##### Table of Contents



United States Securities and Exchange Commission
 Washington, D.C. 20549
 FORM 10-QSB
 þ
    
    Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For
the Quarterly Period Ended March 31, 2007
 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
    
    87-0370820(State or other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 8644
154th Avenue NE
   þ o
  o þ
  Class
    
    Outstanding at April 30, 2007Common capital stock$.00025 par value
    
    29,029,665
  o þ




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##### Table of Contents



Innuity, Inc.
  PagePART I FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2007 and
December 31, 2006 (Unaudited)
    
    
    2Condensed Consolidated Statements of Operations for the three
months ended March 31, 2007 and 2006 (Unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2007 and 2006 (Unaudited)
    
    
    4Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis or Plan of Operations
    
    
    13Item 3. Controls and Procedures
    
    
    32PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    32Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    33Item 6. Exhibits
    
    
    33SIGNATURES
    
    
    33EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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INNUITY, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED
BALANCE SHEETS (UNAUDITED)
 March 31,
    
    December 31,2007
    
    2006ASSETSCurrent AssetsCash and cash equivalents
    
    $
    232,519
    
    
    $
    307,483Settlement deposits
    
    
    637,547
    
    
    
    467,078Settlement receivable, net of allowance for doubtful
accounts of $15,864 and $12,864, respectively
    
    
    143,955
    
    
    
    173,098Trade accounts receivable, net of allowance for doubtful
accounts of $93,559 and $115,693, respectively
    
    
    1,357,729
    
    
    
    1,318,773Inventories, net of allowance for obsolete inventory of $159,772 and $226,656, respectively
    
    
    460,151
    
    
    
    486,736Other current assets
    
    
    178,437
    
    
    
    184,891Total Current Assets
    
    
    3,010,338
    
    
    
    2,938,059Property and equipment, net
    
    
    821,091
    
    
    
    901,318Intangible assets, net
    
    
    1,419,995
    
    
    
    1,670,582Goodwill
    
    
    1,833,220
    
    
    
    1,833,220Total Assets
    
    $
    7,084,644
    
    
    $
    7,343,179LIABILITIES AND STOCKHOLDERS DEFICITCurrent LiabilitiesTrade accounts payable
    
    $
    2,890,704
    
    
    $
    2,587,227Accrued salaries and wages
    
    
    580,758
    
    
    
    612,745Merchant settlement payable
    
    
    793,962
    
    
    
    453,596Accrued liabilities
    
    
    934,205
    
    
    
    1,229,872Deferred revenues
    
    
    3,315,538
    
    
    
    2,543,397Line of credit
    
    
    549,940
    
    
    
    699,365Related party notes payable, current portion, net of discount of $2,700 and $2,700,
respectively
    
    
    377,300
    
    
    
    658,105Long-term debt, current portion
    
    
    1,194,529
    
    
    
    1,294,529Capital lease obligations, current portion
    
    
    145,850
    
    
    
    142,972Total Current Liabilities
    
    
    10,782,786
    
    
    
    10,221,808Long-Term LiabilitiesRelated party notes payable, net of discount of $206,208 and $248,357, respectively
    
    
    372,981
    
    
    
    330,832Long-term debt
    
    
    156,714
    
    
    
    180,126Capital lease obligations
    
    
    152,483
    
    
    
    190,024Total Long-Term Liabilities
    
    
    682,178
    
    
    
    700,982Total Liabilities
    
    
    11,464,964
    
    
    
    10,922,790Stockholders DeficitCommon stock; 200,000,000 shares authorized; par value $0.00025 per share;
21,629,669 shares and 20,741,538 shares issued and outstanding, respectively
    
    
    5,407
    
    
    
    5,185Additional paid-in capital
    
    
    33,650,827
    
    
    
    32,897,053Accumulated deficit
    
    
    (38,036,554
    )
    
    
    (36,481,849
    )Total Stockholders Deficit
    
    
    (4,380,320
    )
    
    
    (3,579,611
    )Total Liabilities and Stockholders Deficit
    
    $
    7,084,644
    
    
    $
    7,343,179
 See accompanying notes to condensed consolidated financial statements.
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INNUITY, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 For the Three Months Ended March 31,
    
    2007
    
    2006RevenuesProduct sales
    
    $
    2,112,871
    
    
    $
    1,899,841Services
    
    
    3,173,870
    
    
    
    3,058,030Total revenues
    
    
    5,286,741
    
    
    
    4,957,871Operating expensesCost of product sales
    
    
    1,643,973
    
    
    
    1,560,053Cost of services
    
    
    1,814,721
    
    
    
    1,711,945General and administrative
    
    
    1,329,874
    
    
    
    1,483,060Selling and marketing
    
    
    1,243,171
    
    
    
    1,352,186Research and development
    
    
    461,165
    
    
    
    364,445Royalty expense
    
    
    
    
    
    
    415,748Amortization expense
    
    
    250,587
    
    
    
    254,336Loss from operations
    
    
    (1,456,750
    )
    
    
    (2,183,902
    )Other income (expense)Other income
    
    
    
    
    
    
    67,387Interest expense
    
    
    (97,955
    )
    
    
    (339,842
    )Total other income (expense)
    
    
    (97,955
    )
    
    
    (272,455
    )Net Loss
    
    $
    (1,554,705
    )
    
    $
    (2,456,357
    )Basic and Diluted Loss Per Common Share
    
    $
    (0.07
    )
    
    $
    (0.13
    )Basic and Diluted Weighted-Average
Common Shares Outstanding
    
    
    21,446,188
    
    
    
    18,291,089
 See accompanying notes to condensed consolidated financial statements.
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INNUITY, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 For the Three Months Ended March 31,
    
    2007
    
    2006Cash flows from operating activitiesNet loss
    
    $
    (1,554,705
    )
    
    $
    (2,456,357
    )Adjustments to reconcile net loss to net
cash used in operating activities:Depreciation and amortization
    
    
    351,268
    
    
    
    307,669Accretion of discount on notes payable
    
    
    41,749
    
    
    
    254,764Non-cash share based compensation
    
    
    246,011
    
    
    
    380,743Common stock issued for services
    
    
    111,202
    
    
    
    Bad debt provision
    
    
    52,623
    
    
    
    3,000Expense for prepaid royalties
    
    
    
    
    
    
    415,748Changes in assets and liabilities, net of acquisitions:Settlement deposits
    
    
    (170,469
    )
    
    
    (183,733
    )Trade accounts receivable
    
    
    (88,579
    )
    
    
    (582,348
    )Settlement receivable
    
    
    26,143
    
    
    
    (196,673
    )Inventories
    
    
    26,585
    
    
    
    (6,766
    )Other current assets
    
    
    6,454
    
    
    
    (30,968
    )Trade accounts payable
    
    
    344,095
    
    
    
    197,399Merchant settlement payable
    
    
    340,366
    
    
    
    467,952Accrued salaries and wages
    
    
    (31,987
    )
    
    
    127,984Deferred revenues
    
    
    772,141
    
    
    
    338,254Accrued liabilities
    
    
    (219,907
    )
    
    
    363,846Total adjustments
    
    
    1,807,695
    
    
    
    1,856,871Net cash provided by (used in) operating activities
    
    
    252,990
    
    
    
    (599,486
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (20,454
    )
    
    
    (4,400
    )Net cash used in investing activities
    
    
    (20,454
    )
    
    
    (4,400
    )Cash flows from financing activitiesIncrease in line of credit
    
    
    
    
    
    
    110,000Payments on long-term debt
    
    
    (123,412
    )
    
    
    (15,000
    )Payments on capital lease obligations
    
    
    (34,663
    )
    
    
    (13,361
    )Payments on line of credit
    
    
    (149,425
    )
    
    
    Proceeds from exercise of options and warrants
    
    
    
    
    
    
    6,067Net cash provided by (used in) financing activities
    
    
    (307,500
    )
    
    
    87,706Net decrease in cash and cash equivalents
    
    
    (74,964
    )
    
    
    (516,180
    )Cash and cash equivalents at beginning of period
    
    
    307,483
    
    
    
    696,997Cash and cash equivalents at end of period
    
    $
    232,519
    
    
    $
    180,817
 See accompanying notes to condensed consolidated financial statements.
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INNUITY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
 For the Three Months Ended March 31,
    
    2007
    
    2006Supplemental disclosure of cash flow informationCash paid during the period for interest
    
    $
    14,989
    
    
    $
    15,227Noncash investing and financing activitiesConvertible debt converted to common stock
    
    
    
    
    
    
    4,726,085Accrued interest converted to common stock
    
    
    
    
    
    
    198,727Reclassification of deferred compensation to APIC
in accordance with SFAS No. 123R
    
    
    
    
    
    
    1,013,308Purchase of software with note payable
    
    
    
    
    
    
    50,817Conversion of long term debt to common stock
    
    
    280,405
    
    
    
    Conversion of accounts payable to common stock
    
    
    40,618
    
    
    
    Conversion of accrued interest to common stock
    
    
    75,760
    
    
    
    
 See accompanying notes to condensed consolidated financial statements.
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INNUITY, INC.
AND SUBSIDIARIES
 
 Notes to Condensed Consolidated Financial Statements
 March 31, 2007
 (Unaudited)
 1.
    
    BASIS OF PRESENTATIONThe accompanying unaudited condensed consolidated financial statements of Innuity, Inc.
(the Company) and its subsidiaries have been prepared in accordance with the instructions
to Form 10-QSB and do not include all of the information and footnotes required by U.S.
generally accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring entries) considered necessary
for a fair presentation have been included.Operating results for the three-month periods ended March 31, 2007 and 2006, are not
necessarily indicative of the results that may be expected for the full fiscal year. The
unaudited condensed consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and footnotes thereto included in the Companys
Annual Report on Form 10-KSB for the year ended December 31, 2006, filed with the Securities
and Exchange Commission on March 6, 2007.The Companys operations are located in California, Utah, and Washington. Operations
are carried out through the Companys Promotion and Commerce divisions, each of which is
focused on a critical business cycle process. The applications and solutions offered by the
Companys Promotion division are designed to help small businesses market and promote their
products and services, while the offerings of the Companys Commerce division can facilitate
and improve a small business selling processes and transaction processing capabilities.The Promotion divisions operations are carried out through the Companys wholly-owned
subsidiary, Vista.com, Inc. The Commerce divisions operations are carried out through its
In-Store Systems business line (which includes the Companys wholly-owned subsidiary Jadeon,
Inc.) and Merchant Services business line. The Merchant Services business line does
business under the names of Merchant Partners and Innuity, Inc. dba Merchant Partners.The accompanying condensed consolidated financial statements have been prepared with
the assumption that the Company will continue as a going concern. However, the Company has
incurred substantial losses and has a working capital deficit and accumulated deficit as of
March 31, 2007. In addition, the report of the Companys independent registered public
accounting firm for the year ended December 31, 2006 expressed substantial doubt about the
Companys ability to continue as a going concern. The Companys ability to continue as a
going concern is dependent on its ability to obtain additional debt or equity financing.
Unless the Company is able to significantly increase its revenues and cash flows from
operating activities, it will be required to raise additional funds in order to continue
operations.Certain reclassifications have been made to the prior period financial statements to
conform to the current presentation.2.
    
    SHARE BASED PAYMENTSThe Company accounts for stock-based awards under Statement of Financial Accounting
Standards (SFAS) No. 123(R), Share-Based Payment,using the modified prospective
transition method, which requires measurement and recognition over the service period of:
(a) compensation cost of all stock-based payments granted prior to, but not yet vested as
of, January 1, 2006 (based on grant-date fair value estimated in accordance with the
original provisions of SFAS No. 123, and previously presented in the pro-forma footnote
disclosures), and (b) compensation cost for all stock-based payments granted subsequent to
January 1, 2006 that are expected to vest (based on the grant-date fair value estimated in
accordance with the provisions of SFAS No. 123(R)).
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The Company grants stock options to employees, non-employee directors and consultants
under its Amended and Restated 1999 Stock Option Plan. Vesting requirements for awards
under this plan vary by individual grant and are time-based. The majority of the options
granted under the plan have a contractual life of 10 years. The fair value of each option
award is estimated as of the date of grant using a Black-Scholes option pricing model. The
weighted average estimated fair values of stock options granted as well as the weighted
average assumptions used in calculating these values during the three-month periods ended
March 31, 2007 and 2006, are:
 2007
    
    2006Estimated values
    
    $
    0.53
    
    
    $
    3.61Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected Volatility
    
    
    197
    %
    
    
    142
    %Risk-free interest rate
    
    
    4.64
    %
    
    
    4.58
    %Expected term
    
    5 years
    
    
    5 years
   WeightedWeighted
    
    
    AverageShares
    
    
    Average
    
    
    Remaining
    
    
    Aggregateunder
    
    
    Exercise
    
    
    Contract
    
    
    IntrinsicOption
    
    
    Price
    
    
    Term
    
    
    ValueOutstanding at December
31, 2006
    
    
    2,159,911
    
    
    $
    0.83Granted
    
    
    557,500
    
    
    $
    0.54Exercised
    
    
    
    
    
    $
    Forfeited or expired
    
    
    (101,748
    )
    
    $
    0.29Cancelled
    
    
    (15,000
    )
    
    $
    0.50Outstanding at March 31,
2007
    
    
    2,600,663
    
    
    $
    0.79
    
    
    8.47 Years
    
    $
    317,028Exercisable at March 31,
2007
    
    
    1,155,566
    
    
    $
    0.65
    
    
    7.59 Years
    
    $
    219,723
  7




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3.
    
    INVENTORIESInventories consist of finished computer hardware and software media held for resale
and are stated at the lower of cost (first-in, first-out method) or market.4.
    
    LONG-TERM DEBT AND CAPITAL LEASESThe Company has two lines of credit with commercial banks. The first credit line is
for $100,000 all of which was outstanding as of March 31, 2007. This line is unsecured and
accrues interest at a rate of prime plus 3.75% (12% as of March 31, 2007).The second credit line is for $600,000 of which $449,940 was outstanding as of March
31, 2007. This credit line accrues interest at a rate the banks prime rate (8.25% as of
March 31, 2007). The credit line was secured by all of the Companys assets and a personal
guaranty of the CEO of the Company. As of March 31, 2007, this credit line had expired and
the $449,940 outstanding balance on the line was due and payable in full. The credit line
was paid off in May 2007 (see Note 8).In January 2007, the Company entered into stock purchase agreements with three parties
affiliated with an officer and director of the Company. Pursuant to the stock purchase
agreements, $280,805 of 8% related party notes payable along with $42,684 of accrued
interest were exchanged for 646,979 shares of the Companys common stock.Long-term debt consisted of the following as of March 31, 2007, and December 31, 2006:
 March 31,
    
    December 31,2007
    
    2006Non-interest bearing note payable to an unrelated party,
interest imputed at 8%, in default
    
    $
    1,100,000
    
    
    $
    1,200,000Note payable to an unrelated party, interest imputed at 2.49%,
matures October 2008, monthly
payments of $8,357
beginning October 2006, unsecured
    
    
    251,243
    
    
    
    274,655Total debt
    
    $
    1,351,243
    
    
    $
    1,474,655Less current maturities
    
    
    (1,194,529
    )
    
    
    (1,294,529
    )Long-term debt
    
    $
    156,714
    
    
    $
    180,126
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March 31,
    
    December 31,2007
    
    2006Notes payable to a shareholder, interest at 12%,
due on demand, in default, unsecured
    
    $
    200,000
    
    
    $
    200,000Note payable to former owner of Jadeon, interest at 5%,
minimum payment of $45,000 quarterly, matures
June 2016, net of discount of $22,270 and $22,944, unsecured
    
    
    391,918
    
    
    
    391,244Note payable to a related party, interest at 8%, matures
Settled by issuing shares of common stock in January 2007
    
    
    
    
    
    
    280,805Convertible note payable to related parties, interest at 15%,
matures beginning April 2008, net of discount
of $186,637 and $228,112, securred
    
    
    158,363
    
    
    
    116,888Total related party notes payable
    
    $
    750,281
    
    
    $
    988,937Less current maturities
    
    
    (377,300
    )
    
    
    (658,105
    )Long-term related party notes payable
    
    $
    372,981
    
    
    $
    330,832
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6.
    
    LOSS PER SHARE
 Earnings Per Share
 7.
    
    SEGMENT INFORMATION
     For The Three Months Ended March 31, 2007Promotion
    
    Commerce
    
    Intercompany
    
    TotalRevenue from external customers
    
    $
    618,099
    
    
    $
    4,668,642
    
    
    $
    
    
    
    $
    5,286,741Depreciation and amortization
    
    
    124,626
    
    
    
    226,642
    
    
    
    
    
    
    
    351,268Interest expense
    
    
    48,639
    
    
    
    49,316
    
    
    
    
    
    
    
    97,955Segment loss
    
    
    (804,442
    )
    
    
    (750,263
    )
    
    
    
    
    
    
    (1,554,705
    )Segment assets
    
    
    3,064,256
    
    
    
    6,419,348
    
    
    
    (2,398,960
    )
    
    
    7,084,644
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For The Three Months Ended March 31, 2006Promotion
    
    Commerce
    
    Intercompany
    
    TotalRevenue from external customers
    
    $
    883,753
    
    
    $
    4,074,118
    
    
    $
    
    
    
    $
    4,957,871Depreciation and amortization
    
    
    100,170
    
    
    
    207,499
    
    
    
    
    
    
    
    307,669Interest expense
    
    
    170,264
    
    
    
    169,578
    
    
    
    
    
    
    
    339,842Segment loss
    
    
    (1,110,574
    )
    
    
    (1,345,783
    )
    
    
    
    
    
    
    (2,456,357
    )Segment assets
    
    
    5,428,314
    
    
    
    7,586,242
    
    
    
    (3,339,916
    )
    
    
    9,674,640
  8.
    
    SUBSEQUENT EVENTS
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Item 2. Managements Discussion and Analysis or Plan of Operations
 The statements contained in this quarterly report on Form 10-QSB 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 or Plan of Operation 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 under Managements Discussion and Analysis or Plan of Operation-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. and its subsidiaries.
 Overview
  
    
    Our Business  a general description of our business and the industry in which we
operate.
    
    Critical Accounting Policies  a discussion of accounting policies that require
critical judgments and estimates.
    
    Operations Review  an analysis of our consolidated results of operations.
    
    Liquidity and Capital Resources  an analysis of our cash flows, sources and uses of cash.
    
    Off-balance Sheet Arrangements  a discussion of any off-balance sheet arrangements
that may have a future effect on our operations and financial condition.
    
    Risk Factors  a description of certain risks and uncertainties that could cause our
actual results to differ materially from our historical results or our current
expectations or projections.
 Our Business
   13




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Critical Accounting Policies
  Operations Review
  Analysis of Condensed Consolidated Statements of Operations
 Three months ended March 31,2007
    
    
    2006
    
    
    %ChangeRevenuesProduct sales
    
    $
    2,112,871
    
    
    $
    1,899,841
    
    
    
    11
    %Services
    
    
    3,173,870
    
    
    
    3,058,030
    
    
    
    4
    %Total revenues
    
    
    5,286,741
    
    
    
    4,957,871
    
    
    
    7
    %Operating expensesCost of product sales
    
    
    1,643,973
    
    
    
    1,560,053
    
    
    
    5
    %Cost of services
    
    
    1,814,721
    
    
    
    1,711,945
    
    
    
    6
    %General and administrative
    
    
    1,329,874
    
    
    
    1,483,060
    
    
    
    -10
    %Selling and marketing
    
    
    1,243,171
    
    
    
    1,352,186
    
    
    
    -8
    %Research and development
    
    
    461,165
    
    
    
    364,445
    
    
    
    27
    %Royalty expense
    
    
    
    
    
    
    415,748
    
    
    
    -100
    %Amortization expense
    
    
    250,587
    
    
    
    254,336
    
    
    
    -1
    %Loss from operations
    
    
    (1,456,750
    )
    
    
    (2,183,902
    )
    
    
    -33
    %Other income (expense)Interest expense
    
    
    (97,955
    )
    
    
    (339,842
    )
    
    
    -71
    %Other expense, net
    
    
    
    
    
    
    67,387
    
    
    
    *Total other expense
    
    
    (97,955
    )
    
    
    (272,455
    )
    
    
    -64
    %Net Loss
    
    $
    (1,554,705
    )
    
    $
    (2,456,357
    )
    
    
    -37
    %
 
 *
    
    Calculation is not meaningful 14




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Revenues
    Expenses
 Cost of product sales
 Cost of services.
 General and administrative.
 Selling and marketing.
 Research and development.
 15




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Royalty.
 Amortization.
 Interest.
 Liquidity and Capital Resources
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Off-Balance Sheet Arrangements
  Risk Factors
  We have incurred losses since our inception, and we may not achieve or maintain profitability.
  We have a significant working capital deficit and will need additional funding to support our
operations and capital expenditures; sufficient funding may not be available to us, and the
unavailability of funding could adversely affect our business.
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The loss of key customers could negatively affect our revenues and profitability.
  We have incurred substantial indebtedness, some of which is past due and in default.
    Our limited operating history makes evaluation of our business difficult.
  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;
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
    
    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.
 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.
   Our future revenues may be uncertain because of reliance on third parties for marketing and
distribution.
  If we fail to develop and maintain an effective system of internal controls, we may not be
able to accurately report our financial results or prevent fraud; as a result, current and
potential shareholders could lose confidence in our financial reporting, which could harm our
business and the trading price of our common stock.
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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.
  
    
    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;
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
    
    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.
   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.
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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.
   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.
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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.
  Our ability to effectively improve a websites positioning in search rankings depends on our
ability to determine and 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;
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
    
    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.
  We have grown quickly and 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.
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,
 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.
  We may become a party to intellectual property infringement claims, which could harm our
business.
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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;
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
    
    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.
 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.
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
    
    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;
    
    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.
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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.
  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.
   Future sales of shares of our common stock may decrease the price for such shares.
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The costs as a public company will make it more difficult for us to achieve profitability and
an active trading market.
  Our stock may be subject to regulation as a penny stock, which could severely limit the
liquidity of your securities.
  
   
  
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INNUITY, INC.
(Registrant)By:
    /s/ JOHN R. WALLJohn R. WallChief Executive Officer, Treasurer and Secretary
(Principal executive officer) By:
    /s/ ROBERT K. BENCHRobert K. BenchChief Financial Officer

(Principal financial and accounting officer)  33