UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 [X]
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
      the quarterly period ended June 30,
2008
 
 [   ]
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
      the transition period from _____________ to
  _____________
 
 COMMISSION
FILE #333-30176
 
 NEW
MEXICO SOFTWARE, INC.
 (Exact
name of Registrant as specified in charter)
 
 NEVADA
              91-1287406(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)
 
 5021
      Indian School Road, Suite 100Albuquerque,
      New Mexico
              87110(Address
      of principal executive offices)
              (Zip
      Code)
 
 (505)
255-1999
 (Registrant’s
telephone number, including area code)
 
 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
      [X] NO [  ]
 
 
 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.Large
      accelerated filer   [  ]
              Accelerated
      filer  [  ]Non-accelerated
      filer  [  ]
              Smaller
      reporting company  [X]
 
 Indicate
      by check mark whether the registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act).
              YES
      [_] NO [X]
 
 The
number of shares outstanding of each of the issuer’s classes of common stock at
August 13, 2008 was 124,293,028.
 
 
 
  
  TABLE OF
CONTENTS
 
 
 PART I FINANCIAL INFORMATIONITEM 1.  FINANCIAL STATEMENTS
      (UNAUDITED)
              3Consolidated Balance Sheet
              3Consolidated Statements of Operations
              4Consolidated Statements of Cash Flows
              5Notes to the Financial Statements
              6ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF
      FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
              14ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES
      ABOUT MARKET RISK
              21ITEM 4T.  CONTROLS AND
      PROCEDURES
              21PART
      II OTHER INFORMATIONITEM 1.  LEGAL PROCEEDINGS
              22ITEM 1A.  RISK FACTORS
              22ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES
      AND USE OF PROCEEDS
              22ITEM 3.  DEFAULTS UPON SENIOR
      SECURITIES
              22ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF
      SECURITY HOLDERS
              23ITEM 5.  OTHER INFORMATION
              23ITEM 6.  EXHIBITS
              23SIGNATURES
              23
 
 
 
 
  2
  
 ITEM
1.                      FINANCIAL
STATEMENTS
  New
      Mexico Software, Inc.Balance Sheet(Rounded
      to the nearest thousand)June
      30,
                
                December
      31,2008
                
                2007(UNAUDITED)
                
                (AUDITED)AssetsCurrent
      assets:Cash and cash equivalents
                
                $
                27,000
                
                
                $
                59,000Accounts receivable, net
                
                
                154,000
                
                
                
                129,000Inventory
                
                
                24,000
                
                
                
                22,000Prepaid expenses and other assets
                
                
                8,000
                
                
                
                2,000Total current assets
                
                
                213,000
                
                
                
                212,000Furniture,
      equipment and improvements, net
                
                96,000
                
                
                
                90,000Security
      deposits
                
                
                4,000
                
                
                
                4,000Total assets
                
                $
                313,000
                
                
                $
                306,000Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts payable
                
                $
                83,000
                
                
                $
                34,000Accrued expenses
                
                
                76,000
                
                
                
                44,000Deferred revenue
                
                
                30,000
                
                
                
                39,000Capital Lease
                
                
                6,000
                
                
                
                -Total current liabilities
                
                
                195,000
                
                
                
                117,000Long-term
      liabilities:Capital lease- Long term portion
                
                
                5,000
                
                
                
                -Total long-term liabilities
                
                
                5,000
                
                
                
                -Total liabilities
                
                
                200,000
                
                
                
                117,000Stockholders'
      equity:Preferred stock, $0.001 par value, 500,000 sharesauthorized, no shares issued and outstanding as of June 30,
      2008
                
                -
                
                
                
                -Common stock, $0.001 par value, 200,000,000 sharesauthorized, 108,293,027 shares issued and outstandingas of June 30, 2008
                
                
                124,000
                
                
                
                107,000Paid-in capital
                
                
                14,510,000
                
                
                
                14,212,000Subscriptions payable
                
                
                21,000
                
                
                
                31,000Deferred compensation
                
                
                (136,000)
                
                
                
                -Accumulated deficit
                
                
                (14,406,000)
                
                
                
                (14,161,000)Total stockholders' equity
                
                
                113,000
                
                
                
                189,000Total liabilities and stockholder's equity
                $
                313,000
                
                
                $
                306,000
  The
accompanying notes are an integral part of these financial
statements.
  3
  
 
 New
      Mexico Software, Inc.Condensed Consolidated Statements of
    Operations(Rounded
      to the nearest thousand)(UNAUDITED)For
      the three months ended
              
              
              For
      the six months endedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007RevenueSoftware
      hosting and maintenance
              
              $
              61,000
              
              
              $
              137,000
              
              
              $
              132,000
              
              
              $
              256,000Software
      usage fees
              
              
              115,000
              
              
              
              97,000
              
              
              
              249,000
              
              
              
              193,000Radiological
      services
              
              
              21,000
              
              
              
              -
              
              
              
              21,000
              
              
              
              -Hardware
      sales
              
              
              5,000
              
              
              
              4,000
              
              
              
              10,000
              
              
              
              23,000Software
      sales and licenses
              
              
              -
              
              
              
              4,000
              
              
              
              14,000
              
              
              
              7,000Custom
      programming
              
              
              -
              
              
              
              2,000
              
              
              
              11,000
              
              
              
              5,000Scanning
      services
              
              
              -
              
              
              
              23,000
              
              
              
              -
              
              
              
              23,000Gross
      revenues
              
              
              202,000
              
              
              
              267,000
              
              
              
              437,000
              
              
              
              507,000Cost
      of services
              
              
              139,000
              
              
              
              104,000
              
              
              
              210,000
              
              
              
              177,000Gross
      Profit
              
              
              63,000
              
              
              
              163,000
              
              
              
              227,000
              
              
              
              330,000Operating
      costs and expenses:General
      and administrative
              
              
              219,000
              
              
              
              187,000
              
              
              
              416,000
              
              
              
              468,000Depreciation
      and amortization
              
              
              10,000
              
              
              
              12,000
              
              
              
              18,000
              
              
              
              22,000Research
      and development
              
              
              4,000
              
              
              
              35,000
              
              
              
              35,000
              
              
              
              84,000Total
      operating costs and expenses
              
              
              233,000
              
              
              
              234,000
              
              
              
              469,000
              
              
              
              574,000Net
      operating income (loss)
              
              
              (170,000
              )
              
              
              (71,000
              )
              
              
              (242,000
              )
              
              
              (244,000
              )Other
      income (expense):Interest
      (expense)
              
              
              (2,000
              )
              
              
              (6,000
              )
              
              
              (3,000
              )
              
              
              (7,000
              )OtherGain
      (loss) on disposal of fixed assets
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6,000Total
      other income (expense)
              
              
              (2,000
              )
              
              
              (6,000
              )
              
              
              (3,000
              )
              
              
              (1,000
              )Net
      income (loss)
              
              $
              (172,000
              )
              
              $
              (77,000
              )
              
              $
              (245,000
              )
              
              $
              (245,000
              )Earnings
      per share - basic and fully diluted
              
              $
              (0.00
              )
              
              $
              (0.00
              )
              
              $
              (0.00
              )
              
              $
              (0.00
              )Weighted
      average number of common sharesoutstanding
      - basic and fully diluted
              
              
              108,872,953
              
              
              
              96,273,006
              
              
              
              108,196,756
              
              
              
              93,301,657
 
 The
accompanying notes are an integral part of these financial
statements.
 
  4
  
 
 New
      Mexico Software, Inc.Statements of Cash Flows(Rounded
      to the nearest thousand)(UNAUDITED)For
      the six months endedJune
      30,2008
              
              
              2007Cash
      flows from operating activitiesNet
      loss
              
              $
              (245,000
              )
              
              $
              (245,000
              )Adjustments
      to reconcile net loss tonet
      cash used by operating activities:Common
      stock issued for salaries
              
              
              30,000
              
              
              
              264,000Common
      stock issued for services
              
              
              71,000
              
              
              
              74,000Common
      stock issued for interest
              
              
              -
              
              
              
              1,000Stock
      options issued for salaries
              
              
              -
              
              
              
              6,000Stock
      options issued for services
              
              
              -
              
              
              
              62,000Depreciation
              
              
              18,000
              
              
              
              22,000Depreciation
      allocated to cost of services
              
              
              3,000
              
              
              
              3,000Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (25,000
              )
              
              
              4,000Inventory
              
              
              (2,000
              )
              
              
              2,000Prepaid
      expenses and other assets
              
              
              (6,000
              )
              
              
              7,000Accounts
      payable
              
              
              49,000
              
              
              
              (53,000
              )Accrued
      expenses
              
              
              32,000
              
              
              
              (69,000
              )Deferred
      revenue
              
              
              (9,000
              )
              
              
              (12,000
              )Net
      cash (used) provided by operating activities
              
              
              (84,000
              )
              
              
              66,000Cash
      flows from investing activitiesAcquisition
      of fixed assets
              
              
              (27,000
              )
              
              
              (42,000
              )Capital
      lease
              
              
              11,000
              
              
              
              -Net
      cash used by investing activities
              
              
              (16,000
              )
              
              
              (42,000
              )Cash
      flows from financing activitiesNet
      proceeds from the issuance of common stock
              
              
              68,000
              
              
              
              -Net
      proceeds from warrants/options exercised
              
              
              -
              
              
              
              -Net
      cash provided by financing activities
              
              
              68,000
              
              
              
              -Net
      increase (decrease) in cash equivalents
              
              
              (32,000
              )
              
              
              24,000Cash
      equivalents - beginning
              
              
              59,000
              
              
              
              21,000Cash
      equivalents - ending
              
              $
              27,000
              
              
              $
              45,000Supplemental
      disclosures:Interest
      paid
              
              $
              -
              
              
              $
              4,000Shares
      issued for exercise of warrants
              
              $
              10,000
              
              
              $
              -
 
 
 The
accompanying notes are an integral part of these financial
statements.
 
  5
  New
Mexico Software, Inc.
 Notes to the Financial Statements
 (Unaudited)
 
 NOTE
1 - BASIS OF PRESENTATION
 
 The
interim financial statements included herein, presented in accordance with
United States generally accepted accounting principles and stated in US dollars,
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission.  Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading.
 
 These
statements reflect all adjustments, consisting of normal recurring adjustments,
which, in the opinion of management, are necessary for fair presentation of the
information contained therein.  It is suggested that these interim
financial statements be read in conjunction with the financial statements of the
Company for the year ended December 31, 2007 and notes thereto included in the
Company's Form 10-KSB.  The Company follows the same accounting
policies in the preparation of interim reports.
 
 Results
of operations for the interim periods are not indicative of annual
results.
 
 NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Revenue
recognition:
 
 Our
revenues are generally classified into five main categories: software hosting
and maintenance contracts; software usage fees; radiological services; the sale
of software licenses to end users; and hardware sales associated with sales of
our various software products. The Company also derives revenue from
customization or modification to our core software products, scanning services
and other services such as consulting, training and installation.  The
Company recognizes revenue in accordance with Statement of Position (SOP) 97-2
Software Revenue
Recognition as amended.
 
 Revenue
from proprietary software sales that does not require further commitment from
the Company is recognized upon persuasive evidence of an arrangement as provided
by agreements executed by both parties, delivery of the software, and
determination that collection of a fixed or determinable fee is
probable.  These sales are generally direct purchases of a software
product and there is no other involvement by the Company.
 
 The
Company offers with certain sales of its software products a software
maintenance, upgrade and support arrangement. These contracts may be elements in
a multiple-element arrangement or may be sold in a stand-alone basis. Revenues
from maintenance and support services are recognized ratably on a straight-line
basis over the term that the maintenance service is provided. The Company
typically charges 17% to 21% of the software purchase price for a 12-month
maintenance contract with discounts available for longer-term agreements. The
complexity of the software determines the percentage that is charged to any
individual customer, and that percentage remains consistent upon renewal unless
there is a change in the software or the terms of the agreement.
 
 Charges
for hosting are likewise spread ratably over the term of the hosting agreement,
with the typical hosting agreement having a term of 12 months, with renewal on
an annual basis.  The Company sells some hosting contracts in
conjunction with the sale of software, and some hosting contracts without an
associated software sale.  When the hosting arrangement is sold in
conjunction with a software sale, the Company allocates a portion of the fee to
the software license.  Hostingservices do not require
the
  6
  New
Mexico Software, Inc.
 Notes to
the Financial Statements
 (Unaudited)
 
 NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Revenue
recognition (continued):
 
 customer
to purchase the software license, and for those hosting contracts that are sold
without an associated software sale, the customer does not have the right or the
ability to operate the software on its own.
 
 Should
the sale of its software involve an arrangement with multiple elements (for
example, the sale of a software license along with the sale of maintenance and
support to be delivered over the contract period), the Company allocates revenue
to each component of the arrangement using the residual value method based on
the fair value of the undelivered elements. The Company defers revenue from the
arrangement equivalent to the fair value of the undelivered elements and
recognizes the remaining amount at the time of the delivery of the product or
when all other revenue recognition criteria have been met. Fair values for the
ongoing maintenance and support obligations are based upon separate sales of
renewals of maintenance contracts. Fair value of services, such as training or
consulting, is based upon separate sales of these services to other
customers.  The Company follows the guidance in SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts for custom
software development arrangements that require significant production,
customization or modification to its core software.  Revenue is
generally recognized for such arrangements under the percentage-of-completion
method.  Under percentage-of-completion accounting, both the product
license and custom software development revenue are recognized as work
progresses based on specific milestones in accordance with paragraphs 85 – 91 of
SOP 97-2.  The Company believes that project milestones based on
completion of specific tasks provide the best approximation of progress toward
the completion of the contract.  At June 30, 2008 and June 30, 2007,
there were no custom software development arrangements in progress.
 
 The
Company also derives revenue from the sale of third party hardware, which is
billed as a separate deliverable under consulting or custom development
contracts.  Revenue from installation, training and consulting
services is recognized when the services are rendered.  They include
services that are not essential to the functionality of the
software.  If these services are included in a software agreement with
multiple elements, amounts are allocated to these categories based on the
estimated number of hours required to complete the work, which is the same
criteria used to bill for the services separately.  License revenue is
recognized ratably over the term of the license. Revenue for all other services
is recognized when the services are rendered.
 
 Amounts
collected prior to satisfying the above revenue recognition criteria are
included in deferred revenue.
 
 The
application of SOP 97-2, as amended, requires judgment, including a
determination that collectibility is probable and the fee is fixed and
determinable.  On occasion, the Company has approved extended payment
arrangements for certain customers.  These arrangements generally do
not exceed 120 days, therefore collectibility is considered probable at the time
of delivery.  If an installment payment is allowed which exceeds
twelve months, revenue for that installment is recognized at the time payment is
received.
 
 The
Company follows the guidance provided by SEC Staff Accounting Bulletin (SAB) No.
101, Revenue Recognition in
Financial Statements and SAB No. 104, Revenue Recognition, which
provide guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC.
 
 Due to
uncertainties inherent in the estimation process it is at least reasonably
possible that completion costs for contracts in progress will be further revised
in the near-term.
  7
  New
Mexico Software, Inc.
 Notes to
the Financial Statements
 (Unaudited)
 
 NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Revenue
recognition (continued):
 
 The cost
of services, consisting of staff payroll, outside services, equipment rental,
communication costs and supplies, is expensed as incurred.
 
 Cash and
cash equivalents:
  The
Company considers all highly liquid instruments purchased with a maturity of
three months or less to be cash equivalents.  At June 30, 2008, the
Company had no cash and cash equivalents that exceeded federally insured
limits.
 
 Trade
Accounts Receivable:
 
 The
Company extends unsecured credit to customers under normal trade agreements
which generally require payment within 25 - 45 days.  Accounts not
paid within 15 days after their original due date are considered
delinquent.  Unless specified by the customer, payments are applied to
the oldest unpaid invoice.  Accounts receivable are presented at the
amount billed.
 
 The
Company also estimates an allowance for doubtful accounts, which amounted to
$20,000 and $25,000 at June 30, 2008 and 2007, respectively.  The
estimate is based upon management’s review of all accounts and an assessment of
the Company’s historical evidence of collections.  Specific accounts
are charged directly to the reserve when management obtains evidence of a
customer’s insolvency.  There were no charge-offs, net of recoveries,
for the quarters ended June 30, 2008 and 2007.
 
 Inventory:
 
 Inventory,
composed of component parts and finished goods, is valued at cost on a specific
identity basis for those items with serial numbers.  The remainder of
the inventory is valued at the lower of first-in-first-out (FIFO) cost or
market.  On a quarterly basis, management compares the inventory on
hand with our records to determine whether write-downs for excess or obsolete
inventory are required.
 
 Furniture,
equipment and improvements:
 
 Furniture,
equipment and improvements are recorded at cost. The cost of maintenance and
repairs is charged against results of operations as incurred. Depreciation is
charged against results of operations using the straight-line method over the
estimated economic useful life. Leasehold improvements are amortized on a
straight-line basis over the life of the related lease.
 
 Income
taxes:
 
 As of
June 30, 2008, the Company’s federal net operating loss carryforwards were
approximately $14,406,000.  The Company did not have a provision for
(benefit from) income taxes for the six months ended June 30, 2008 and
2007.
 
 The
Financial Accounting Standards Board has published FASB Interpretation No. 48
(FIN No. 48), “Accounting for Uncertainty in Income Taxes,” to address the
non-comparability in reporting tax assets and liabilities resulting from a lack
of specific guidance in FASB Statement of Financial Accounting Standards No. 109
(SFAS 109), “Accounting for Income Taxes,” on the uncertainty in income taxes
recognized in an enterprise’s financial statements. Specifically, FIN No. 48
prescribes (a) a consistent
  8
  New
Mexico Software, Inc.
 Notes to
the Financial Statements
 (Unaudited)
 
 NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Income
taxes (continued):
 
 recognition
threshold and (b) a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return, and provides related guidance on derecognition, classification,
interest and penalties, accounting interim periods, disclosure and
transition.  To the extent interest and penalties would be assessed by
taxing authorities on any underpayment of income taxes, such amounts would be
accrued and classified as a component of income tax expenses on the statement of
operations.  FIN No. 48 will apply to fiscal years beginning after
December 15, 2006, with earlier adoption permitted.  The Company has
completed its evaluation of the effects of FIN No. 48 and has concluded that the
adoption of FIN No. 48 did not impact the financial statements for the quarter
ended June 30, 2008.  The Company’s federal tax returns are
potentially open to examinations for fiscal years 2003 through
2007.
 
 Per share
data:
 
 The basic
and diluted per share data has been computed on the basis of the net loss
available to common stockholders for the period divided by the historic weighted
average number of shares of common stock.  All potentially dilutive
securities have been excluded from the computations since they would be
antidilutive, however, these dilutive securities could potentially dilute
earnings per share in the future. Options and warrants exercisable for
11,416,545 and 5,626,712 shares of common stock have been excluded from the
diluted loss per share calculation for the years ended June 30, 2008 and 2007,
respectively, because inclusion of such would be antidilutive.
 
 Advertising
expenses:
 
 The
Company expenses advertising costs which consist primarily of direct mailings,
promotional items and print media, as incurred. Advertising expenses amounted to
$0 and $9,000 for the quarters ended June 30, 2008 and 2007,
respectively.
 
 Use of
estimates:
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
 
 Stock-based
compensation:
 
 The
Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment (SFAS 123R), effective January 1,
2006.  SFAS 123R requires the recognition of the fair value of
stock-based compensation in net income. Stock-based compensation primarily
consists of stock options. Stock options are granted to employees at exercise
prices equal to the fair market value of our stock at the dates of grant. The
Company now recognizes the stock-based compensation expense over the requisite
service period of the individual grantees, which generally equals the vesting
period. The Company provides newly issued shares to satisfy stock option
exercises.  There were 12,000,000 and 500,000 option awards granted to
employees and directors in the years ended December 31, 2006 and
2007.  Of these, 6,500,000 are vested and outstanding at June 30,
2008.  During the quarters ended
  9
  New
Mexico Software, Inc.
 Notes to
the Financial Statements
 (Unaudited)
 
 NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Stock-based
compensation (Continued):
 
 June 30,
2008 and 2007, the Company did not have expenses related to option grants to
employees and directors.
 
 As of
June 30, 2008, the Company has reserved 1,000,000 shares of its common stock for
issuance upon exercise of stock options and warrants.
 
 Software
development:
 
 The
Company accounts for computer software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed". As such, all costs
incurred prior to the product achieving technological feasibility are expensed
as research and development costs. Technological feasibility is generally
achieved upon satisfactory beta test results. Upon achieving technological
feasibility, programming costs are capitalized and amortized over the economic
useful live which is estimated to be two years. There were no capitalized
software development costs as of June 30, 2008 and 2007.
 
 NOTE
3 - GOING CONCERN
 
 The
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company has incurred cumulative net losses
of approximately $14,406,000 since its inception and requires capital for its
contemplated operational and marketing activities to take place. The Company’s
ability to raise additional capital through the future issuances of the common
stock is unknown. The obtainment of additional financing, the successful
development of the Company’s contemplated plan of operations, and its
transition, ultimately, to the attainment of profitable operations are necessary
for the Company to continue operations. The ability to successfully resolve
these factors raise substantial doubt about the Company’s ability to continue as
a going concern. The financial statements of the Company do not include any
adjustments that may result from the outcome of these aforementioned
uncertainties.
 
 NOTE
4 - FURNITURE, EQUIPMENT, AND IMPROVEMENTS
 
 Furniture,
equipment, and improvements as of June 30, 2008, consisted of the
following:
 
 Computers
              
              $
              389,000Furniture,
      fixtures and equipment
              
              
              122,000Automobiles
              
              
              41,000Leasehold
      improvements
              
              
              20,000572,000Accumulated
      depreciation
              
              
              (476,000
              )$
              96,000
 
 Depreciation
expense for the six months ended June 30, 2008 and 2007 was $18,000 and $22,000
respectively.
 
  10
  New
Mexico Software, Inc.
 Notes to
the Financial Statements
 (Unaudited)
 
 NOTE
5 - CAPITAL LEASE PAYABLE
 
 During
the six month period ended June 30, 2008, the Company leased computer equipment
valued at approximately $13,000.  The lease term is for 24 months
beginning March 25, 2008 with an interest rate of 15%.  Monthly lease
payments are approximately $600.
 
 NOTE
6 - CAPITAL TRANSACTIONS
 
 Common
stock:
 
 During
the six month period ended June 30, 2008, the Company effected the following
stock transactions:
 
 The
Company issued a total of 1,425,840 shares of the Company’s $0.001 par value
common stock to employees in lieu of salary, which was valued at
$30,000.
 
 The
Company issued a total of 11,706,707 shares the Company’s $0.001 par value
common stock to outside contractors in exchange for services rendered of
$71,000.
 
 The
Company issued a total of 4,000,001 shares of the Company’s $0.001 par value
common stock in exchange for cash of $68,000.
 
 Warrants:
 
 During
the six month period ended June 30, 2008, there were no warrants issued and none
were exercised.
 
 The
following is a summary of warrants outstanding as of June 30, 2008:
 
 Number of Warrants
              
              
              Exercise Price
              
              Expiration Date771,545
              
              
              $
              0.21
              
              July
      24, 2009110,000
              
              
              $
              0.25
              
              July
      24, 2008700,000
              
              
              $
              0.15
              
              June
      29, 2011
 
  Stock
options:
  
 The
Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment (SFAS 123R), effective January 1, 2006. SFAS
123R requires the recognition of the fair value of stock-based compensation in
net income. Stock-based compensation primarily consists of stock options. Stock
options are granted to employees at exercise prices equal to the fair market
value of our stock at the dates of grant.  The Company now recognizes
the stock-based compensation expense over the requisite service period of the
individual grantees, which generally equals the vesting
period.  Exercise prices and weighted-average contractual lives of
stock options outstanding as of June 30, 2008, are as follows:
  11
  New
Mexico Software, Inc.
 Notes to
the Financial Statements
 (Unaudited)
 
 NOTE
6 - CAPITAL TRANSACTIONS (CONTINUED)
 
  Options
      Outstanding
              
              
              Options
      ExercisableExercise
                Prices
              
              
              Number
                Outstanding
              
              
              Weighted
                Average
                Remaining
                Contractual
      Life
              
              
              Weighted
                Average
                Exercise
                Prices
              
              
              Number
                Exercisable
              
              
              Weighted
                Average
                Exercise
                Price$
              0.01-$0.049
              
              
              
              12,500,000
              
              
              
              8.4
              
              
              $
              0.03
              
              
              
              6,500,000
              
              
              $
              0.03$
              0.05-$0.30
              
              
              
              2,335,000
              
              
              
              4.3
              
              
              $
              0.06
              
              
              
              2,335,000
              
              
              $
              0.06$
              0.31-$0.50
              
              
              
              100,000
              
              
              
              2.8
              
              
              $
              0.39
              
              
              
              100,000
              
              
              $
              0.39
 
 
 Summary
of Options Granted and Outstanding:
 
 For
      the six months ended June 30,2008
              
              
              2007Shares
              
              
              Weighted
                Average
                Exercise
                Price
              
              
              Shares
              
              
              Weighted
                Average
                Exercise
                PriceOptions:Outstanding
      at beginning of year
              
              
              15,835,000
              
              
              $
              0.04
              
              
              
              16,085,000
              
              
              $
              0.04Granted
              
              
              -
              
              
              
              -
              
              
              
              500,000
              
              
              $
              0.04Cancelled
              
              
              (900,000
              )
              
              $
              0.06
              
              
              
              (750,000
              )
              
              $
              0.07Exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Outstanding
      at end of period
              
              
              14,935,000
              
              
              $
              0.04
              
              
              
              15,835,000
              
              
              $
              0.04
 
 Deferred
compensation:
 
 During
the six month period ended June 30, 2008, the Company issued a total of
8,000,000 shares of its $0.001 par value common stock to members of the Board of
Directors valued at $136,000 for services for 2008 and 2009.  At June
30, 2008, 2,000,000 shares have been earned, and the remaining 6,000,000 shares
are considered deferred compensation.  During the six months ended
June 30, 2008, the Company has expensed $34,000 in compensation expense for
these shares.
 
 During
the six month period ended June 30, 2008, the Company issued a total of
3,000,000 shares of its $0.001 par value common stock to Mary Hansen valued at
$51,000 for services.  At June 30, 2008, 1,000,000 shares have been
earned, and the remaining 2,000,000 shares are considered deferred
compensation.  During the six months ended June 30, 2008, the Company
has expensed $17,000 in compensation expense for these shares.
 
  12
  New
Mexico Software, Inc.
 Notes to
the Financial Statements
 (Unaudited)
 
 NOTE
7 - MAJOR CUSTOMERS
 
 During
the six month period ended June 30, 2008, two customers accounted for 42% or
approximately $180,000 of the Company's revenue.
 
 As of
June 30, 2008, balances due from two customers comprised 57% or approximately
$88,000 of total accounts receivable.
 
 NOTE
8 - COMMITMENTS AND CONTINGENCIES
 
 Leases:
 
 The
Company leases office space in New Mexico expiring April 30,
2009.  The Company also leases an automobile expiring June 21, 2011
and computer equipment expiring March 24, 2010.  Future minimum lease
payments as of June 30, 2008, are as follows:
 
 Year
              
              Amount2008
              
              $
              35,0002009
              
              $
              31,0002010
              
              $
              6,000
 
 Rent
expense for the six months ended June 30, 2008 and 2007 amounted to $31,000 and
$30,000, respectively.
 
 Employment
agreement:
 
 The
Company entered into an employment and non-competition agreement with a
stockholder to act in the capacity of President and Chief Executive Officer
(CEO). The term of the employment agreement is for three years commencing on
January 1, 2007. The agreement allows for a one-year renewal option unless
terminated by either party.  Base salary is $60,000 per annum with
available additional cash compensation as defined in the
agreement.  Compensation under this agreement of $31,000 is included
in general and administrative expenses for the six months ended June 30,
2008.  The non-competition agreement commences upon the termination of
the employment agreement for a period of one year.   At June 30,
2008, there was a total of $0 in accrued payroll for this
executive.
 
  13
  
 ITEM 2.  MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
 
 OVERVIEW
 
 Through
June, 2008, we have realized revenues from six primary sources:
 
 1.
              software
      hosting and maintenance services;
 2.
              software
      usage fees;
 3.
              radiological
      services;
 4.
              hardware
      sales;
 5.
              software
      sales and licenses;
 6.
              custom
      programming services.
 
 We also
occasionally realize revenues from scanning services and from other
services.
 
 With each
sale of our enterprise-level products, the end user enters into a license
agreement for which an initial license fee is paid.  The license
agreement also provides that in order to continue the license, the licensee must
pay an annual software maintenance fee for which the party receives access to
product upgrades, bug fixes and product patches.  Software maintenance
consists primarily of hosting and managing our customers’ data on our servers,
as well as technical support programs for our products.  Software
usage comprises any charges for actual usage of our
software.  Currently, software usage consists of XR-EXpress report
fees, Business EXpress application minute fees and MedConEXpress case
fees.
 
 Also,
during the quarter ended June 30, 2008, we began operating our new radiological
services business through our wholly owned subsidiary, Telerad Service, Inc.
(Telerad). Telerad provides radiological services to hospitals, mobile and
portable x-ray providers, prisons, urgent care facilities, and assisted living
facilities. Telerad utilizes our XR-EXpress software in providing the services.
At the date of this report, we have fourteen licensed radiologists available to
read and report on radiological studies, which include x-ray films, ultrasounds,
MRI’s and various scanned images. Telerad provides professional liability
insurance for all radiologists on staff. Our services are available all day,
every day of the year.  This line of business is a direct outgrowth of
our work with the New Mexico Department of Health. Our teleradiology services
are an expansion beyond the original scope of this work.
 
 Cost of
services consists primarily of engineering salaries and compensation-related
expenses, engineering supplies, hardware purchases and connectivity
costs.  General and administrative expenses consist primarily of
salaries and benefits of personnel responsible for business development and
operating activities, and include corporate overhead
expenses.  Corporate overhead expenses relate to salaries and benefits
of personnel responsible for corporate activities, including acquisitions, sales
and marketing, administrative, and reporting responsibilities.  We
record these expenses when incurred.  Fees to radiologists, a
component of personnel-related expenses, will become an increasing component of
our cost of services in future periods as our revenues from radiological
services are expected to increase.
 
 In
general, our key indicator of operating progress is gross
revenue.  For the quarters ended June 2008 and 2007, personnel-related
expenses have accounted for approximately 80% of our total operating expenses,
with fixed costs such as building and equipment rent, utilities, insurance,
communications and depreciation accounting for an additional 10%.  The
only personnel-related costs that are directly variable with sales are those
associated with custom programming, because they are directly
billable.  This means that over 70% of our expenses are relatively
fixed.  All of the remaining expenses vary, but less than five percent
vary directly with sales.   Until we have been marketing our
products consistently for a certain period of time, gross revenue will remain
the best gauge of our progress.
 
 CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
 
 The
preparation of our financial statements in conformity with accounting principles
generally accepted in the United States of America requires our management to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.  As such, in accordance with the
use of accounting principles generally accepted in the United States of America,
our actual realized results may differ from management’s initial estimates as
reported.  A summary of our significant accounting policies is
detailed in the notes to the financial statements, which are an integral
component of this filing.
  14
  
 Revenue
Recognition
 
 Our
software recognition policies are in accordance with the American Institute of
Certified Public Accountants’ Statement of Position (“SOP”) 97-2, Software Revenue Recognition
as amended.  Revenue is recognized when (a) persuasive evidence of an
arrangement exists, (b) delivery has occurred, (c) the fee is fixed or
determinable, and (d) collectibility is probable.  We follow the
guidance in SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts for custom
software development arrangements that require us to provide significant
production, customization or modification to our core
software.  Revenue is generally recognized for such arrangements under
the percentage of completion method.  Amounts collected prior to
satisfying the above revenue recognition criteria are included in deferred
revenue.
 
 We follow
the guidance provided by SEC Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial
Statements and SAB No. 104 Revenue Recognitionwhich
provide guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC.
 
 Income
Taxes
  Management
evaluates the probability of the utilization of the deferred income tax
assets.  We have estimated a $4,977,000 deferred income tax asset at
December 31, 2007, related primarily to net operating loss carryforwards at
December 31, 2007.  Management determined that because we have not yet
generated taxable income it was not appropriate to recognize a deferred income
tax asset related to the net operating loss carryforward.  Therefore,
the fully deferred income tax asset is offset by an equal valuation
allowance.  If we begin to generate taxable income, we may determine
that some, if not all of the deferred income tax asset may be
recognized.  Recognition of the asset could increase after tax income
in the future.  Management is required to make judgments and estimates
related to the timing and utilization of net operating loss carryforwards,
utilization of other deferred income tax assets, applicable tax rates and
feasible tax planning strategies.
 
 Stock
Based Compensation
 
 We grant
stock awards and stock options to employees and non-employees as consideration
for services.  Management believes that the best indicator of value
for stock awards is the trading value of the shares of stock on the date the
Company enters into the agreements.  For non-employees, that date is
generally the date on which the company is committed to such an
agreement.  At times the Company may grant stock as payment for
accrued but unpaid payroll.  In these cases, the Company values the
shares at the trading price on the date they are granted and reduces the payroll
accrual by the same amount.  We have adopted SFAS 123(R) for stock
options granted to employees and non-employees by estimating the value of those
awards using the Black-Scholes option pricing model.
 
 Contingencies
 
 We are
subject to the possibility of various law contingencies arising in the ordinary
course of business.  We consider the likelihood of loss or impairment
of an asset or the incurrence of a liability, as well as our ability to
reasonably estimate the amount of the loss contingencies.
 
 Software
Development Costs
 
 We
account for software development costs in accordance with SFAS No. 86 Accounting for Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed.  Product
research and development expenses consist primarily of personnel, outside
consulting and related expenses for development, and systems personnel and
consultants and are charged to operations as incurred until technological
feasibility is established.  The Company considers technological
feasibility to be established when all planning, designing, coding and testing
have been completed to design specifications.  After technological
feasibility is established, costs are capitalized.  Historically,
product development has been substantially completed with the establishment of
technological feasibility and, accordingly, no costs have been
capitalized.
 
 See Note
2 to the Company’s Financial Statements for a full discussion of the Company’s
critical accounting policies and estimates.
  15
  
 RESULTS
OF OPERATIONS
 
 Revenues:
 
 For
      the Quarter Ended June 30,2008
              
              
              
              2007$
              202,000
              
              compared
      to
              
              $
              267,000
              
              a
      decrease of $65,000 or 24.3%
 
 For
      the Six Months Ended June 30,2008
              
              
              
              2007$
              437,000
              
              compared
      to
              
              $
              507,000
              
              a
      decrease of $70,000 or 13.8%
 
 These
changes are a result of the following factors:
 
 1.  Software
hosting and maintenance:
 
 For
      the Quarter Ended June 30,2008
              
              
              
              2007$
              61,000
              
              compared
      to
              
              $
              137,000
              
              a
      decrease of $76,000 or 55.5%
 
 For
      the Six Months Ended June 30,2008
              
              
              
              2007$
              132,000
              
              compared
      to
              
              $
              256,000
              
              a
      decrease of $124,000 or 48.4%
 
 Substantially
all of the decrease in software hosting and maintenance revenues during the
first half of 2008 as compared to the same period in 2007 is the result of
decreases in revenues from customers using our older software, due to the loss
of several customers during 2007 and early 2008.  Revenue from hosting
and maintenance for our XR-Express and Business EXpress products remained
relatively level for the first half of 2008 as compared to the same period in
2007.  Software maintenance consists mainly of hosting and managing
our customers’ data on our systems, and to a lesser extent includes technical
support programs associated with our products.
 
 2.  Software
usage fees:
 
 For
      the Quarter Ended June 30,2008
              
              
              
              2007$
              115,000
              
              compared
      to
              
              $
              97,000
              
              an
      increase of $18,000 or 18.6%
 
 For
      the Six Months Ended June 30,2008
              
              
              
              2007$
              249,000
              
              compared
      to
              
              $
              193,000
              
              an
      increase of $56,000 or 29.0%
 
 The
increase in revenue from software usage fees is primarily due to a combination
of new XR-EXpress end users added plus a net increase in the volume of
XR-EXpress reports generated by existing customers during the first half of
2008.  Approximately 179,000 reports were generated during the first
half of 2008, as compared to approximately 145,000 reports during the first half
of 2007.  We are still adding new XR-EXpress customers per quarter,
and we currently have over 3,000 end users of the software.  As a
result, we expect the increases in this revenue category to continue during
2008.
 
 3.  Radiological
services:
 
 For
      the Quarter Ended June 30,2008
              
              
              
              2007$
              21,000
              
              compared
      to
              
              $
              0
              
              an
      increase of $21,000
 
  16
  
 For
      the Six Months Ended June 30,2008
              
              
              
              2007$
              21,000
              
              compared
      to
              
              $
              0
              
              an
      increase of $21,000
 
 Our
radiological services business began generating revenue in June,
2008.  To date, we have been adding several new customers per month
and expect this experience to continue into the near
future.  Accordingly, we anticipate increases in this revenue category
during the remainder of the year. However, it is not possible to accurately
predict the future rate of increase of this category until we have been
marketing this service for a longer period of time.
 
 4.  Hardware
revenue:
 
 For
      the Quarter Ended June 30,2008
              
              
              
              2007$
              5,000
              
              compared
      to
              
              $
              4,000
              
              an
      increase of $1,000 or 25.0%
 
 For
      the Six Months Ended June 30,2008
              
              
              
              2007$
              10,000
              
              compared
      to
              
              $
              23,000
              
              a
      decrease of $13,000 or 56.5%
 
 The
decrease in hardware revenue during the first half of 2008 as compared to the
same half in 2007 is mainly due to the sale of a Business EXpress server to one
customer during the first quarter of 2007.  All hardware sales were
associated with sales of our XR-EXpress and Business EXpress
software.  We expect this category to remain flat or decrease slightly
in the coming year as we continue to focus on providing services rather than
sales of software.
 
 5.  Software
sales and licenses:
 
 For
      the Quarter Ended June 30,2008
              
              
              
              2007$
              0
              
              compared
      to
              
              $
              4,000
              
              a
      decrease of $4,000
 
 For
      the Six Months Ended June 30,2008
              
              
              
              2007$
              14,000
              
              compared
      to
              
              $
              7,000
              
              an
      increase of $7,000 or 100.0%
 
 The
decrease in software sales and license revenue for the quarter ended June 30,
2008 is attributable to our continued focus on providing services as opposed to
sales of software.  The increase for the six months ended June 30,
2008 was mostly attributable to the addition of three new XR-EXpress customers
during the first quarter of 2008, as compared to the addition of only one new
customer during the same quarter in 2007.  Software sales will most
likely vary from one quarter to the next during 2008 as we continue to add new
customers for XR-EXpress, MedConEXpress, and Business
EXpress.  However, since we are continuing to focus our efforts on
building recurring revenues, we have modified our policy to include the cost of
the XR-EXpress compression software with the setup for any new customers that
have at least ten end users.  As a result, we expect our revenues from
software sales and licenses to remain low during the coming year.
 
 6.  Custom
programming revenue:
 
 For
      the Quarter Ended June 30,2008
              
              
              
              2007$
              0
              
              compared
      to
              
              $
              2,000
              
              a
      decrease of $2,000
 
 For
      the Six Months Ended June 30,2008
              
              
              
              2007$
              11,000
              
              compared
      to
              
              $
              5,000
              
              an
      increase of $6,000 or 120.0%
 
  17
  
 The
decrease in custom programming revenue for the first half of 2008 as
compared to the same half in 2007 is due to the fact that we had no custom
programming projects during the current quarter. The increase in custom
programming revenue during the first half of 2008 as compared to the same half
in 2007 is due to the addition of one MedConEXpress customer during the first
quarter of 2008.  Since we have reduced our focus on sales of
software, the number of custom programming projects requested by customers with
enterprise-level systems has been inconsistent.  We continue to offer
programming services for database integration and for other projects for our
existing customers; however, we expect our custom programming revenues to remain
low during the coming year.
 
 Cost of
services:
 
 For
      the Quarter Ended June 30,2008
              
              
              
              2007$
              139,000
              
              compared
      to
              
              $
              104,000
              
              an
      increase of $35,000 or 33.7%
 
 For
      the Six Months Ended June 30,2008
              
              
              
              2007$
              210,000
              
              compared
      to
              
              $
              177,000
              
              an
      increase of $33,000 or 18.6%
 
 These
increases in cost of services are due to the fact that during the first half of
2008, approximately 75% of the engineering time that would normally be allocated
to research and development was used to integrate our XR-Express product with
the software used by our new radiology customers.  This effort
included seeking FDA section 510k approval for portions of our existing
radiology software.  During the first half of 2008, approximately 77%
of our cost of sales consisted of salaries, contract services and other
personnel-related expenses for our engineering staff, as compared with
approximately 83% during the first half of 2007.  This range of
percentages has been consistent over the last three years. However, we
anticipate that the cost of services will increase as our radiological services
revenue increases.
 
 General
and administrative expenses:
 
 For
      the Quarter Ended June 30,2008
              
              
              
              2007$
              219,000
              
              compared
      to
              
              $
              187,000
              
              an
      increase of $32,000 or 17.1%
 
 For
      the Six Months Ended June 30,2008
              
              
              
              2007$
              416,000
              
              compared
      to
              
              $
              468,000
              
              a
      decrease of $52,000 or 11.1%
 
 The
increase in general and administrative expenses for the second quarter of 2008
as compared to the same period last year was due to a credit for overpayment of
legal expenses during the second quarter of 2007.  The decrease in
general and administrative expenses for the first half of 2008 as compared to
the first half of 2007 was due to two factors:  marketing expenses
decreased due to our participation in two trade shows during the first half of
2007 as compared to only one in the same period in 2008, and compensation
expenses decreased due to the vesting of options issued to directors during
2006.  The remaining decrease was due to a variety of immaterial
factors.
 
 Depreciation
expense:
 
 For
      the Quarter Ended June 30,2008
              
              
              
              2007$
              10,000
              
              compared
      to
              
              $
              12,000
              
              a
      decrease of $2,000 or 16.7%
 
 For
      the Six Months Ended June 30,2008
              
              
              
              2007$
              18,000
              
              compared
      to
              
              $
              22,000
              
              a
      decrease of $4,000 or 18.2%
 
 The
decrease in depreciation expense was due to the maturation of our furniture and
fixtures and some of our computer equipment during the first quarter of
2008.
  18
  
 Research
and development costs:
 
 For
      the Quarter Ended June 30,2008
              
              
              
              2007$
              4,000
              
              compared
      to
              
              $
              35,000
              
              a
      decrease of $31,000 or 88.6%
 
 For
      the Six Months Ended June 30,2008
              
              
              
              2007$
              35,000
              
              compared
      to
              
              $
              84,000
              
              a
      decrease of $49,000 or 58.33%
 
 These
decreases are due to reduction in personnel costs as a result of the completion
of our DDS-EXpress product during 2007, as well as allocation of engineering
time during the second quarter of 2008 to integrating our XR-Express product
with our new radiology customers as opposed to research and development (see
discussion on cost of services above).
 
 During
2007 and 2008, over 90% of our research and development costs are directly
associated with staffing.  In the software industry it is common for
research and development costs to be ongoing, since development of the next
version of the software begins as soon as the current version is
completed.  In addition, we are constantly developing new applications
for our existing software that require modification.  Management
anticipates that research and development costs in the future will focus both on
the upgrading of our existing products and the continued development of new
products using our core technology; therefore they will remain relatively steady
during the coming year.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 As of June 30, 2008, cash and cash equivalents
totaled $27,000, representing a $32,000 decrease from December 31, 2007. The
decrease in available cash was due to the following factors during the
period:
 
 Operating
activities:
 
 For
      the Six Months Ended June 30,2008
              
              2007used
      $(84,000)
              compared
      to
              provided
      $66,000
              a
      decrease in available cash of
$150,000
 
 The
decrease in available cash from operations during the first half of 2008 was
primarily due to two factors:  we stopped issuing options and shares
for salaries and reduced the issuance of shares for services, which resulted in
an increased use of cash for salaries and contractors of
$305,000.  This decrease was partially offset by the increase in
accounts payable and accrued expenses due to slow cash flow, which provided
$203,000 in cash flow.  This decrease in cash flow means that we have
sold equity securities during the second quarter of 2008 to augment our cash
flow.  We expect the reduced cash flow to continue into the third
quarter of 2008.  Beginning in the fourth quarter of 2008, we
anticipate improved cash flow as a result of our new radiology services which
began generating revenue in June 2008.
 
 Investing
activities:
 
 For
      the Six Months Ended June 30,2008
              
              2007used
      $(16,000)
              compared
      to
              used
      $(42,000)
              an
      increase in available cash of
$26,000
 
 During
the first half of 2008, we purchased $13,000 and leased $10,000 of computer
equipment, as compared to the purchase of a vehicle valued at $42,000 during the
first quarter of 2007.
 
 Financing
activities:
 
 For
      the Six Months Ended June 30,2008
              
              2007provided
      $68,000
              compared
      to
              provided
      $0
              an
      increase in available cash of
$68,000
 
  19
  
 The
increase in available cash from financing activities was the result of stock
purchases by two investors during the second quarter of 2008.
 
 Capital
expenditure commitments:
 
 We do not
currently have material commitments for capital expenditures and do not
anticipate entering into any such commitments during the next twelve
months.  Our current commitments consist primarily of lease
obligations for office space.
 
 Working
capital:
 
 At June
30, 2008, we had a working capital surplus of $18,000 as opposed to a working
capital surplus of $95,000 at the beginning of the period, a decrease of
$77,000.  This decrease is primarily due to an increase in current
accounts payable and accrued expenses during the first half of 2008 as a result
of increased legal fees associated with the startup of Telerad Service, Inc. and
increased accounting fees associated with our annual audit during the first
quarter.  Also, as of June 30, 2008, balances due from two customers
comprised 57% or approximately $88,000 of our total accounts receivable, and we
have one account valued at approximately $18,000 in collections.  If
we are not able to collect from these customers, it could extend our cash flow
shortage into the fourth quarter of 2008.  We have incurred operating
losses and negative cash flows for the past two fiscal years that have been
funded through the issuance of equity securities.  Our monthly
recurring revenues increased from an average of $45,000 per month at the
beginning of 2006 to a current average of approximately $65,000 per
month.  We may also continue to sell equity securities and incur debt
as needed to meet our operating needs during 2008.
 
 We
anticipate that our primary uses of cash in the next year will be for general
operating purposes.  Based on cash flow projections, our normal
operating cash requirements for the next twelve months will continue to be
approximately $1,200,000.  Our goal during 2007 was to be funding our
operating requirements entirely from revenues by the end of the year, and we did
achieve that goal toward the end of the year.  We are currently
generating cash flow from recurring revenues of approximately $65,000 per month,
and this amount has increased steadily since the beginning of
2006.  We also generate revenues from sales of software, hardware, and
custom programming projects.  This level of cash flow will allow us to
maintain our current level of operations.  Our goal for 2008 is to
begin generating a net profit and positive cash flow by the end of the
year.  We expect the upward trend in recurring revenues to continue in
2008 and 2009, although it is not possible to predict the rate of increase until
our new products have been established in the market for a reasonable period of
time.
 
 OFF-BALANCE
SHEET ARRANGEMENTS
 
 We have
no off-balance sheet arrangements.
 
 FORWARD-LOOKING
STATEMENTS
 
 This
report contains statements that plan for or anticipate the
future.  Forward-looking statements include statements about the
future of operations involving the marketing and maintenance of products which
manage large volumes of media or digital material, statements about our future
business plans and strategies, and most other statements that are not historical
in nature.  In this report forward-looking statements are generally
identified by the words “anticipate,” “plan,” “believe,” “expect,” “estimate,”
and the like.  Although management believes that any forward-looking
statements it makes in this report are reasonable, because forward-looking
statements involve future risks and uncertainties, there are factors that could
cause actual results to differ materially from those expressed or
implied.  For example, a few of the uncertainties that could affect
the accuracy of forward-looking statements include the following:
 
 ·
              Rapid
      changes in technology relating to the
Internet
 ·
              Continued
      growth and use of the Internet
 ·
              Changes
      in government regulations
 ·
              Changes
      in our business strategies
 ·
              Hardware
      failure of a catastrophic
proportion
  20
  
 ·
              Terrorist
      interference with the operation of the Internet or effects of terrorist
      activities on the economy
 ·
              Difficulty
      recruiting and retaining staff of sufficient technical caliber to provide
      adequate and on-going customer support and product maintenance and
      development
 ·
              Failure
      to successfully market our products through the Internet and our
      representatives
 ·
              Inability
      to locate sources to retire our line of credit or to obtain alternative
      lending sources
 ·
              Inability
      to solve cash flow problems
 
 In light
of the significant uncertainties inherent in the forward-looking statements made
in this report, particularly in view of our early stage of operation, the
inclusion of this information should not be regarded as a representation by us
or any other person that our objectives and plans will be achieved.
 
 ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
 
 Not
required.
 
 ITEM 4T.  CONTROLS AND PROCEDURES.
 
 Management’s responsibility
for controls and procedures
 
 Our
management is responsible for establishing and maintaining adequate internal
control over our financial reporting.  Our controls over financial
reporting are designed to ensure that information required to be disclosed by us
in the reports that we file or submit under the Securities Exchange Act of 1934,
as amended (Exchange Act) is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, or
persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
 
 Evaluation of disclosure
controls and procedures
  Under the supervision and with the
participation of our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Exchange Act, as of June 30, 2008.
Based on this evaluation, our principal executive officer and principal
financial officer have concluded that our disclosure controls and procedures as
of the end of such periods are not effective to ensure that information required
to be disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms. Management did not use a framework to
conduct the required evaluation of the effectiveness of our internal control
over financial reporting since, in the view of management, comparison with a
framework was unwarranted because of (i) the small size of our current
operations and (ii) our executive management structure (consisting of only our
principal executive officer and principal financial officer) which enables
management to be aware of all transactions.
 
 The
company has limited resources and as a result, a material weakness in financial
reporting currently exists, because of our limited resources and
personnel.
 
 A
material weakness is a deficiency (within the meaning of the Public Company
Accounting Oversight Board (PCAOB) auditing standard 5) or combination of
deficiencies in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of the Company's annual or
interim financial statements will not be prevented or detected on a timely
basis.  Management has determined that a material weakness exists due
to a lack of segregation of duties, resulting from the Company's limited
resources and personnel.
 
 We have
not made any change in our internal control over financial reporting during the
quarter ended June 30, 2008.
 
 
  21
  
 PART II
 
 ITEM 1.  LEGAL PROCEEDINGS
 
 We are
not engaged in any legal proceedings, and do not know of any threatened
litigation or claims.
 
 ITEM 1A.  RISK FACTORS
 
 During
the three month period ended June 30, 2008, there has not been any change in or
addition to the risk factors to which investment in our common stock is
subject.
 
 ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS
 
 The
following table sets forth information about our unregistered sales of common
stock during the three month period ended June 30, 2008:
 
 Name
      of Purchaser
              
              Number
      of Shares
              
              
              Price
              
              RelationshipMary
      Hansen (1)
              
              
              3,000,000
              
              
              $
              51,000
              
              ContractorBruce
      Stabile (2)
              
              
              525,654
              
              
              $
              14,000
              
              ContractorRichard
      Govatski (3)
              
              
              2,000,000
              
              
              $
              34,000
              
              Board
      MemberTeresa
      Dickey (4)
              
              
              2,000,000
              
              
              $
              34,000
              
              Board
      MemberJohn
      Handley (5)
              
              
              2,000,000
              
              
              $
              34,000
              
              Board
      MemberFrank
      Reidy (6)
              
              
              2,000,000
              
              
              $
              34,000
              
              Board
      MemberFrank
      Reidy (7)
              
              
              2,823,530
              
              
              $
              48,000
              
              Board
      MemberJohn
      Shaver (8)
              
              
              1,176,471
              
              
              $
              20,000
              
              ShareholderRafael
      Rubio (9)
              
              
              1,000,000
              
              
              $
              17,000
              
              Employee
  1.
                Of
      the 3,000,000 shares issued to Ms. Hansen, 1,000,000 shares have been
      earned as of June 30, 2008.  Ms. Hansen provided services in
      payment for the shares earned.
 2.
                Mr.
      Stabile provided services in payment for the shares issued to
      him.
 3.
                Of
      the 2,000,000 shares issued to Mr. Govatski, 500,000 shares have been
      earned as of June 30, 2008.  Mr. Govatski provided services in
      payment for the shares earned.
 4.
                Of
      the 2,000,000 shares issued to Ms. Dickey, 500,000 shares have been earned
      as of June 30, 2008.  Ms. Dickey provided services in payment
      for the shares earned.
 5.
                Of
      the 2,000,000 shares issued to Mr. Handley, 500,000 shares have been
      earned as of June 30, 2008.  Mr. Handley provided services in
      payment for the shares earned.
 6.
                Of
      the 2,000,000 shares issued to Mr. Reidy, 500,000 shares have been earned
      as of June 30, 2008.  Mr. Reidy provided services in payment for
      the shares earned.
 7.
                Mr.
      Reidy provided cash in payment for these shares issued to
    him.
 8.
                Mr.
      Shaver cash in payment for these shares issued to
  him.
 9.
                Mr.
      Rubio provided services in payment for these shares issued to
      him.
 
 We did
not pay and to our knowledge no one acting on our behalf or paid any commissions
of other compensation with respect to the sales identified in the foregoing
table.  We made the sale directly to each purchaser for the
consideration stated in the table.  We used cash proceeds from such
sales for working capital in payment of current obligations.  See
footnotes to the foregoing table for information regarding the nature of
non-cash consideration paid for shares.  Each purchaser acknowledged
the investment nature of the transaction and a legend was placed on each
certificate, prohibiting public resale of the shares, except in compliance with
Rule 144.  We believe Mr. each purchaser has such knowledge and
experience in business and financial transactions that he or she is able to
understand and evaluate the risks and merits of investment in our common
stock.  We relied upon the exemption from the registration requirement
of the Securities Act of 1933, as amended (the “Act”) provided in Section 4(2)
of the Act and the rules and regulations thereunder, on grounds that this sale
did not involve a public offering within the meaning of the Act.
 
 ITEM 3.  DEFAULTS UPON SENIOR
SECURITIES
 
 Not
applicable.
 
  22
  
 ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
 
 Not
applicable.
 
 ITEM 5.  OTHER INFORMATION
 
 Not
applicable.
 
 ITEM 6.  EXHIBITS
 
 The
following exhibits are attached to this report:
 
 31.1         Rule 15d-14 (a)  Certification by Principal
Executive Officer
 31.2
              Rule 15d-14 (a)  Certification by
      Principal Financial Officer
 32         
  Section 1350 Certification of Principal
Executive Officer and Principal Financial Officer
 
 
 SIGNATURES
 
 In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 NEW MEXICO SOFTWARE, INC.
 
 
 Date:                      August
14,
2008                                                                           By  /s/  Richard F.
Govatski
 Richard F. Govatski,
President
 
 
 
 Date:                      August
14,
2008                                                                           By  /s/  Teresa B.
Dickey
 Teresa B. Dickey,
Treasurer  (Principal
 Financial Officer)
 
 
  23