UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K








[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES


EXCHANGE
ACT OF 1934





FOR THE FISCAL YEAR ENDEDDECEMBER 31,
2008








COMMISSION
FILE #333-30176








NEW MEXICO SOFTWARE,
INC.


(Exact
name of registrant as specified in its charter)





NEVADA


(State or
other jurisdiction of incorporation or organization)





91-1287406


(I.R.S.
Employer Identification No.)





5021
INDIAN SCHOOL RD., SUITE 100


ALBUQUERQUE, NEW
MEXICO  87110


(Address
of principal executive offices)(Zip code)





(505)
255-1999


(Issuer’s
telephone number)








SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE





SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE







Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act


YES [
 ] NO [X]





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act


YES
[  ] NO [X]





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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and  will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [X]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.





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]



















AGGREGATE
MARKET VALUE OF THE VOTING COMMON STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT
ON DECEMBER 31, 2008, WAS: $7,420,999








DOCUMENTS
INCORPORATED BY REFERENCE


None













































2





PART
I





ITEM
1. DESCRIPTION OF BUSINESS





Our
History and Background





Our
business was incorporated in New Mexico in 1996 under the name of New Mexico
Software, Inc.  We were acquired by Raddatz Exploration, Inc., a
publicly traded Delaware corporation, in 1999.   At that time,
Raddatz changed its name to NMXS.com, Inc., and operated New Mexico Software,
Inc. as a wholly-owned subsidiary.    On January 1, 2006,
NMXS.com, Inc. merged into its newly incorporated, wholly-owned subsidiary, New
Mexico Software, Inc., a Nevada corporation, for the sole purpose of changing
its state of incorporation and its name.  In May 2008, we created a
wholly-owned subsidiary called Telerad Service, Inc. to provide radiological
services.





Our
address on the World Wide Web is www.nmxs.com.  A secondary address is
also available, www.nmxc.net, which broadcasts the same information as
www.nmxs.com. The information at that web site is not part of our annual report,
and we specifically disclaim any liability under federal securities law related
to the web site.





Our
Business





We
provide Software-as-a-Service (SaaS) solutions for a wide variety of
industries.  We offer our services via our web-based technology that
allows our customers in any type of commercial business and not-for-profit
organization to optimize their operations without spending significant time and
money on upfront costs for hardware, software, tech support and
training.





Our
Products and Services





Every
industry shares the need to track, organize and distribute information
efficiently and accurately.  Our software solutions are the service
that bridges the gap between the paper and digital worlds.  Our
software solutions reduce dependence on paper files and physical
images.  In addition to organizing and archiving, our software
solutions enable a company to control access to and dissemination of its digital
files, providing protection of the digital assets.





XR-EXpress:  XR-EXpress
is a secure, HIPAA-compliant system that enables medical providers to examine
medical images such as x-rays, EKG’s, and ultrasounds over the
Internet.  The originating medical facility or service provider
uploads medical images as high-resolution DICOM digital files to our secure
servers.  The digital files are tagged with patient
information.  The independent radiologist then accesses the digital
images on our secure servers through his or her own computer and returns the
diagnostic report to our secure server for access by the treating
physician.  XR-EXpress significantly reduces the time between the
imaging events and report delivery.  Our workflow technology provides
scheduling, dispatching, monitoring and reporting functions, which boosts the
customer’s efficiency and productivity while enhancing patient
care.  XR-EXpress is structured and delivered as a hosted model,
reducing the customer’s need for capital investment in technology and
eliminating technology support costs.  During 2008, we received the US
Food and Drug Administration’s 510(k) clearance to market XR-EXpress as a Class
II medical device. This clearance allows us to market XR-EXpress in the United
States under FDA general control provisions, including requirements for annual
registration of devices, good manufacturing practice, labeling, and prohibitions
against misbranding and adulteration.  We believe that this will
provide increased assurance to potential new customers regarding the quality of
XR-EXpress, which will result in increased marketing opportunities for us in the
future.





XR-EXpressalso may be used
in neurosurgery, trauma, cardiology and pediatric care by facilitating referrals
and consultations.  XR-EXpress enables a referring hospital to
instantly transmit digital diagnostic images and reports to a consulting
physician, providing a means for the consulting physician to aid the attending
physician in applying the appropriate care.  We believe XR-EXpress is
especially useful when the patient is located a substantial distance from a
Class I Trauma Facility and transport decisions must be made quickly and cost
effectively.  XR-EXpress enables hospitals to avoid unnecessary
transports, more effectively utilize resources, and make better triage and
management decisions, thus saving money and facilitating superior patient
care.  XR-EXpress will soon be available with videophone capabilities
for face-to-face remote diagnosis.  The audio/video can be stored
digitally and linked with the appropriate patient images and reports to provide
documentation for billing purposes.




3





DFC3:  DFC3  is
our business automation platform.  Our customers can automate common
paper tasks with PDF files and Javascript using any Web 2.0 compliant
device.  Since our DFC3 product is hosted online, customers can stay
synchronized at their desks and on their mobile devices.





Telerad Service,
Inc.:  Telerad Service provides radiological
services.  We currently have 23 doctors on contract, licensed in 48
states, providing reads for x-rays, ultrasounds and MRIs for customers in 34
states.  We operate 24 hours per day, 7 days per week, 365 days per
year, providing high-quality reports with exceptional turn-around times and
customer service.





Our
Technology





Our
technology is the key to our product differentiation.  We engineer our
products around a central core of unique Internet technology.  This
proprietary technology makes it possible to rapidly view, distribute and manage
a variety of media files such as documents, graphic images, animation sequences,
film clips, audio files, x-rays, other medical images and high-definition media
streams.  The value of our core technology is that it provides maximum
flexibility in the presentation of digital images to the customer, and
integrates general browsing capabilities with specific search capabilities in
one product.





All of
our products are accessed via the Internet.  This means that the
customer needs only a PC with browser capability to be able to use our
products.  No additional expensive equipment, software or tech support
is required, and training is accomplished smoothly and quickly.  The
customer’s data is available 24 hours per day, so that the customer can work
according to his or her own schedule with productivity available around the
clock.  Additionally, documents and images can be viewed from or
distributed anywhere in the world at any time.





These
unique features make our core technology adaptable to and highly desirable in a
wide variety of commercial applications.  Basically, any company in
any industry that manages digital assets and makes use of browser and search
engine technology can benefit from our products.





Business
Strategy





Our
greatest growth over the preceding three years has been in the medical
division.  According to the Centers for Medicare and Medicaid
Services, “Telemedicine is viewed as a cost-effective alternative to the more
traditional face-to-face way of providing medical
care.”  (www.cms.hhs.gov/telemedicine)  Today, there is
tremendous pressure to reduce health care costs as part of overall health care
reform, and it is widely acknowledged that telemedicine can and should be an
integral part of health care reform.





Telemedicine
can potentially contribute to providing safe, effective services while reducing
costs in a wide variety of medical applications, such as avoiding unnecessary
patient transports, providing support for hospital overflows, providing
increased services in remote or rural areas, decreasing the length of some
patient stays, provide increased home management of chronic diseases, and
increase access to specialized services.  Digital diagnostics systems
in particular have demonstrated significantly improved image quality over the
last few years, while at the same time being available at reduced
costs.  By providing enhanced diagnostic capabilities with quick
turn-around times, teleradiology can potentially increase patient safety and
reduce costs.  Teleradiology can be useful in such diverse
environments as rural areas, nursing and assisted living facilities, corrections
facilities, battlefields, and possibly even maritime and aviation
applications.





Because
of the potential opportunities in telemedicine in general and teleradiology in
particular as health care reform is pursued in the country, we will be focusing
the majority of our marketing efforts in these areas during the coming
year.   We believe that we can continue to take advantage of the
growth in the telemedicine market in general and the teleradiology market in
particular during the next few years to further expand our customer base and our
revenues.








4





During
the next few years, we will implement this new strategy in a more formal
way.  Our current strategy involves the following
factors:





o
            Leverage
      our technology that we have developed during the last nine years to become
      a service provider.  Our workflow technologies can significantly
      improve our customers’ efficiency and productivity, as well as help them
      to provide high-quality customer
service.





o
            Continue
      to emphasize the flexibility and affordability of our products as hosted
      applications.  Our customers do not need extensive hardware,
      software or technology staff to use our products.  Also, we are
      usually able to get new customers and doctors operational within days,
      sometimes within hours, including
training.





o
            Continue
      to expand the products and services we offer.  For example, we
      have recently introduced a dispatch module for our XR-EXpress product, and
      we will soon introduce an accounting and billing module, as well as the
      ability to transmit specialized medical images and other high resolution
      digital information.  We have implemented a quality assurance
      program including peer review for Telerad Service. Our XR-EXpress product
      can be offered for remote consultation via videophones.  These
      applications are programs facilitating the instant delivery of certain
      data, with multiple uses in the medical and security
      industries.





o
            Continue
      to offer timely and thorough customer
service.





Competition





Other,
better-financed companies may be developing similar products that could compete
with our products.  Such competition could have a material adverse
effect on our business, financial condition, performance and
prospects.  While the Internet technology marketplace is extremely
competitive, we believe we have a first-to-market advantage with our
products.  In addition, although the current market for telemedicine
and teleradiology is growing rapidly, they are also exceptionally
competitive.  Other highly capitalized companies that have recognized
the potentials of digital image management products and telemedicine could
overwhelm our advantage with expensive and expansive media blitzes that create
the perception of a dominant market presence and/or superior
products.  If we are unsuccessful in addressing these risks and
uncertainties, our business, results of operations, and financial condition will
be materially and adversely affected.  The risk factor inherent in the
use of Open Source software development tools is the fact that a sophisticated
competitor might be able to imitate our work and produce similar
functionality.  Any such imitation, should it occur, could have
material adverse effects on our business, financial condition, performance and
prospects.





Marketing
and Customers





During
the last three years we have concentrated on expanding our customer base for
recurring revenues for software hosting and usage fees.  During this
time, our most effective marketing tool has been customer referrals and direct
sales.  During 2009, we plan to continue this approach, along with
targeted trade shows and occasional direct marketing to potential XR-Express and
Telerad Service customers, to further build our customer base and to sustain our
progress in growing our revenues.  Overall, we anticipate that our
customer base will continue to broaden in the next year, particularly for
Telerad Service, giving more stability, steady growth, and predictability to our
revenues.





Our
Intellectual Properties





We have
several proprietary aspects to our software that we believe make our products
unique and desirable in the marketplace.  We believe the compiled
object code that is accessible to our customers makes it difficult to discover
the source code needed to create other similar programs, even though the code we
use originates from Open Source.  Because we maintain our enterprise
software code on dedicated servers in our Albuquerque data center, it provides
better protection and security of our products.





We have
entered into confidentiality and non-disclosure agreements with our employees
and contractors in order to limit access to, and disclosure of, our proprietary
information.  There is no assurance that these contractual
arrangements or the other steps we have taken to protect our intellectual
property will prove sufficient to prevent misappropriation of our technology or
to deter independent third-party development of similar
technologies.




5





Although
we do not believe that we infringe the proprietary rights of third parties,
there is no assurance that third parties will not claim infringement by us with
respect to past, current, or future technologies.  We expect that
participants in our markets will be increasingly subject to infringement claims
as the number of services and competitors in our industry grows.  Any
such claim, whether meritorious or not, could be time-consuming, result in
costly litigation, cause service upgrade delays, or require us to enter into
royalty or licensing agreements.  Such royalty or licensing agreements
may not be available on terms acceptable to us or at all.  As a
result, any such claim could have a material adverse effect upon our business,
results of operations, and financial condition.





Government
Regulation





Our
operations, products, and services are all subject to regulations set forth by
various federal, state and local regulatory agencies. We take measures to ensure
our compliance with all such regulations as promulgated by these agencies from
time to time.  The Federal Communications Commission sets certain
standards and regulations regarding communications and related
equipment.





The
Health Insurance Portability and Accountability Act (HIPAA) provides standards
for the use, dissemination and disclosure of protected health
information.  Protected health information is any information about
health status, provision of health care, or payment for health care that can be
linked with an individual.  The act applies to any company that
transmits health care data.  The act encourages the use of electronic
transmission of data within the U.S. healthcare system, and provides three types
of security safeguards that are required for
compliance:  administrative, physical and technical.  For
each of these types, HIPAA identifies various security standards which must be
adopted and administered by any entity covered by the act.  Our
software strictly adheres to the privacy and security standards dictated by
HIPAA.





There are
currently few laws and regulations directly applicable to the
Internet.  It is possible that a number of laws and regulations may be
adopted with respect to the Internet covering issues such as user privacy,
pricing, content, copyrights, distribution, antitrust and characteristics and
quality of products and services.  The growth of the market for online
commerce may prompt calls for more stringent consumer protection laws that may
impose additional burdens on companies conducting business online. Tax
authorities in a number of states are currently reviewing the appropriate tax
treatment of companies engaged in online commerce, and new state tax regulations
may subject us to additional state sales and income taxes.





Employees





As of
March 31, 2009, we had 21 full-time and three part-time staff, including five in
systems engineering and quality assurance; two in sales, twelve customer
support; and five in administration.  We also have 23 radiologists on
contract for Telerad Service.





Item
1A.  Risk Factors





A
small number of customers represent a large amount of our revenues and the loss
of such customers will result in a significant decrease in revenues and threaten
our ongoing operations.





During
the year ended December 31, 2008, three customers accounted for 44% of our
revenue.  During the year ended December 31, 2007, three customers
accounted for 36% of our revenues.  The loss of such customers would
result in a significant decrease in our revenues.  Such decrease will
negatively impact our growth and threaten our ongoing operations.





A
small number of customers represent a large amount of our accounts receivable
and the failure to collect those balances will result in a significant decrease
in cash flow and threaten our ongoing operations.





As of
December 31, 2008, balances due from two customers comprised 43% of total
accounts receivable.  Failure to collect these balances would result
in a significant decrease in our working cash flow.  Such decrease
will negatively impact our growth and threaten our ongoing
operations.





Our
business depends on a limited number of key personnel, the loss of whom could
negatively affect us.





Richard
F. Govatski and Teresa B. Dickey, our senior executives and major stockholders,
are important to our success. If they become unable or unwilling to continue in
their present positions, our business and financial results could be materially
negatively affected.






6








If
we fail to adequately manage our growth, we may not be successful in growing our
business and becoming profitable.





We expect
our business and number of employees to grow over the next 12 months,
particularly as Telerad Service continues to add new customers.  We
expect that our growth will place significant stress on our operations,
management, employee base and ability to meet capital requirements sufficient to
support our growth.  Any failure to address the needs of our growing
business successfully could have a negative impact on our chance of
success.





Our
occasional reliance on issuances of shares of our common stock for services
performed for us in lieu of paying for such services will result in dilution of
your investment and a depressed market price for our shares of common
stock.





Occasionally,
we have paid for services by issuing shares of our common stock, in lieu of
paying cash, to our employees and other service providers.  We may
find it necessary to continue this practice from time to time.  In the
event we issue stock for services in the future, the issuance of such shares
will result in the dilution of your investment in us.





Reliance
on oral agreements with some of our customers could have a material negative
impact on our revenues.





We have
oral agreements with a few of our long-term major customers rather than written
contracts.  As a result, these agreements may be terminated at any
time, and therefore they provide little guarantee of future
revenues.  In addition, if these customers fail to perform their
obligations under these agreements, it could have a material negative impact on
our future cash flows, and there is little likelihood that we would be able to
recover any unpaid receivables from these customers without significant effort
and legal costs.





Our
ability to grow our medical division in order to achieve profitability depends
on our ability to contract with qualified radiologists.  Inability to
locate and attract licensed and qualified radiologists could have a material
negative impact on our future growth and profitability.





The
current market for highly qualified radiologists is competitive, and the number
of available radiologists could potentially decrease in the coming
years.  If we are unable to locate and attract licensed and qualified
radiologists, we could have difficulty growing our teleradiology business, which
would negatively impact our revenues and operations, as well as reducing our
opportunities for becoming profitable.





The
current telemedicine and teleradiology markets are competitive, and they are
projected to become significantly more competitive in the next few years, which
may make it difficult to attract and retain customers.





The
markets for telemedicine in general and teleradiology in particular are
exceptionally competitive and volatile at this time, and potential government
intervention in the form of health care reform may increase these
factors.  In addition, the technology used in these industries is
rapidly changing.  If we are not able to continually adapt to the
changing market conditions, we may experience difficulties attracting and
retaining customers, which could have a materially adverse effect on our
revenues and operations.





ITEM
1B.  UNRESOLVED STAFF COMMENTS





We do not
have any unresolved staff comments.





ITEM
2.  DESCRIPTION OF PROPERTY





We
currently lease a 3,000 square foot facility in Albuquerque, New Mexico, at a
cost of approximately $4,820 per month.  The lease expires on April
30, 2009.  We currently are in negotiations to extend the
lease.  The facility houses our administrative, marketing and
engineering offices, and provides adequate room for expansion.  It
also contains an advanced telephone system which will provide the capability
needed to provide adequate customer telephone support.  We house our
servers in a separate facility downstairs from ours, at a cost of approximately
$1,700 per month on a month-to-month basis.  The two locations are
networked together by fiber optics.  In this facility we have access
to a large power generator, which enables our servers to continue operating
during power outages.






7





ITEM
3.  LEGAL PROCEEDINGS





On
February 18, 2009, Premier Medical Enterprise Solutions, Inc. filed a complaint
in the Federal District Court in Albuquerque against us and our chief executive
officer.  Premier has been a customer of our XR-EXpress
application.  The complaint alleges among other things breaches of (i)
fiduciary duty, (ii) covenant of good faith and fair dealing and (iii) contract,
along with claims of conversion and tortuous interference.  The suit
seeks compensatory, punitive and exemplary damages in excess of $75,000,
together with injunctive relief against unfair competition, an accounting (for
three items) and attorney’s fees. The case is Premier Medical Enterprise
Solution, Inc. v. New Mexico Software, Inc. and Richard Govatski, Case
No.  Civ – 09 – 165.





There are
no new events in the working relationship between us and Premier to give rise to
this lawsuit, other than our demand for timely payment of invoices and notice of
termination of the agreement with Premier for nonpayment.  This suit
is Premier’s response to our cancellation of Premier’s agreement for services
for nonpayment which was served on February 2, 2009.  We believe the
suit is frivolous and filed solely to delay payment of amounts owed by
Premier.  On March 9, 2009, we filed an Answer and Counterclaims for
Breach of Contract, demanding payment in full for past due and ongoing charges,
attorney’s fees and costs, all of which are provided for in the Agreement with
Premier, and for Declaratory Judgment that we properly terminated the agreement
with Premier for breach of contract and nonpayment.





ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





No
matters were submitted to a vote of the security holders during the year ended
December 31, 2008.








PART
II





ITEM
5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS





Market
Information





Our stock
is quoted on the OTC Bulletin Board under the symbol “NMXC.”  The
table below sets forth, for the periods indicated below, high and low bids for
our common stock.  These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.  The source of this information is Big
Charts: www.bigcharts.com.








Quarter
                High
                LowFISCAL
      YEAR ENDED
                First
                $0.036
                $0.036DECEMBER
      31, 2007
                Second
                $0.044
                $0.029Third
                $0.035
                $0.025Fourth
                $0.031
                $0.030FISCAL
      YEAR ENDED
                First
                $0.038
                $0.020DECEMBER
      31, 2008
                Second
                $0.028
                $0.013Third
                $0.019
                $0.011Fourth
                $0.065
                $0.018FISCAL
      YEAR ENDED
                First
                $0.084
                $0.052DECEMBER
      31, 2009





Recent
Sales of Unregistered Securities





The
following table sets forth information about our unregistered sales of common
stock during the year ended December, 2008:




8





Class of Purchaser
                  Aggregate Number of
  SharesDirectors
                  0Employees
      (10 persons)
                  1,420,446Contractors
      (3 persons)
                  1,834,787Contract
      radiologists (4 persons)
                  400,000





Shares
issued to our employees were issued as bonuses.  Shares issued to
contractors were in payment of services.  Shares issued to our
contract radiologists were for sign-on bonuses.





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 any cash proceeds and any
cash which would have been used to pay bonuses and contractor fees, but for the
issue of the shares, for working capital in payment of current
obligations.  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
each purchaser has either (a) such relationship with us or (b) 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 these sales
did not involve a public offering within the meaning of the Act.





No shares
were issued in 2008 pursuant to stock issuance plans and related registration
statements on Form S-8.





Shareholders





As of
March 24, 2009, there were 365 holders of record of our common
shares.





Dividends





We did
not declare any cash dividends on our common stock during the year ended
December 31, 2008.  We have no plans to pay any dividends to the
holders of our common stock in 2009.




ITEM
7.  MANAGEMENT’S DISCUSSION AND ANALYSIS





The
following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this Form 10-K.





OVERVIEW





Through
2008, we have realized revenues from six primary sources:




1.
            radiological
      services


2.
            software
      usage fees


3.
            software
      hosting and maintenance services


4.
            software
      sales and licenses


5.
            custom
      programming services


6.
            hardware
      sales





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 and DFC3 application minute fees.






9





Also, in
May 2008, we began operating our new radiological services business Telerad
Service.  Telerad Service provides radiological services to hospitals,
mobile and portable x-ray providers, prisons, urgent care facilities, and
assisted living facilities.  Telerad Service utilizes our XR-EXpress
software in providing the services.  At this time, we have more than
twenty licensed radiologists available to read and report on radiological
studies, which include x-ray films, ultrasounds, MRI’s and various scanned
images.  Telerad Service provides professional liability insurance for
all radiologists under contract.  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.





In
general, our key indicator of operating progress is gross
revenue.  During 2008, general personnel-related expenses (including
engineering, administrative, customer support and sales staff) have accounted
for approximately 46% of our total operating expenses, with fixed costs such as
office rent, utilities, insurance, communications and depreciation accounting
for an additional 12%.  Radiologist fees, which account for almost 30%
of total operating expenses, are directly variable with radiological services
revenues.  This means that in 2008, over 50% of our expenses have been
relatively fixed.





Currently
radiological fees are slightly more than 70% of radiological services
revenues.  The remaining costs of services for Telerad Services
consist of engineering, customer support and quality assurance salaries,
professional liability insurance, and bandwidth costs.  None of these
costs vary directly with sales.  Until we have been providing the
radiological services for a consistent 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 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.





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.









10


Income
Taxes




Management
evaluates the probability of the utilization of the deferred income tax
assets.  We have estimated a $4,670,400 deferred income tax asset at
December 31, 2008, related primarily to net operating loss carryforwards at
December 31, 2008.  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 elected to apply the fair value
method prescribed in 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 assets 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
B to the Company’s Consolidated Financial Statements for a full discussion of
the Company’s critical accounting policies and estimates.





RESULTS
OF OPERATIONS





Revenues:





For
      the Year Ended December 31,2008
                
                
                
                2007$
                1,636,000
                
                compared
      to
                
                $
                988,000
                
                an
      increase of $648,000 or
65.6%





These
changes are a result of the following factors:





1.  Radiological
services:





For
      the Year Ended December 31,2008
                
                
                
                2007$
                864,000
                
                compared
      to
                
                $
                0
                
                an
      increase of $864,000 or
100%





11





Our
radiological services business began generating revenue in June,
2008.  Since beginning operations, we have added several new customers
per month and have provided almost 61,000 reports on combined reads of x-rays,
CT scans and ultrasounds.





2.  Software
usage fees:





For
      the Year Ended December 31,2008
                
                
                
                2007$
                457,000
                
                compared
      to
                
                $
                399,000
                
                an
      increase of $58,000 or
14.5%





This
increase is the result of a net increase in XR-Express customers during
2008.  Approximately 335,000 reports were generated during 2008, as
compared to approximately 300,000 reports during 2007.  Although we
are still adding new XR-EXpress customers, the rate of growth has slowed
significantly during 2008.  We expect these revenues to remain stable
or increase slightly during 2009, as we continue to focus on growing the medical
division.





3.  Software
hosting and maintenance:





For
      the Year Ended December 31,2008
                
                
                
                2007$
                275,000
                
                compared
      to
                
                $
                453,000
                
                a
      decrease of $178,000 or
39.3%





This
decrease is a result of our focus on our medical division and our decreased
focus on our older enterprise software applications that were developed prior to
DFC3 and XR-EXpress.  As a result, we have lost several customers that
were using these older enterprise systems, while almost all of our new customers
are using our medical software (we charge usage fees for the medical software,
rather than hosting fees).  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.   We expect revenues in this category to remain stable
or decrease slightly during the coming year, as we continue to focus our efforts
on building our medical division.





4.  Software
sales and licenses:





For
      the Year Ended December 31,2008
                
                
                
                2007$
                17,000
                
                compared
      to
                
                $
                23,000
                
                a
      decrease of $6,000 or
26.1%





The
decrease in software sales and license revenue is due to our continuing efforts
to build recurring revenues.  As a result, we have modified our policy
to include the cost of XR-EXpress software with the setup for new
customers.  We expect our revenues from software sales and licenses to
remain low during the coming year.





5.  Custom
programming revenue:





For
      the Year Ended December 31,2008
                
                
                
                2007$
                16,000
                
                compared
      to
                
                $
                22,000
                
                a
      decrease of $6,000 or
27.3%





The
decrease in custom programming revenue during 2008 as compared to 2007 is due to
a decrease in the number of custom programming projects in 2008 as compared to
2007.  Since we have reduced our focus on sales of enterprise-level
systems requiring substantial customization, the number of custom programming
projects requested by customers has been inconsistent.  We continue to
offer programming services for customer database integration, and for other
projects for our existing customers.





6.  Hardware,
scanning and other revenues:





For
      the Year Ended December 31,2008
                
                
                
                2007Hardware
                
                $
                7,000
                
                compared
      to
                
                $
                68,000
                
                a
      decrease of $61,000 or 89.7%Scanning
      and other
                
                $
                0
                
                compared
      to
                
                $
                23,000
                
                a
      decrease of $23,000 or
100.0%





12





All
hardware sales were associated with sales of our XR-EXpress and DFC3
software.  We are no longer offering our jal camera units for sale to
our XR-EXpress customers, and we are no longer focusing on growing the DFC3
division.  As a result, we expect this category to remain low during
the coming year.  We had one major scanning project that began in the
second half of 2006 and was extended to the middle of 2007, and no scanning
projects during 2008.  Although we still offer scanning, we are not
emphasizing this service, so we do not anticipate any major projects in the
future.





Cost of
services:





For
      the Year Ended December 31,2008
                
                
                
                2007$
                1,173,000
                
                compared
      to
                
                $
                476,000
                
                an
      increase of $697,000 or
146.4%





Almost
70% of the cost of services for the year ended December 31, 2008 is related to
Telerad Service.  These costs consist of radiologist fees, management
fees, and professional credentialing and professional liability insurance. The
cost of services not related to Telerad Service decreased by approximately 20%
during 2008 as compared to 2007, due to shifting existing employee efforts to
Telerad Service, and due to the discontinuation of issuing stock in lieu of
salaries at the end of 2007.





General
and administrative expenses:





For
      the Year Ended December 31,2008
                
                
                
                2007$
                811,000
                
                compared
      to
                
                $
                1,075,000
                
                a
      decrease of $264,000 or
24.6%





The
decrease in general and administrative expenses was a result of several
factors:  discontinuation of issuing stock in lieu of salaries at the
end of 2007 represents approximately 2 8% of the decrease (due to the additional
bonuses that were included in compensation in 2007 for stock payments), vesting
in 2007 of options issued to directors in 2006 represents approximately 21% of
the decrease, additional stock issued to management in 2007 but not in 2008
represents approximately 24% of the decrease, and discontinuation of efforts on
the DDS-EXpress product represents approximately 10% of the
decrease.  The remaining decrease was due to a variety of
miscellaneous factors.





Research
and development costs:





For
      the Year Ended December 31,2008
                
                
                
                2007$
                50,000
                
                compared
      to
                
                $
                136,000
                
                a
      decrease of $86,000 or
63.2%





This
decrease is entirely due to reduction in personnel costs as a result of our
continued focus during 2008 toward marketing and supporting our completed
products, and growing our medical division.





During
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.





Depreciation
and bad debt expense:





For
      the Year Ended December 31,2008
                
                
                
                2007Depreciation
      expense
                
                $
                34,000
                
                compared
      to
                
                $
                37,000
                
                a
      decrease of $3,000 or 8.1%Bad
      debt expense
                
                $
                47,000
                
                compared
      to
                
                $
                12,000
                
                an
      increase of $35,000 or
291.7%





13





The
decrease in depreciation expense is due to a combination of changes in several
fixed asset categories:  depreciation of furniture and fixtures
decreased by approximately $8,000 due to assets being fully depreciated;
depreciation of automobiles and computer equipment increased by approximately
$5,000 due to the purchase of a new automobile in 2007 and the lease of new
computer equipment during 2008.  The increase in bad debt expense is
due to several factors: approximately 60% of the increase is a result of the
startup of our teleradiology services, and includes the write-off of one account
and the establishment of an allowance for 2009, and the remaining 40% of the
increase is due to the write-off of one account that went out of business, and
the establishment of an additional allowance relative to the lawsuit from
another customer.





Interest
expense:





For
      the Year Ended December 31,2008
                
                
                
                2007$
                6,000
                
                compared
      to
                
                $
                10,000
                
                a
      decrease of $4,000 or
40.0%





The
decrease in interest expense is due to our continued efforts to pay our
obligations promptly.  However, we do still have several short-term
financing arrangements that generate monthly interest, such as credit cards and
equipment leases.





REPORTABLE
SEGMENTS





In May
2008, we began operating Telerad Service (TRS) as a wholly-owned subsidiary of
New Mexico Software (NMS).  Information about the Company’s reportable
segments is reflected in the following table.  Since Telerad was not
in existence in 2007, only 2008 data is included in this table.





2008NMS
                
                
                TRS
                
                
                TOTALRevenue
                
                $
                772,000
                
                
                $
                864,000
                
                
                $
                1,636,000Cost
      of services
                
                
                379,000
                
                
                
                794,000
                
                
                
                1,173,000General
      and administrative
                
                
                648,000
                
                
                
                163,000
                
                
                
                811,000Depreciation
                
                
                33,000
                
                
                
                1,000
                
                
                
                34,000Research
      and development
                
                
                50,000
                
                
                
                -
                
                
                
                50,000Bad
      Debt
                
                
                26,000
                
                
                
                21,000
                
                
                
                47,000Operating
      income (loss)
                
                $
                (364,000
                )
                
                $
                (115,000
                )
                
                $
                (479,000
                )Total
      assets
                
                $
                219,000
                
                
                $
                335,000
                
                
                $
                554,000





LIQUIDITY
AND CAPITAL RESOURCES





As of
December 31, 2008, cash and cash equivalents totaled $68,000, representing a
$9,000 increase from the beginning of the period.  The increase in
available cash was due to a combination of several factors during the
year:





Operating
activities:





For
      the Year Ended December 31,2008
                
                2007used
      $(94,000)
                compared
      to
                provided
      $55,000
                a
      decrease in available cash of
$149,000





The
decrease in available cash from operations during 2008 as compared to 2007 is
due to several factors:  a $630,000 decrease in cash due to a
reduction in stock and options issued for salaries and services during 2008 as
compared to 2007, a $271,000 decrease in cash due to an increase in accounts
receivable during 2008 as compared to 2007 (primarily due to the startup of
Telerad Service with the addition of its new customers), offset by a $254,000
increase in cash due to the reduction in net loss for 2008 as compared to 2007,
and a $488,000 increase in cash due to the increase in accounts payable and
accrued expenses during 2008 as compared to 2007.  The increase in
accounts payable and accrued expenses is a result of continued cash flow
shortages.






14





Investing
activities:





For
      the Year Ended December 31,2008
                
                2007used
      $(15,000)
                compared
      to
                used
      $(31,000)
                an
      increase in available cash of
$16,000





During
2007, we purchased $31,000 of fixed assets as compared to leasing new computer
equipment in 2008.





Financing
activities:





For
      the Year Ended December 31,2008
                
                2007provided
      $118,000
                compared
      to
                provided
      $14,000
                an
      increase in available cash of
$104,000





This
increase was primarily due to receiving $86,000 of note payable in 2008 as
opposed to paying $51,000 of note payable in 2007.  We also received
$55,000 in proceeds from the sale of stock in 2007, as opposed to receiving only
$40,000 in 2008.





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.





At
December 31, 2008 we had a working capital deficit of $85,000 as opposed to a
working capital surplus of $95,000 at the end of 2007.  This decrease
is primarily due to the increase in current liabilities during 2008 as a result
of cash flow shortages, coupled with two short-term loans from shareholders
during 2008.  We have incurred operating losses and negative cash
flows for the past two fiscal years that have been funded through the issuance
of additional equity securities.  Our monthly recurring revenues
increased from an average of $60,000 per month in early 2007 to over $200,000
per month during the fourth quarter of 2008, primarily due to the revenue from
Telerad Service.  However, the margins from the Telerad Service
operations are still quite low while we are in the startup phase of the
operation, so we continue to experience some cash flow shortages.  We
may continue to sell equity securities and incur debt as needed to meet our
operating needs during 2009.





We
anticipate that our primary uses of cash in the next year will be for general
operating purposes.  With the addition of Telerad Service, our
operating cash requirements for the next twelve months will be in the range of
$4,200,000 to $5,000,000.  This level of cash flow will allow us to
maintain our current level of operations.  Our goal for 2009 remains
to become profitable by the end of the year.  We expect the upward
trend in recurring revenues to continue in 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.





ITEM
8. FINANCIAL STATEMENTS










15





De
Joya Griffith & Company, LLC





CERTIFIED
PUBLIC ACCOUNTANTS & CONSULTANTS










REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






To the
Board of Directors and Stockholders of


New
Mexico Software, Inc.


Albuquerque,
New Mexico





We have
audited the accompanying balance sheets of New Mexico Software, Inc. as of
December 31, 2008 and 2007, and the related statements of operations,
stockholders' deficit, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.





We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of New Mexico Software, Inc. as of
December 31, 2008 and 2007, and the results of their operations and cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note A, the Company has
incurred an accumulated deficit of $14,646,000 as of December 31, 2008. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note A. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.







De Joya
Griffith & Company, LLC








/s/
De Joya Griffith & Company, LLC


Henderson,
Nevada


April 2,
2009
















2580
Anthem Village Dr., Henderson, NV  89052


Telephone
(702) 563-1600 ● Facsimile (702) 920-8049


16





New
      Mexico Software, Inc.Consolidated
      Balance Sheets(Rounded
      to the nearest thousand)December
      31,
                            
                            
                            December
      31,2008
                            
                            
                            2007Assets
                            
                            (Audited)
                            
                            
                            (Audited)Current
      assets:Cash
      and equivalents
                            
                            $
                            68,000
                            
                            
                            $
                            59,000Accounts
      receivable, net
                            
                            
                            363,000
                            
                            
                            
                            129,000Inventory
                            
                            
                            18,000
                            
                            
                            
                            22,000Prepaid
      expenses and other assets
                            
                            
                            5,000
                            
                            
                            
                            2,000Total
      current assets
                            
                            
                            454,000
                            
                            
                            
                            212,000Furniture,
      equipment and improvements, net
                            
                            
                            96,000
                            
                            
                            
                            90,000Security
      deposits
                            
                            
                            4,000
                            
                            
                            
                            4,000Total
      Assets
                            
                            $
                            554,000
                            
                            
                            $
                            306,000Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts
      payable
                            
                            $
                            282,000
                            
                            
                            $
                            34,000Accrued
      expenses
                            
                            
                            134,000
                            
                            
                            
                            44,000Customer
      deposits
                            
                            
                            20,000
                            
                            
                            
                            -Deferred
      revenue
                            
                            
                            28,000
                            
                            
                            
                            39,000Notes
      payable
                            
                            
                            58,000
                            
                            
                            
                            -Capital
      lease
                            
                            
                            17,000
                            
                            
                            
                            -Total
      current liabilities
                            
                            
                            539,000
                            
                            
                            
                            117,000Long-term
      liabilitiesCapital
      lease - long-term portion
                            
                            
                            8,000
                            
                            
                            
                            -Total
      long-term liabilities
                            
                            
                            8,000
                            
                            
                            
                            -Total
      liabilities
                            
                            
                            547,000
                            
                            
                            
                            117,000Stockholders'
      equity:Preferred
      stock, $0.001 par value, 500,000 shares authorized,0
      shares issued and outstanding as of 12/31/08
                            
                            
                            -Common
      stock, $0.001 par value, 200,000,000 shares
                            
                            
                            
                            
                            
                            
                            -authorized,
      127,948,261 shares issued and outstandingas
      of 12/31/08
                            
                            
                            128,000
                            
                            
                            
                            107,000Paid-in
      capital
                            
                            
                            14,606,000
                            
                            
                            
                            14,212,000Subscriptions
      payable
                            
                            
                            21,000
                            
                            
                            
                            31,000Deferred
      compensation
                            
                            
                            (102,000
                            )
                            
                            
                            -Accumulated
      deficit
                            
                            
                            (14,646,000
                            )
                            
                            
                            (14,161,000
                            )Total
      stockholders' equity
                            
                            
                            7,000
                            
                            
                            
                            189,000Total
      Liabilities and Stockholders' Equity
                            
                            $
                            554,000
                            
                            
                            $
                            306,000











The
accompanying notes are an integral part of these financial
statements.





17





New
      Mexico Software, Inc.Consolidated
      Statements of Operations(Rounded
      to the nearest thousand)For
      the year endedDecember
      31,2008
                    
                    
                    2007(Audited)
                    
                    
                    (Audited)RevenuesRadiological
      services
                    
                    $
                    864,000
                    
                    
                    $
                    -Software
      usage fees
                    
                    
                    457,000
                    
                    
                    
                    399,000Software
      hosting and maintenance
                    
                    
                    275,000
                    
                    
                    
                    453,000Software
      sales and licenses
                    
                    
                    17,000
                    
                    
                    
                    23,000Custom
      programming
                    
                    
                    16,000
                    
                    
                    
                    22,000Hardware
      sales
                    
                    
                    7,000
                    
                    
                    
                    68,000Scanning
      services
                    
                    
                    -
                    
                    
                    
                    23,000Gross
      revenues
                    
                    
                    1,636,000
                    
                    
                    
                    988,000Cost
      of services
                    
                    
                    1,173,000
                    
                    
                    
                    476,000Gross
      profit
                    
                    
                    463,000
                    
                    
                    
                    512,000Operating
      costs and expenses:General
      and administrative
                    
                    
                    811,000
                    
                    
                    
                    1,075,000Depreciation
      and amortization
                    
                    
                    34,000
                    
                    
                    
                    37,000Research
      and development
                    
                    
                    50,000
                    
                    
                    
                    136,000Bad
      debt
                    
                    
                    47,000
                    
                    
                    
                    12,000Total
      operating costs and expenses
                    
                    
                    942,000
                    
                    
                    
                    1,260,000Net
      operating loss
                    
                    
                    (479,000
                    )
                    
                    
                    (748,000
                    )Other
      income (expense):Interest
      expense
                    
                    
                    (6,000
                    )
                    
                    
                    (10,000
                    )Gain
      on sale of fixed asset
                    
                    
                    -
                    
                    
                    
                    6,000Gain
      on legal settlement
                    
                    
                    -
                    
                    
                    
                    13,000Total
      other income (expense)
                    
                    
                    (6,000
                    )
                    
                    
                    9,000Net
      loss
                    
                    $
                    (485,000
                    )
                    
                    $
                    (739,000
                    )Loss
      per share - basic
                    
                    $
                    (0.00
                    )
                    
                    $
                    (0.01
                    )Weighted
      average number of commonshares
      outstanding - basic
                    
                    
                    99,287,638
                    
                    
                    
                    98,576,001





The
accompanying notes are an integral part of these financial
statements.





18





New
      Mexico Software, Inc.Consolidated
      Statements of Cash Flows(Rounded
      to the nearest thousand)For
      the year endedDecember
      31,2008
                      
                      
                      2007Cash
      flows from operating activities
                      
                      (Audited)
                      
                      
                      (Audited)Net
      loss
                      
                      $
                      (485,000
                      )
                      
                      $
                      (739,000
                      )Adjustments
      to reconcile net loss tonet
      cash used by operating activities:Common
      stock issued for salaries
                      
                      
                      69,000
                      
                      
                      
                      466,000Common
      stock issued for services
                      
                      
                      166,000
                      
                      
                      
                      187,000Common
      stock issued for interest
                      
                      
                      -
                      
                      
                      
                      1,000Stock
      options issued for salaries
                      
                      
                      -
                      
                      
                      
                      12,000Stock
      options issued for services
                      
                      
                      -
                      
                      
                      
                      13,000Stock
      options issued for compensation
                      
                      
                      -
                      
                      
                      
                      186,000Depreciation
      and amortization
                      
                      
                      34,000
                      
                      
                      
                      37,000Depreciation
      and amortization allocated to cost of goods sold
                      
                      
                      8,000
                      
                      
                      
                      7,000Changes
      in operating assets and liabilities:Accounts
      receivable
                      
                      
                      (234,000
                      )
                      
                      
                      37,000Inventory
                      
                      
                      4,000
                      
                      
                      
                      2,000Prepaid
      expenses and other assets
                      
                      
                      (3,000
                      )
                      
                      
                      19,000Accounts
      payable
                      
                      
                      248,000
                      
                      
                      
                      (72,000
                      )Customer
      deposits
                      
                      
                      20,000
                      
                      
                      
                      -Accrued
      expenses
                      
                      
                      90,000
                      
                      
                      
                      (78,000
                      )Deferred
      revenue
                      
                      
                      (11,000
                      )
                      
                      
                      (23,000
                      )Net
      cash provided (used) by operating activities
                      
                      
                      (94,000
                      )
                      
                      
                      55,000Cash
      flows from investing activitiesAcquisition
      of fixed assets
                      
                      
                      (15,000
                      )
                      
                      
                      (31,000
                      )Net
      cash used by investing activities
                      
                      
                      (15,000
                      )
                      
                      
                      (31,000
                      )Cash
      flows from financing activitiesRepayment
      of note payable
                      
                      
                      -
                      
                      
                      
                      (51,000
                      )Proceeds
      from note payable
                      
                      
                      86,000
                      
                      
                      
                      -Repayment
      of principal under capital lease
                      
                      
                      (8,000
                      )
                      
                      
                      -Subscriptions
      payable
                      
                      
                      -
                      
                      
                      
                      10,000Net
      proceeds from the issuance of common stock
                      
                      
                      40,000
                      
                      
                      
                      55,000Net
      cash provided by financing activities
                      
                      
                      118,000
                      
                      
                      
                      14,000Net
      increase (decrease) in cash equivalents
                      
                      
                      9,000
                      
                      
                      
                      38,000Cash
      equivalents - beginning
                      
                      
                      59,000
                      
                      
                      
                      21,000Cash
      equivalents - ending
                      
                      $
                      68,000
                      
                      
                      $
                      59,000Supplemental
      disclosures:Interest
      paid
                      
                      $
                      1,000
                      
                      
                      $
                      6,000Shares
      issued for exercise of warrants
                      
                      $
                      10,000
                      
                      
                      $
                      -Assets
      acquired under capital lease
                      
                      $
                      34,000
                      
                      
                      $
                      -Stock
      issued for settlement of note
                      
                      $
                      28,000
                      
                      
                      $
                      -








The
accompanying notes are an integral part of these financial
statements.






19





New
      Mexico Software, Inc.Consolidated
      Statements of Stockholders' Equity (Deficit)(Rounded
      to the nearest thousand)(Audited)Additional
                                              
                                              
                                              
                                              
                                              
                                              TotalPreferred
      Stock
                                              
                                              Common
      Stock
                                              Paid-in
                                              
                                              Deferred
                                              
                                              Subscriptions
                                              Accumulated
                                              Stockholders'Shares
                                              
                                              Amount
                                              
                                              Shares
                                              Amount
                                              Capital
                                              
                                              Compensation
                                              
                                              Payable
                                              (Deficit)
                                              Equity
      (Deficit)Balance,
      December 31, 2006
                                              -
                                              
                                              $
                                              -
                                              
                                              87,760,322
                                              $
                                              88,000
                                              $
                                              13,497,000
                                              $
                                              (186,000)
                                              
                                              -
                                              $
                                              (13,422,000)
                                              $
                                              (23,000)Issuance
      of common stockfor
      salaries
                                              -
                                              
                                              
                                              -
                                              
                                              12,156,400
                                              
                                              12,000
                                              
                                              454,000
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              466,000Issuance
      of common stockfor
      services
                                              -
                                              
                                              
                                              -
                                              
                                              4,803,758
                                              
                                              5,000
                                              
                                              182,000
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              187,000Issuance
      of common stockfor
      cash
                                              -
                                              
                                              
                                              -
                                              
                                              2,000,000
                                              
                                              2,000
                                              
                                              53,000
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              55,000Issuance
      of common stockfor
      interest
                                              -
                                              
                                              
                                              -
                                              
                                              50,000
                                              
                                              -
                                              
                                              1,000
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              1,000Issuance
      of stock optionsfor
      salaries
                                              -
                                              
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              12,000
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              12,000Issuance
      of stock optionsfor
      services
                                              -
                                              
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              13,000
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              13,000Compensation
      earned
                                              -
                                              
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              186,000
                                              
                                              
                                              
                                              -
                                              
                                              186,000Compensation
      earned
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              31,000
                                              
                                              -
                                              
                                              31,000Net
      (loss)For
      the year endedDecember
      31, 2007
                                              -
                                              
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              (739,000)
                                              
                                              (739,000)Balance,
      December 31, 2007
                                              -
                                              
                                              $
                                              -
                                              
                                              106,770,480
                                              $
                                              107,000
                                              $
                                              14,212,000
                                              $
                                              -
                                              $
                                              31,000
                                              $
                                              (14,161,000)
                                              $
                                              189,000Issuance
      of common stockfor
      salaries
                                              -
                                              
                                              
                                              -
                                              
                                              2,846,286
                                              
                                              3,000
                                              
                                              66,000
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              69,000Issuance
      of common stockfor
      services
                                              -
                                              
                                              
                                              -
                                              
                                              3,941,494
                                              
                                              4,000
                                              
                                              94,000
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              98,000Issuance
      of common stockfor
      services to be rendered
                                              -
                                              
                                              
                                              -
                                              
                                              10,000,000
                                              
                                              10,000
                                              
                                              160,000
                                              
                                              (170,000)
                                              
                                              
                                              
                                              
                                              
                                              -Issuance
      of common stockfor
      cash
                                              -
                                              
                                              
                                              -
                                              
                                              2,352,942
                                              
                                              2,000
                                              
                                              38,000
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              40,000Issuance
      of common stockfor
      settlement of note
                                              
                                              
                                              
                                              
                                              
                                              1,647,059
                                              
                                              2,000
                                              
                                              26,000
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              28,000Issuance
      of common stockfor
      exercise of warrants
                                              -
                                              
                                              
                                              -
                                              
                                              390,000
                                              
                                              -
                                              
                                              10,000
                                              
                                              -
                                              
                                              (10,000)
                                              
                                              -
                                              
                                              -Conversion
      of note payable tosubscriptions
      payable
                                              -
                                              
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              -Compensation
      earned
                                              -
                                              
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              68,000
                                              
                                              -
                                              
                                              -
                                              
                                              68,000Net
      (loss)For
      the year endedDecember
      31, 2008
                                              -
                                              
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              -
                                              
                                              (485,000)
                                              
                                              (485,000)Balance,
      December 31, 2008
                                              -
                                              
                                              $
                                              -
                                              
                                              127,948,261
                                              $
                                              128,000
                                              $
                                              14,606,000
                                              $
                                              (102,000)
                                              $
                                              21,000
                                              $
                                              (14,646,000)
                                              $
                                              7,000








The
accompanying notes are an integral part of these financial
statements.






20





New
Mexico Software, Inc.


Notes to
Consolidated Financial Statements








NOTE
A - ORGANIZATION AND OPERATIONS





[1]
Description of business and history





New
Mexico Software, Inc., a Nevada corporation, (the Company), develops and markets
proprietary Internet technology-based software for the management of digital
high-resolution graphic images, documents, video clips and audio recordings. The
Company believes that its software has applications for any industry that has
the need to track, organize and distribute information in a digital format
efficiently and accurately.





Our
business was incorporated in New Mexico in 1996 under the name of New Mexico
Software, Inc.  We were acquired by Raddatz Exploration, Inc., a
publicly traded Delaware corporation, in 1999.   At that time,
Raddatz changed its name to NMXS.com, Inc., and operated New Mexico Software,
Inc. as a wholly-owned subsidiary.    On January 1, 2006,
NMXS.com, Inc. merged into its newly incorporated, wholly-owned subsidiary, New
Mexico Software, Inc., a Nevada corporation, for the sole purpose of changing
its state of incorporation and its name.


In May
2008, we formed Telerad Service Inc. as a wholly-owned subsidiary of New Mexico
Software, Inc., to provide radiological services to hospitals, mobile and
portable x-ray providers, prisons, urgent care facilities, and assisted living
facilities.  Telerad Service utilizes our XR-EXpress software in
providing the services.  At this time, we have more than twenty
licensed radiologists available to read and report on radiological studies,
which include x-ray films, ultrasounds, MRI’s and various scanned
images.





[2] 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 $14,646,000 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 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 consolidated financial statements of the Company do not
include any adjustments that may result from the outcome of these aforementioned
uncertainties.





[3]
Corporate status





During
2007, the Nevada Secretary of State revoked the corporate license of New Mexico
Software, Inc. due to failure to file the necessary reports and non-payment of
fees.  On March 27, 2008, the Company filed the annual report and paid
approximately $1,200 in accumulated fees.  The Company’s status was
reinstated at that time.








21


New
Mexico Software, Inc.


Notes to
Consolidated Financial Statements








NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





[1]
Revenue recognition:





The
Company’s revenues are generally classified into five main categories: the sale
of software licenses to end users, software hosting and maintenance contracts,
software licenses that require us to provide production, customization or
modification to our core software product, XR-EXpress customer usage fees, and
hardware sales associated with sales of our various software products. The
Company also derives revenue from 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, software
maintenance, upgrade and support arrangements. 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 customer to purchase the software license, and for those hosting contracts
that are sold without an associated software sale, the customer has neither the
right nor 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






22


New
Mexico Software, Inc.


Notes to
Consolidated Financial Statements








NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





[1]
Revenue recognition (continued):





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 December 31, 2008 and
December 31, 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.





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.





The cost
of services, consisting of staff payroll, outside services, equipment rental,
communication costs and supplies, is expensed as incurred.





[2]
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 December 31, 2008,
the Company did not have cash and equivalents that exceeded federally insured
limits.





[3] Trade
Accounts Receivable:





The
Company extends unsecured credit to customers under normal trade agreements
which generally require payment within 30 - 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.






23


New
Mexico Software, Inc.


Notes to
Consolidated Financial Statements








NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





[3] Trade
Accounts Receivable (Continued):





The
Company also estimates an allowance for doubtful accounts, which amounted to
$32,000 and $20,000 at December 31, 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.  Charge-offs, net of recoveries, for the years
ended December 31, 2008 and 2007 totaled $47,000 and $12,000,
respectively.





[4]
Inventory:





Inventory,
which is 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.  Write-downs of $5,000 and $0 for
obsolete inventory are included in expenses for 2008 and 2007,
respectively.





[5]
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.





[6]
Income taxes:





The
Company recognizes deferred tax liabilities and assets for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred tax liabilities and assets are
determined on the basis of the differences between the tax basis of assets and
liabilities and their respective financial reporting amount ("temporary
differences") at enacted tax rates in effect for the years in which the
differences are expected to reverse.





[7] Per
share data:





The basic
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 3,576,545 and 4,606,545
shares of common stock have been excluded from the diluted loss per share
calculation for the years ended December 31, 2008 and 2007, respectively,
because inclusion of such would be antidilutive.





[8]
Research and development expenses:





Costs of
research and development activities are expensed as incurred.







24


New
Mexico Software, Inc.


Notes to
Consolidated Financial Statements








NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





[9]
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 $10,000 for the years ended December 31, 2008 and 2007,
respectively.





[10]
Presentation of Financial Statements





The
Company rounds the figures on the financial statements to the nearest
thousand.





[11] 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.





[12]
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 0 and 390,000 option awards granted to employees and directors in the years
ended December 31, 2008 and 2007, respectively.  During the year ended
December 31, 2008, the Company recorded $0 in expense related to option grants
to employees and directors.





[13]
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 life which is estimated to be two years. There were no capitalized
software development costs as of December 31, 2008 and 2007.







25


New
Mexico Software, Inc.


Notes to
Consolidated Financial Statements








NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





[14] Fair
value of financial instruments:





Financial
accounting standards Statement No. 107, “Disclosure About Fair Value of
Financial Instruments”, requires the Company to disclose, when reasonably
attainable, the fair market values of its assets and liabilities which are
deemed to be financial instruments. The carrying amounts and estimated fair
values of the Company’s financial instruments approximate their fair value due
to the short-term nature.





[15]
Recent pronouncements:





In
September 2006, the FASB issued SFAS 157, “Fair Value
Measurements”.  The statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements.  This
statement applies under other accounting pronouncements that require or permit
fair value measurements, the Board having previously concluded in those
accounting pronouncements that fair value is the relevant measurement
attribute.  The statement is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007.  As at
December 31, 2008, the Company adopted FASB 157 and concluded that it had no
material impact on financials.





In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB Statement No.
115.”  The statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions.  The statement is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007.  As at
December 31, 2008 the Company adopted FASB 159 and concluded that it had no
material impact on financials.





In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements”, an amendment of ARB No. 51 which applies to
all entities that prepare consolidated financial statements, except
not-for-profit organizations, but will affect only those entities that have an
outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. The statement is effective for annual periods
beginning after December 15, 2008. The management is currently evaluating the
effect of this pronouncement on financial statements.





In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and
Hedging Activities – an amendment of FASB Statement No. 133,” (SFAS “161”) as
amended and interpreted, which requires enhanced disclosures about an entity’s
derivative and hedging activities and thereby improves the transparency of
financial reporting. Disclosing the fair values of derivative instruments and
their gains and losses in a tabular format provides a more complete picture of
the location in an entity’s financial statements of both the derivative
positions existing at period end and the effect of using derivatives during the
reporting period. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows. SFAS No. 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. Early adoption is
permitted. The management is currently evaluating the effect of this
pronouncement on financial statements.






26


New
Mexico Software, Inc.


Notes to
Consolidated Financial Statements








NOTE
B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





[15]
Recent pronouncements (Continued):





In May
2008, the FASB issued SFAS 163, “Accounting for Financial Guarantee Insurance
Contracts – an Interpretation of FASB statement No.
60.”   Diversity in accounting practices for financial guarantee
insurance contracts by insurance enterprises has resulted in inconsistencies in
the recognition and measurement of claim liabilities because of differing views
of when a loss has been incurred.  This statement requires that an
insurance enterprise recognize a claim liability prior to an event of default
when there is evidence that credit deterioration has occurred in an insured
financial obligation.  The statement also clarifies how statement No.
60 applies to financial guarantee insurance contracts, including the recognition
and measurement to be used to account for premium revenue and claim liabilities,
and requires expanded disclosures about financial guarantee insurance
contracts.  This statement is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and all interim
periods within those fiscal years.  The statement also requires that
disclosures about the risk-management activities of the insurance enterprise be
effective for the first period (including interim periods) beginning after
issuance of this statement.  Except for those disclosures, earlier
application is not permitted.  As at December 31, 2008 the Company
concluded that this statement had no material impact on financials.





NOTE
C - FURNITURE, EQUIPMENT, AND IMPROVEMENTS





Furniture,
equipment, and improvements as of December 31, 2008 and 2007 consisted of the
following:





2008
                
                
                2007Computers
                
                $
                411,000
                
                
                $
                362,000Furniture,
      fixtures and equipment
                
                
                121,000
                
                
                
                121,000Automobiles
                
                
                41,000
                
                
                
                41,000Leasehold
      improvements
                
                
                20,000
                
                
                
                20,000593,000
                
                
                
                544,000Accumulated
      depreciation
                
                
                (497,000
                )
                
                
                (454,000
                )$
                96,000
                
                
                $
                90,000





Depreciation
expense for the years ended December 31, 2008 and 2007 was $34,000 and $37,000,
respectively.





NOTE
D - NOTE PAYABLE





INTEREST
      RATE
                  
                  NOTE PAYABLE
                  
                  December
      31,
                    2008
                  
                  
                  December
      31,
                    20070
                  %
                  Short-term
      loans from two Directors
                  
                  $
                  58,000
                  
                  
                  $
                  -





In
January 2009, the Board of Directors approved the issuance of shares of the
Company’s $0.001 par value common stock as repayment of notes payable to two
Directors in the amount of $58,000.


27


New
Mexico Software, Inc.


Notes to
Consolidated Financial Statements








NOTE
E – STOCKHOLDERS’ EQUITY





Common
stock:





During
the year ended December 31, 2008, the Company effected the following stock
transactions:





The
Company issued a total of 2,846,286 shares of the Company’s $0.001 par value
common stock to employees in lieu of salary, which was valued at
$69,000.





The
Company issued a total of 3,941,494 shares of the Company’s $0.001 par value
common stock to outside contractors in exchange for services rendered valued at
$98,000.





The
Company issued a total of 10,000,000 shares of the Company’s $0.001 par value
common stock in exchange for services to be rendered valued at $170,000, of
which $68,000 was earned as of December 31, 2008.





The
Company issued a total of 2,352,942 shares of the Company’s $0.001 par value
common stock in exchange for cash of $40,000.





The
Company issued a total of 1,647,059 shares of the Company’s $0.001 par value
common stock in exchange for settlement of note of $28,000.





The
Company issued a total of 390,000 shares of the Company’s $0.001 par value
common stock related to the exercise of warrants valued at $10,000.





Treasury
stock:





In
December 2004, the Board of Directors authorized First Mirage to exercise
479,483 options on a cashless basis, resulting in 309,000 shares being issued to
First Mirage and 170,483 shares being returned to treasury stock.





Warrants:





During
the year ended December 31, 2008, there were no warrants issued and 390,000
warrants were exercised at $0.025 per share.





The
following is a summary of warrants outstanding as of December 31,
2008:





Number of Warrants
                  Exercise Price
                  Expiration
      Date771,545
                  $0.21
                  July
      24, 2009700,000
                  $0.15
                  June
      29, 20111,471,545
                  $0.181(average)





All
warrants outstanding as of December 31, 2008 are exercisable.







28


New
Mexico Software, Inc.


Notes to
Consolidated Financial Statements








NOTE
E – STOCKHOLDERS’EQUITY (CONTINUED)





Stock
options:





Stock options employees and
directors– During the years ended December 31, 2008 and 2007; the
Company granted stock options to employees and directors totaling 0 and 0 shares
of its common stock with a weighted average strike price of $0.00 and $0.03 per
share, respectively. The stock options vest at the rate of 50% per year over two
years and have a life of 10 years. The stock options have been valued at $0 and
$0 using the Black-Scholes option pricing model based upon the following
assumptions: term of 10 years, risk free interest rates ranging from 3.5% to
4.5%, a dividend yield of 0% and volatility rates ranging from 155% to 162%,
respectively.  The Company has recorded an expense of $0 for the year
ended December 31, 2008 based upon the vested portion of the stock options
totaling $0 through December 31, 2008.





Stock options non-employees
and directors– During the years ended December 31, 2008 and 2007; the
Company granted stock options for services totaling 0 and 0 shares of its common
stock with a weighted average strike price of $0 and $0.03 per share,
respectively. Certain stock options were exercisable upon grant and have a life
of 10 years. The stock options have been valued at $0 and $0 using the
Black-Scholes option pricing model based upon the following assumptions: term of
10 years, risk free interest rates ranging from 3.5% to 4.5%, a dividend yield
of 0% and volatility rates of 155%.





Exercise
prices and weighted-average contractual lives of stock options outstanding as of
December 31, 2008 are as follows:





Options
      Outstanding
                
                
                Options
      ExercisableWeighted
      Average
                
                
                Weighted
      AverageExercise
      Prices
                
                
                Number
      Outstanding
                
                
                Remaining
      Contractual Life
                
                
                Exercise
      Prices
                
                
                Number
      Exercisable$
                0.01-0.04
                
                
                
                12,500,000
                
                
                
                7.85
                
                
                $
                0.03
                
                
                
                12,500,000$
                0.05-0.30
                
                
                
                2,205,000
                
                
                
                4.07
                
                
                $
                0.06
                
                
                
                2,205,000$
                0.31-0.50
                
                
                
                100,000
                
                
                
                2.25
                
                
                $
                0.39
                
                
                
                100,000





Summary
of Options Granted and Outstanding:





For
      the Years Ended December 31,2008
                
                
                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
                
                
                0
                
                
                $
                0.00
                
                
                
                500,000
                
                
                $
                0.00Cancelled
                
                
                (1,030,000
                )
                
                $
                0.06
                
                
                
                (750,000
                )
                
                $
                0.07Exercised
                
                
                0
                
                
                $
                0.00
                
                
                
                0
                
                
                $
                0.00Outstanding
      at end of year
                
                
                14,805,000
                
                
                $
                0.04
                
                
                
                15,835,000
                
                
                $
                0.04





During
the year ended December 31, 2008, no options were granted.






29


New
Mexico Software, Inc.


Notes to
Consolidated Financial Statements








NOTE
F - INCOME TAXES





The
Company accounts for income taxes using the liability method, under which
deferred tax liabilities and assets are determined based on the difference
between the financial statement carrying amounts and the tax basis of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.





As of
December 31, 2008, the Company had net operating loss carryforwards of
approximately $11,441,000, which expire in varying amounts between 2017 and
2028. Realization of this potential future tax benefit is dependent on
generating sufficient taxable income prior to expiration of the loss
carryforward.





At
December 31, 2008 and 2007, the Company had a federal operating loss carry
forward of $11,441,000 and $11,191,000, respectively.





Components
of net deferred tax assets, including a valuation allowance, are as follows at
December 31:





2008
                          
                          
                          2007Deferred
      tax assets:Net
      operating loss carry forward
                          
                          $
                          4,728,000
                          
                          
                          $
                          4,476,400Stock
      based compensation
                          
                          
                          94,000
                          
                          
                          
                          286,400Total
      deferred tax assets
                          
                          
                          4,670,400
                          
                          
                          
                          4,762,800Less:
      Valuation Allowance
                          
                          
                          (4,670,400
                          )
                          
                          
                          (4,762,800
                          )Net
      Deferred Tax Assets
                          
                          $
                          -
                          
                          
                          $
                          --





The
valuation allowance for deferred tax assets as of December 31, 2008 and 2007 was
$4,670,400 and $4,762,800, respectively.  In assessing the recovery of
the deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be
realized.  The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income in the periods in which
those temporary differences become deductible.  Management considers
the scheduled reversals of future deferred tax assets, projected future taxable
income, and tax planning strategies in making this assessment.  As a
result, management determined it was more likely than not the deferred tax
assets would be realized as of December 31, 2008 and 2007.





Reconciliation
between the statutory rate and the effective tax rate is as follows at December
31:





2008
                
                
                2007Federal
      statutory tax rate
                
                
                (35.0
                )%
                
                
                (35.0
                )%State
      taxes, net of federal tax benefit
                
                
                (5.0
                )%
                
                
                (5.0
                )%Permanent
      difference and other
                
                
                40.0
                %
                
                
                40.0
                %Effective
      tax rate
                
                
                0
                %
                
                
                0
                %





30


New
Mexico Software, Inc.


Notes to
Consolidated Financial Statements








NOTE
G - MAJOR CUSTOMERS





During
the year ended December 31, 2008, three customers accounted for 44% of the
Company's revenue.  During the year ended December 31, 2007, three
customers accounted for 36% of the Company's revenue.





As of
December 31, 2008, balances due from two customers comprised 43% of total
accounts receivable.





NOTE
H - REPORTABLE SEGMENTS





Management
has identified the Company's reportable segments based on separate lines of
business. New Mexico Software (NMS) derives revenues from the development and
marketing proprietary internet technology-based software and Telerad Service
(TRS) provides radiological services. Information related to the Company's
reportable segments for 2008 is as follows:





NMS
                      
                      
                      TRS
                      
                      
                      TOTALRevenue
                      
                      $
                      772,000
                      
                      
                      $
                      864,000
                      
                      
                      $
                      1,636,000Cost
      of services
                      
                      
                      379,000
                      
                      
                      
                      794,000
                      
                      
                      
                      1,173,000General
      and administrative
                      
                      
                      648,000
                      
                      
                      
                      163,000
                      
                      
                      
                      811,000Depreciation
                      
                      
                      33,000
                      
                      
                      
                      1,000
                      
                      
                      
                      34,000Research
      and development
                      
                      
                      50,000
                      
                      
                      
                      -
                      
                      
                      
                      50,000Bad
      Debt
                      
                      
                      26,000
                      
                      
                      
                      21,000
                      
                      
                      
                      47,000Operating
      income (loss)
                      
                      $
                      (364,000
                      )
                      
                      $
                      (115,000
                      )
                      
                      $
                      (479,000
                      )Total
      assets
                      
                      $
                      219,000
                      
                      
                      $
                      335,000
                      
                      
                      $
                      554,000





A
reconciliation of the segments' operating loss to the consolidated net
loss/comprehensive loss is as follows:





Segment’s
      operating loss
                  
                  $
                  ( 479,000
                  )Other
      income (expense)
                  
                  
                  ( 6,000
                  )Consolidated
      net loss
                  
                  $
                  ( 485,000
                  )





NOTE
I – COMMITMENTS AND CONTINGENCIES





Leases:





The
Company leases office space in New Mexico expiring on April 30,
2009.  The Company is currently in negotiations to extend the
lease.   The Company also leases one
automobile.  Future minimum lease payments as of December 31, 2008 are
as follows:





Year
                  
                  Amount2009
                  
                  42,0002010
                  
                  14,000





Rent
expense for the years ended December 31, 2008 and 2007 amounted to $64,000 and
$61,000, respectively.





31


New
Mexico Software, Inc.


Notes to
Consolidated Financial Statements








NOTE
I – COMMITMENTS AND CONTINGENCIES (CONTINUED)





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 for the year ended December
31, 2008 is $60,000 per annum with available additional cash compensation as
defined in the agreement.  Compensation under this agreement of
$61,000 including bonus for stock payments is included in general and
administrative expenses for the year ended December 31, 2008.  The
non-competition agreement commences upon the termination of the employment
agreement for a period of one year.   As of December 31, 2008,
there was a total of $2,500 in accrued payroll for this executive.





NOTE J – LEGAL PROCEEDINGS





On
February 18, 2009, Premier Medical Enterprise Solutions, Inc. filed a complaint
in the Federal District Court in Albuquerque against us and our chief executive
officer.  Premier has been a customer of our XR-EXpress
application.  The complaint alleges among other things breaches of (i)
fiduciary duty, (ii) covenant of good faith and fair dealing and (iii) contract,
along with claims of conversion and tortuous interference.  The suit
seeks compensatory, punitive and exemplary damages in excess of $75,000,
together with injunctive relief against unfair competition, an accounting (for
three items) and attorney’s fees. The case is Premier Medical Enterprise
Solution, Inc. v. New Mexico Software, Inc. and Richard Govatski, Case
No.  Civ – 09 – 165.





There are
no new events in the working relationship of Premier with New Mexico Software to
give rise to this lawsuit, other than New Mexico Software, Inc.’s demand for
timely payment of invoices and notice of termination of the Agreement with
Premier for nonpayment.  This suit is Premier’s response to our
cancellation of Premier’s agreement for services for nonpayment which was served
on February 2, 2009.  We believe the suit is frivolous and filed
solely to delay payment of amounts owed by Premier.  New Mexico
Software, Inc. on March 9, 2009, filed its Answer and Counterclaims for Breach
of Contract, demanding payment in full for past due and ongoing charges,
attorney’s fees and costs, all of which are provided for in the Agreement with
Premier, and for Declaratory Judgment that the Agreement with Premier has been
properly terminated by New Mexico Software, Inc. for breach of contract and
nonpayment.





NOTE
K – SUBSEQUENT EVENTS





In
January 2009, the Board of Directors approved the issuance of shares of the
Company’s $0.001 par value common stock as repayment of notes payable to two
Directors in the amount of $58,000.











32





INSERT
AUDITOR’S REPORT AND FINANCIAL STATEMENTS AND FOOTNOTES HERE





ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE





During
the two most recent fiscal years, there have been no disagreements with De Joya
Griffith & Company, LLC, our independent auditor for the years ended
December 31, 2008 and 2007, on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.



























33





ITEM
9A.  CONTROLS AND PROCEDURES





307 – Disclosure controls and
procedures:  As of December 31, 2008, we carried out an
evaluation of the effectiveness of our disclosure controls and procedures, with
the participation of our principal executive and principal financial
officers.  Disclosure controls and procedures are defined in Exchange
Act Rule 15d–15(e) as “controls and other procedures of an issuer that are
designed to ensure that information required to be disclosed by the issuer in
the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded,
processed, summarized and reported, within the time periods specified in the
Commission's rules and forms [and] include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by an
issuer in the reports that it files or submits under the Act is accumulated and
communicated to the issuer's management, including its principal executive and
principal financial officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.”  Based on our evaluation, our President/Chief Executive
Officer and Chief Financial Officer have concluded that, as of December 31,
2008, such disclosure controls and procedures were not effective.





308T(a)(1) – Management’s
responsibility:  Our management is responsible for establishing
and maintaining adequate internal control over financial
reporting.  Internal control over financial reportingis defined in Exchange
Act Rule 15d–15(f) “as a process designed by, or under the supervision of, the
issuer's principal executive and principal financial officers, or persons
performing similar functions, and effected by the issuer's board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:  (1)
Pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the issuer;
(2) Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the issuer are
being made only in accordance with authorizations of management and directors of
the issuer; and (3) Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the issuer's assets
that could have a material effect on the financial
statements.”   Because of inherent limitations, internal control
over financial reporting is not intended to provide absolute assurance that a
misstatement of our financial statements would be prevented or
detected.





308T(a)(2) – Framework used for
evaluation:  In its evaluation of our internal control over
financial reporting, our management has used the Internal Control - Integrated
Framework (1992) and Internal Control Over Financial
Reporting Guidance for Smaller Public Companies (2006), issued by the
Committee of Sponsoring Organizations of the Treadway Commission.





308T(a)(3) – Evaluation of our
internal control over financial reporting:Pursuant to Rule 15d–15 of the
Exchange Act, our management conducted an evaluation of the effectiveness of our
internal control over financial reporting as of December 31,
2008.   Based on this evaluation, our management, with the
participation of our principal executive and principal financial officers,
concluded that our internal control over financial reporting was not effective
as of December 31, 2008.  Management has identified the following
material weakness in our internal control over financial reporting:





*
            We
      do not have adequate personnel and other resources to assure that
      significant and complex transactions are timely analyzed and
      reviewed.*
            We
      have limited personnel and financial resources available to plan, develop,
      and implement disclosure and procedure controls and other procedures that
      are designed to ensure that information required to be disclosed in our
      periodic reports filed or submitted 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.*
            Our
      limited financial resources restrict our employment of adequate personnel
      needed and desirable to separate the various receiving, recording,
      reviewing and oversight functions for the exercise of effective control
      over financial reporting.*
            Our
      limited resources restrict our ability to ensure that information required
      to be disclosed in our periodic reports filed under the Exchange Act is
      accumulated and communicated to management to allow timely decisions
      regarding required disclosure.




308T(a)(4) – Absence of auditor’s
attestation:  This annual report does not include an
attestation report of our registered public accounting firm regarding internal
control over financial reporting.  Our management's report was not
subject to attestation by our registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit us to
provide only management's report in this annual report.







34





308T(b) – Changes in internal
control over financial reporting:Based upon an evaluation by
our management of our internal control over financial reporting, with the
participation of our principal executive and principal financial officers, there
were no changes made in our internal control over financial reporting during the
quarter ended December 31, 2008 that have materially affected or are reasonably
likely to materially affect our internal control over financial
reporting.





Limitations on the Effectiveness of
Internal Control:Our management does not expect that our disclosure
controls and procedures or our internal control over financial reporting will
necessarily prevent all fraud and material errors.  An internal
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations on all internal
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, and/or by management
override of the control. The design of any system of internal control is also
based in part upon certain assumptions about risks and the likelihood of future
events, and there is no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in circumstances and the degree of
compliance with the policies and procedures may deteriorate. Because of the
inherent limitations in a cost-effective internal control system, financial
reporting misstatements due to error or fraud may occur and not be detected on a
timely basis.





ITEM
9B.  OTHER INFORMATION





None








PART
III





ITEM
10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT





Our
directors and officers are set forth below. The directors hold office for a
one-year term and until their successors are duly elected and qualified.
Vacancies in the board are filled by a majority vote of the remaining directors.
The officers serve at the will of the board of directors.





Name
                  Age
                  Position
                  Director SinceRichard
      F. Govatski
                  64
                  Chairman,
      President and Chief Executive Officer
                  1999Teresa
      B. Dickey
                  65
                  Director,
      Secretary & Treasurer
                  2002John
      E. Handley
                  47
                  Director
                  2003Frank
      A. Reidy
                  67
                  Director
                  2005





We do not
have a separately designated audit committee.  However, our outside
directors John Handley and Frank Reidy both qualify as “audit committee
financial experts” because of their education and experience in business and
accounting.





Set forth
below is certain biographical information regarding our executive officers and
directors:





RICHARD
GOVATSKI has been our chairman, CEO, and President since 1996.  Mr.
Govatski founded New Mexico Software in 1996 after he identified market
inefficiencies in how intellectual property owners managed their image assets.
Prior to New Mexico Software, Mr. Govatski spent 18 years in systems integration
and publishing, both in sales management and software development. Mr. Govatski
led the sales teams for Popular Electronics, Computer Shopper, Shutterbug, and
MacWeek.   Later he sold numerous solutions for vendors,
including Kodak, Apple Computer, and Sun Microsystems. Mr. Govatski also spent
several years in systems development as President of Media Publishing Group and
built graphic applications for companies including Ferrari Color, Time Magazine,
New York Daily News, and Getty Images. He received a Bachelor of Science Degree
in Communications from Butler University, located in Indianapolis, Indiana in
1968.






35





TERESA B.
DICKEY has been the Secretary/Treasurer of our company since August
1999.  She became a member of our Board of Directors on December 19,
2002 and has held such position since such time.  From 1988 until 1999
she was employed by Sandia National Laboratory as art
director.  Sandia National Laboratory is a U.S. Department of Energy
national security laboratory.  In 1964, Ms. Dickey received her
Bachelor of Professional Arts from the Art Center College of Design in Pasadena,
California.





JOHN E.
HANDLEY has been our director since January 2003.  He has been
self-employed since September 2002 as a telecommunications
consultant.  From August 1987 until August 2002 he was employed, as an
associate partner (from September 1997 until August 2000) and as a partner
(September 2000 until August 2002), by Accenture LLP, a business and technology
consulting and outsourcing company.  He received his Bachelor of Arts
degree in Psychology and Business from Roanoke College in
1983.  Thereafter, he received his Masters in Business Administration
from Virginia Tech in 1987.





FRANK A.
REIDY received his Bachelor of Science degree in Marketing from Oklahoma State
University in 1964 and a Masters of Arts in Economics from the University of
Toledo in 1972, where he taught micro and macro economics as an evening division
adjunct professor for seventeen years. Full-time from 1973 - 1984 he was Chief
Accountant for Tecumseh Products Company, Tecumseh, MI.  From 1984 -
1989 he was Director of RETS Institute of Technology, Toledo, OH. From 1989 -
1998 he was the Business Manager for Plaza Medical Laboratory, Bartlesville,
OK.  Currently he is owner of a general construction business in
Bartlesville.





ITEM
11. EXECUTIVE COMPENSATION





Compensation
of Executive Officers





Summary
Compensation Table.  The following table sets forth information
concerning the annual and long-term compensation awarded to, earned by, or paid
to the named executive officer for all services rendered in all capacities to
our company, or any of its subsidiaries, for the years ended December 31, 2008,
2007 and 2006:





SUMMARY
COMPENSATION TABLE





The
following table sets forth the compensation we paid to our President and Chief
Executive Officer.





Name and Principal Position
                  Year
                  
                  Salary
                  
                  
                  Bonus
                  
                  
                  Stock Awards
                  
                  
                  Options Awards
                  
                  
                  Total ($)Richard
      F. Govatski
                  2008
                  
                  $
                  60,000
                  
                  
                  $
                  1,000
                  
                  
                  $
                  17,000
                  
                  
                  $
                  0
                  
                  
                  $
                  78,000President
      and Chief Executive Officer
                  2007
                  
                  $
                  60,000
                  
                  
                  $
                  14,000
                  
                  
                  $
                  63,000
                  
                  
                  $
                  22,000
                  
                  
                  $
                  159,0002006
                  
                  $
                  60,000
                  
                  
                  none
                  
                  
                  $
                  63,000
                  
                  
                  $
                  25,000
                  
                  
                  $
                  148,000





The
following table sets forth certain information regarding stock options exercised
during fiscal 2008 and held as of December 31, 2008, by Mr.
Govatski.





AGGREGATED
OPTION EXERCISES IN LAST FISCAL YEAR


AND
FISCAL YEAR-END OPTION/SAR VALUES





Name
                            Shares
      acquired on exercise
                            Value
      realized
                            Number
      of securities underlying unexercised options at fiscal year-end
      Exercisable/Unexercisable
                            Value
      of unexercised in-the-money options at fiscal year-end (1) Exercisable/UnexercisableRichard
      F. Govatski
                            -0-
                            N/A
                            3,500,000/0
                            $112,000/$0
      (2)





(1) Value
is based on the closing sale price of the Common Stock on December 31, 2008, the
last trading day of fiscal 2008 ($0.058), less the applicable option exercise
price.


(2) Of
these options, 500,000 were exercisable at $0.044 per share and 3,000,000 were
exercisable at $0.03 per share.





36





Employment
Contracts





We
entered into an employment and non-competition agreement with Mr. Govatski to
continue in the capacity of President and CEO for a term ending December 31,
2009.  Base salary is $60,000 per annum with available additional cash
compensation as defined in the agreement.  Additional cash
compensation is based upon the achievement of target goals as approved by the
Board of Directors, and is dependent on the company’s available cash
flow.  The non-competition agreement commences upon the termination of
the employment agreement for a period of one year.





We do not
have an employment agreement with Ms. Dickey





Compensation
of Directors





Name
                  
                  Shares
      Awards
                  
                  
                  2008
      TotalTeresa
      B. Dickey
                  
                  $
                  17,000
                  
                  
                  $
                  17,000John
      Handley
                  
                  $
                  17,000
                  
                  
                  $
                  17,000Frank
      Reidy
                  
                  $
                  17,000
                  
                  
                  $
                  17,000





Directors
are permitted to receive fixed fees and other compensation for their services to
the company.  The Board of Directors has the authority to fix the
compensation of directors.  During the year ended December 31, 2008,
the Board awarded 1,000,000 shares of the Company’s common stock to each
Director for services performed during the fiscal year ended December 31,
2008.





Stock
Option and Stock Issuance Plans





Plan
                Year
                
                Options
      Outstanding and Exercisable (#)
                
                Option
      Expiration DateStock
      Incentive Plan
                2005
                
                
                500,000
                
                March
      2, 2017Stock
      Incentive Plan
                2006
                
                
                12,000,000
                
                October
      17, 2016Stock
      Incentive Plan
                2007
                
                
                0Stock
      Incentive Plan
                2008
                
                
                0





ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





The
following table sets forth certain information about the stock ownership by (i)
each director and executive officer; and (ii) directors and executive officers
as a group.  We do not know of any other person who owns more than
five percent of our common stock.





Title of Class
                Name and Address of Beneficial
      Owner
                Amount
      and Nature of Beneficial Owner
      (1)
                Percent of Class (1)Common
      stock
                Richard
      F. Govatski
                18,164,043  (2)
                14.20%Teresa
      B. Dickey
                3,375,510  (3)
                2.64%John
      Handley
                4,949,445  (4)
                3.87%Frank
      Reidy
                8,463,530  (5)
                6.61%Executive
      Officers and Directors as a Group (4 Persons)
                34,952,528
                27.32%





(1) All
of the persons are believed to have sole voting and investment power over the
shares of common stock listed or share voting and investment power with his or
her spouse, except as otherwise provided.  Percentage is based on
127,948,261 shares outstanding as of March 24, 2009.  Percentage
includes amounts which the listed beneficial owner has the right to acquire
within sixty days.


(2) This
number of shares includes options to purchase 2,000,000 shares.  These
options have vested and are currently exercisable. The shares underlying these
options are included in the table and are considered to be outstanding for
purposes of computing the percentage interest held by Mr. Govatski.


(3) This
number of shares includes options to purchase 1,200,000 shares.  These
options have vested and are currently exercisable. The shares underlying these
options are included in the table and are considered to be outstanding for
purposes of computing the percentage interest held by Ms. Dickey.




37





(4)  This
number of shares includes options to purchase 1,500,000 shares.  These
options have vested and are currently exercisable.  The shares
underlying these options are included in the table and are considered to be
outstanding for purposes of computing the percentage interest held by Mr.
Handley.


(5)  This
number of shares includes options to purchase 1,500,000 shares.  These
options have vested and are currently exercisable.  The shares
underlying these options are included in the table and are considered to be
outstanding for purposes of computing the percentage interest held by Mr.
Reidy.








ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





We did
not enter into any transactions with our directors and executive officers in
2008 and none are proposed.





ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES





The
following table sets forth amounts we have been billed with respect to 2008 and
2007 for certain services provided by our independent accountant.





Service
                  
                  2008
                  
                  
                  2007Audit
                  
                  $
                  29,000
                  
                  
                  $
                  25,000Review
      of unaudited financial statements
                  
                  $
                  13,000
                  
                  
                  $
                  12,000Audit-related
      fees
                  
                  none
                  
                  
                  noneTax
      compliance, tax advice and tax planning
                  
                  $
                  2,000
                  
                  
                  $
                  6,000All
      other services
                  
                  none
                  
                  
                  none





ITEM
15. EXHIBITS





(a) The
following documents are filed as part of this report:





1.
Financial statements; see index to financial statement and schedules in Item 8
herein.





2.
Financial statement schedules; see index to financial statements and schedules
in Item 8 herein.





3.
Exhibits: None





38








SIGNATURES





In
accordance with Section 13 or 15(d) 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:  April
      13, 2009
              /s/
      Richard F. GovatskiRichard
      F. GovatskiPresident,
      Chief Executive Officer and Chairman of theBoard
      of DirectorsDate:  April
      13, 2009
              /s/
      Teresa B. DickeyTeresa
      B. Dickey, Director, Secretary, Treasurer andPrincipal
      Financial OfficerDate:  April
      13, 2009
              /s/
      John HandleyJohn
      E. Handley, DirectorDate:  April
      13, 2009
              /s/
      Frank A. ReidyFrank
      A. Reidy, Director


























39