##### Table of Contents



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.
   Utah
    
    8644 154thAvenue 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.)
  þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 o þ
 
 Class
    
    Outstanding at October 31, 2008Common stock
$.00025 par value
    
    26,693,392




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##### 



Innuity, Inc.
  
 TABLE OF CONTENTS
 PagePART I FINANCIAL INFORMATIONItem 1. Financial Statements
Condensed Consolidated Balance Sheets as of September
30, 2008 and December 31, 2007 (Unaudited)
    
    
    2Condensed Consolidated Statements of Operations for the
three months and nine months ended September 30, 2008
and 2007 (Unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2008 and 2007
(Unaudited)
    
    
    4Notes to Condensed Consolidated Financial Statements
(Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    15Item 4T. Controls and Procedures
    
    
    19PART II OTHER INFORMATION
    
    
    19Item 1. Legal Proceedings
    
    
    19Item 1A. Risk Factors
    
    
    19Item 4. Submission of Matters to a Vote of Security Holders
    
    
    33Item 6. Exhibits
    
    
    33SIGNATURES
    
    
    34EX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 September 30,
    
    December 31,2008
    
    2007ASSETSCurrent AssetsCash and cash equivalents
    
    $
    104,486
    
    
    $
    200,877Restricted cash
    
    
    377,164
    
    
    
    Settlement deposits
    
    
    322,391
    
    
    
    361,675Settlement receivable, net of allowance for doubtful accounts of $19,562 and $18,615, respectively
    
    
    136,300
    
    
    
    156,817Trade accounts receivable, net of allowance for doubtful accounts of $6,998 and $50,883, respectively
    
    
    108,987
    
    
    
    322,131Current assets relating to discontinued operations
    
    
    
    
    
    
    1,252,763Other current assets
    
    
    260,508
    
    
    
    132,634Total Current Assets
    
    
    1,309,836
    
    
    
    2,426,897Property and equipment, net
    
    
    617,081
    
    
    
    578,864Intangible assets, net
    
    
    145,082
    
    
    
    412,915Long-term assets relating to discontinued operations
    
    
    
    
    
    
    2,195,993Total Assets
    
    $
    2,071,999
    
    
    $
    5,614,669LIABILITIES AND STOCKHOLDERS DEFICITCurrent LiabilitiesCurrent liabilities relating to discontinued operations
    
    $
    1,053,790
    
    
    $
    4,624,111Trade accounts payable
    
    
    1,221,300
    
    
    
    1,449,062Accrued salaries and wages
    
    
    170,851
    
    
    
    413,737Merchant settlement payable
    
    
    658,348
    
    
    
    389,993Accrued liabilities
    
    
    353,717
    
    
    
    854,785Deferred revenues
    
    
    193,163
    
    
    
    183,093Current portion of obligations from terminated employment contracts
    
    
    60,493
    
    
    
    Related party notes payable, current portion, net of discount of $0 and $73,754, respectively
    
    
    
    
    
    
    684,703Long-term
debt, current portion, net of discount of $0 and $99,633, respectively
    
    
    94,398
    
    
    
    1,103,847Capital lease obligations, current portion
    
    
    275,861
    
    
    
    195,662Total Current Liabilities
    
    
    4,081,921
    
    
    
    9,898,993Long-Term LiabilitiesLong-term obligation from terminated employment contracts, net of discount and current portion
    
    
    337,913
    
    
    
    Long-term debt, net of current portion
    
    
    8,339
    
    
    
    82,821Capital lease obligations, net of current portion
    
    
    183,114
    
    
    
    165,074Total Long-Term Liabilities
    
    
    529,366
    
    
    
    247,895Total Liabilities
    
    
    4,611,287
    
    
    
    10,146,888Commitments and ContingenciesStockholders DeficitCommon
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
    
    
    
    5,899Additional paid-in capital
    
    
    35,964,757
    
    
    
    34,905,591Accumulated 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




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##### Table of Contents



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
    
    2007RevenuesMerchant Services
    
    $
    649,402
    
    
    $
    982,321
    
    
    $
    1,969,024
    
    
    $
    2,272,129Promotion Services
    
    
    485,346
    
    
    
    567,462
    
    
    
    1,474,522
    
    
    
    1,746,699Total revenues
    
    
    1,134,748
    
    
    
    1,549,783
    
    
    
    3,443,546
    
    
    
    4,018,828Operating expensesCost of services
    
    
    432,411
    
    
    
    384,062
    
    
    
    1,323,508
    
    
    
    1,296,685General and administrative
    
    
    667,152
    
    
    
    521,765
    
    
    
    2,223,748
    
    
    
    2,237,021Selling and marketing
    
    
    571,585
    
    
    
    604,702
    
    
    
    1,730,558
    
    
    
    1,728,999Research and development
    
    
    382,507
    
    
    
    330,460
    
    
    
    1,112,123
    
    
    
    1,136,523Amortization expense
    
    
    59,110
    
    
    
    107,043
    
    
    
    267,833
    
    
    
    333,969Loss from operations
    
    
    (978,017
    )
    
    
    (398,249
    )
    
    
    (3,214,224
    )
    
    
    (2,714,369
    )Other expenseGain from settlement of debt
    
    
    
    
    
    
    
    
    
    
    139,329
    
    
    
    577,434Other 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
    
    
    
    21,827,473Diluted 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




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 For the Nine Months Ended September 30,
    
    2008
    
    2007Cash flows from operating activitiesNet 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
    
    
    
    1,046,747Accretion of debt discount
    
    
    239,615
    
    
    
    338,130Share-based payments
    
    
    1,045,210
    
    
    
    967,869Bad debt provision
    
    
    113,176
    
    
    
    146,623Gain 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
    )
    
    
    208,402Settlement receivable
    
    
    20,517
    
    
    
    (1,067
    )Inventories
    
    
    52,795
    
    
    
    (20,243
    )Other current assets
    
    
    (225,902
    )
    
    
    (15,426
    )Trade accounts payable
    
    
    (749,203
    )
    
    
    590,415Merchant settlement payable
    
    
    268,355
    
    
    
    194,519Accrued salaries and wages
    
    
    (472,950
    )
    
    
    (127,531
    )Deferred revenues
    
    
    299,123
    
    
    
    320,088Accrued liabilities
    
    
    (409,936
    )
    
    
    (51,576
    )Total adjustments
    
    
    (4,303,978
    )
    
    
    2,919,555Net cash used in operating activities
    
    
    (3,370,987
    )
    
    
    (77,044
    )Cash flows from investing activitiesPurchase 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 activitiesProceeds from issuance of long-term debt
    
    
    
    
    
    
    1,825,000Proceeds from exercise of warrants and options
    
    
    14,730
    
    
    
    3,869Payments 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
    )
    
    
    199,146Net increase (decease) in cash and cash equivalents
    
    
    (96,391
    )
    
    
    102,006Cash and cash equivalents at beginning of period
    
    
    200,877
    
    
    
    307,483Cash and cash equivalents at end of period
    
    $
    104,486
    
    
    $
    409,489
 See accompanying notes to condensed consolidated financial statements.
 4




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INNUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
 For the Nine Months Ended September 30,
    
    2008
    
    
    2007Supplemental disclosure of cash flow informationCash paid during the period for interest
    
    $
    252,985
    
    
    $
    334,213Noncash investing and financing activitiesDiscount on notes payable
    
    
    
    
    
    
    303,115Debt converted to common stock
    
    
    
    
    
    
    280,405Accrued interest converted to common stock
    
    
    
    
    
    
    75,760Acquisition of property and equipment under terms of capital lease agreements
    
    
    296,822
    
    
    
    Conversion of accounts payable to common stock
    
    
    
    
    
    
    40,618Sale of In-Store business line:Assets sold:Accounts receivable
    
    $
    867,235Inventory
    
    
    497,901Other current assets
    
    
    185,090Property and equipment
    
    
    116,746Intangible assets
    
    
    69,632Goodwill
    
    
    1,833,2203,569,824Liabilities assumed by buyer:Deferred revenue
    
    
    (2,891,196
    )Accrued liabilities
    
    
    (90,004
    )Assets sold net of liabilities
    
    
    588,624Sale price
    
    
    7,000,000Accrued purchase price adjustment
    
    
    78,471Accrued 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




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INNUITY, INC.
AND SUBSIDIARIES
 
 Notes to Condensed Consolidated Financial Statements
September 30, 2008
(Unaudited)
          6




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##### Table of Contents



Three Months Ended
    
    
    Nine Months Ended2008
    
    
    2007
    
    
    2008
    
    
    2007Dividend 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
   WeightedWeighted
    
    
    AverageShares
    
    
    Average
    
    
    Remaining
    
    
    Aggregateunder
    
    
    Exercise
    
    
    Contract
    
    
    IntrinsicOption
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at December
31, 2007
    
    
    3,618,511
    
    
    $
    0.64Granted
    
    
    12,500
    
    
    $
    0.24Forfeited or expired
    
    
    (1,621,366
    )
    
    $
    0.58Outstanding 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
    
    $
    
  7




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##### Table of Contents



2008
    
    
    2007Cost of services
    
    $
    5,189
    
    
    $
    760General and administrative expense
    
    
    92,106
    
    
    
    146,399Sales and marketing expense
    
    
    85,849
    
    
    
    105,748Research and development expense
    
    
    5,351
    
    
    
    7,622Total share-based payment expense from
continuing operations
    
    
    188,495
    
    
    
    260,529Discontinued operations
    
    
    
    
    
    
    41,487Total share-based payment expense
    
    $
    188,495
    
    
    $
    302,016
  2008
    
    
    2007Cost of services
    
    $
    13,853
    
    
    $
    4,189General and administrative expense
    
    
    363,785
    
    
    
    488,428Sales and marketing expense
    
    
    236,097
    
    
    
    289,831Research and development expense
    
    
    18,887
    
    
    
    21,360Total share-based payment expense from
continuing operations
    
    
    632,622
    
    
    
    803,808Discontinued operations
    
    
    412,588
    
    
    
    164,061Total share-based payment expense
    
    $
    1,045,210
    
    
    $
    967,869
 8




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##### Table of Contents



September 30,
    
    December 31,2008
    
    2007Note payable to an unrelated party,
interest at 15%, net of discount
of $99,633 at December 31, 2007,
paid in full May 2008
    
    $
    
    
    
    $
    975,367Note payable to an unrelated party,
interest imputed at 2.49%,
matures October 2008, monthly
payments of $8,357
    
    
    102,737
    
    
    
    211,301Total debt
    
    $
    102,737
    
    
    $
    1,186,668Less current maturities
    
    
    (94,398
    )
    
    
    (1,103,847
    )Long-term debt
    
    $
    8,339
    
    
    $
    82,821
  September 30,
    
    December 31,2008
    
    2007Notes payable to a shareholder, interest at 12%, paid in full May 2008
    
    $
    
    
    
    $
    200,000Note payable to former owner of Jadeon, interest at 5%, net of
discount of $10,587 at December 31, 2007, paid in full May 2008
    
    
    
    
    
    
    202,870Convertible note payable to related parties, interest at 15%, net of
discount of $63,167 at December 31, 2007, paid in full June 2008
    
    
    
    
    
    
    281,833Total related party notes payable
    
    
    
    
    
    $
    684,703Less current maturities
    
    
    
    
    
    
    (684,703
    )Long-term related party notes payable
    
    $
    
    
    
    $
    
   9




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##### Table of Contents



September 30,
    
    
    December 31,2008
    
    
    2007Trade accounts receivable, net of allowance for doubtful
accounts of $54,871 as of December 31, 2007
    
    $
    
    
    
    $
    615,005Inventories, net of allowance for obsolete inventory of
$209,962 as of December 31, 2007
    
    
    
    
    
    
    550,696Other current assets
    
    
    
    
    
    
    87,062Total current assets related to discontinued operations
    
    $
    
    
    
    $
    1,252,763Property and equipment, net
    
    $
    
    
    
    $
    107,455Intangible assets, net
    
    
    
    
    
    
    255,318Goodwill
    
    
    
    
    
    
    1,833,220Total long-term assets related to discontinued operations
    
    $
    
    
    
    $
    2,195,993Trade accounts payable
    
    $
    991,899
    
    
    $
    1,591,812Accrued salaries and wages
    
    
    23,999
    
    
    
    254,063Accrued liabilities
    
    
    37,892
    
    
    
    176,093Deferred revenues
    
    
    
    
    
    
    2,602,143Total current liabilities related to discontinued
operations
    
    $
    1,053,790
    
    
    $
    4,624,111
  Bonuses
    
    $
    560,000Amounts paid under employee settlement agreements
    
    
    450,000Legal and professional services
    
    
    96,515Travel and other
    
    
    26,183$
    1,132,698
    Total amount due net of discount of $526,524, under obligations
from terminated employment contracts
    
    $
    398,406Less current portion
    
    
    60,493Long Term
obligations from terminated employment contracts
    
    $
    337,913
 10




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Earnings Per Share
 11




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##### Table of Contents



Promotion
 Commerce
   For the Three Months Ended September 30, 2008Promotion
    
    Commerce
    
    TotalRevenue from external customers
    
    $
    485,346
    
    
    $
    649,402
    
    
    $
    1,134,748Depreciation and amortization
    
    
    47,656
    
    
    
    84,184
    
    
    
    131,840Interest expense
    
    
    38,748
    
    
    
    
    
    
    
    38,748Segment loss
    
    
    (139,066
    )
    
    
    (316,663
    )
    
    
    (455,729
    )Segment assets
    
    
    334,007
    
    
    
    1,074,075
    
    
    
    1,408,082
 For The Three Months Ended September 30, 2007Promotion
    
    Commerce
    
    TotalRevenue from external customers
    
    $
    567,462
    
    
    $
    982,321
    
    
    $
    1,549,783Depreciation and amortization
    
    
    118,270
    
    
    
    65,071
    
    
    
    183,341Interest expense
    
    
    20,681
    
    
    
    
    
    
    
    20,681Segment income (loss)
    
    
    (93,970
    )
    
    
    290,456
    
    
    
    196,486Segment assets
    
    
    744,314
    
    
    
    1,332,054
    
    
    
    2,076,368
 12




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##### Table of Contents



For the Nine Months Ended September 30, 2008Promotion
    
    Commerce
    
    TotalRevenue from external customers
    
    $
    1,474,522
    
    
    $
    1,969,024
    
    
    $
    3,443,546Depreciation and amortization
    
    
    285,673
    
    
    
    211,740
    
    
    
    497,413Interest expense
    
    
    77,561
    
    
    
    
    
    
    
    77,561Segment 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, 2007Promotion
    
    Commerce
    
    TotalRevenue from external customers
    
    $
    1,746,699
    
    
    $
    2,272,129
    
    
    $
    4,018,828Depreciation and amortization
    
    
    367,653
    
    
    
    195,968
    
    
    
    563,621Interest expense
    
    
    23,627
    
    
    
    
    
    
    
    23,627Segment income (loss)
    
    
    (10,099
    )
    
    
    58,170
    
    
    
    48,071Segment assets
    
    
    744,314
    
    
    
    1,332,054
    
    
    
    2,076,368
  Three Months Ended September 30,2008
    
    2007Total Segment income (loss)
    
    $
    (455,729
    )
    
    $
    196,486Unallocated 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
    
    
    
    
    
    
    200,000Executive and other
    
    
    (198,078
    )
    
    
    (345,225
    )Loss from continuing operations
    
    $
    (1,030,496
    )
    
    $
    (931,186
    )
 13




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##### Table of Contents



Nine Months Ended September 30,2008
    
    2007Total Segment income (loss)
    
    $
    (1,366,556
    )
    
    $
    48,071Unallocated 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
    
    
    
    
    
    
    200,000Executive and other
    
    
    (782,497
    )
    
    
    (941,255
    )Loss from continuing operations
    
    $
    (3,486,455
    )
    
    $
    (2,992,725
    )
  2008Total segment assets
    
    $
    1,408,082Cash and cash equivalents
    
    
    104,486Restricted cash
    
    
    377,164Assets related to discontinued operations
    
    
    Other assets not allocated to segments
    
    
    182,267Total assets
    
    $
    2,071,999
  14




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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 on Form 10-K for the year
ended December 31, 2007.
 Overview
    Recent Developments
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Critical Accounting Policies
 Managements Discussion
and Analysis of Financial Condition and Results of Operations
 Operations Review
  Analysis of Condensed Consolidated Statements of Operations
 Three Months Ending September 30,
    
    
    Nine Months Ending September 30,%
    
    
    
    
    
    
    
    
    
    
    %2008
    
    
    2007
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    ChangeRevenuesMerchant 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 expensesCost 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  16




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Revenues
   Expenses
 Cost of services
  General and administrative.
  Selling and marketing.
  17




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Research and development.
 Amortization expense.
 Gain on settlement of debt.
  Interest.
 Liquidity and Capital Resources
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Off-Balance Sheet Arrangements
  
   
  
   
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We have incurred losses since our inception, and we may not achieve or maintain profitability.
  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.
  The loss of key customers could negatively affect our revenues and profitability.
  General economic conditions may affect our revenue and our ability to obtain financing.
  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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Our future revenues may be uncertain because of reliance on third parties for marketing and
distribution.
  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.
  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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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.
   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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##### Table of Contents




    
    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.
  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.
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##### Table of Contents



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.
  
    
    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 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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##### Table of Contents



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.
   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.
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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 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.
  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.
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If we fail to manage our growth, our business could suffer.
  The loss of any members of our senior management could harm our current and future operations
and prospects.
 ,
 We face significant competition for a limited supply of qualified software engineers,
consultants and sales and marketing personnel.
  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.
  27




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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.
   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.
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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.
   Our business may be harmed by errors in our software.
  
    
    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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##### Table of Contents



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.
  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.
  We and our small business customers must comply with complex and changing laws and
regulations.
  Government regulation of the Internet may adversely affect our business and operating results.
  
    
    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.
   We may be subject to lawsuits for information displayed on our small business customers
websites, which may 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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##### Table of Contents



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



Our stock may be subject to regulation as a penny stock, which could severely limit the
liquidity of your securities.
  
   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. MallKeith 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.
 
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Exhibit
    
    
    
    FiledNo.
    
    Description
    
    Herewith
    
    Form
    
    Exhibit No.
    
    Filing Date31.1
    
    Certification of
Chief Executive
Officer pursuant to
Section 302 of the
Sarbanes-Oxley Act
of 2002
    
    X31.2
    
    Certification of
Chief Financial
Officer pursuant to
Section 302 of the
Sarbanes-Oxley Act
of 2002
    
    X32.1
    
    Certification of
Chief Executive
Officer pursuant to
Section 906 of the
Sarbanes-Oxley Act
of 2002
    
    X32.2
    
    Certification of
Chief Financial
Officer pursuant to
Section 906 of the
Sarbanes-Oxley Act
of 2002
    
    X
 
   INNUITY, INC.
(Registrant)By:
    
    /s/ JOHN R. WALL

John R. WallChief Executive Officer, Treasurer and Secretary(Principal executive officer)By:
    
    /s/ LINDEN N BARNEYLinden N BarneyChief Financial Officer(Principal financial and accounting officer)
  34