Innuity (INNU) 10-Q 2008 Q3 Quarterly report

United States
Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

þ Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2008

o Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                    to                    

Commission File Number: 0-29129

Innuity, Inc.

Exact Name of Small Business Issuer as

Specified in its Charter

Utah	8644 154th Avenue NE	87-0370820
(State or other Jurisdiction of Incorporation or Organization)	Redmond, WA 98052 (Address of Principal Executive Offices)	(I.R.S. Employer Identification No.)

Registrant’s telephone number, including area code: (425) 497-9909

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 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.    Yes  þ         No  o

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

Large accelerated filero  Accelerated filero  Non-accelerated filer  o
(Do not check if a smaller reporting company) Smaller reporting companyþ 

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  o         No  þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
the latest practicable date:

Class	Outstanding at October 31, 2008
Common stock $.00025 par value	26,693,392

Innuity, Inc.
Quarterly Report on Form 10-Q
Quarter ended September 30, 2008

TABLE OF CONTENTS

	Page
PART I FINANCIAL INFORMATION
Item 1. Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007 (Unaudited)		2
Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2008 and 2007 (Unaudited)		3
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (Unaudited)		4
Notes to Condensed Consolidated Financial Statements (Unaudited)		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 4T. Controls and Procedures		19
PART II OTHER INFORMATION		19
Item 1. Legal Proceedings		19
Item 1A. Risk Factors		19
Item 4. Submission of Matters to a Vote of Security Holders		33
Item 6. Exhibits		33
SIGNATURES		34
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INNUITY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	September 30,			December 31,
	2008			2007
ASSETS
Current Assets
Cash and cash equivalents	$	104,486		$	200,877
Restricted cash		377,164			—
Settlement deposits		322,391			361,675
Settlement receivable, net of allowance for doubtful accounts of $19,562 and $18,615, respectively		136,300			156,817
Trade accounts receivable, net of allowance for doubtful accounts of $6,998 and $50,883, respectively		108,987			322,131
Current assets relating to discontinued operations		—			1,252,763
Other current assets		260,508			132,634
Total Current Assets		1,309,836			2,426,897
Property and equipment, net		617,081			578,864
Intangible assets, net		145,082			412,915
Long-term assets relating to discontinued operations		—			2,195,993
Total Assets	$	2,071,999		$	5,614,669
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Current liabilities relating to discontinued operations	$	1,053,790		$	4,624,111
Trade accounts payable		1,221,300			1,449,062
Accrued salaries and wages		170,851			413,737
Merchant settlement payable		658,348			389,993
Accrued liabilities		353,717			854,785
Deferred revenues		193,163			183,093
Current portion of obligations from terminated employment contracts		60,493			—
Related party notes payable, current portion, net of discount of $0 and $73,754, respectively		—			684,703
Long-term debt, current portion, net of discount of $0 and $99,633, respectively		94,398			1,103,847
Capital lease obligations, current portion		275,861			195,662
Total Current Liabilities		4,081,921			9,898,993
Long-Term Liabilities
Long-term obligation from terminated employment contracts, net of discount and current portion		337,913			—
Long-term debt, net of current portion		8,339			82,821
Capital lease obligations, net of current portion		183,114			165,074
Total Long-Term Liabilities		529,366			247,895
Total Liabilities		4,611,287			10,146,888
Commitments and Contingencies
Stockholders’ Deficit
Common stock; 200,000,000 shares authorized; par value $0.00025 per share; 26,693,392 shares and 23,595,228 shares issued and outstanding, respectively		6,673			5,899
Additional paid-in capital		35,964,757			34,905,591
Accumulated deficit		(38,510,718	)		(39,443,709	)
Total Stockholders’ Deficit		(2,539,288	)		(4,532,219	)
Total Liabilities and Stockholders’ Deficit	$	2,071,999		$	5,614,669

See accompanying notes to condensed consolidated financial statements.

2

INNUITY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

For the Three and Nine Months Ended September 30,

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Revenues
Merchant Services	$	649,402		$	982,321		$	1,969,024		$	2,272,129
Promotion Services		485,346			567,462			1,474,522			1,746,699
Total revenues		1,134,748			1,549,783			3,443,546			4,018,828
Operating expenses
Cost of services		432,411			384,062			1,323,508			1,296,685
General and administrative		667,152			521,765			2,223,748			2,237,021
Selling and marketing		571,585			604,702			1,730,558			1,728,999
Research and development		382,507			330,460			1,112,123			1,136,523
Amortization expense		59,110			107,043			267,833			333,969
Loss from operations		(978,017	)		(398,249	)		(3,214,224	)		(2,714,369	)
Other expense
Gain from settlement of debt		—			—			139,329			577,434
Other income		1,189			—			15,865			—
Interest expense, net		(53,668	)		(532,937	)		(427,425	)		(855,790	)
Total other income (expense)		(52,479	)		(532,937	)		(272,231	)		(278,356	)
Loss before income taxes		(1,030,496	)		(931,186	)		(3,486,455	)		(2,992,725	)
Income tax benefit		—			—			—			—
Loss from continuing operations		(1,030,496	)		(931,186	)		(3,486,455	)		(2,992,725	)
Income (loss) from discontinued operations		1,056			5,945			(531,976	)		(3,874	)
Gain on disposal		—			—			4,951,422			—
Net gain (loss) from discontinued operations		1,056			5,945			4,419,446			(3,874	)
Net income (loss)	$	(1,029,440	)	$	(925,241	)	$	932,991		$	(2,996,599	)
Basic and Diluted Loss from Continuing Operations Per Common Share	$	(0.04	)	$	(0.04	)	$	(0.14	)	$	(0.14	)
Basic Income (Loss) from Discontinued Operations Per Common Share	$	0.00		$	0.00		$	0.17		$	(0.00	)
Diluted Income (Loss) from Discontinued Operations Per Common Share	$	0.00		$	0.00		$	0.17		$	(0.00	)
Basic Income (Loss) Per Common Share	$	(0.04	)	$	(0.04	)	$	0.04		$	(0.14	)
Diluted Income (Loss) Per Common Share	$	(0.04	)	$	(0.04	)	$	0.04		$	(0.14	)
Basic Weighted-Average Common Shares Outstanding		26,686,653			22,131,454			25,514,718			21,827,473
Diluted Weighted-Average Common Shares Outstanding		26,686,653			22,131,454			26,313,079			21,827,473

See accompanying notes to condensed consolidated financial statements.

3

INNUITY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For the Nine Months Ended September 30,	2008			2007
Cash flows from operating activities
Net income (loss)	$	932,991		$	(2,996,599	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		718,951			1,046,747
Accretion of debt discount		239,615			338,130
Share-based payments		1,045,210			967,869
Bad debt provision		113,176			146,623
Gain from settlement of debt		(139,329	)		(577,434	)
Gain from disposal of discontinued operations		(4,951,422	)		—
Changes in assets and liabilities, net of acquisitions:
Settlement deposits		39,284			(99,961	)
Trade accounts receivable		(152,262	)		208,402
Settlement receivable		20,517			(1,067	)
Inventories		52,795			(20,243	)
Other current assets		(225,902	)		(15,426	)
Trade accounts payable		(749,203	)		590,415
Merchant settlement payable		268,355			194,519
Accrued salaries and wages		(472,950	)		(127,531	)
Deferred revenues		299,123			320,088
Accrued liabilities		(409,936	)		(51,576	)
Total adjustments		(4,303,978	)		2,919,555
Net cash used in operating activities		(3,370,987	)		(77,044	)
Cash flows from investing activities
Purchase of property and equipment		(16,119	)		(20,096	)
Increase in restricted cash		(2,164	)		—
Proceeds from sale of in-store business line, net of expenses and restricted cash		5,492,302			—
Net cash provided by (used in) investing activities		5,474,019			(20,096	)
Cash flows from financing activities
Proceeds from issuance of long-term debt		—			1,825,000
Proceeds from exercise of warrants and options		14,730			3,869
Payments under obligations from terminated employement contracts		(35,998	)		—
Payments on related party notes payable		(758,507	)		(180,303	)
Payments on long-term debt		(1,221,065	)		(693,961	)
Payments on capital lease obligations		(198,583	)		(106,094	)
Payments on line of credit		—			(649,365	)
Net cash provided by (used in) financing activities		(2,199,423	)		199,146
Net increase (decease) in cash and cash equivalents		(96,391	)		102,006
Cash and cash equivalents at beginning of period		200,877			307,483
Cash and cash equivalents at end of period	$	104,486		$	409,489

See accompanying notes to condensed consolidated financial statements.

4

INNUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)

For the Nine Months Ended September 30,	2008			2007
Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	252,985		$	334,213
Noncash investing and financing activities
Discount on notes payable		—			303,115
Debt converted to common stock		—			280,405
Accrued interest converted to common stock		—			75,760
Acquisition of property and equipment under terms of capital lease agreements		296,822			—
Conversion of accounts payable to common stock		—			40,618
Sale of In-Store business line:
Assets sold:
Accounts receivable	$	867,235
Inventory		497,901
Other current assets		185,090
Property and equipment		116,746
Intangible assets		69,632
Goodwill		1,833,220
		3,569,824
Liabilities assumed by buyer:
Deferred revenue		(2,891,196	)
Accrued liabilities		(90,004	)
Assets sold net of liabilities		588,624
Sale price		7,000,000
Accrued purchase price adjustment		78,471
Accrued obligation from terminated employment contracts		(405,727	)
Transaction expenses		(1,132,698	)
Gain from disposal	$	4,951,422

See accompanying notes to condensed consolidated financial statements.

5

INNUITY, INC.
AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
September 30, 2008
(Unaudited)

1. BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements of Innuity, Inc. and its subsidiaries (the “Company”) have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring entries) considered necessary for a fair presentation have been included.

     Operating results for the three-month and nine-month periods ended September 30, 2008, are not necessarily indicative of the results that may be expected for the full fiscal year. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the United States Securities and Exchange Commission on April 15, 2008.

     The Company’s operations are located in California, Utah, and Washington. Operations are carried out through the Company’s Promotion and Commerce divisions, each of which is focused on a critical business cycle process. The applications and solutions offered by the Company’s Promotion division are designed to help small businesses market and promote their products and services, while the offerings of the Company’s Commerce division can facilitate and improve a small business’s selling processes and transaction processing capabilities.

     The Promotion division’s operations are carried out through the Company’s wholly-owned subsidiary, Vista.com, Inc. The Commerce division’s operations are carried out through its Merchant Services business line. The Merchant Services business line does business under the names of Merchant Partners, Creditdiscovery, Acquirint and Innuity, Inc. dba Merchant Partners.

     On May 2, 2008, the Company sold substantially all of the assets of its wholly owned subsidiary, Jadeon, Inc. The operations of Jadeon, Inc. have been reclassified as discontinued operations on the accompanying condensed consolidated statements of operations. The assets and liabilities of Jadeon, Inc. have been reclassified as assets and liabilities related to discontinued operations in the accompanying condensed consolidated balance sheets.

     Of the proceeds received for the sale of Jadeon, Inc., $375,000 was placed in an escrow account to satisfy any indemnified losses under the asset purchase agreement that are incurred by the buyer for up to one year after the sale. The funds in the escrow account, including interest earned on escrowed funds, have been recorded as restricted cash in the accompanying condensed consolidated balance sheet as of September 30, 2008.

     The accompanying condensed consolidated financial statements have been prepared with the assumption that the Company will continue as a going concern. However, the Company has incurred substantial losses and has a working capital deficit and accumulated deficit as of September 30, 2008. In addition, the report of the Company’s independent registered public accounting firm for the year ended December 31, 2007 expressed substantial doubt about the Company’s ability to continue as a going concern. Unless the Company is able to significantly increase its revenues and cash flows from operating activities, it will be required to raise additional funds in order to continue operations. No assurance can be given that the Company will be able to obtain such financing or that the Company will be able to obtain such financing with agreeable terms.

     Certain reclassifications have been made to the prior period financial statements to conform to the current presentation.

6

2. SHARE-BASED PAYMENTS

     The Company grants stock options and restricted stock to employees and non-employee directors and consultants under its Amended and Restated 1999 Stock Option Plan (the “1999 Plan”). Vesting requirements for awards under the 1999 Plan vary by individual grant and are time-based. The majority of the options granted under the Plan have a contractual life of 10 years.

     Cash flows resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) are required to be classified as financing cash flows. However, the Company has significant net operating loss carry-forwards for tax purposes and therefore has not recognized any excess tax benefits from the exercise of stock options.

     The fair value of each option award is estimated as of the date of grant using a Black-Scholes option pricing model. No options were granted during the three months ended September 30, 2008. The weighted average assumptions for the three- and nine- month periods ended September 30, 2008 and 2007 were:

	Three Months Ended					Nine Months Ended
	2008		2007			2008			2007
Dividend yield		—		0.0	%		0.0	%		0.0	%
Expected Volatility		—		186	%		161	%		187	%
Risk-free interest rate		—		4.5	%		3.1	%		4.5	%
Expected term (years)		—		5.86			5.86			5.86

     Expected volatility is based on historical volatility of the Company’s common stock. The Company uses historical data to estimate employee termination behavior within the valuation model. The Company’s valuation assumption for the expected term of options granted is calculated using the simplified expected term calculation allowed under the United States Securities and Exchange Commission’s Staff Accounting Bulletin 107. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

     The following summary presents information regarding outstanding options as of September 30, 2008 and changes during the period then ended with regard to all options:

						Weighted
				Weighted		Average
	Shares			Average		Remaining	Aggregate
	under			Exercise		Contract	Intrinsic
	Option			Price		Term	Value
Outstanding at December 31, 2007		3,618,511		$	0.64
Granted		12,500		$	0.24
Forfeited or expired		(1,621,366	)	$	0.58
Outstanding at September 30, 2008		2,009,645		$	0.69	7.53 Years	$	—
Exercisable at September 30, 2008		1,354,968		$	0.71	7.03 Years	$	—

     The weighted average grant-date fair value of options granted during the three-months ended September 30, 2007 was $0.31. The weighted average grant-date fair value of options granted during the nine-months ended September 30, 2008 and 2007 was $0.22 and $0.38, respectively. No stock options were exercised during the three-month and nine-month periods ended September 30, 2008. The total intrinsic value of options exercised during the three-month and nine-month periods ended September 30, 2007, was $8,737. Total share-based payment expense relating to options for the three-month periods ended September 30, 2008 and 2007 was $74,793 and $212,016, respectively. Total share-based payment expense related to options for the nine-month periods ended September 30, 2008 and 2007 was $403,383 and $679,544, respectively.

7

     As of September 30, 2008 there were 1,056,915 shares of restricted common stock issued and outstanding under the 1999 Plan. The Company issued 225,000 shares of restricted common stock under the 1999 Plan during the nine months ended September 30, 2008 and did not issue restricted shares of common stock under the 1999 Plan during the nine months ended September 30, 2007. Of the total restricted shares issued under the 1999 Plan, 910,532 shares were vested as of September 30, 2008. The value of the unvested shares ($0.24 per share) is being amortized into expense over the vesting period of 3.5 years.

     During the nine months ended September 30, 2008, the Company issued an aggregate of 1,200,000 shares of its restricted common stock outside of the 1999 Plan to officers for compensation expense. These shares were valued at the fair market value of the Company’s common stock ($0.23 to $0.24 per share) as of the dates issued. The value of the shares is being amortized into expense over vesting periods of one to two years. No share-based payment costs were capitalized during the three-month and nine-month periods ended September 30, 2008 and 2007.

     In addition to restricted stock issued under the 1999 Plan and shares issued to officers outside of the 1999 Plan, the Company issued 200,000 shares of common stock in June 2008, to a third party for increasing an equipment lease line by $1.0 million, bringing the total line from the existing $1.0 million up to $2 million. The issue date fair value ($0.16 per share) was recorded as an expense during June 2008.

     During the nine-months ended September 30, 2007, the Company issued 1,628,131 shares of its common stock outside of the 1999 Plan, including 803,131 shares of common stock issued to related parties, under various service agreements and in exchange under notes payable. The Company recorded expense of $90,000 and $288,325, respectively, during the three- and nine-month periods ended September 30, 2007 for the value of the shares issued, net of amounts already accrued under notes payable exchanged for shares.

     Total share-based payment expense for the three months ended September 30, 2008, and 2007 were as follows:

	2008		2007
Cost of services	$	5,189	$	760
General and administrative expense		92,106		146,399
Sales and marketing expense		85,849		105,748
Research and development expense		5,351		7,622
Total share-based payment expense from continuing operations		188,495		260,529
Discontinued operations		—		41,487
Total share-based payment expense	$	188,495	$	302,016

     Total share-based payment expense for the nine months ended September 30, 2008, and 2007 were as follows:

	2008		2007
Cost of services	$	13,853	$	4,189
General and administrative expense		363,785		488,428
Sales and marketing expense		236,097		289,831
Research and development expense		18,887		21,360
Total share-based payment expense from continuing operations		632,622		803,808
Discontinued operations		412,588		164,061
Total share-based payment expense	$	1,045,210	$	967,869

8

3. LONG-TERM DEBT AND CREDIT LINE

     The Company had a $100,000 unsecured line of credit with a bank in the name of the Company’s wholly owned subsidiary, Jadeon, Inc. In May 2008, the Company sold substantially all of the assets of Jadeon, Inc. to a third party, and paid the outstanding balances on the credit line.

     Long-term debt consisted of the following as of September 30, 2008, and December 31, 2007:

	September 30,			December 31,
	2008			2007
Note payable to an unrelated party, interest at 15%, net of discount of $99,633 at December 31, 2007, paid in full May 2008	$	—		$	975,367
Note payable to an unrelated party, interest imputed at 2.49%, matures October 2008, monthly payments of $8,357		102,737			211,301
Total debt	$	102,737		$	1,186,668
Less current maturities		(94,398	)		(1,103,847	)
Long-term debt	$	8,339		$	82,821

     Related party notes payable consisted of the following as of September 30, 2008, and December 31, 2007:

	September 30,		December 31,
	2008		2007
Notes payable to a shareholder, interest at 12%, paid in full May 2008	$	—	$	200,000
Note payable to former owner of Jadeon, interest at 5%, net of discount of $10,587 at December 31, 2007, paid in full May 2008		—		202,870
Convertible note payable to related parties, interest at 15%, net of discount of $63,167 at December 31, 2007, paid in full June 2008		—		281,833
Total related party notes payable		—	$	684,703
Less current maturities		—		(684,703	)
Long-term related party notes payable	$	—	$	—

4. DISCONTINUED OPERATIONS

     The Company completed the sale of substantially all of the assets of its wholly owned subsidiary, Jadeon, Inc., to a third party in May 2008. The September 30, 2008 and December 31, 2007 balances relating to the assets and liabilities of Jadeon, Inc. have been classified as assets and liabilities related to discontinued operations in the accompanying condensed consolidated balance sheets. The Company generated $4,960,817 of revenue through the operations of Jadeon, Inc. from January 1, 2008, through May 2, 2008, the date of sale. During the three-month and nine-month periods ended September 30, 2007, the Company generated revenue of $3,662,873 and $11,998,879, respectively, through the operations of Jadeon, Inc.

9

     The schedule below sets forth the balances relating to the assets and liabilities related to discontinued operations as of September 30, 2008 and December 31, 2007:

	September 30,		December 31,
	2008		2007
Trade accounts receivable, net of allowance for doubtful accounts of $54,871 as of December 31, 2007	$	—	$	615,005
Inventories, net of allowance for obsolete inventory of $209,962 as of December 31, 2007		—		550,696
Other current assets		—		87,062
Total current assets related to discontinued operations	$	—	$	1,252,763
Property and equipment, net	$	—	$	107,455
Intangible assets, net		—		255,318
Goodwill		—		1,833,220
Total long-term assets related to discontinued operations	$	—	$	2,195,993
Trade accounts payable	$	991,899	$	1,591,812
Accrued salaries and wages		23,999		254,063
Accrued liabilities		37,892		176,093
Deferred revenues		—		2,602,143
Total current liabilities related to discontinued operations	$	1,053,790	$	4,624,111

     The Company recorded a gain from the sale of the assets from discontinued operations related to Jadeon, Inc. during the nine months ended September 30, 2008 of $4,951,442. The Company received $7,000,000 from the sale of Jadeon, Inc. on May 2, 2008, of which $375,000 has been recorded as restricted cash. The Company incurred $1,132,698 of transaction related expenses from the sale. Transaction expenses include the following:

Bonuses	$	560,000
Amounts paid under employee settlement agreements		450,000
Legal and professional services		96,515
Travel and other		26,183
	$	1,132,698

     Of the bonuses paid on the sale of Jadeon, Inc., the Company paid $350,000 to John R. Dennis, the Company’s President and board member, and $210,000 to John R. Wall, the Company’s Chairman and Chief Executive Officer.

5. LONG TERM OBLIGATIONS FROM TERMINATED EMPLOYMENT CONTRACTS

     Certain employees that were terminated in conjunction with the sale of Jadeon, Inc.’s assets had employment agreements with the Company that called for continuation bonuses to be paid quarterly. According to the employment agreements, the minimum quarterly payments were payable to such employees for so long as the employees remained with the Company and were not terminated for cause. Because the employees were terminated with the asset sale, and not terminated for cause, the Company is obligated to pay minimum quarterly amounts to these employees until the total amounts due under the contracts have been paid. The total amount to be paid under these contracts over future quarterly periods was $924,930 as of September 30, 2008, payable at $16,498 per quarter. The net present value of the amount due under these obligations, net of discount (at 15%), has been recorded on the accompanying condensed consolidated balance sheet as of September 30, 2008 as follows:

Total amount due net of discount of $526,524, under obligations from terminated employment contracts	$	398,406
Less current portion		60,493
Long Term obligations from terminated employment contracts	$	337,913

10

6. COMMON STOCK

     In February 2008, the Company issued a total of 1,000,000 shares of its common stock to officers. The shares are restricted and were valued at the fair market value of $0.24 per share and are being expensed as share-based compensation over the vesting period of one year.

     In February 2008, the Company issued 225,000 shares of its common stock to employees under the 1999 Plan. These shares were valued at the fair market value of $0.24 per share and are being expensed as share-based compensation over the vesting period of 3.5 years.

     In April 2008, the Company issued 200,000 shares of its common stock to officers. The shares are restricted and were valued at the fair market value of $0.23 per share and are being expensed as share-based compensation over the vesting period of two years.

     In April 2008, the Company issued 310,000 shares of its common stock to certain members of its board of directors upon the exercise of warrants issued in 2006 in conjunction with the issuance of the Company’s 15% convertible debt. The aggregate exercise price received for these warrants was $3,100.

     In June 2008, the Company issued 200,000 shares to a third party for increasing the Company’s equipment lease line with the third party by $1 million, bringing the total lease line to $2 million. The shares were valued at the fair market value of $0.16 per share. The Company recorded general and administrative expense of $32,000 during June 2008 for the issuance of these shares.

     In July 2008, the Company issued 35,000 shares of its common stock to three shareholders upon the exercise of warrants issued in 2006 in conjunction with the issuance of the Company’s 15% convertible debt. The aggregate exercise price received for these warrants was $350.

7. INCOME (LOSS) PER SHARE

     Income (loss) per share is computed in accordance with Statement of Financial Accounting Standards No. 128,Earnings Per Share. Basic income (loss) per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period. Diluted loss per share reflects the potential dilution that could occur from shares of common stock issuable through stock options, warrants and other convertible instruments, if dilutive. Shares issuable upon the exercise of options and warrants totaling 2,085,833 have not been included in the calculation of diluted weighted average common shares outstanding for the three months ended September 30, 2008, because the effect would be anti-dilutive. Shares issuable upon conversion of debt and interest, and shares issuable upon the exercise of options and warrants totaling 5,664,222 have not been included in the calculation of diluted weighted average common shares outstanding for the three and nine months ended September 30, 2007, because the effect would be anti-dilutive.

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8. SEGMENT INFORMATION

     Information related to the Company’s reportable operating business segments is shown below. The Company’s reportable segments are reported in a manner consistent with the way management evaluates the businesses. The Company identifies its reportable business segments based on differences in products and services. The accounting policies of the business segments are the same as those described in the summary of significant accounting policies. The Company has identified the following business segments:

     Promotion– This division provides services to small businesses that help to connect them with customers who are most likely to buy their particular products and services — helping generate new customers for the small businesses as well as grow their existing customer revenue. Applications include local search services Yellow Page Guides (YP Guides) and LeadConnect™, pay-per-click advertising, search engine optimization, link recruitment, conversion rate enhancement, web analytics tools, domain name registration, business and eCommerce websites and email.

     Commerce– This division provides services to small businesses that provide operational capability for processing, managing and supporting commerce transactions between small businesses, their online and offline customers, vendors and business partners. Applications include merchant approval software, merchant acquiring solutions and merchant life cycle management solutions; payment processing services for credit cards, check processing transactions, bill presentment and payment; and business cash advances.

     One of the primary metrics used to evaluate the business segments is Adjusted EBITDA (net income or loss before interest expense, income taxes, depreciation, amortization and share-based payments). Therefore, certain items including most share-based payments and interest expense on corporate-level debt have not been allocated to operating segments. In addition, operating expenses that management has determined to be attributable to the costs of being a public company and not directly related to segment operations have not been allocated to operating segments. These expenses include professional services for external reporting, corporate development and company-wide financing, as well as wages, benefits and other operating expenses of corporate-level executives.

     The following presents certain segment information as of and for the three months ended September 30, 2008 and 2007:

	For the Three Months Ended September 30, 2008
	Promotion			Commerce			Total
Revenue from external customers	$	485,346		$	649,402		$	1,134,748
Depreciation and amortization		47,656			84,184			131,840
Interest expense		38,748			—			38,748
Segment loss		(139,066	)		(316,663	)		(455,729	)
Segment assets		334,007			1,074,075			1,408,082

	For The Three Months Ended September 30, 2007
	Promotion			Commerce		Total
Revenue from external customers	$	567,462		$	982,321	$	1,549,783
Depreciation and amortization		118,270			65,071		183,341
Interest expense		20,681			—		20,681
Segment income (loss)		(93,970	)		290,456		196,486
Segment assets		744,314			1,332,054		2,076,368

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     The following presents certain segment information as of and for the nine months ended September 30, 2008 and 2007:

	For the Nine Months Ended September 30, 2008
	Promotion			Commerce			Total
Revenue from external customers	$	1,474,522		$	1,969,024		$	3,443,546
Depreciation and amortization		285,673			211,740			497,413
Interest expense		77,561			—			77,561
Segment loss		(645,231	)		(721,325	)		(1,366,556	)
Segment assets		334,007			1,074,075			1,408,082

	For The Nine Months Ended September 30, 2007
	Promotion			Commerce		Total
Revenue from external customers	$	1,746,699		$	2,272,129	$	4,018,828
Depreciation and amortization		367,653			195,968		563,621
Interest expense		23,627			—		23,627
Segment income (loss)		(10,099	)		58,170		48,071
Segment assets		744,314			1,332,054		2,076,368

     A reconciliation of segment income (loss) to the Company’s consolidated loss from continuing operations for the three-month and nine-month periods ended September 30, 2008 and 2007 are as follows:

	Three Months Ended September 30,
	2008			2007
Total Segment income (loss)	$	(455,729	)	$	196,486
Unallocated items:
Share-based payments from continuing operations		(188,495	)		(260,529	)
Interest expense		(14,920	)		(506,364	)
Professional services		(173,274	)		(215,554	)
Reversal of accrued penalty from registration rights agreement		—			200,000
Executive and other		(198,078	)		(345,225	)
Loss from continuing operations	$	(1,030,496	)	$	(931,186	)

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	Nine Months Ended September 30,
	2008			2007
Total Segment income (loss)	$	(1,366,556	)	$	48,071
Unallocated items:
Share-based payments from continuing operations		(632,622	)		(803,808	)
Interest expense		(349,864	)		(832,163	)
Professional services		(354,916	)		(663,570	)
Reversal of accrued penalty from registration rights agreement		—			200,000
Executive and other		(782,497	)		(941,255	)
Loss from continuing operations	$	(3,486,455	)	$	(2,992,725	)

     A reconciliation of segment assets to the Company’s total consolidated assets as of September 30, 2008 is as follows:

	2008
Total segment assets	$	1,408,082
Cash and cash equivalents		104,486
Restricted cash		377,164
Assets related to discontinued operations		—
Other assets not allocated to segments		182,267
Total assets	$	2,071,999

     During the three and nine month periods ended September 30, 2008, substantially all of the Company’s revenues and assets were in the United States of America and Canada.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

          The statements contained in this quarterly report on Form 10-Q that are not purely historical are “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. All forward-looking statements involve various risks and uncertainties. Forward-looking statements contained in this report include statements regarding our plans to develop and deliver products and services, market opportunities and acceptance, expectations, goals, revenues, financial performance, strategies, mission and intentions for the future. Such forward-looking statements are included under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and encompass our beliefs, expectations, hopes or intentions regarding future events. Words such as “expects,” “intends,” “believes,” “anticipates,” “should,” and “likely” also identify forward-looking statements. All forward-looking statements included in this report are made as of the date hereof, based on information available to us as of such date, and we assume no obligation – and specifically disclaim any obligation — to update any forward-looking statement. It is important to note that such statements may not prove to be accurate and that our actual results and future events will vary, and may vary materially, from those anticipated in such statements. Among the factors that could cause actual results to differ materially from our expectations are those described in this section of this quarterly report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and those identified in Item 1A of Part II entitled “Risk Factors.” All subsequent written and oral forward-looking statements attributable to Innuity or persons acting on our behalf are expressly qualified in their entirety by this section and other factors included elsewhere in this report. Unless otherwise indicated “we,” “us,” “our,”, “Innuity” and “the Company” refer to Innuity, Inc., a Utah corporation, and its subsidiaries.

     The following management’s discussion and analysis of financial condition and results of operation should be read in conjunction with our audited financial statements and accompanying notes to those financial statements that appear in our annual report onForm 10-K for the year ended December 31, 2007.

     Overview

     We are a software as a service, or SaaS, company that designs, acquires and integrates applications to deliver solutions for small business. Our Internet technology is based on an affordable, on-demand model that allows small businesses to interact simply with customers, business partners and vendors and to manage their businesses efficiently. Using our on-demand applications, small businesses can grow their revenues, reach and serve customers and run everyday operations.

     We deliver our Internet technology applications and solutions through our Innuity Velocity Internet technology platform. Employing proprietary technology and integration processes, our technology platform provides small businesses the opportunity to choose applications that are right for their businesses—individually or as an integrated suite—with minimal initial start-up costs and maintenance. With our use-based pricing, small businesses pay a monthly subscription fee for our applications they choose to use.

     We have two operating divisions, Promotion and Commerce, each of which is focused on a critical business process. The applications and solutions offered by our Promotion division help small businesses market and promote their products and services, while the offerings of our Commerce division are designed to facilitate and improve a small business’ selling processes and transaction processing capabilities.

     Recent Developments

     On May 2, 2008, we sold our In Store Systems business line, Jadeon, Inc., to Radiant Systems, Inc. for $7.0 million. Under the terms of the agreement, Radiant Systems acquired substantially all of the assets of Jadeon and assumed certain liabilities related to those assets. The transaction is subject to a purchase price adjustment based on the net assets of Jadeon as of the closing date.

     The assets and liabilities of the In Store Systems business line meet the requirements of Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” as being held for sale. Operations and cash flows will be eliminated as a result of the sales and we will not have any significant involvement in the ongoing operations. In accordance with appropriate accounting rules, we have reclassified the previously reported financial results to exclude the results of the In Store Systems business line

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operations and have presented on a historical basis these operations as a separate line in the consolidated statements of operations and the consolidated balance sheets under discontinued operations. All of the financial information in the condensed consolidated financial statements and notes to the condensed consolidated financial statements has been revised to reflect only the results of continuing operations of our Promotion and Commerce divisions.

     Critical Accounting Policies

     Our discussion and analysis of financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of our consolidated financial statements requires subjective and complex judgments due to the need to make estimates about the effect of matters that are inherently uncertain. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. As discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our annual report on Form 10-K for the fiscal year ended December 31, 2007, we believe our most critical accounting policies and estimates relate to revenue recognition, credit risk, long-lived assets, and stock-based compensation. The application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties, and as a result, actual results could differ materially from these estimates. Management discussed with the audit committee of our board of directors the development, selection and disclosure of our critical accounting policies and estimates and the application of these policies and estimates.

     Operations Review

     The following discussion presents certain changes in our revenue and expenses that have occurred during the three- and nine-month periods ended September 30, 2008, as compared to the same periods in 2007.

     Analysis of Condensed Consolidated Statements of Operations

	Three Months Ending September 30,									Nine Months Ending September 30,
							%									%
	2008			2007			Change			2008			2007			Change
Revenues
Merchant Services	$	649,402		$	982,321			-34	%	$	1,969,024		$	2,272,129			-13	%
Promotion Services		485,346			567,462			-14	%		1,474,522			1,746,699			-16	%
Total revenues		1,134,748			1,549,783			-27	%		3,443,546			4,018,828			-14	%
Operating expenses
Cost of services		432,411			384,062			13	%		1,323,508			1,296,685			2	%
General and administrative		667,152			521,765			28	%		2,223,748			2,237,021			-1	%
Selling and marketing		571,585			604,702			-5	%		1,730,558			1,728,999			0	%
Research and development		382,507			330,460			16	%		1,112,123			1,136,523			-2	%
Amortization expense		59,110			107,043			-45	%		267,833			333,969			-20	%
Loss from operations		(978,017	)		(398,249	)		146	%		(3,214,224	)		(2,714,369	)		18	%
Other income (expense)
Gain from settlement of debt		—			—			*			139,329			577,434			*
Other income		1,189			—			*			15,865			—			*
Interest expense		(53,668	)		(532,937	)		-90	%		(427,425	)		(855,790	)		-50	%
Total other income (expense)		(52,479	)		(532,937	)		-90	%		(272,231	)		(278,356	)		-2	%
Net loss from continuing operations	$	(1,030,496	)	$	(931,186	)		11	%	$	(3,486,455	)	$	(2,992,725	)		16	%

* Calculation not meaningful

Note — Refer to the above Analysis of Consolidated Statements of Operations while reading the operations review discussion below:

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     Revenues

     Revenues decreased by $415,000 during the three months ended September 30, 2008, compared to the same period in 2007. Of this decrease, $333,000 was from merchant services and $82,000 was from promotion services. Our merchant services revenue for the third quarter of 2007 includes $300,000 of revenue from the sale of a source code license to our Creditdiscovery product. We had no source code license sales during the third quarter of 2008. The decrease in our promotion services primarily relates to a decrease in search engine optimization services for large customers. This decrease was due mainly to a planned migration away from enterprise customer search engine optimization services that were acquired in June 2005 (10x Marketing LLC) and toward small business search engine marketing offerings that were launched in March 2007. This migration has been completed and has allowed us to focus our efforts on our core small business customer base.

     Revenues decreased by $575,000 during the nine months ended September 30, 2008, compared to the same period in 2007. Of this decrease, $300,000, relates to our sale of a source code license to our Creditdiscovery product during the third quarter of 2007, with no comparable source code license sales during the first nine months of 2008. The remaining decrease relates primarily to the planned migration away from enterprise customer search engine optimization services discussed above.

     Expenses

     Cost of services. Cost of services increased by $48,000 during the three months ended September 30, 2008, compared to the same period in 2007. Our margins decreased by 13% from 75% during the three months ended September 30, 2007 to 62% during the three months ended September 30, 2008. The increase in our cost of services was due mainly to an increase in telecommunication and processing fees. While we did have an increase in costs during the third quarter of 2008, a significant amount of our costs of providing services to customers is fixed at our current business volume. We would not anticipate a significant increase in our fixed costs for providing services unless we have a substantial increase in business volume.

     Our cost of services increased by $27,000, or by 2%, when comparing the nine months ended September 30, 2008 to the same nine month period in 2007. Our margins decreased 6% to 62% during the nine months ended September 30, 2008, when compared to 68% during the same nine month period in 2007. The decrease in margin was due to a decrease in revenue while our costs remained relatively constant because of the significant amount of our costs that are fixed in nature at the current volume levels.

     General and administrative. Our general and administrative expenses increased by $145,000 during the three months ended September 30, 2008, when compared to the same period in 2007. Our total general and administrative expenses for the third quarter of 2007 were reduced by a reversal of $237,000 of previously accrued penalties 2007. We had a reduction in head count, share-based payments, and professional services during the third quarter of 2008, when compared to the same period in 2007. The net increase in our total general and administrative expenses is a result of the decrease in costs related to headcount, professional services, and share-based payments during the third quarter of 2008, being less than our reversal of accrued penalties during the same period in 2007. The penalties we reversed during the third quarter of 2007 included $200,000 accrued in December 2006 that related to registration rights granted with securities we issued.

     Our general and administrative expenses remained constant at $2,224,000 and $2,237,000, respectively, during the nine month periods ended September 30, 2008 and 2007. We had a decrease in general and administrative expenses during the first nine months of September 30, 2008, relating to headcount reductions and reduced share based payment expense that offset the reversal of previously accrued penalties that took place during the third quarter of 2007.

     Selling and marketing. Our selling and marketing expenses decreased by $33,000 during the three months ended September 30, 2008, compared to the same period in 2007. The decrease in our sales and marketing expense relates mainly to a decrease in sales commission resulting from lower revenue and a decrease in share-based payment expense.

     Our selling and marketing expenses remained constant at $1,731,000 and $1,729,000, respectively, during the nine month periods ended September 30, 2008, and 2007. We had a decrease in commission expense during the nine months ended September 30, 2008, compared to the same period in 2007. We also had a decrease in share-based payment expense when comparing the nine months ended September 30, 2008, to the same period in 2007.

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These decreases were offset by increased expenses related to an increase in the headcount of our direct sales team and sales costs related to a new product offering.

     Research and development. Our research and development expenses increased by $52,000 for the three months ended September 30, 2008, compared to the same period in 2007. The increase was primarily due to an increase in labor costs for the enhancement of our product offerings. Our research and development costs remained relatively constant at $1,112,000 and $1,137,000, respectively, during the nine months ended September 30, 2008, and 2007.

     Amortization expense.Our amortization expense decreased by $48,000, and $66,000, respectively, during the three and nine month periods ended September 30, 2008, when compared to the same periods in 2007. Our amortization expense decreased because of certain intangible assets that we acquired in 2005, became fully amortized during the second quarter of 2008.

     Gain on settlement of debt. During May 2008, we paid an aggregate of $200,000 to settle $339,000 of note obligations under outstanding notes payable ($200,000 principal plus $139,000 of accrued interest). The difference between the amount paid and the principal and accrued interest was recorded as a gain on the settlement of debt in May 2008.

     During May 2007, we paid the remaining amount due under a settlement agreement relating to a disputed product-line purchase agreement. The total amount accrued under the disputed product-line purchase agreement was $1,100,000 and included in long-term debt. The amount paid under the settlement agreement was $500,000 plus $22,566 of penalties and interest. We recorded a gain for the difference between the amount accrued under the agreement and the amount paid.

     Interest. Our interest expense decreased by $479,000 and $428,000, respectively, for the three and nine months ended September 30, 2008, compared to the same three and nine month periods in 2007. The decrease was due, in part to $250,000 of interest that was accrued during the third quarter of 2007, and payable to John Wall, our Chairman and Chief Executive Officer, for the use of his assets to personally guarantee our bank credit line, our merchant processing accounts and amounts that were due under our product line purchase agreement with CitySearch.com over a five year period. The remaining decrease in interest expense relates to the reduction of debt during May 2008.

     Liquidity and Capital Resources

          We financed our operations during the three and nine months ended September 30, 2008, primarily from our existing cash and working capital at December 31, 2007 and the proceeds from the sale of our In-store business line during May 2008. As of September 30, 2008, we had $104,000 of cash and cash equivalents and a working capital deficit of $2.8 million. As of September 30, 2008, we also had $377,000 of restricted cash held in an escrow account from the sale of our In-Store business line. We deposited this amount into escrow to satisfy our indemnification obligations under the purchase agreement. Under the terms of the purchase agreement, any amounts remaining in escrow and not subject to an indemnification claim will be released to us on May 2, 2009.

          On May 2, 2008, we received $5.5 million ($7 million less transaction costs and cash held in escrow) in proceeds from the sale of our In Store Systems business line, Jadeon, Inc. The transaction remains subject to a purchase price adjustment based on the net assets of Jadeon as of the closing date. The net proceeds from the transaction were used to pay outstanding debt and to fund our operations.

          We will need our operations to become profitable or we will need to raise additional funds through a combination of the issuance of equity or debt securities, or other sources of financing in the near future. We do not currently have any credit lines available other than approximately $1.3 million available under our equipment lease line. We do not have arrangements in place for future financings, and may not be able to secure sufficient financing on favorable terms, or at all. Our failure to raise sufficient funds to support our operations would harm our financial condition and future prospects and could cause us to reduce the scope of or discontinue our operations. In addition, any additional equity or convertible debt financing may cause immediate and substantial dilution to new or existing stockholders.

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     Due to our recurring losses, negative cash flows, working capital deficit and accumulated deficit, the report of our independent registered public accounting firm for the year ended December 31, 2007, expressed substantial doubt about our ability to continue as a going concern. As of September 30, 2008, we had current assets of $1,310,000 and current liabilities of $4,082,000, resulting in a working capital deficit of ($2,772,000). Our ability to continue as a going concern is dependent, in the near term, on our ability to obtain additional debt or equity financing, and, in the long term, on our ability to develop and maintain profitable operations. Unless we are able to significantly increase our revenues and cash flows from operating activities, we will be required to raise additional funds through the issuance of debt or equity securities or other sources of financing in 2008.

     We used $3,371,000 of cash in our operations during the nine months ended September 30, 2008, and used $77,000 of cash in our operations during the nine months ended September 30, 2007. The use of cash for operations during the nine months ended September 30, 2008, included a net decrease of $749,000 in accounts payable, and a net decrease of $883,000 in accrued salaries, wages and other accrued liabilities. While we had net losses of $2,997,000 during the nine months ended September 30, 2007, significant charges included in these losses were non-cash items such as depreciation and amortization, share-based payments, accretion of debt discount, provisions for bad debts and gain on the settlement of debt. These non-cash items totaled $1,922,000. Changes in our operating assets and liabilities further offset our cash losses from operations by $998,000 during the nine months ended September 30, 2007. The $998,000 increase in cash from changes in operating assets and liabilities during the nine months ended September 30, 2007 was due in part to increased collection of our accounts receivable, extended vendor payment cycles and growth in our deferred revenue from an increased number of customers prepaying for service contracts.

     We purchased property and equipment of $16,000 and $20,000, respectively, during the nine month periods ended September 30, 2008, and 2007. We received $5,492,000 in cash for the sale of Jadeon ($7,000,000 net of restricted cash held in escrow totaling $375,000, and expenses of $1,133,000) in May 2008. With these proceeds we made principal payments on long-term debt, related party debt and capital leases of $2,178,000. We paid $649,000 on our credit lines during the nine months ended September 30, 2007. We had principal payments on various debt instruments and capital leases of $980,000 and received $1,825,000, net of debt issuance costs, from the issuance of notes payable during the nine months ended September 30, 2007.

     Off-Balance Sheet Arrangements

     We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

     Item 4T. Controls and Procedures

     Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is identified under Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     None

Item 1A. Risk Factors

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     There are a number of factors that may affect our operating results, including the risks and uncertainties identified in the following paragraphs. In addition to other information set forth in this report, readers should review and carefully consider the following factors.

     We have incurred losses since our inception, and we may not achieve or maintain profitability.

     We have not historically been profitable in any fiscal period since our inception, and may not be profitable in future periods. At September 30, 2008, we had an accumulated deficit of approximately $38.5 million. We expect that our expenses relating to sales and marketing, technology development, general and administrative functions, as well as operating and maintaining our technology infrastructure, will increase in the future. We will need to increase our revenues to be able to achieve and then maintain profitability in the future. We may not be able in a timely manner to reduce our expenses in response to any decrease or shortfall in our revenues, and our failure to do so would adversely affect our operating results and our efforts to achieve or maintain profitability. We cannot predict when, or if, we will become profitable in the future. Even if we achieve profitability, we may not be able to sustain it.

     If we fail to obtain additional funding to support our operations and capital expenditures, we may be required to reduce the scope of our business.

     As of September 30, 2008, we had a working capital deficit of approximately $2.8 million. Due to our recurring losses, working capital deficit and accumulated deficit, the report of our independent registered public accounting firm dated April 14, 2008, expressed substantial doubt about our ability to continue as a going concern. In May 2008, we sold substantially all of the assets of our wholly owned subsidiary, Jadeon, Inc., for $7 million. With the sale proceeds we have retired debt, including a $1.0 million secured 15% promissory note that was due in May 2008, $200,000 of 12% promissory notes due to a shareholder, that were in default, a $100,000 note payable to the former owner of Jadeon, and $345,000 of 15% notes due primarily to members of our board of directors that were due from April through July 2008. We used the remaining proceeds for working capital purposes. We will need our operations to become profitable or we will need additional funds to continue our operations in the near-term and to expand our staffing, develop new Internet technology solutions, pursue business opportunities (such as licensing or acquisition of complementary technologies or businesses), react to unforeseen difficulties and respond to competitive pressures. We cannot assure you that any financing will be available in amounts or on terms acceptable to us, or at all. Furthermore, the sale of additional equity or convertible debt securities may result in additional dilution to our existing shareholders. If adequate additional funds are not available, we may be required to delay, reduce the scope of or eliminate implementation of material parts of our business strategy, potentially including the development or acquisition of additional Internet technology solutions and capabilities.

     The loss of key customers could negatively affect our revenues and profitability.

     While we believe our relationships with our major customers are good, we do not generally have long-term contracts with them. Because of competitive changes and the fact that the types of solutions we offer may be available from a number of other providers there is the possibility that any customer could alter the amount of business it does with us. The loss of key customers would likely have a negative impact on our revenues and profitability.

General economic conditions may affect our revenue and our ability to obtain financing.

As widely reported, financial markets in the United States, Europe and Asia have been experiencing extreme disruption in recent months. Unfavorable changes in economic conditions, including declining consumer confidence, inflation, recession or other changes, may lead our customers to delay or reduce purchases of our products and services and our results of operations and financial condition could be adversely affected thereby. Challenging economic conditions may also affect our ability to obtain financing. We are unable to predict the duration and severity of the current disruption in financial markets and adverse economic conditions in the U.S. and other countries.

     We face intense and growing competition from larger, more established companies, as well as new entrants into our market, and we may not be able to compete effectively, which could reduce demand for our services.

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     The market for Internet technology applications and solutions and related products is competitive and has relatively low barriers to entry. Our competitors vary in size and in the variety of services and products they offer.

     Due to relatively low barriers to entry in our industry and the significant market opportunity the small business market represents, we expect the intensity of competition to increase in the future from established and emerging companies. Increased competition may result in price reductions, reduced gross margins, and loss of market share, any one of which could seriously harm our business. We also expect that competition will increase as a result of industry consolidations and formation of alliances among industry participants. Most of our existing competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing, distribution and other resources than we do. Many of our competitors have more management and employees with more extensive experience, and a better ability to service customers in multiple locations. There is no assurance that we will be more successful than new entrants or existing competitors, whether or not they have greater resources than we do.

     Our future revenues may be uncertain because of reliance on third parties for marketing and distribution.

     We rely on outside sales partners to distribute our Internet technology applications and solutions, and this distribution channel has been a key source of revenue. We intend to continue to market and distribute our current and future Internet technology applications and solutions through existing and other sales relationships. There are no minimum purchase obligations applicable to any existing distributor or other sales and marketing partners, and we do not expect to have any guarantees of continuing orders. Failure by our existing and future sales and marketing partners to generate significant revenues, or our failure to establish additional distribution or sales and marketing alliances, or changes in the industry that render third party distribution networks less desirable or obsolete, could have a material adverse effect on our business, operating results and financial condition. In addition, distributors and other sales and marketing partners may become our competitors with respect to the services and products they distribute, either by developing competitive service offerings themselves or by distributing competitive service offerings. For example, resellers of our transaction processing and payment services are permitted to, and generally do, market and sell competing services. Competition from existing and future distributors or other sales and marketing partners could significantly harm sales of our Internet technology solutions.

     Our business will be harmed if we are unable to develop or offer additional Internet technology applications and solutions in a timely and cost-effective manner.

     A key element of our strategy is to combine a variety of functionalities in our Internet technology solutions offerings to provide small business customers with comprehensive solutions to their promotion and commerce needs. We currently provide some of these services through non-exclusive arrangements with third parties, and may in the future find it necessary or desirable to enter into additional arrangements for the provision, licensing or acquisition of additional services from other third parties. We believe that small businesses will eventually desire or demand certain Internet technology solutions, such as customer relationship management and back-office accounting and management applications, which we do not currently provide. Demand for additional Internet technology solutions that we do not currently have available may also develop in the future. Our ability to obtain or develop and provide these services at a low cost will be critical to the success of our business. We believe we are currently lacking some key components in our service offerings that are or will be important to many of our customers. If we are unable to develop, license, acquire, or otherwise offer through arrangements with third parties, the additional services that our customers desire, or if any of our existing or future relationships with such third parties were to be terminated, or if the economic terms of our arrangements with third parties were changed, we could lose our ability to provide key Internet technology solutions at a cost-effective price to our customers, which could cause our revenues to decline or our costs to increase.

     Expansion in the sales of our Internet technology applications and solutions will depend on the continued acceptance of the Internet as a communications and commerce platform for small businesses.

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     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 have 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 small businesses do not continue to become Internet-enabled and maintain an online presence, the demand for our services and solutions would be significantly reduced. In particular, concerns over the security of transactions conducted on the Internet and the privacy of users may inhibit the growth of the Internet and other online services, especially online commerce. For the online commerce market to develop successfully, we and other market participants must be able to transmit confidential information, including credit card information, securely over public networks. Any decrease or less than anticipated growth in Internet usage could have a material adverse effect on our business. Providing Internet technology applications and solutions for the promotion and management of small businesses is a new and emerging market; if this market fails to develop, we will not be able to grow our business or become successful.

     Our success depends on a significant number of small businesses making the decision to adopt and use online promotion and commerce applications and services such as search engine optimization, pay-per-click campaign advertising, local search business profiles, affiliate marketing management, web analytics, domain name registration and business and e-commerce websites. Currently, many small businesses do not have an Internet presence, and it is uncertain whether a significant demand for creating an Internet presence among small businesses will develop in the future. The market for our Internet technology applications and solutions is relatively new and untested. Our future revenues and profits, if any, will be substantially dependent upon the widespread acceptance, growth, and use of the Internet and other online business promotion and management tools by small businesses. Custom website development has been the predominant method of Internet enablement to date, and small businesses may be slow to adopt our Internet technology solutions. Further, if small businesses determine that having an Internet presence does not benefit their businesses, they would be less likely to purchase other Internet-based business promotion and management services. If the market for our Internet technology applications and solutions fails to grow, or grows more slowly than we currently anticipate, or if our technology solutions fail to achieve widespread customer acceptance, our business would be seriously harmed.

     We may find that it is difficult to identify, or license or acquire additional Internet technology solutions on favorable terms, or to integrate future technology or business acquisitions, which could limit our growth, disrupt our business and adversely affect our operating results.

     We have in the past expanded our service offerings by means of acquisitions of other businesses, and we may find it necessary or desirable to license or acquire additional technologies or businesses in the future to expand our offerings of Internet technology solutions. We completed our acquisition of the business of Merchant Partners in January of 2004, the acquisition of 10x Marketing in June of 2005, and the acquisition of Creditdiscovery and Acquirint in December 2006. These acquisitions provided us with key elements of our current offerings, including the capability to process credit card and ACH transactions, and Internet marketing services. Additional acquisitions may become necessary for us to expand our offerings in response to evolving customer demand or competitive factors, or to acquire additional customer base. Although we intend to carefully evaluate possible licensing and acquisition opportunities in the future, we may not be able to license or acquire any of such technologies or businesses at favorable prices, or at all. If we are unable to obtain needed licenses or acquisitions, we may not be able grow our business or maintain our competitiveness.

     The task of integrating technologies or businesses that we license or acquire into our operations could also add significant complexity and risk to our business, and additional burdens to the substantial tasks already performed by our management team. For example, we could find it necessary to integrate different corporate cultures, disparate technologies and multiple direct and indirect sales channels. The key personnel associated with any acquired technologies or businesses may also decide not to continue to work for us. These integration efforts may not succeed, or may distract our management from our existing business operations. Our failure to successfully manage and integrate any future technology or business acquisitions could seriously harm our business.

     If we are unable to expand or appropriately enhance or modify our Internet technology solutions offerings quickly and efficiently, our business and operating results will be adversely affected.

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     The Internet and online promotion and commerce industries are characterized by rapid technological change, changing market conditions and customer demands. As a result, our Internet technology applications and solutions could become obsolete quickly. The introduction of competing services employing new technologies and the evolution or emergence of new industry standards could render our existing services obsolete and unmarketable. To be successful, our Internet technology applications and solutions must keep pace with technological developments and evolving industry standards, address the ever-changing and increasingly sophisticated needs of our customers, and achieve market acceptance. The development of systems and other proprietary technologies entails significant technical and business risk. We may encounter unexpected problems in connection with the development of our technologies, including cost overruns, bugs or software incompatibilities. Our existing technologies or those that we develop may not adequately address our customer’s business needs, or may not address those needs as well as our competitors’ service offerings. To remain competitive and successfully address the evolving needs of our small business customers, a significant portion of our resources will need to be expended to:

• identify and anticipate emerging technological and market trends affecting the small business segment in which we do business;

• enhance our current services offerings so as to increase their functionality, features and cost-effectiveness;

• develop, license or acquire new applications or services that meet emerging customer needs;

• modify our services offerings in response to changing business practices and technical requirements of our customers, as well as new regulatory requirements;

• integrate our current and future services offerings with third-party systems and services; and

• create and maintain interfaces to changing customer and third party systems and services.

     We must achieve these goals in a timely and cost-effective manner and successfully market our new and enhanced services offerings to our small business customers or our business and operating results will be adversely affected.

     If we are unable to maintain our existing private label distribution arrangements or if we are unable to enter into additional private label distribution arrangements, our future revenues could be significantly reduced and our expenses would increase.

     As a key element of our business strategy, we plan to continue entering into agreements with large companies under which they will market our Internet technology applications and solutions to their small business customers under their own branding. We believe these indirect distribution relationships will be critical to our business because they would enable us to penetrate the small business sector with a smaller expenditure of our own resources than if we were relying solely on building our own direct sales force. Our target small business market is very fragmented and difficult to reach, and we have therefore chosen to rely on the business relationships that these large companies already have with large numbers of small businesses to reach our target market. We have not devoted significant resources to developing any other distribution channels, and we cannot offer any assurance to you that these distribution relationships will be successful. We do not have any long-term contracts with any of our existing customer-acquisition partners, nor do we anticipate entering into long-term contracts with any of these partners, which are generally not restricted from working with our competitors. Accordingly, our success will depend upon the willingness of these organizations to continue their distribution arrangements with us. If any of our private label distribution arrangements are terminated or otherwise fail, or if we are unable to enter into additional private label distribution arrangements, our revenues would likely decline significantly and we could be required to devote substantial additional resources to the development of alternative internal resources or external channels for the direct sale and marketing of our Internet technology solutions.

     Our failure to build brand awareness quickly could compromise our ability to compete and grow our business. As a result of the anticipated increase in competition in our market, and the likelihood that some of this competition will come from companies with established brands, we believe brand name recognition and reputation will become increasingly important. Our strategy of relying significantly on arrangements with third-party customer-acquisition partners to find new customers may impede our ability to build brand awareness, as many of our customers may be

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under the impression that our Internet technology applications and solutions are actually owned and offered by our distribution partners with whom we have private relationships. If we do not build brand awareness quickly, we could be placed at a competitive disadvantage to companies whose brands are more recognizable than our brands.

     If we are unable to sell additional services to our existing customers, or if our renewal rates decline for any reason, our revenues may decrease and our business will be harmed.

     Typically our Internet technology applications and solutions are sold pursuant to month-to-month subscription agreements, and our customers can generally cancel their subscriptions at any time with little or no penalty. Our strategy to increase revenues and improve our profitability is partly dependent on our ability to increase revenues from existing customers by selling additional services to those customers. We are currently experiencing an annual turnover rate of approximately 14% in our customer base. Our ability to sell additional services to our existing customers, and our subscription renewal rates, may be impaired or decline due to a variety of factors, including the impact of the overall U.S. economic environment on small businesses, the services and prices offered by us and our competitors, and the degree of use of the Internet by small businesses. If we are unable to sell additional services to our existing customers, or if our renewal rates decline for any reason, our revenues may decrease and our business will be harmed.

     Our systems and our third-party providers’ systems may fail due to factors beyond our control, which could interrupt our service, causing us to lose business and increase our costs.

     We depend on the efficient and uninterrupted operation of our computer network systems, software, data center and telecommunications network, as well as the systems of third parties. Our systems and operations of those of our third-party providers could be exposed to damage or interruption from, among other things, fire, natural disaster, power loss, telecommunications failure, unauthorized entry and computer viruses. Our property and business interruption insurance may not be adequate to compensate us for all losses or failures that may occur. Defects in our systems or those of third parties, errors or delays in the processing of payment transactions, telecommunications failures or other difficulties could result in:

• loss of revenues;

• loss of customers;

• loss of customers’ credit card data;

• harm to our business or reputation;

• exposure to fraud losses or other liabilities;

• negative publicity;

• additional operating and development costs; and/or

• diversion of technical and other resources.

     Changes to credit card association rules or practices could adversely impact our business.

     Our credit card payment gateway does not directly access the Visa and MasterCard credit card associations because we are not a member of those associations. As a result, we must rely on banks and their service providers to process our payment transactions. We must comply with the operating rules of the credit card associations. The associations’ member banks set and interpret these rules. Some of those member banks compete with us. Visa, MasterCard, American Express or Discover could adopt new operating rules or interpretations of existing rules which we might find difficult or even impossible to comply with, resulting in our inability to provide customers the option of using credit cards to fund their payments. If we are unable to provide a gateway for credit card transactions, our business would be materially and adversely affected.

     Our reliance on suppliers and vendors could adversely affect our ability to provide our services and products to our small business customers on a timely and cost-efficient basis, which could reduce our revenues.

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     We rely to a substantial extent on third parties to provide our equipment, software, data, systems and services. In some circumstances, we rely on a single supplier or limited group of suppliers. For example, our merchant gateway service requires the assistance of third-party payment processors. If any of these processors cease to allow us to access their processing platforms, our ability to process credit card payments would be severely impacted. In addition, we depend on our Originating Depository Financial Institution (ODFI) partner to process ACH transactions, and our ability to process these transactions would be severely impacted if we were to lose our ODFI partner for any reason. We also rely on distribution partners and local search engines to publish our LeadConnect service offering. Should they no longer distribute or publish this information, our ability to provide this service would be severely impaired.

     We have faced, and may in the future face, significant chargeback liability if our small business customers refuse or cannot reimburse chargebacks resolved in favor of their customers, and we may also face potential liability for merchant or customer fraud; we may not accurately forecast or protect ourselves against these liabilities.

     We have potential liability for chargebacks associated with the credit card or ACH transactions we process. If a billing dispute between one of our small business customers and a cardholder is not ultimately resolved in favor of the cardholder, the disputed transaction is “charged back” to our small business customers bank and credited to the account of the cardholder. If we or our sponsoring banks are unable to collect the chargeback from our small business customer or if our small business customer refuses or is financially unable, due to bankruptcy or other reasons, to reimburse the cardholder’s bank for the chargeback, we must bear the loss for the amount of the refund paid to the cardholder’s bank. We also have potential liability for losses caused by fraudulent credit card transactions. Card fraud occurs when a cardholder doing business with one of our small business customers uses a stolen card (or a stolen card number in a card-not-present transaction) to purchase merchandise or services. In a traditional card-present transaction, if the merchant swipes the card, receives authorization for the transaction from the card issuing bank and verifies the signature on the back of the card against the paper receipt signed by the cardholder, the card issuing bank remains liable for any loss. In a fraudulent card-not-present transaction, even if the merchant receives authorization for the transaction, the merchant is liable for any loss arising from the transaction. Many of the small business customers that we serve are small businesses that transact a substantial percentage of their sales over the Internet or in response to telephone or mail orders. Because sales of this type are card-not-present transactions, these merchants are more vulnerable to credit card fraud than larger merchants. Because we target small businesses, we experience chargebacks arising from cardholder fraud more frequently than providers of payment processing services that service larger merchants. Merchant fraud occurs when a merchant, rather than a cardholder, knowingly uses a stolen or counterfeit card or card number to record a false sales transaction, or intentionally fails to deliver the merchandise or services sold in an otherwise valid transaction. Anytime a merchant is unable to satisfy a chargeback, we are responsible for that chargeback. We have established systems and procedures to detect and reduce the impact of merchant fraud, but we cannot assure you that these measures are or will be effective. It is possible that incidents of fraud could increase in the future. Failure to effectively manage risk and prevent fraud could increase our chargeback liability.

     Chargebacks for ACH transactions work in much the same way as credit card chargebacks. The chargebacks are the result of a dispute arising between one of our small business customers and the consumer. Consumers have up to six months to do a chargeback against a merchant from an ACH transaction. If our small business customer refuses or is financially unable, due to bankruptcy or other reasons, to reimburse the consumer, we must bear the loss for the amount of the refund to the consumer’s bank account.

     On occasion, we experience increases in interchange costs; if we cannot pass these increases along to our small business customers, our profit margins will be reduced.

     We pay interchange fees or assessments to bank card associations for each transaction we process using their credit and debit cards. From time to time, the bank card associations increase the interchange fees that they charge processors and the sponsoring banks. At their sole discretion, our sponsoring banks have the right to pass any increases in interchange fees on to us. In addition, our sponsoring banks may seek to increase their Visa and MasterCard sponsorship fees to us, all of which are based upon the dollar amount of the payment transactions we process. If we are unable to pass these fee increases along to our small business customers through corresponding increases in our processing fees, our profit margins will be reduced. Even if we are able to pass such fee increases along to our small business customers, we could be placed at a competitive disadvantage or lose customers as a result.

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     Our ability to effectively improve a website’s positioning in search rankings depends on our ability to determine search engine algorithms; a significant change in the way these algorithms function could negatively affect our business.

     Search engines base their rankings on constantly evolving algorithms, and they frequently modify the specific criteria they use to determine a website’s ranking for a particular keyword and regularly reevaluate the websites and their rankings. Although we have never claimed detailed knowledge of how these algorithms work or how often they change, we are able to determine effective approximations by closely scrutinizing the existing algorithms and analyzing the changes we observe. In the event that a significant change to the way these algorithms functions does occur, we may experience a loss of productivity. It could take us more time than usual to determine the changes, and it is possible that our technical team may not be able to determine and adjust to them at all. Our inability to effectively evaluate the search engine algorithms would negatively affect our ability to provide successful results to our clients. Potential challenges would ensue if any or all of the following occurred:

• search engines stop providing critical data used by our internally developed tools;

• search engine algorithms arbitrarily prevent new sites from obtaining rankings;

• search engine algorithms weigh new factors that are more difficult for us to influence;

• search engines implementation of new algorithms; or

• search engines switch to an entirely fee-based system, eliminating natural rankings as currently used.

     Margins on pay-per-click advertising may become too low to be profitable.

     One of the main revenue sources within the business of search engine marketing is pay-per-click advertising. To participate in a pay-per-click campaign, our clients bid for specific placement on search engine results lists. The minimum amount that must be paid for these paid placements is determined entirely by search engine companies. If the cost of this pay-per-click advertising for our customers becomes prohibitively expensive relative to the revenues that our customers generate from such advertising, then we may lose customers or may not be able to attract new customers and our business would be materially and adversely affected.

     Hackers or ‘black-hat’ search engine optimization companies may negatively impact the public’s perception of the search engine optimization industry, which could impair our ability to maintain our current customers and attract new customers.

     The search engine optimization industry is mostly comprised of companies, such as our company, that provide services that are based on facts and objectively verifiable results. However, there are certain companies (so-called black-hatters) that engage in unethical business practices, such as keyword stuffing, cloaking, sneaky redirects and hidden text, which reflect poorly on the industry as a whole. These practices are disfavored by search engine companies and could result in a company being blacklisted by one or more search engines. These black-hatter companies may target our current and potential customers with often unrealistic and sensational performance promises. These unethical business practices may negatively affect the public’s perception of the search engine optimization industry as a whole, which could negatively impact our ability to maintain our existing customers and attract new customers.

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     If we fail to manage our growth, our business could suffer.

     We anticipate that further expansion, including possible additional acquisitions of businesses, will be required in order to successfully pursue our business strategy. We anticipate that we will need to hire additional employees to expand our customer base and to continue to develop and enhance our Internet technology solutions offerings. To manage the growth of our operations and personnel, we will need to enhance our operational, financial, and management systems and procedures. This will require additional personnel and capital investments, which will increase our costs. The growth in personnel costs may make it more difficult for us to reduce our expenses in the short term to offset any shortfall in our revenues. If we are unable to manage our growth effectively or if we are unable to successfully integrate any businesses or technologies that we may acquire, our business would be adversely affected.

     The loss of any members of our senior management could harm our current and future operations and prospects.

     We believe that our future success will be dependent upon the continuing service of our executive officers and senior management team, especially: John Wall, our Chief Executive Officer; John Dennis, our President; Linden Barney, our Chief Financial Officer; Marvin Mall, our Chief Operating Officer, and Douglas Merryman, President of our Merchant Services business line. We do not have long-term employment agreements with any of the members of our senior management team nor do we carry key-man insurance. Each of these individuals may voluntarily terminate his or her employment with us at any time upon short notice. Following any termination of employment, each of these individuals would only be subject to a twelve-month period of non-competition under our standard confidentiality agreement. As of October 31, 2008,our executive officers together controlled approximately 35% of the combined voting power of our issued and outstanding capital stock. The loss of the services of any member of our senior management for any reason, or any conflict among our senior management, could harm our current, and our future, operations and prospects.

     We face significant competition for a limited supply of qualified software engineers, consultants and sales and marketing personnel.

     Our business depends on the services of skilled software engineers who can develop, maintain and enhance our service offerings, consultants who can undertake complex customer projects, and sales and marketing personnel. In general, only highly qualified, highly educated personnel have the training and skills necessary to perform these tasks successfully. To maintain the competitiveness of our Internet technology solutions and to meet our small business customers’ requirements, we need to attract, motivate and retain a significant number of software engineers, consultants and sales and marketing personnel. Qualified personnel such as these are in short supply and we face significant competition for these employees, from not only our competitors but also customers and other enterprises. Other employers may offer software engineers, consultants and sales and marketing personnel significantly greater compensation and benefits or more attractive career paths than we are able to offer. Any failure by us to hire, train and retain a sufficient number of qualified personnel would seriously damage our business.

     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.

     Our success depends, in part, on our ability to protect and preserve the proprietary aspects of our technology. If we are unable to protect our intellectual property, our competitors could use it to market services similar to those that we offer, which could decrease demand for our Internet technology applications and solutions. We may be unable to prevent third parties from using our proprietary assets without our authorization. We do not currently rely on patents to protect our core intellectual property, and we do not currently have any pending applications for patents in any jurisdictions inside or outside of the United States. To protect, control access to, and limit distribution of our intellectual property, we generally enter into confidentiality and proprietary inventions agreements with our employees, and confidentiality or license agreements with consultants, third-party developers, and customers. We also rely on copyright, trademark, and trade secret protection. However, these measures afford only limited protection and may be inadequate. Enforcing our rights to our technology could be costly, time-consuming and distracting. Additionally, others may develop non-infringing technologies that are similar or superior to ours. Any significant failure or inability to adequately protect our proprietary assets will harm our business and reduce our ability to compete.

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     Our Internet technology applications and solutions involve the storage and transmission of our small business customers’ proprietary information, as well as the personal information of their customers. Our business could be harmed if there is a breach of privacy.

     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. Because 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 preventative measures.

     Because some of our activities involve the storage and transmission of confidential personal or proprietary information, such as credit card numbers and social security numbers, and because we are a link in the chain of e-commerce, security breaches, service interruptions and fraud schemes could damage our reputation and expose us to a risk of loss or litigation and possible monetary damages. Although we employ data encryption processes, an intrusion detection system, firewall hardware and other internal control procedures to protect the security of our customers’ data, we cannot guarantee that these measures will be sufficient for this purpose. If our security measures are breached as a result of third-party action, employee error or otherwise, and as a result our customers’ data 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. Cyber-terrorists may attempt to interrupt our payment gateway services in attempts to extort payments from us or disrupt commerce. Our payment gateway services may be susceptible to credit card and other payment fraud schemes, including unauthorized use of credit cards or bank accounts, identity theft or merchant fraud. We expect that technically sophisticated criminals will continue to attempt to circumvent our anti-fraud systems. If such fraud schemes become widespread or otherwise cause our small business customers to lose confidence in our Internet technology solutions in particular, or in Internet systems generally, our business could suffer. In addition, the large volume of payments that we handle for our small business customers makes us vulnerable to third party or employee fraud or other internal security breaches. Further, we may be required to expend significant capital and other resources to protect against security breaches and fraud, and to address any problems they may cause.

     Our technical systems are vulnerable to interruption and damage that may be costly and time-consuming for us to resolve and may harm our business and reputation, and we could be subject to liability as a result of service interruptions by cyber-terrorists or fraudulent or illegal use of our services.

     A disaster could interrupt the delivery of our services and solutions for an indeterminate length of time and severely damage our business. Our systems and operations are vulnerable to damage or interruption from: fire; floods; network failure; hardware failure; software failure; power loss; telecommunications failures; break-ins; terrorism, war or sabotage; computer viruses; denial of service attacks; penetration of our network by unauthorized computer users and “hackers” and other similar events; natural disaster; and other unanticipated problems. We may not have developed or implemented adequate protections or safeguards to overcome any of these events. We also may not have anticipated or addressed many of the potential events that could threaten or undermine our technology network. Any of these occurrences could cause material interruptions or delays in our business, result in the loss of data or render us unable to provide services to our customers.

     Our payment system may also be susceptible to potentially illegal or improper uses. These uses may include illegal online gambling, fraudulent sales of goods or services, illicit sales of prescription medications or controlled substances, software and other intellectual property piracy, money laundering, bank fraud, child pornography trafficking, prohibited sales of alcoholic beverages and tobacco products and online securities fraud. Despite having taken measures to detect and lessen the risk of this kind of conduct, we cannot ensure that these measures will succeed. In addition, regulations under the USA Patriot Act of 2001 may require us to revise the procedures we use to comply with the various anti-money laundering and financial services laws. Our business could suffer if customers use our system for illegal or improper purposes or if our regulatory compliance costs increase significantly.

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     We have expended, and we may be required to continue to expend, significant capital resources to protect against security breaches, service interruptions and fraud schemes. Our security measures may not prevent security breaches, service interruptions and fraud schemes and the failure to do so may disrupt our business, damage our reputation and expose us to risk of loss or litigation and possible monetary damages.

     We rely heavily 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 service, or increased expenditures.

     The software and workflow processes that underlie our ability to deliver our Internet technology applications and solutions have been developed primarily by our own employees and employees of companies we have acquired. The reliability and continuous availability of these internal systems are critical to our business, and any interruptions that result in our inability to timely deliver our Internet technology applications and solutions, or that materially impact the efficiency or cost with which we provide these technology applications and solutions, would harm our reputation, profitability, and ability to conduct business. In addition, many of the software systems we currently use will need to be enhanced over time or replaced with equivalent commercial products, either of which could entail considerable effort and expense. 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 revenues.

     A key element of our strategy is to generate a high volume of traffic across our network infrastructure to and from our customers and distribution partners. Accordingly, the satisfactory performance, reliability and availability of our software systems, transaction-processing systems and network infrastructure are critical to our reputation and our ability to attract and retain customers. We may experience periodic systems interruptions, which could give rise to liability for losses or damages experienced by our customers, or damage to our reputation as a reliable online services provider. Any substantial increase in the volume of traffic on our software systems or network infrastructure will require us to expand and upgrade our technology, transaction-processing systems and network infrastructure. We cannot assure you that we will be able to accurately project the rate or timing of increases, if any, in the use of our network infrastructure or to timely expand and upgrade our systems and infrastructure to accommodate such increases.

     Our business may be harmed by errors in our software.

     The software that we develop and license to our customers is extremely complex and contains hundreds of thousands of lines of computer code. Complex software systems such as ours are susceptible to errors. Our software design, development and testing processes are not always adequate to detect errors in our software prior to its release or commercial use. As a result, we have from time to time discovered, and we may likely in the future discover, errors in software that has been placed into commercial use for our customers. Because of the complexity of our systems and the large volume of transactions we process on a daily basis, we sometimes have not detected software errors until after they have affected a significant number of transactions. Such errors can harm our business in several ways, including the following:

• we may suffer a loss of revenues if, due to software errors, we are temporarily unable to provide Internet technology applications and solutions to our customers;

• we may not be paid for the applications and services provided to a customer that contain or result in errors, or we may be liable for losses or damages sustained by a customer or its subscribers as a result of such errors;

• we may incur additional expenses to correct errors in our software, or to fund product development projects that we may undertake to minimize the occurrence of such errors in the future;

• we may damage our relationships with customers or suffer a loss of reputation within our industry;

• we may become subject to litigation or regulatory scrutiny; and

• our customers may terminate or fail to renew their agreements with us or reduce the services they purchase from us.

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     If economic or other factors negatively affect the small business sector, our customers may become unwilling or unable to purchase our Internet technology applications and solutions and related products, which could cause our revenues to decline and impair our ability to operate profitably.

     Our existing and target customers are small businesses. These businesses are more likely to be significantly affected by economic downturns than larger, more established businesses. Additionally, these customers often have limited discretionary funds, and they may choose to spend their limited resources on items other than our Internet technology applications and solutions and related products. If small businesses experience economic hardship, they may be unwilling or unable to expend resources to develop their Internet presences, or to add additional capabilities for promoting or managing their businesses, which would negatively affect the overall demand for our services and could cause our revenues to decline.

     If we are unable to respond to the rapid technological changes that are characteristic of our industry, our Internet technology applications and solutions may not be competitive.

     The market for our Internet technology applications and solutions is characterized by rapid changes in business models and technological features and capabilities, and we will need to constantly adapt to changing markets and technologies to provide competitive services. We believe that our future success will depend, in part, upon our ability to develop and continually adapt our services offerings to suit the needs of our target small business market. We may not, however, be able to successfully do so, and our competitors may develop innovations that render our services obsolete or uncompetitive.

     We and our small business customers must comply with complex and changing laws and regulations.

     Government regulation influences our activities and the activities of our small business customers, as well as our customers’ expectations and needs in relation to our services. Businesses that handle consumers’ funds, such as our transaction processing and payment services, are subject to numerous regulations, including those related to banking, credit cards, electronic transactions and communication, escrow, fair credit reporting, privacy of financial records and others. State money transmitter regulations and federal anti-money laundering and money services business regulations can also apply under some circumstances. The application of many of these laws with regard to electronic commerce is currently unclear. If applied to us, any of the foregoing rules and regulations could require us to change the way we do business in a way that increases costs or makes our business more complex. In addition, violation of some statutes may result in severe penalties or restrictions on our ability to engage in online commerce, which could have a material adverse effect on our business. Consumer protection laws in the areas of privacy, credit and financial transactions have also been evolving rapidly at the state, federal and international levels. As the electronic transmission, processing and storage of financial information regarding consumers continues to grow and develop, it is likely that more stringent consumer protection laws may impose additional burdens on companies like ours involved in such transactions.

     Government regulation of the Internet may adversely affect our business and operating results.

     Companies engaging in online search, commerce and related businesses face uncertainty related to future government regulation of the Internet. Due to the rapid growth and widespread use of the Internet, legislatures at the federal and state levels are enacting and considering various laws and regulations relating to the Internet. Furthermore, the application of existing laws and regulations to Internet companies remains somewhat unclear. Our business could be negatively affected by new laws, and such existing or new regulations may expose us to substantial compliance costs and liabilities and may impede the growth in use of the Internet. The application of these statutes and others to the Internet search and commerce industry is not entirely settled. Further, several existing and proposed federal laws could have an impact on our business:

• the Digital Millennium Copyright Act and its related safe harbors, are intended to reduce the liability of online service providers for listing or linking to third-party websites that include materials that infringe copyrights or other rights of others;

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• the Children’s Online Protection Act and the Children’s Online Privacy Protection Act are intended to restrict the distribution of certain materials deemed harmful to children, and impose additional restrictions on the ability of online services to collect user information from minors;

• the Protection of Children from Sexual Predators Act of 1998 requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances; and

• the CAN-SPAM Act of 2003 and certain state laws are intended to regulate interstate commerce by imposing limitations and penalties on the transmission of unsolicited commercial electronic mail via the Internet.

     With respect to the subject matter of each of these laws, courts may apply these laws in unintended and unexpected ways. As a company that provides services over the Internet, we may be subject to an action brought under any of these or future laws governing online services. Many of the services of the Internet are automated and companies, such as ours, may be unknowing conduits for illegal or prohibited materials. It is not known how courts will rule in many circumstances; for example, it is possible that some courts could find strict liability or impose “know your customer” standards of conduct in certain circumstances.

     We may also be subject to costs and liabilities with respect to privacy issues. Several companies that conduct business via the Internet have incurred costs and paid penalties for violating their privacy policies. Further, it is anticipated that new legislation will be adopted by federal and state governments with respect to user privacy. Additionally, foreign governments may pass laws which could negatively impact our business and/or may prosecute us for our services based upon existing laws. The restrictions imposed by, and costs of complying with, current and possible future laws and regulations related to our business could harm our business.

     We may be subject to lawsuits for information displayed on our small business customers’ websites, which may affect our business.

     Laws relating to the liability of providers of online services for activities of their customers and for their customers’ advertising content is currently unsettled. Because our Internet technology applications and solutions allow customers to transmit information over the Internet on their own websites, and because we develop and host many of these websites, we may be found to be liable for any improper information that our customers transmit. Although we retain discretion to cancel the applications and services being provided to customers if we learn such content is being transmitted, there can be no guarantee that our customers will refrain from such transmission or that we will not be deemed responsible for the content being transmitted or hosted using our Internet technology solutions or infrastructure. It is unclear whether we could be subjected to claims for defamation, negligence, copyright or trademark infringement or claims based on other theories relating to the information that is published on the websites of our small business customers or the information that is published across our distribution network. These types of claims have been brought, sometimes successfully, against online services as well as other print publications in the past. We may not be able to successfully avoid civil or criminal liability for unlawful activities carried out by small business customers. Our potential liability for unlawful activities of our customers or for the content of our customers’ listings could require us to implement measures to reduce our exposure to such liability, which may require us, among other things, to expend substantial resources or to discontinue certain service offerings. Our insurance may not adequately protect us against these types of claims and the defense of such claims may divert the attention of our management from our operations. If we are subjected to such lawsuits, it may adversely affect our business.

     State and local governments may in the future be permitted to levy additional 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 Internet technology applications and solutions.

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     In November 2004, the federal government passed legislation placing a three-year ban on state and local governments’ imposition of new taxes on Internet access or electronic commerce transactions. Subsequently, the federal government extended the ban until November 2011. An increase in taxes may make electronic commerce transactions less attractive for small businesses, which could result in a decrease in the level of demand for our Internet technology applications and solutions.

     Shares of our common stock may continue to be subject to price volatility and illiquidity because our shares may continue to be thinly traded and may never become eligible for trading on Nasdaq or a national securities exchange.

     Although a trading market for our common stock exists, the trading volume has historically been insignificant, and an active trading market for our common stock may never develop. There currently is no analyst coverage of our business. We do not have very many shares of common stock outstanding and the amount of shares in our public “float” will continue to be limited due to the applicability of resale restrictions under applicable securities laws on shares issued to the former shareholders of Vista.com and the fact that significant portions of our outstanding shares are held by our officers, directors or major shareholders. As a result of the thin trading market for our common stock, and the lack of analyst coverage, the market price for our shares may continue to fluctuate significantly, and will likely be more volatile than the stock market as a whole. There may be a limited demand for shares of our common stock due to the reluctance or inability of certain investors to buy stocks quoted for trading on the OTC Bulletin Board (OTCBB), lack of analyst coverage of our common stock, and a negative perception by investors of stocks traded on the OTCBB; as a result, even if prices appear favorable, there may not be sufficient demand in order to complete a shareholder’s sell order. Without an active public trading market or broader public ownership, shares of our common stock are likely to be less liquid than the stock of most public companies, and any of our shareholders who attempt to sell their shares in any significant volumes may not be able to do so at all, or without depressing the publicly quoted bid prices for their shares.

     In addition, while we may at some point be able to meet the requirements necessary for our common stock to be listed on one of the Nasdaq stock markets or on a national securities exchange, we cannot assure you that we will ever achieve a listing of our common stock on Nasdaq or on a national securities exchange. Initial listing on one of the Nasdaq markets or one of the national securities exchanges is subject to a variety of requirements, including minimum trading price and minimum public “float” requirements, and could also be affected by the general skepticism of such markets concerning companies that are the result of mergers with inactive publicly-held companies. There are also continuing eligibility requirements for companies listed on public trading markets. If we are unable to satisfy the initial or continuing eligibility requirements of any such market, then our stock may not be listed or could be delisted. This could result in a lower trading price for our common stock and may limit your ability to sell your shares, any of which could result in you losing some or all of your investments.

     Our stock price may be volatile, and you may lose some or all of your investment.

     The trading prices of the stock of companies in the Internet industry, as well as shares of companies listed on the OTCBB, have been highly volatile. Accordingly, the trading price of our common stock is likely to be subject to wide fluctuations. Factors affecting the trading price of our common stock may include, among other things:

• variations in our operating results;

• announcements of technological innovations, new services or service enhancements, or significant agreements, by us or by our competitors;

• recruitment or departure of key personnel;

• changes in estimates of our operating results, or changes in recommendations by any securities analysts that may follow us;

• sales of our common stock, particularly sales by officers, directors and significant shareholders; or

• conditions in our industry, the industries of our customers and the economy as a whole.

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     Our stock may be subject to regulation as a “penny stock”, which could severely limit the liquidity of your securities.

     Our common stock may be subject to regulation as a “penny stock,” which generally includes stocks traded on the OTCBB that have a market price of less than $5.00 per share. If shares of our common stock continue to trade for less than $5.00 per share, they would be subject to Rule 15g-9 under the Exchange Act which, among other things, requires that broker/dealers satisfy special sales practice requirements, including making individualized written suitability determinations, providing disclosure explaining the nature and risks of the penny stock market, receiving a purchaser’s written consent prior to any transaction and waiting two days before effecting the transaction. Such requirements could severely limit the liquidity of your securities.

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

          We held our annual meeting of shareholders on September 15, 2008 at which our shareholders considered the matters listed below and voted as follows:

1. The shareholders considered whether to elect the following persons as directors, each to serve until the next annual meeting of shareholders and until his respective successor shall have been duly elected and qualified:

John R. Wall	John R. Dennis	Marvin A. Mall
Keith A. Cannon	Harold H. Kawaguchi	Greg M. Stevenson

	Mr. Wall and Mr. Mall each received a total of 15,275,381 shares voted in favor which was sufficient for election. Messer’s Dennis, Cannon, Kawaguchi and Stevenson each received 15,314,067 shares voted in favor which was sufficient for election.
2.	The shareholders considered whether to approve our reincorporation fro the State of Utah to the State of Washington. There were 13,367,533 votes cast in favor, 287,294 votes cast against and 2,218,276 votes withheld, which vote tally was sufficient for approval.
3.	The shareholders considered whether to approve an amendment to increase the maximum number of shares of common stock that may be issued under our stock option plan by 2,000,000 shares to a total of 6,440,466. There were 13,061,342 votes cast in favor, 487,353 votes cast against and 2,324,408 votes withheld, which vote tally was sufficient for approval.
4.	The shareholders considered whether to appoint Hansen Barnett & Maxwell P.C. as our independent public accountants. There were 15,739,450 votes cast in favor, 100,013 votes cast against and 33,640 votes withheld, which vote tally was sufficient for approval.

Item 6. Exhibits

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Exhibit		Filed
No.	Description	Herewith	Form	Exhibit No.	Filing Date
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X

     SIGNATURES

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

INNUITY, INC. (Registrant)
By:	/s/ JOHN R. WALLJohn R. Wall
	Chief Executive Officer, Treasurer and Secretary
	(Principal executive officer)
By:	/s/ LINDEN N BARNEY
	Linden N Barney
	Chief Financial Officer
	(Principal financial and accounting officer)

     Dated November 19, 2008

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