health records and the favorable health care IT environment created by the Stark Law exceptions.

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FACILITATE PARTICIPATION IN NATIONAL HEALTHCARE INFORMATION NETWORK (NHIN)

Electronic data communication networks have vast potential for enhancing the quality of patient care, mitigating the soaring costs of health care, and protecting patient privacy. To harness this potential, the current administration, Congress, and administrative agencies are advocating that all physicians get connected to the NHIN, the proposed national health information system. A NHIN is expected to enable physicians to write electronic prescriptions (eRx) and securely share patient electronic health records (EHR), including medical images, with other health care providers at hospitals, clinics, and individual physician offices.

In order to access and use the NHIN, individual physicians must have the appropriate information technology environment at their offices, and the hospitals where they admit patients. Further, the hospitals credentialed physicians must be on a common HIPAA compliant network. Once the hospital has installed the necessary secure electronic connectivity behind their firewall, the "last mile" of connectivity, the figurative distance from the telecommunication provider's switch to an end user (i.e. the physician), still presents a major challenge. In addition to being HIPAA-compliant, the networks also need to be interoperable, which requires assessing and augmenting physicians' existing IT equipment and resources. Adequate training and technical support is necessary to ensure the highest possible network availability and security and the ability to move and manage information back and forth.

Today, Bluegate’s offering singularly solves a particularly vexing piece of the HIPAA requirement and the “last mile” challenges of a NHIN by connecting the individual physician's practice to this secured network. As a result, Bluegate is positioning itself, through its Medical Grade Network®, to provide HIPAA compliant connectivity to the NHIN linking physician practices, hospitals and insurance companies to a secure network. As a result, Bluegate, has acquired and deployed significant resources towards this national opportunity. Bluegate began its business installing Medical Grade Networks® in Houston, Texas in late 2004 and 2005. We are in active contract negotiations with health care entities in Texas and around the country to design, develop and deploy networks that are based upon the success of those deployed in Houston, Texas.

BLUEGATE STRATEGY

Our current short term strategies are to: (1) increase our market penetration and dominance of the Houston hospital, centralized health care and physician markets; (2) commence systems in other Texas cities; and, (3) commence systems in other cities in the U.S. Our long term strategy is fourfold: (1) fill as much of the national HIPAA-compliant secured communications void that exists between the physician and the hospital as we can; (2) sell our services to the physicians that join our Medical Grade Network®, enabling them to choose Bluegate as their electronic health solutions firm and as the IT outsource firm of choice for all of their technology needs; (3) to be "THE" IT solutions resource to medical institutions, health care facilities, regional health information organizations (RHIOs) and centralized health care organizations (HCOs) for all their information technology needs; and, (4) partner with a wide array of third party providers of software, managed systems, pharmacy benefits and many other applications that must run on electronic networks and be installed in hospitals, HCOs and medical practices.

COMPETITION

We are not aware of any completely direct competitors at this time. However, competition may include vendors of HIPAA software and Internet Protocol ("IP") networks whose security may or may not comply with the terms of the HIPAA confidentiality compliance requirements.

The Internet, VPN and data services market is extremely competitive, highly fragmented and has grown dramatically in recent years. The market is characterized by the absence of significant barriers to entry and the rapid growth in Internet and VPN usage among customers. Other competitors may be:

Access and content providers, such as AOL, Microsoft, EarthLink and Time Warner;

Local, regional and national Internet service providers, such as Megapath, EarthLink, XO Communications and Mindspring;

Regional, national and international telecommunications companies, such as AT&T, MCI and Allegiance Telecom;

On-line services offered by incumbent cable providers such as Time Warner;

DSL providers such as Covad.

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Most of our competitors have greater financial and other resources than we have, and there is no assurance that we will be able to successfully compete.

Our web site is www.bluegate.com.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon financial statements which have been prepared in accordance with generally accepted accounting principles 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, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate these estimates. We base our estimates on historical experience and on assumptions that are believed to be reasonable. These estimates and assumptions provide a basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and these differences may be material.

We believe that the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

REVENUE RECOGNITION

Revenue, which includes licensing revenue, is recognized based upon contractually determined monthly service charges to individual customers. Services are billed in advance and, accordingly, revenues are deferred until the period in which the services are provided.

STOCK-BASED COMPENSATION

Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123R") established financial accounting and reporting standards for stock-based employee compensation plans. It defines a fair value based method of accounting for an employee stock option or similar equity instrument. In January 2006, we implemented SFAS No. 123R, and accordingly, Bluegate accounts for compensation cost for stock option plans in accordance with SFAS No. 123R.

GOING CONCERN

We remain dependent on outside sources of funding for continuation of our operations. Our independent auditors included a going concern qualification in their report dated March 12, 2007 (included in our annual report on Form 10-KSB for the year ended December 31, 2006), which raises substantial doubt about our ability to continue as a going concern.

During the six months ended June 30, 2007, and the year ended December 31, 2006, we have been unable to generate cash flows sufficient to support our operations and have been dependent on debt and equity raised from qualified individual investors.

During the six months ended June 30, 2007 and 2006, we experienced negative financial results as follows:

	Six Months Ended June 30,
	2007			2006

Net loss attributable to common shareholders	$	(3,763,240	)	$	(2,386,373	)
Negative cash flow from operations		(1,073,458	)		(883,630	)
Negative working capital		(1,369,237	)		(1,705,074	)
Stockholders' deficit		(1,267,823	)		(1,523,785	)

These factors raise substantial doubt about our ability to continue as a going concern. The financial statements contained herein do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue in existence. Our ability to continue as a going concern is dependent upon our ability to generate sufficient cash flows to meet our obligations on a timely basis, to obtain additional financing as may be required, and ultimately to attain profitable operations. However, there is no assurance that profitable operations or sufficient cash flows will occur in the future.

We have supported current operations by: (1) raising additional operating cash through the private sale of our common stock, (2) selling convertible debt and common stock to certain key stockholders and (3) issuing stock and options as compensation to certain employees and vendors in lieu of cash payments.

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These steps have provided us with the cash flows to continue our business plan, but have not resulted in significant improvement in our financial position. We are considering alternatives to address our cash flow situation that include: (1) raising capital through additional sale of our common stock and/or debt Securities and (2) reducing cash operating expenses to levels that are in line with current revenues.

These alternatives could result in substantial dilution of existing stockholders. There can be no assurance that our current financial position can be improved, that we can raise additional working capital or that we can achieve positive cash flows from operations. Our long-term viability as a going concern is dependent upon the following:

Our ability to locate sources of debt or equity funding to meet current commitments and near-term future requirements.

Our ability to achieve profitability and ultimately generate sufficient cash flow from operations to sustain our continuing operations.

Our operations are located in Houston, Texas. Our business consists of the sales and marketing of our HIPAA compliant VPN and HIPAA application software and related services.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2007 AS COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2006

During the three months ended June 30, 2007, our revenue was $1,807,255 versus $814,846 for the three month period ended June 30, 2006. This represents an increase of $992,409 and is primarily attributable to our professional service business and our efforts to market our Medical Grade Network® business.

Our cost of services for the three months ended June 30, 2007 was $1,009,975 compared to $344,151 for the three months ended June 30,2006. The increase in cost of services of $665,824 is due to the increase in the costs associated with the increase in our professional service business and interconnect fees and costs associated with the expansion of our Medical Grade Network® services.

Our gross margin for the three months ended June 30, 2007 was $797,280 compared to $470,695 for the three months ended June 30, 2006. Our gross margin as a percentage of sales decreased to 44% for the three months ended June 30, 2007 from 58% for the three months ended June 30, 2006 due to an increase in the cost of products and services purchased in the second quarter of 2007.

We incurred selling, general and administrative expenses (SG&A) of $413,685 for the three months ended June 30, 2007 compared to $393,870 for the three months ended June 30, 2006. The increase in SG&A of $19,815 was negligible.

We incurred compensation expense of $1,462,358 for the three months ended June 30, 2007 compared to $1,236,168 for the three months ended June 30, 2006. The increase in compensation expense of $226,190 is primarily due to the expansion of our sales and marketing efforts and recording stock option expenses as a result of our adoption of SFAS No. 123R in 2006.

We incurred a net loss of $1,087,034 for the three months ended June 30, 2007 compared to a net loss of $1,373,837 for the three months ended June 30, 2006. The decrease of $286,803 is primarily attributable to a decrease in interest expense.

The net loss attributable to common shareholders was $1,687,034 for the three months ended June 30, 2007 due to a deemed dividend of $600,000 on preferred shares and common stock warrants issued.

SIX MONTHS ENDED JUNE 30, 2007 AS COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2006

During the six months ended June 30, 2007 our revenue was $3,168,322 versus $1,750,495 for the six month period ended June 30, 2006. This represents an increase of $1,417,827 and is and is primarily attributable to our professional service business and our efforts to market our Medical Grade Network® business.

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Our cost of services for the six months ended June 30, 2007 was $1,743,487 compared to $766,891 for the six months ended June 30, 2006. The increase in cost of services of $976,596 is due to the increase in the costs associated with the increase in our professional service business and interconnect fees and costs associated with the expansion of our Medical Grade Network® services.

Our gross profit for the six months ended June 30, 2007 was $1,424,835 compared to $983,604 for the six months ended June 30, 2006. Our gross profit as a percentage of sales decreased to 45% for the six months ended June 30, 2007 from 56% for the six months ended June 30, 2006 due to an increase in the cost of products and services purchased in the second quarter of 2007.

We incurred SG&A of $1,281,144 for the six months ended June 30, 2007 compared to $871,769 for the six months ended June 30, 2006. The increase in SG&A of $409,375 is primarily attributable to the expansion of our sales and marketing efforts.

We incurred compensation expense of $3,259,483 for the six months ended June 30, 2007 compared to $2,024,542 for the six months ended June 30, 2006. The increase in compensation expense of $1,234,941 is primarily due to the expansion of our sales and marketing efforts and recording stock option expenses as a result of our adoption of SFAS No. 123R in 2006.

We incurred a net loss of $3,163,240 for the six months ended June 30, 2007 compared to a net loss of $2,386,373 for the six months ended June 30, 2006. The increase of $776,867 is due to a decrease in interest expense and to the expansion of our sales and marketing efforts and an increase in stock option expenses as a result of our adoption of SFAS No. 123R in 2006.

The net loss attributable to common shareholders was $3,763,240 for the six months ended June 30, 2007 due to a deemed dividend of $600,000 on preferred shares and common stock warrants issued.

FORECAST OF GROWTH IN OUR MEDICAL GRADE NETWORK® CUSTOMER BASE

At June 30, 2007, we had approximately 1,100 Medical Grade Network® customers. We are forecasting an increase in the number of Medical Grade Network® customers through 2007.

During 2006 we commenced our national marketing efforts to hospital systems and recently have been successful in securing two initial projects for hospitals outside of Texas. We expect to announce additional successes in the near future and, as a result, we believe that our revenue growth will accelerate in 2007.

The exceptions to the Stark Law that were made in the latter part of 2006 are creating an ideal business environment for Bluegate in 2007 and beyond, and are contributing to the continued expansion of our sales pipeline for our Medical Grade Network® and health care IT services and solutions to healthcare systems and physician practices.

As projected in early 2006, we made our first expansion outside the state of Texas in 2006 and we continued our growth within Texas with the addition of several clients. Our operational focus for 2007 continues to be the build out of the Houston market and strategic expansion to additional markets in Texas and other regions of the country. There is rapidly increasing demand for our networks, technologies, remote management and professional IT services, largely as the result of increasing pressure for health care providers to adopt electronic health records and the favorable health care IT environment created by the Stark Law exceptions.

LIQUIDITY AND CAPITAL RESOURCES

Operations for the three months ended June 30, 2007 have been funded by the issuance of common stock and options for cash in private transactions and loans from related parties. Bluegate has continued to take steps to reduce its monthly operating expenses relating to its core business and has expanded its efforts in creating a market for the health care industry.

As of June 30, 2007, our cash on hand was $19,378; total current assets were $497,667, total current liabilities were $1,866,904 and total stockholders’ deficit was $1,267,823.

We are seeking additional capital to fund expected operating costs. We believe that future funding may be obtained from public or private offerings of equity securities, debt or convertible debt securities or other sources. Stockholders should assume that any additional funding will likely be dilutive.

If we are unable to raise additional funding, we may have to limit our operations to an extent that we cannot presently determine. The effect of this on our business may include the sale of certain assets, reduction in the scope of current operations or the cessation of business operations.

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Our ability to achieve profitability will depend upon our ability to raise additional operating capital, the continued growth in demand for connectivity services and our ability to execute and deliver high quality, reliable connectivity services.

Our growth is dependent on attaining profit from our operations and our raising additional capital either through the sale of stock or borrowing. There is no assurance that we will be able to raise any equity financing or sell any of our products at a profit.

Our future capital requirements will depend upon many factors, including the following:

The cost of operating our VPN

The cost of third-party software

The cost of sales and marketing

The rate at which we expand our operations

The response of competitors

Capital expenditures

ITEM 3.

CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Based on their evaluation of our disclosure controls and procedures (as defined in Rule 13a-15e under the Securities Exchange Act of 1934), our principal executive officer and principal financial officer have concluded that as of the end of the period covered by this quarterly report on Form 10-QSB such disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Our Chief Financial Officer has implemented revisions and instituted certain checks and balances to our accounting system. Additionally, he has addressed tighter controls over all aspects of financial revenue and expense recognition, as well as improving supervision and training of our accounting staff. We are continuing our efforts to enhance, improve and strengthen our control processes and procedures. Our management and directors will continue to work with our auditors and other outside advisors to ensure that our controls and procedures are adequate and effective.

(b) Changes in internal control over financial reporting.

During the quarter under report, our Chief Financial Officer has implemented revisions and instituted certain checks and balances to our accounting system. Additionally, he continues to address tighter controls over all aspects of financial revenue and expense recognition, as well as improving supervision and training of our accounting staff.

The evaluation of our disclosure controls included a review of whether there were any significant deficiencies in the design or operation of such controls and procedures, material weaknesses in such controls and procedures, any corrective actions taken with regard to such deficiencies and weaknesses and any fraud involving management or other employees with a significant role in such controls and procedures.

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PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

NONE.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In July 2007, Manfred Sternberg, a Director, gave us $200,000 in cash for the purchase of 400,000 shares of common stock at a purchase price of $0.50 per share and for the purchase of 1,000,000 warrants to purchase common stock at an exercise price of $0.17 per share expiring in July 2012. We issued these securities in reliance on Section 4(2) of the Securities Act. This transaction did not involve a public offering. The investors were knowledgeable about our operations and financial condition. The investors had knowledge and experience in financial and business matters that allowed them to evaluate the merits and risk of receipt of these securities. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions.

In July 2007, William Koehler, a Director, gave us $50,000 in cash for the purchase of 100,000 shares of common stock at a purchase price of $0.50 per share and for the purchase of 250,000 warrants to purchase common stock at an exercise price of $0.17 per share expiring in July 2012. We issued these securities in reliance on Section 4(2) of the Securities Act. This transaction did not involve a public offering. The investors were knowledgeable about our operations and financial condition. The investors had knowledge and experience in financial and business matters that allowed them to evaluate the merits and risk of receipt of these securities. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions.

In July 2007, Albert Koehler, the brother of William Koehler, gave us $50,000 in cash for the purchase of 100,000 shares of common stock at a purchase price of $0.50 per share and for the purchase of 250,000 warrants to purchase common stock at an exercise price of $0.17 per share expiring in July 2012. We issued these securities in reliance on Section 4(2) of the Securities Act. This transaction did not involve a public offering. The investors were knowledgeable about our operations and financial condition. The investors had knowledge and experience in financial and business matters that allowed them to evaluate the merits and risk of receipt of these securities. Each certificate issued for unregistered securities contained a legend stating that the securities have not been registered under the Securities Act and setting forth the restrictions on the transferability and the sale of the securities. No underwriter participated in, nor did we pay any commissions or fees to any underwriter in connection with any of these transactions.

ITEM 5.

OTHER INFORMATION

NONE

ITEM 6.

EXHIBITS

Exhibit
Number		Name

31.1		Certification pursuant to Section 13a-14 of CEO

31.2		Certification pursuant to Section 13a-14 of CFO

32.1		Certification pursuant to Section 1350 of CEO

32.2		Certification pursuant to Section 1350 of CFO

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SIGNATURES

In accordance with the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized

	Bluegate Corporation

Date: August 23, 2007	/s/	Stephen J. Sperco
		Stephen J. Sperco,
		Chief Executive Officer


	Bluegate Corporation

Date: August 23, 2007	/s/	Charles E. Leibold
		Charles E. Leibold,
		Chief Financial Officer

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Date: August 23, 2007

/s/ Stephen J. Sperco
Stephen J. Sperco
Chief Executive Officer

Date: August 23, 2007

/s/ Charles E. Leibold
Charles E. Leibold
Chief Financial Officer