UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-KSB





[X]    
      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934 FOR THE FISCAL YEAR ENDED  JULY 31,
    2008[  
      ]      TRANSITION REPORT PURSUANT TO SECTION 13
      OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
      FROM ______ TO ________


Commission
file number 000-30151




Proginet
Corporation


(Name of
small business issuer in its charter)


Delaware
            
            11-3264929(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)200
      Garden City Plaza, Garden City, New York
            
            11530(Address
      of principal executive offices)
            
            (Zip
      Code)





Issuer's
telephone number   (516)
535-3600





Securities
registered under Section 12(b) of the Exchange Act:





Title of each
      class
            Name of each exchange
      on which registeredNone
            None





Securities
registered under Section 12(g) of the Exchange Act:


Common Stock, $.001 par
value


(Title
      of class)
              Check
      whether the issuer is not required to file reports pursuant to Section 13
      or 15(d) of the Exchange Act. ___


Check
whether the issuer: (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 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
___





Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB___





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).





Yes ___
No _X__





The
issuer’s revenues for its most recent fiscal year were $7,565,185.





The
aggregate market value of the voting stock (based on the closing price of such
stock on the OTC Bulletin Board) held by non-affiliates of the issuer as
of  September 10, 2008 was approximately $9,652,000.  All
officers and directors of the issuer have been deemed, solely for the purpose of
the foregoing calculation, to be “affiliates” of the issuer.





There
were 14,849,055 shares of Common Stock outstanding at September 10,
2008.





DOCUMENTS
INCORPORATED BY REFERENCE





Certain
information required by Part III of this Form 10-KSB is incorporated by
reference from the Proxy Statement for the 2008 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A not later than 120 days after the end of the fiscal year covered by this
Form 10-KSB.


Transitional
Small Business Disclosure Format:   Yes ___ No _X__











TABLE OF CONTENTS




Page





Part
      IItem
      1.
            Description of Business
            1Item
      2.
            Description of Property
            14Item
      3.
            Legal Proceedings
            14Item
      4.
            Submission of Matters to a Vote of Security
      Holders
            14Part
      IIItem
      5.
            Market for Common Equity and Related Stockholder Matters and
      Small Business Issuer Purchases of Equity Securities
            15Item
      6.
            Management's Discussion and Analysis or Plan of
      Operation
            16Item
      7.
            Financial Statements
            24Item
      8.
            Changes in and Disagreements With Accountants on Accounting and
      Financial Disclosure
            44Item
      8A(T)
            Controls and Procedures
            44Item
      8B.
            Other Information
            44


Part
      IIIItem
      9.
            Directors,  Executive Officers,  Promoters
      and Control Persons and Corporate Governance; Compliance with Section
      16(a) of the Exchange Act.
            45Item
      10.
            Executive Compensation
            45Item
      11.
            Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
            45Item
      12.
            Certain Relationships and Related Transactions and Director
      Independence
            45Item
      13.
            Exhibits
            46Item
      14.
            Principal Accountant Fees and Services
            47Signatures
            
            47








i





Part I




Item
      1.           
      Description of Business




This
Form 10-KSB and the documents incorporated herein by reference contain
forward-looking statements that involve risks and
uncertainties.  Actual results may differ materially from those
expressed in forward-looking statements. See—"Risk Factors" at the end of this
Item 1.




Proginet
Corporation ("Proginet" or the "the Company") offers a universal, multi-platform
software solution for fast, inexpensive and secure file transfers both inside
and outside the enterprise. Proginet’s flagship solution, CyberFusion
Integration Suite (CFI)®, is
used by companies of all sizes to conduct business more efficiently while
protecting customer data and limiting the risks associated with sharing
proprietary information with partners and colleagues around the globe. The
Company also offers solutions for e-mail attachment management and password
management, selling its products in North America through its direct sales force
and channel partnerships (value-added resellers and distributors) and
internationally through a global network of distributors. The Company also sells
its products through Original Equipment Manufacturer (OEM) partners in the
United States and Europe.




With over
20 years of experience in the managed file transfer arena, Proginet has built a
customer base of more than 400 companies spanning 30
countries. Headquartered in New York, the Company is publicly traded under
the symbol [OTCBB: PRGF]. For more information, visit www.proginet.com.  Our
website and the information contained therein or connected thereto shall not be
deemed to be incorporated into this Form 10-KSB.




General
Development of the Business




Proginet
was incorporated in New York in 1986 as the Teleprocessing Connection, Inc. and
changed its name in 1990 to Proginet Corporation. In 1994, Proginet incorporated
in Delaware, and then became a public company by listing on the Vancouver Stock
Exchange (which subsequently
merged with the Canadian TSX exchange) in 1995. In September 2000, Proginet
common stock began trading on the OTC Bulletin Board (“OTCBB”) under the symbol
PRGF. In 2003 the Company delisted from the Canadian TSX exchange. The Company's
major product offerings are the result of internal development of software.
Proginet has supplemented its offerings by completing five acquisitions between
1994 and 2005, including product acquisitions from Novell, Microsoft,
KnowledgNet, SureFire and Blockade. The Company has also recently partnered with
several technology vendors to provide enhanced capabilities, including but not
limited to acceleration and archiving, for its major file transfer product
line.




Products




This
section provides a brief overview of the principal products marketed by
Proginet. Proginet has designed its products with an emphasis on innovation,
reliability, security, scalability, ease of use and deployment, and strong ROI.
Proginet’s goal is to offer the fastest, most economical solution for electronic
delivery of business files to anyone, anywhere, regardless of
platform.




Product
Category: Advanced Managed File Transfer




Proginet’s
advanced managed file transfer (MFT) solution allows users to send business
information over extended corporate networks and over the Internet, confident
that no one other than the intended recipient can access the information.
Proginet’s advanced MFT software is in use at some of the largest corporations
in the world. The Company's flagship solution, CyberFusion Integration Suite
(CFI)TM, was introduced to the market in July 2005 to satisfy the B2B data
transfer requirements of global enterprises, in addition to satisfying the
enterprise data transfer needs already addressed by Proginet's other MFT
solutions.




Proginet
believes that CFI positions the Company for growth. Accelerating market
globalization, major advances in technology, and increased levels of security
risk, have increased the importance of managed file transfer, so much so that it
has become a critical element of data integration and application integration
for major enterprises. Enterprise needs for more advanced MFT capabilities are
compelling and driven by many factors. The most significant drivers
include:




·
            Integration
      Requirements


·
            Open
      Standards


·
            Performance


·
            Security


·
            Regulatory
      Compliance Mandates


·
            Control
      & Management


·
            Efficiency




CFI has
been developed specifically to address these key drivers. The following section
provides a high-level overview of CFI and its components:




Return to Table of Contents
 1





CyberFusion Integration
SuiteTM: CFI is a totally integrated advanced managed file transfer
solution that provides a single point of control for all file-transfer activity
inside and outside an extended enterprise. A multi-platform solution that serves
the mainframe world and all major distributed platforms, CFI enables
organizations to conduct all enterprise file transfer securely and efficiently
with internal departments, suppliers, business partners, and customers, and to
integrate with a broad range of B2B applications in support of end-to-end
processing. In the summer of 2008, Proginet entered into an agreement with
RocketStream, a subsidiary of Voyant International Corporation, and a leading
provider of data transfer acceleration software, which is exclusive as to a
certain industry sector, whereby Proginet would embed RocketStream’s technology
for data transfer acceleration into CFI. Proginet believes this will prove to be
a major differentiator for the Company. Initial testing of the combined solution
between the US and Asia have revealed speeds that are 15 to 50 times faster than
traditional FTP. It is anticipated that the accelerated version of CFI will be
generally available for purchase in the Fall of 2008.




From a
conceptual level, CFI is comprised of four major integrated components, as
detailed below:




CFI Command Center:Command
Center provides a single point of control to manage all enterprise file
transfers – inside and outside the enterprise, and across all platforms. The
Command Center's Web-based interface provides a single view of all file transfer
activity, including server management, user profiles, alerts, status reporting,
and audit logging. The Command Center easily monitors the incoming and outbound
file transfers of a company and the company's business partners.




CFI Platform Server: Platform
Server's core strength is handling multi-platform transfers. The Platform Server
provides total security and control for every file entering or leaving the
enterprise, regardless of platform. Platform Server's peer-to-peer architecture,
enterprise-level automation, and high-volume file-transfer capabilities enable
seamless integration with other enterprise applications to deliver true
end-to-end processing.




CFI Internet Server:Internet
Server enables organizations to exchange information securely over the Internet
– with complete control. Internet Server is ideal for integrating with trading
partners and for building secure trading partner networks; the only requirement
for trading partners is a standard Web browser (no client software is
required).




CFI Commerce Server: Commerce
Server is a fully-featured electronic data interchange (EDI) integration
solution for B2B data exchange and is appropriate for a range of vertical
industries including healthcare, retail, manufacturing, and financial services.
Commerce Server supports EDI, the standard data format for exchanging business
data, and provides full transaction mapping, transformation, and auditing
functionality. In conjunction with CFI's Internet Server, Commerce Server
supports Internet EDI, enabling organizations to transition from, and eliminate,
value-added networks (VANs) and lease lines, and high associated costs.
Companies using Commerce Server for Internet EDI can integrate suppliers and
trading partners seamlessly over the Internet, with zero transaction
cost.




RocketStreamTM:Proginet is also
reselling RocketStream as a standalone solution.The RocketStream
software suite is a file transfer acceleration solution that overcomes the
harmful effects of network latency on IP data throughput. The solution is sold
by Proginet under a reseller agreement with RocketStream. RocketStream is as
easy to use as an FTP client but is exponentially faster. Available in
client/server and peer-to-peer configurations, RocketStream provides features
like job scheduling, hot folders, synchronization, and mirroring – in a
user-friendly interface.




Product
Category: Gateway Proxy Server




With
growing enterprise security risk and increasing pressures from industry and
government regulations (Sarbanes-Oxley, GLBA, HIPAA, PCI-DSS, et al), companies
are demanding additional layers of security to protect their business data.
Proginet believes that a Gateway Proxy Server (or ‘Edge’ Server) will be an
effective tool in promoting enterprise data security.




CFI Edge ServerTM: CFI Edge
Server is a new appliance-based proxy server that provides a secure
gateway for bi-directional communications between enterprise file transfer
systems and external business partners and systems. Edge Server, which the
Company expects to start shipping in November, will be the only secure file
transfer gateway appliance that works with any file transfer system to
facilitate secure data transfer across the Demilitarized Zone or DMZ and
directly into an organization’s corporate network (a DMZ is a firewall protected
“neutral zone” between a company’s private network and the external public
network and is designed to prevent external parties getting direct access to the
corporate system). The Edge Server resides within the DMZ and enables
enterprises to safely house their file servers and all associated data inside
the corporate network (‘the edge’ of the network). By deploying Edge Server as
their file transfer gateway, companies can ensure that data is never written to
or stored in the DMZ, thereby eliminating a key point of corporate
vulnerability. Edge Server is delivered as a ready-to-install appliance for
quick and easy deployment in any technology environment.






Return to Table of Contents
 2





Product
Category: E-mail Attachment Management




A large
increase in the use and size of e-mail attachments has contributed to the major
challenges associated with corporate e-mail systems today. These challenges
relate to several major issues including file-size limitations, storage
capacity, security, and audit. Left unaddressed, these issues can cause major
problems for an organization, impacting the productivity and performance of
business users and the organization as a whole.




CFI SlingshotTM: CFI Slingshot is an
enterprise solution that solves the major challenges of e-mail attachments and
how they are handled. Slingshot integrates seamlessly with enterprise e-mail
systems (as a plug-in to Microsoft Outlook), as well as through a standard Web
browser, so that business users can easily share and transfer files of any size
– outside of the traditional confines of the e-mail system. Target customers
include organizations of any size with a requirement to eliminate common
problems related to e-mail attachments: file-size limitations, storage capacity
(the mail store), security, and audit. Proginet has also developed Slingshot
Vault which is an appliance-based version of the solution with additional
archiving capabilities.




Product
Category: Password & Access Management




Enterprises
face many challenges when it comes to managing passwords and user access.
Proginet’s password and access management solutions secure and protect corporate
resources and provide centralized management and control of enterprise users.
Proginet has been providing password management solutions to major enterprises
for more than a decade. In early 2005, Proginet further solidified its position
in this marketplace by acquiring the assets of Blockade Corporation, a Canadian
security software vendor. The core technologies acquired from Blockade have
since been incorporated into Proginet's portfolio of security software products
and rebranded under the names SecurForceTM and SecurAccessTM. Expanding its
portfolio of security software products has enabled Proginet to offer the
following enterprise solutions:




·
            Password
      Management


·
            Access
      Management


·
            Two-factor
      Authentication




The
following section provides an overview of Proginet products that fall under the
category of password and access management:




SecurForceTM: SecurForce, from Proginet,
is a comprehensive password management solution for the large or extended
enterprise. The SecurForce Suite is comprised of the SelfServ and SyncServ
modules. The modules work independently for specific usage or can be combined to
form a comprehensive, enterprise-grade password management system.




SelfServ: The self-service
password reset and registration module automates the password reassignment
process, enabling users to easily reset their own passwords without placing
expensive and time consuming calls to the help desk. This slashes help-desk
costs related to password management and tremendously improves operational
efficiencies and overall productivity. Users can also register accounts,
associate accounts, and maintain their own identity details.




SyncServ: The password
synchronization module reduces the number of passwords a user needs to one –
regardless of the number of platforms or applications the user is authorized to
access. User-password changes propagate across all systems automatically and
systems are securely synchronized in real-time.




SecurPass®: SecurPass is Proginet’s
entry-level software solution for password management. The solution is value
priced for small-to-medium sized businesses. SecurPass protects data within the
enterprise – locking out unauthorized users – and integrates the enterprise's
disparate platforms so that users can access all of their business applications
using a single password. SecurPass comprises two modules that can be deployed
either together or separately in an organization to achieve password
synchronization and/or reset functionality.




SecurPass: Reset: Proginet's
security module for self-service, password reset, SecurPass:Reset enables users
to reset their own passwords in real time, eliminating expensive calls to the
organization's help desk. A Web-based, self-service utility, SecurPass: Reset
prompts users through the reset process – quickly, effortlessly, and
efficiently.




SecurPass: Sync:SecurPass:
Sync is a security module for synchronizing user passwords across multiple
platforms; users only have to remember a single password to access all of their
critical business applications. This minimizes the potential for password
exposure and mitigates security risk for the organization.




SecurAccessTM: SecurAccess is a single
sign-on solution for the enterprise that enables users to access corporate
resources and applications using a single, secure password. A centralized
enterprise access control and management solution, SecurAccess takes advantage
of the power of the IBM z/OS Enterprise Server system to effectively solve the
organization’s security and access challenges. With SecurAccess, users have
access to enterprise applications on any server authorized to their profile.
They can access these applications seamlessly and in complete compliance with
enterprise security policies.







Return to Table of Contents
 3





SecurAccessTMwith VASCO®Tokens: Two-factor
authentication is gaining popularity within organizations and has been adopted
by a number of major consumer-facing financial institutions. Seen as a viable,
and indeed desirable, method of improving password strength and overall
security, two-factor authentication combines something you have (a physical
device) – with something you know (a password). Proginet is an authorized
reseller of VASCO tokens. Proginet's SecurAccess combines with VASCO
Digipass® tokens to
deliver true two-factor authentication, enabling secure user access to corporate
resources and applications.




Product
Category: Legacy Solutions




Proginet
maintains a portfolio of legacy products that are used at leading corporations
worldwide. These products include file transfer and middleware solutions that
have significant positive impact on Proginet's revenue stream, but are no longer
actively promoted in the marketplace. Existing customers of these products
receive technical support from Proginet.




Strategy




File
Transfer represents one of the most critical problems that companies must
address. However, the accelerating growth of the global economy demands that
more and more data be shared among business partners. The security and control
of data as it moves within and between companies’ remains as one of the highest
IT priorities throughout the world. It is more imperative than ever to control,
track, and audit all of the information leaving and entering an enterprise every
day.




Product Strategy:
Proginet’s product strategy continues to be to develop and market enterprise
file transfer software solutions that are standards-based, forward-looking and
interoperable, and capable of meeting or exceeding the market's evolving
requirements in terms of data movement, security and regulatory compliance. The
Company's core technologies are integral to an enterprise's overall business
process and promote secure, controlled data movement. Proginet implements
its strategy by investing in a highly qualified development team that produces
and brings to market unique and creative products, as well as establishing
partnerships to acquire components and expertise in complementary technologies
geared to the software requirements of large, medium and small enterprises.
Proginet will continue to pursue a combination of internal software development
and strategic technology partnerships in order to innovate in the marketplace
and maintain competitive advantage.




Proginet
provides enterprise software to many diversified industries worldwide with
technology that includes advanced security and management features to ensure
secure access and control over enterprise systems and data. Proginet’s
technology provides comprehensive features and capabilities to ensure compliance
with laws, regulations, and mandates, as well as standards appropriate for these
industries – generating cost effective, efficient, scalable, reliable and secure
infrastructures to move, manage, protect and secure the typical enterprise's
most important asset – its data.




The
driving force behind Proginet’s strategy is the absolute dedication and
commitment to fully utilize Proginet’s expertise, background, and core
competencies in the critical area of data movement and control. These
competencies have resulted in Proginet’s product development architecture, which
is focused on critical aspects of data security and management. This development
architecture is an evolutionary approach to integrate all of the methods of data
communications under one comprehensive data security and control umbrella. The
core product under which this development is taking place is CyberFusion
Integration Suite (CFI).




CFI is an
end-to-end, advanced managed file transfer (MFT) solution that tightly
integrates all enterprise file-transfer activity, both inside and outside the
enterprise – enabling the organization to achieve total control, security, and
efficiency with all file-based business activity. CFI's value proposition is
underpinned by the fundamental concepts of: single point of control, total
security, total auditability, guaranteed delivery, end-to-end process
automation, and transfers inside and outside the extended
enterprise.




One of
the key components of the CFI Suite is the CFI Command Center, a central control
capability that serves as the central hub for the synchronization and
coordination of all activities of the other CFI components that are deployed on
network servers throughout the enterprise. A key product development strategy is
to incorporate more types of data flows under the umbrella of the Command
Center. This includes CFI Commerce Server, which provides the capability to
incorporate and control all EDI based files within the CFI Suite. Proginet has
also introduced CFI Slingshot to provide a superior method of handling e-mail
attachments to solve the growing problems of attachment size and space
requirements in e-mail systems. By incorporating these components within CFI,
customers will benefit from all of the control, security, and auditing
capabilities standard to the CFI suite.




Proginet's
CFI technology follows a logically designed “road map” and provides a master
control system to secure and protect access to, and movement of, enterprise data
– anywhere, anytime and anyhow – with industry standards for compliance and
control. CFI also complies with Service Oriented Architecture (SOA) standards,
which allows for CFI to be utilized as set of integrated services within the SOA
structure of any sized corporation. As more and more companies adopt SOA
architecture, this will serve as a strong differentiator between CFI and other
products.







Return to Table of Contents
 4





For
clients looking to adopt our technology enterprise-wide, Proginet provides a
logical and orderly migration path – an evolutionary approach – to building and
managing a total infrastructure for data movement. We also define the deployment
strategies and phases of deployment required to achieve a secure
data-integration environment.




Market Strategy:
Proginet's market strategy is dependent on the Company's successful development
and deployment of the product development architecture. With success in research
and development, the strategy is then driven by three major components of the
strategic plan: direct sales, channel partnerships, and technology alliances. A
significant aspect of the market strategy is recognizing the importance of
understanding that the needs of the marketplace are fluid and dynamic. The
emphasis, the order of priority, and the commitment of resources, must be
adjusted to maximize performance and capitalize on the most significant
opportunities.




The
direct sales component emphasizes the need to develop more aggressive and
creative sales and marketing programs. Every aspect of Proginet's sales process
has been improved from the perspective of lead generation, lead qualification,
product evaluation, and the closing of business. The sales strategy is
specifically focused on increasing the average size of deals and reducing the
average length of the sales process.




The
channel partnership strategy is focused on the companies and resellers that
satisfy Proginet's core objectives. The channel will continue to be Proginet’s
prime strategy for international growth, and the Company will continue to
establish both domestic and international partnerships with VARs, distributors,
and major system integrators. With a focus of leveraging the expertise and
strength of these firms in their respective vertical and geographic markets,
Proginet is strengthening its ability to penetrate these markets.




Technology
alliances will continue to be a core part of our overall market strategy.
Technology alliances, such as the one announced recently with RocketStream,
should enable Proginet to innovate quickly and differentiate clearly in the
marketplace.




Sales
and Marketing




Proginet’s
sales strategy is comprised of three sales models: direct sales and VARs in
North America; indirect sales through distribution partners and value added
resellers (VARs) in over 23 countries around the world and in the United States;
and strategic alliances with partners who integrate Proginet’s technology with
their technology and sell the combined product(s). This last model is commonly
referred to as OEM.




The
direct sales model includes a direct telemarketing and sales force comprised of
Proginet employees. This group has been significantly revamped during the fourth
quarter of fiscal 2008, and additional sales representatives have been added.
The direct sales model covers the entire sales cycle from lead generation
through a proof-of-concept (POC) evaluation process, to the signing of a
software license agreement. Proginet estimates that the “typical” sales cycle
averages about 90 days for smaller sales, and up to 150 days or more for larger
sales, and that the Company closes the sale in approximately thirty five (35)
percent of POC’s started.




The
indirect sales model is built on the premise that presence and knowledge in
local markets is paramount to establishing necessary business relationships and
closing sales. Distributor/channel partnerships are established in local markets
and Proginet commits significant resources to train and support them to sell
Proginet software in their countries. The distributors’ role is to act as
agents, make the marketplace aware of Proginet’s technology and explain how the
technology can be used in their business environments. Proginet supports the
distributors with assistance and support, customer installations, and training
whenever necessary. Distributors are typically compensated at a commission rate
of 40% to 50% of the license revenue generated based upon their level of effort,
resources assigned, and commitment to closing sales. In addition, Proginet’s VAR
relationships leverage the sales and marketing facilities of these entities to
promote Proginet products through the VAR networks. Similar to a distributor
partnership, VARs are trained extensively in Proginet’s software. However
customer support and maintenance is generally preformed by Proginet. As such,
VARs are compensated at a commission rate of 25% to 40% of the license revenue
generated.




The OEM
sales model is based on the ability of an outside software company with
complementary technology to sell, install and support Proginet’s technology.
These OEMs incorporate Proginet’s technology to provide services to other
customers. The OEM arrangements include a commission structure similar to
distributors and also include specific fixed pricing for the number of “users”
the product is licensed for.




All of
Proginet’s sales are dependent on visibility in the marketplace and the market's
acceptance of Proginet’s products. As such, the relationships with technology
partners such as IBM, Microsoft, HP and others, as well as with industry
analysts, most notably Gartner, gives Proginet greater visibility, which will
continue to benefit both the direct and indirect sales model. Such visibility is
often provided via coverage on these companies' Web sites, and in reports
published by them. In both models, while there is no contractual obligation for
Web site or other coverage, such visibility provides leads and references to
prospective customers who could benefit from Proginet’s products and their
integration into our partner’s technology. The Company, however, does not
maintain statistics on the amount of revenues attributable to such
leads.







Return to Table of Contents
 5





Proginet’s
marketing strategy is centered on communicating the Company’s product solutions
and overall value proposition to the marketplace. It is focused on two primary
categories: targeted vertical marketing and marketing
communications.




Targeted
vertical marketing identifies specific vertical markets where Proginet’s
products are most beneficial to create the greatest number of opportunities and
then develops positioning, programs and materials to reach these customers and
support sales activities.




Marketing
communications is a comprehensive program to deliver Proginet’s message to
identified audiences. These methods include public relations and press coverage,
developing industry analyst relationships, trade show attendance, industry
conference participation, targeted e-mail and direct mail campaigns, and
communication through our corporate Web site.




Proginet's
Web site plays a critical role in our sales lead generation program. The Company
is currently in the process of a complete Web site redesign, enhancing the
structure, content, and positioning of our corporate site in line with new
corporate positioning and recognized best practices. The Company has also added
e-commerce functionality to its Web site with a Web store which has recently
been launched.  Search engine optimization will also be a key area of
focus for the Company.




Customers




Proginet
has established a worldwide customer base of companies or organizations in 30
countries. These customers are engaged in financial services, insurance,
healthcare, telecommunications, government, and many other vertical industries.
No one customer represented 10% or more of Proginet’s revenues during each of
the past two fiscal years.




Suppliers




Proginet
is not reliant on any particular supplier for any of its operating needs. Any
products required can be purchased from a number of sources.




Competition




The
enterprise software space in which Proginet operates is highly competitive. Many
of our competitors, including IBM, Computer Associates, Sterling Commerce (an
AT&T company), Axway, and Tumbleweed (Axway and Tumbleweed have merged as of
September 4th, 2008),
have longer operating histories, larger customer bases, greater brand
recognition and significantly greater financial, marketing and other resources.
Some of our competitors may devote greater resources to marketing and
promotional campaigns, adopt more aggressive pricing policies and devote
substantially more resources to Web site and systems development. If our
competitors are able to offer products and services on more favorable terms, we
may experience reduced operating margins, loss of market share and a diminished
brand franchise. We cannot assure stockholders or other parties that we will
compete successfully against our current and future competitors. Competitive
pressures created by any one of our competitors, or by our competitors
collectively, could have a material adverse effect on our business, prospects,
financial condition, and results of operations.




We
believe that the key criteria considered by potential purchasers of our products
are substantially as they have been reported in previous years, including: the
operational advantages and cost savings provided by our products; product
quality and capability; product price and the terms on which the product is
licensed; ease of integration of the product with the purchaser’s existing
systems; ease of product installation and use; quality of support and product
documentation; and the deep expertise and experience of our
Company.




Proprietary
Rights




Proginet
does not possess any patents.  Proginet relies on a combination of
trademark, copyright and trade secret laws to protect its proprietary
rights.  Proginet has trademarked the names CyberFusion, CyberFusion
Integration Suite, CFI, SecurForce, SecurPass, and SecurAccess in the United
States. These trademarks are considered significant in the protection of the
Company's technology.  The Company believes that its source code and its
product designs are best protected by the Company’s Employee Confidential
Information and Non-Competition Agreements entered into with each of its
employees as well as work-for-hire agreements with
consultants.







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 6





Government
Regulation




Proginet
has received authorization from the United States Commerce Department to export
strong encryption that will ensure the security of critical business information
transferred worldwide via the Internet.  Other than regulations
concerning the export of sensitive materials applicable to all businesses in
general, the Company is not subject to direct regulation by any government
agency.




Employees




As of
July 31, 2008, Proginet had sixty one full-time salaried employees and two
consultants on retainer.  The Company believes its relations with its
employees are satisfactory.




Research
and Development Activities




Proginet's
investments in new technology development have and will continue to be a most
significant factor in the Company's success.  Proginet's expenditures
for development are accounted for as research and development expense and
capitalized software development expenditures.  A more thorough
explanation of capitalized software and its financial treatment can be found in
the Company's financial statements and the associated footnotes.





In 2008,
the Company incurred research and development expense of $401,578and incurred capitalized
software development expenditures of $1,472,792.  In 2007 the Company
incurred $168,222 in research and development expenses and $937,857 in
capitalized software expenditures.  It is the sum of these two costs
that represents the investment in new technology offered to the
marketplace.




Risk
Factors




An
investment in shares of our stock involves various risks.  Before
deciding to invest in our stock, you should carefully consider the risks
described below in conjunction with the other information in this Form 10-KSB,
including the items included as exhibits.  Our business, financial
condition and results of operations could be harmed by any of the following
risks or by other risks that have not been identified or that we may believe are
immaterial or unlikely.  The value or market price of our stock could
decline due to any of these risks, and you may lose all or part of your
investment.  The risks discussed below also include forward-looking
statements, and our actual results may differ substantially from those discussed
in these forward-looking statements.





We
may have difficulty in executing our business operations.




Our
future operating results will depend on our overall ability to manage
operations, which includes, among other things:




·
            maintaining
      a strong balance sheet and positive or neutral cash
  flow;




·
            retaining
      and hiring, as required, the appropriate number of qualified
      employees;




·
            growing
      our international sales;




·
            building
      an adequate pipeline of prospective
sales;




·
            accurately
      forecasting revenues;




·
            training
      our sales force and channel partners, particularly its newer members, to
      sell more products and services;




·
            developing
      products with strong market appeal;




·
            controlling
      expenses, particularly sales, product development, and general and
      administrative expenses;




·
            managing,
      protecting and enhancing, as appropriate, our infrastructure, including
      but not limited to, our information systems and internal controls;
      and




·
            otherwise
      executing on our strategic plans.







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 7





An
unexpected decline in revenues without a corresponding and timely reduction in
expenses or a failure to manage other aspects of our operations could have a
material adverse effect on our business, results of operations or financial
condition.




If
we have elected an ineffective strategy, or do not execute an effective strategy
well, our business could be harmed.




Our
objective is to leverage and expand our core products in managed file transfer
(MFT) to be a leading provider of such technology in the MFT market space. We
have developed a strategic and operating plan based on what we believe to be
critical success factors for growing our business in MFT solutions. The plan
includes key initiatives such as: continuing to build our direct and channel
sales model and leveraging these partnerships to reach more customers and
vertical industries, maximizing our marketing efforts and developing innovative
products which are focused in the MFT space. If the strategy we have elected to
pursue turns out to be ineffective, it could significantly limit our ability to
compete successfully against current and future competitors and otherwise
negatively impact our business.




If on the
other hand we have elected to pursue an effective strategy, but we do not
execute our strategy well by optimizing our methods of producing, marketing, and
selling our products, it could significantly limit our ability to compete
successfully against current and future competitors and otherwise negatively
impact our business.




Our
sales cycles can be long and unpredictable, and our sales efforts require
considerable time and expense. As a result, our sales are difficult to predict
and may vary substantially from quarter to quarter, which may cause our
operating results to fluctuate significantly.




The
timing of our realizing revenue is difficult to predict. Our sales efforts
involve educating our customers about the use and benefit of our products,
including their technical capabilities, potential cost savings to an
organization and advantages compared to lower-cost products offered by our
competitors. Customers typically undertake a significant evaluation process that
has in the past resulted in a lengthy sales cycle, which typically lasts several
months, and may last a year or longer. We spend substantial time, effort and
money on our sales efforts without any assurance that our efforts will produce
any sales. In addition, product purchases are frequently subject to budget
constraints, multiple approvals, and unplanned administrative, processing and
other delays. Additionally, the greater number of competitive alternatives, as
well as announcements by our competitors that they intend to introduce
competitive alternatives at some point in the future, can lengthen customer
procurement cycles, cause us to spend additional time and resources to educate
end users on the advantages of our product offerings and delay product sales. If
sales expected from a specific customer for a particular quarter are not
realized in that quarter or at all, our results could fall short of public
expectations and our business, operating results and financial condition could
be materially adversely affected.




Fluctuations
in our quarterly operating results may not be predictable and may result in
significant volatility in our stock price.




Our
revenue and our operating results have fluctuated and may continue to fluctuate
based on, among other things, the timing of the execution and termination of
customer agreements in a given quarter. We have experienced, and expect to
continue to experience, fluctuations in revenue and operating results from
quarter to quarter for other reasons, including the timing of our target
customers’ election to adopt and implement our products and services and the
election of our customers to delay their purchase commitments or purchase in
smaller amounts. Further,we have experienced and
may continue to experience difficulty in managing the amount and timing of
operating costs and capital expenditures relating to our business, operations
and infrastructure as well as collecting fees owed by
customers.  Finally, any acquisitions or divestitures we complete as
well as the announcement or introduction of new or enhanced products and
services may create additional volatility in our results.




In
addition, many customers negotiate software licenses near the end of each
quarter. In part, this is because customers are able, or believe that they are
able, to negotiate lower prices and more favorable terms at that time. Our
reliance on a large portion of software license revenue occurring at the end of
the quarter and the increase in the dollar value of transactions that occur at
the end of a quarter can result in increased uncertainty relating to quarterly
revenues. Due to end of period variances, forecasts may not be achieved, either
because expected sales do not occur or because they occur at lower prices or on
terms that are less favorable to us.




As a
result of these factors, we believe that quarter-to-quarter comparisons of our
revenue and operating results are not necessarily meaningful, and that these
comparisons may not be accurate indicators of future performance. Because our
staffing and operating expenses are based on anticipated revenue levels, and
because a high percentage of our costs are fixed, small variations in the timing
of the recognition of specific revenue could cause significant variations in our
operating results from quarter to quarter. If we are unable to adjust spending
in a timely manner to compensate for any unexpected revenue shortfall, any
significant revenue shortfall would likely have an immediate negative effect on
our operating results. Our operating results in the past have, and in future
quarters may, fail to meet our expectations or those of securities analysts or
our investors due to any of a wide variety of factors, including fluctuations in
our performance as measured by any of a variety of metrics employed by such
persons. Any of these factors may cause a significant decline in the trading
price of our stock.







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 8





Various
factors may delay our ability to recognize revenue in connection with
contracts.




Many
factors may require us to defer recognition of license revenue for a significant
period of time after entering into a license agreement. We recently signed a
major license agreement with a governmental agency which required certain
contractual requirements to be achieved by Proginet before revenue could be
recognized in connection with this contract.  While this incident
marks the first time Proginet has not been able to recognize revenue immediately
upon execution of a license with a customer, other types of conditions may arise
in the future that would require us to defer recognition of revenue in
connection with executed license agreements.




We
may incur losses as we attempt to expand our business.




We intend
to expand our business and therefore expect to expend significant additional
resources on developing our sales force, developing a more robust reseller
program, research and development, marketing and product development. As a
result, we may need to expend significant resources to accomplish these goals.
If we fail to successfully develop and market new products or improve our direct
and channel sales results, we may not be able to achieve the necessary revenue
growth and may not be profitable.




Adverse
economic conditions or reduced information technology spending may adversely
impact our revenues.




Our
business depends on the overall demand for information technology and on the
economic health of our current and prospective customers. The purchase of our
products is often discretionary and may involve a significant commitment of
capital and other resources. Weak economic conditions, or a reduction in
information technology spending even if economic conditions improve, would
likely adversely impact our business, operating results and financial condition
in a number of ways, including by lengthening sales cycles, lowering prices for
our products and services and reducing unit sales.




We
may not be able to compete effectively with larger, better-positioned companies,
resulting in lower margins and loss of market share.




We
operate in intensely competitive markets that experience rapid technological
developments, changes in industry standards, changes in customer requirements,
and frequent new product introductions and improvements.  If we are unable
to anticipate or react to these competitive challenges or if existing or new
competitors gain market share in any of our markets, our competitive position
could weaken and we could experience a drop in revenues that could adversely
affect our business and operating results.  To compete successfully, we
must maintain a successful research and development effort to develop new
products and services and enhance existing products and services, effectively
adapt to changes in the technology or product rights held by our competitors,
appropriately respond to competitive strategy, and effectively adapt to
technological changes and changes in the ways that our information is accessed,
used, and stored within our enterprise and consumer markets.  If we are
unsuccessful in responding to our competitors or to changing technological and
customer demands, we could experience a negative effect on our competitive
position and our financial results.




We
compete with a variety of companies who have significantly greater revenues and
financial resources than Proginet as well as greater personnel and technical
resources. For example, CyberFusion Platform Server competes with products
offered by Sterling Commerce and several other vendors, and CyberFusion Platform
Server competes with Axway Technology.  Large companies may be able to
develop new technologies more quickly than we can, to offer a broader array of
products, and to respond more quickly to new opportunities, industry standards
or customer requirements.




Because
competition for our target employees is intense, we may not be able to attract
and retain the highly skilled employees we need to support our planned growth
and our compensation expenses may increase.




To
execute our growth plan, we must attract and retain highly qualified personnel.
Competition for these personnel is intense, especially for engineers with high
levels of experience in designing and developing software and senior sales
executives. We may not be successful in attracting and retaining qualified
personnel. We have from time to time in the past experienced, and we expect to
continue to experience in the future, difficulty in hiring and retaining highly
skilled employees with appropriate qualifications. Many of the companies with
which we compete for experienced personnel have greater resources than we have.
In addition, in making employment decisions, particularly in the high-technology
industry, job candidates often consider the value of the stock options,
restricted stock grants or other stock-based compensation they are to receive in
connection with their employment. A decline in the value of our stock could
adversely affect our ability to attract or retain key employees. If we fail to
attract new personnel or fail to retain and motivate our current personnel, our
business and future growth prospects could be severely harmed.




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 9





Our
ability to sell our products is dependent on the quality of our support and
services offerings, and our failure to offer high-quality support and services
could have a material adverse effect on our sales and results of
operations.




Once our
products are integrated within our customers’ hardware and software systems, our
customers may depend on our support organization to resolve any issues relating
to our products. A high level of support is critical for the successful
marketing and sale of our products. If we or our channel partners do not
effectively assist our customers in deploying our products, succeed in helping
our customers quickly resolve post-deployment issues, and provide effective
ongoing support, our ability to sell our products to existing customers would be
adversely affected, and our reputation with potential customers could be harmed.
In addition, as we expand our operations internationally, our support
organization will face additional challenges, including those associated with
delivering support, training and documentation in languages other than English.
As a result, our failure to maintain high-quality support and services, or to
adequately assist our channel partners in providing high-quality support and
services, could result in customers choosing to use our competitors’ products
instead of ours in the future.




Our
international business exposes us to additional risks that may result in future
additional costs or limit the market for product sales.




Products
and services provided to our international customers accounted for 27.6%, and
29.9% of our revenues for 2008 and 2007, respectively. Conducting business
outside of the United States subjects us to additional risks,
including:




·
            changes
      in regulatory requirements and any resulting costs of
      compliance;




·
            reduced
      protection of intellectual property rights; evolving privacy laws; tariffs
      and other trade barriers;




·
            Foreign
      currency exchange risks;




·
            problems
      in collecting accounts receivable;
and




·
            difficulties
      in authenticating customer
information.




Managing
these risks may subject us to additional costs that may not be justified in
light of the market opportunity, and the inability to comply with or manage
foreign laws and related risks may preclude or limit sales in foreign
jurisdictions.




Our
revenues depend upon key alliances.




We
currently have over 23 partners worldwide and may continue to enter into and
discontinue contractual strategic alliances.  Our revenues in the past
have depended and in the future will continue to depend, in part, on these
relationships.  We cannot assure you that any of these alliances will
develop successfully, if at all, or that these alliances will generate revenues
or earnings for us.  If we fail to manage these relationships
successfully, or if our alliances or partners fail to perform as we expect, we
could suffer substantial losses in sales and customers. Any such losses would
have a material adverse effect on our business, results of operations and
financial condition.




Additional
regulations could be imposed on our industry.




We are
not currently subject to direct regulation by any government agency other than
regulations applicable to businesses generally, which include export regulations
on encryption software for which Proginet has received exemptions from the U.S.
Commerce Department.  However, due to the increasing popularity and
use of the Internet, it is possible that a number of laws and regulations may be
adopted with respect to the Internet, covering issues such as privacy, pricing
and characteristics and quality of products and
services.  Furthermore, the growth and development of the market for
Internet commerce may prompt calls for more stringent protection laws that may
impose additional burdens on those companies conducting business over the
Internet.




Our
current research and development efforts may not produce significant revenues
for several years, if at all.




Developing
our products is expensive. Our investment in research and development may not
result in marketable products or may result in products that take longer to
generate revenues, or generate less revenue, than we anticipate. Our research
and development costs were $1,874,550, or 24.8% of our total revenues in 2008,
and $1,106,079, or 11.8% of our total revenues in 2007. Our future plans include
significant investments in software research and development and related product
opportunities. We believe that we must continue to dedicate a significant amount
of resources to our research and development efforts to maintain our competitive
position. However, we may not receive significant revenues from these
investments for several years, if at all.







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 10





Our
products are highly technical and may contain errors, which could cause harm to
our reputation and adversely affect our business.




Our
products are highly technical and complex and, when deployed, have contained and
may contain errors, defects or security vulnerabilities. Some errors in our
products may only be discovered after a product has been installed and used by
customers. Any errors, defects or security vulnerabilities discovered in our
products after commercial release could result in loss of revenue or delay in
revenue recognition, loss of customers and increased service cost, any of which
could adversely affect our business, operating results and financial condition.
Undiscovered vulnerabilities in our products could expose them to hackers or
other unscrupulous third parties who develop and deploy viruses, worms, and
other malicious software programs that could attack our products. Actual or
perceived security vulnerabilities in our products could harm our reputation and
lead some customers to return products, to reduce or delay future purchases or
use competitive products. End users, who rely on our products and services for
the interoperability of enterprise servers and applications that are critical to
their information systems, may have a greater sensitivity to product errors and
security vulnerabilities than customers for software products generally. Any
security breaches could lead to interruptions, delays and data loss and
protection concerns. In addition, we could face claims for product liability,
tort or breach of warranty, including claims relating to changes to our products
made by our channel partners. Our contracts with customers contain provisions
relating to warranty disclaimers and liability limitations, which may not be
upheld. Defending a lawsuit, regardless of its merit, is costly and
time-consuming and may divert management’s attention and adversely affect the
market’s perception of us and our products. In addition, if our business
liability insurance coverage proves inadequate or future coverage is unavailable
on acceptable terms or at all, our business, operating results and financial
condition could be adversely impacted.




We
utilize “open source” software in some of our products.




Open
source commonly refers to third party software whose source code is subject to a
license allowing it to be modified, combined with other software and
redistributed, subject to restrictions set forth in the license.  Open
source software is typically licensed for use for little or no charge, but
imposes on the user of the open source software certain requirements to license
to others both the open software as well as the software that relates to, or
interacts with, the open source software.  We use open source software
in some of our products and may continue to do so in the future.  In
particular, we use and rely on open source software for the encryption features
in our CyberFusion products.  Our use and reliance on open source
software may impose limitations on our ability to commercialize our products
and/or technologies incorporating open source software because, among other
reasons, open source license terms may be ambiguous and may result in
unanticipated obligations regarding our products; competitors will have improved
access to information that may help them develop competitive products; open
source software cannot be protected under trade secret law; it may be difficult
for us to accurately determine the developers of the open source code and
whether the open source software we use infringes third party intellectual
property rights and, consequently, may subject us to intellectual property
infringement or misappropriation litigation relating to our use of open source
software in our products; and, open source software potentially increases
customer support costs because licensees can modify the software and potentially
introduce errors.  Claims of infringement or misappropriation against
us could be costly for us to defend, divert the efforts of our technical and
management personnel and could require us to seek to obtain licenses from third
parties in order to continue offering our products, to re-engineer our products
or to discontinue the sale of any or all of our products in the event
re-engineering cannot be accomplished on a timely basis.  If this
occurs, our business, customer relationships, financial condition and operating
results could be materially harmed.




Our
industry is characterized by frequent litigation regarding patent, copyright and
other intellectual property rights and trends suggest that this may increase.
While there are no known pending or threatened claims against us for which we
expect to have an unsatisfactory resolution that could have a material adverse
effect on our operations and financial condition, there can be no assurance that
such claims will not be asserted, or, if asserted, will be resolved in a
satisfactory manner.  Any claim, regardless of outcome, may be costly
to defend.  In addition, there can be no assurance that third-parties
will not assert other claims against us with respect to any third-party
technology.




In
addition, the laws of certain countries in which our products are or may be
developed, manufactured, or sold may not protect our products and intellectual
property rights to the same extent as the laws of the U.S.




Our
products may expose customers to invasion of privacy, causing customer
dissatisfaction.




Our
CyberFusion products are intended to provide outsiders access to a customer’s
computer, making the customer vulnerable to security breaches, which could
result in the loss of their privacy or property. Customers suffering invasions
of privacy or other harm could result in customer dissatisfaction and possible
claims against us for any resulting damages.







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 11





We
depend on our ability to protect and enforce our intellectual property
rights.




We
believe that our trademarks and other proprietary rights are important to our
success and competitive position.  However, we do not possess any
patents.  We rely on a combination of trademark, copyright and trade
secret laws to protect our proprietary rights.  We have registered the
“CyberFusion”, “CyberFusion Integration Suite”, “CFI”, “SecurForce”,
“SecurAccess” and “SecurPass” trademarks in the United States.  We
cannot assure you that we will secure significant protection for our proprietary
rights or that claims will not be made against us in connection with our
proprietary rights.  The actions we take to establish and protect our
trademarks and other proprietary rights may be inadequate to prevent imitation
of our services or products or to prevent others from claiming violations of
their trademarks and proprietary rights by us.  In addition, others
may develop similar technology independently or assert rights on our trademarks
and other proprietary rights.  The laws of other countries may afford
us little or no effective protection of our intellectual property.




Intellectual
property claims against us can be costly and could impair our
business.




Other
parties may assert infringement or unfair competition claims against
us.  We cannot predict whether third parties will assert claims of
infringement against us, or whether any past or future assertions or
prosecutions will harm our business.  If we are forced to defend
against any such claims, whether they are with or without merit or are
determined in our favor, then we may face costly litigation, diversion of
technical and management personnel, or product shipment delays.  As a
result of such a dispute, we may have to develop non-infringing technology or
enter into royalty or licensing agreements.  Such royalty or licensing
agreements, if required, may be unavailable on terms acceptable to us, or at
all.  If there is a successful claim of product infringement against
us and we are unable to develop non-infringing technology or license the
infringed or similar technology on a timely basis, it could have a material
adverse effect on our business, financial condition and results of
operations.




We
may engage in future acquisitions that could disrupt our business, cause
dilution to our stockholders and harm our business, operating results and
financial condition.




In the
future we may seek to acquire other businesses, products or technologies.
However, we may not be able to find suitable acquisition candidates and we may
not be able to complete acquisitions on favorable terms, if at all. If we do
complete acquisitions, we may not ultimately strengthen our competitive position
or achieve our goals, or they may be viewed negatively by customers, financial
markets or investors. Acquisitions may disrupt our ongoing operations, divert
management from day-to-day responsibilities, increase our expenses and adversely
impact our business, operating results and financial condition. Future
acquisitions may reduce our cash available for operations and other uses and
could result in an increase in amortization expense related to identifiable
intangible assets acquired, potentially dilutive issuances of equity securities
or the incurrence of debt. We have limited historical experience with the
integration of acquired companies. There can be no assurance that we will be
able to manage the integration of acquired businesses effectively or be able to
retain and motivate key personnel from these businesses. Any difficulties we
encounter in the integration process could divert management from day-to-day
responsibilities, increase our expenses and have a material adverse effect on
our business, financial condition and results of operations. In addition, we
review our amortizable intangible assets for impairment when events or changes
in circumstances indicate the carrying value may not be recoverable and are
required to test goodwill for impairment at least annually. We may be required
to record a significant charge to earnings in our financial statements during
the period in which any impairment of our goodwill or amortizable intangible
assets resulting from an acquisition or otherwise is determined, resulting in an
adverse impact on our results of operations.




We
may require additional funding to expand our business.




We may
require additional financing in order to expand our business.  Our
working capital requirements in the foreseeable future will depend on a variety
of factors, including our ability to implement our business plan.  We
cannot assure you that we will successfully negotiate or obtain additional
financing, or that we will obtain financing on terms favorable or acceptable to
us.  We do not have any commitments for additional
financing.  Our ability to obtain additional capital depends on market
conditions, the national economy and other factors outside of our
control.  If we do not obtain adequate financing or such financing is
not available on acceptable terms, our ability to finance our expansion, develop
or enhance services or products or respond to competitive pressures would be
limited significantly.




Our
stock trades on the Over-The-Counter Bulletin Board, and may be subject to
volatility.





In 2000,
we began trading on the Over-The-Counter (“OTC”) Bulletin
Board.  Trading on the OTC Bulletin Board may decrease the number of
investors willing to trade in our common stock as opposed to stock which trades
on established exchanges such as the New York Stock Exchange, American Stock
Exchange or NASDAQ Stock Market, and therefore could decrease the liquidity and
trading volume of our common stock and reduce the number of market makers
willing to trade in our stock, making it likely that wider fluctuations in the
quoted price of our common stock would occur.  As a result, there is a
risk that stockholders will not be able to obtain price quotes that reflect the
actual value of our common stock.  Increases in the volatility of our
common stock due to the decreased number of individuals willing to trade in it
could also make it more difficult to pledge the common stock as collateral, if a
stockholder sought to do so, because a lender might be unable to accurately
value the common stock.







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 12





In
addition, we are subject to the SEC’s penny stock rules.  Penny stocks
are securities with a price of less than $5.00 per share, other than securities
that are registered on certain national securities exchanges, that are quoted on
Nasdaq or that meet certain conditions.  The penny stock rules require
delivery, by a broker-dealer prior to any transaction in a penny stock, of a
disclosure schedule about commissions payable to both the broker-dealer and the
registered representative and current quotations for the
securities.  The rules also require that broker-dealers send monthly
statements disclosing recent price information for each penny stock held in the
account and information on the limited market in penny
stocks.  Because of the burden placed on broker-dealers to comply with
the penny stock rules, stockholders may have difficulty selling our common stock
in the open market.




Our
stock price could be adversely affected if we are unable to continue to
favorably assess the effectiveness of our internal control over financial
reporting.




In the
future, we may encounter problems or delays in completing the implementation of
any changes necessary to make a favorable assessment of our internal controls
over financial reporting. If we cannot favorably assess the effectiveness of our
internal controls over financial reporting, investor confidence and our stock
price could be adversely affected.




We
do not pay dividends on our common stock.




We have
not paid a dividend on our common stock and have no plan to do so in the near
future. In addition, the terms of our revolving credit facility prohibit the
payment of dividends.




Delaware
law and our certificate of incorporation and bylaws contain anti-takeover
provisions that could delay or discourage takeover attempts that stockholders
may consider favorable.




Delaware
law, as well as provisions in our certificate of incorporation and bylaws could
have the effect of delaying or preventing a change of control.  For
example, our Board of Directors, without further stockholder approval, may issue
up to 10,000,000 shares of preferred stock with terms set by the Board of
Directors, which rights could be senior to those of common stock, which could
delay or prevent a change of control as well as reduce the voting power of the
holders of common stock.


















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 13





Item 2.
            Description
      of Property




Proginet
maintains its headquarters at 200 Garden City Plaza, Garden City, New York,
11530 where most employees are located.  This lease expires May 2013
with current monthly rent payments of approximately $23,000.  Proginet
also maintains a satellite office at 21 St. Clair Avenue East, Suite 301,
Toronto, Ontario.  This lease expires in May 2010 with current monthly
payments of approximately $4,000.




Item
3.            Legal
Proceedings




In early
April 2008, we received a letter from Red Oak Partners, LLC (“Red Oak”), which
acquired shares of our common stock in a tender offer completed in August 2007,
alleging that it was damaged because the directors and management of Proginet
made misrepresentations and/or breached their fiduciary duties to Red Oak,
Proginet’s stockholders and the investing public with respect to (i)
representations concerning the existence of contractually committed orders and
future financial performance; (ii) severance  arrangements made with
Proginet’s former CEO and (iii) a claim with respect to Proginet’s having
procured directors and officers insurance from a relative of Proginet’s former
CEO.  While Red Oak has not alleged a specific dollar amount with
respect to its damages, it has asked to be “made whole”.  In
connection with its claims, Red Oak has served a demand to inspect books and
records of the Company pursuant to Section 220 of the Delaware General
Corporation Law (the “220 Demand”).  We have responded to the
correspondence as well as the 220 Demand, and certain documentation has been
offered to Red Oak in response to the 220 Demand.  Management has
informed Red Oak that it believes Red Oak’s claims are
meritless.  Although we believe that Red Oak’s claims are without
merit and that we have substantial defenses in this matter, if Red Oak brings a
litigation, we could in the future incur substantial litigation related
expenses, and additional monetary expense if Red Oak prevails in its
claims.  We  intend to contest vigorously any litigation
that is commenced.





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




None.





Return to Table of Contents
 14





Part II




Item
      5.
            Market
      for Common Equity and Related Stockholder Matters and Small Business
      Issuer Purchases of Equity
Securities




In
September 2000, Proginet common stock began trading on the OTC Bulletin Board
(“OTCBB”) under the symbol PRGF. The following table shows the high and low
closing sales price in U.S. dollars, of Proginet’s common stock on the OTCBB for
each quarter within the last two fiscal years:




Quarter
      Ended
            High
            LowJuly
      31, 2008
            $1.00
            $.70April
      30, 2008
            $1.25
            $.85January
      31, 2008
            $1.65
            $1.22October
      31, 2007
            $1.81
            $1.45July
      31, 2007
            $1.70
            $1.13April
      30, 2007
            $1.25
            $1.01January
      31, 2007
            $1.14
            $0.66October
      31, 2006
            $1.26
            $0.70




These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.




Holders




Proginet’s
stock is held by approximately one hundred sixty-five holders of
record.




Dividends




Proginet
has not paid dividends and does not anticipate paying dividends in the
foreseeable future.  The Board of Directors intends to retain
earnings, if any, to finance growth.  Accordingly, any payment of
dividends by Proginet in the future will depend upon the need for working
capital and the financial condition of the Company at the time.




Securities
Authorized for Issuance under Equity Compensation Plan







Equity
Compensation Plan Information





(a)
            
            (b)
            
            (c)Number
      of securities to be issued upon exercise of outstanding options, warrants,
      and rights
            
            Weighted-average
      exercise price of outstanding options, warrants, and
rights
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))Equity
      compensation plans approved by security holders
            
            2,526,000
            
            
            $.78
            
            
            53,812Equity
      compensation plans not approved by security holders
            
            -
            
            
            -
            
            
            -Total
            
            2,526,000
            
            
            $.78
            
            
            53,812








Return to Table of Contents
 15




Item 6.
            Management's
      Discussion and Analysis or Plan of
Operation




General




You
should read the following discussion in conjunction with our financial
statements and the notes thereto included elsewhere herein.  Certain
statements under the captions “Description of Business”, “Management's
Discussion and Analysis or Plan of Operation” and elsewhere in this Form 10-KSB
contain “forward-looking statements” within the meaning of the Securities
Exchange Act of 1934.  Words such as “may”, “should”, “could”,
“believe”, “expect”, “anticipate”, “estimate”, “intend”, “strategy”, “likely”
and similar expressions are intended to identify forward-looking statements
about the Company’s future plans, objectives, performance, intentions and
expectations.  Such forward-looking statements are subject to a number
of known and unknown risks, uncertainties and other factors which may cause the
Company's actual results of operations and future financial condition to differ
materially from those expressed or implied in or by any such forward-looking
statements.  Such factors include factors that may be beyond the
Company’s control and include, among others, the risk factors set forth in Item
1 above and the risk factors set forth in this discussion, including under the
caption “Contingency Relating to Stockholder Claim.”  The Company
cautions that the foregoing list of important factors is not
exclusive.  The Company does not undertake to update any
forward-looking statements contained herein or that may be made from time to
time by or on behalf of the Company.





Use
of Estimates and Critical Accounting Policies




In preparing our financial
statements, we make estimates, assumptions and judgments that can have a
significant impact on our revenues, income from operations, and net income, as
well as on the value of certain assets on our balance sheet. We believe that
there are several accounting policies that are critical to an understanding of
our historical and future performance, as these policies affect the reported
amounts of revenues, expenses, and significant estimates and judgments applied
by management. While there are a number of accounting policies, methods and
estimates affecting our financial statements, areas that are particularly
significant include revenue recognition and capitalized software development
costs. These policies are described in detail below. In addition, please refer
to Note 1 to the accompanying financial statements for further discussion of our
accounting policies.




In
addition to the estimates and assumptions that we use to prepare our historical
financial statements, we monitor our sales pipeline in order to estimate the
timing and amount of future revenues. If we are unable to properly estimate the
timing and amount of revenues, our future operations could be significantly
impacted. Our sales pipeline may not consistently relate to revenues in a
particular period, as the data upon which the assumptions and estimates were
made by management may change. For example, information technology spending
trends may cause customers to delay and reduce purchasing decisions.
Accordingly, it may be harder to close contracts with customers, the size of the
transactions may decrease, and many of our license contracts are pushed to the
very end of the quarter, making it difficult for us to forecast revenues for the
quarter, and adjust spending to respond to variations in revenue growth during
the quarter, all of which may adversely affect our business, financial condition
and results of operations.




Revenue
Recognition




We
recognize revenue in accordance with Statement of Position, or SOP, 97-2,
“Software Revenue Recognition,” and SOP 98-9, “Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions.” We
recognize software license revenues when all of the following criteria are met:
persuasive evidence of an arrangement exists, the fee is fixed or determinable,
collectability is probable, delivery of the product has occurred and the
customer has accepted the product (including the expiration of an acceptance
period) if the terms of the contract include an acceptance requirement. In
instances when any of the criteria are not met, we will either defer recognition
of the software license revenue until the criteria are met or we will recognize
the software license revenue on a ratable basis, as required by SOPs 97-2 and
98-9.  We generally utilize written contracts as the means to
establish the terms and conditions by which our products support and services
are sold to our customers.





We
consider a non-cancelable agreement signed by us and the customer to be evidence
of an arrangement. Delivery is considered to occur when media containing the
licensed programs is provided to a common carrier, or the customer is given
electronic access to the licensed software. Our typical end user license
agreements do not contain acceptance clauses. We consider the fee to be fixed or
determinable if the fee is not subject to refund or adjustment. If the fee is
not fixed or determinable, we recognize revenue as the amounts become due and
payable. Probability of collection is based upon our assessment of the
customer’s financial condition through review of its current financial
statements or credit reports. Collection is deemed probable if we expect that
the customer will be able to pay amounts under the arrangement as payments
become due. For follow-on sales to existing customers, prior payment history is
also used to evaluate probability of collection. If we determine that collection
is not probable, we defer the revenue and recognize the revenue upon cash
collection.





Our
revenues are derived from direct sales executives, distributors, VARs and OEM
partners.  Commission expense is recorded at the time of sale.
Commission rates to direct sales people are based on a graduating scale, ranging
from 5% to 15% of the sale, dependent upon the revenue volume generated by the
sales executive. . Distributors are typically compensated at a commission rate
of 40% to 50% and VARs are compensated at a commission rate of 25% to 40% of the
license revenue generated. The rates vary based upon their level of effort,
resources assigned and products sold. The OEM arrangements include a commission
structure similar to distributors and also may include specific fixed pricing
for the number of “users” the product is licensed for. Revenues from sales
through distributors are recorded at the gross amount charged based on the
economic risks and ongoing product support responsibilities we
assume.








Return to Table of Contents
 16





When our
software licenses contain multiple elements, we allocate revenue to each element
based on the relative fair values of the elements. Multiple element arrangements
generally include post-contract support (PCS or support), software products and,
in some cases, service. Revenue from multiple-element arrangements is allocated
to undelivered elements of the arrangement, such as PCS, based on the relative
fair values of the elements specific to us. Our determination of fair value of
each element in multi-element arrangements is based on vendor-specific objective
evidence, which is generally determined by sales of the same element or service
to third parties or by reference to a renewal rate specified in the related
arrangement.





Where
vendor-specific objective evidence of fair value exists for all undelivered
elements, but evidence does not exist for one or more delivered elements, we
account for the delivered elements in accordance with the “Residual Method”
prescribed by SOP 98-9. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement
fee is recognized as revenue. In most cases, the bundled multiple elements
include PCS and the software product. In such cases, when vendor-specific
objective evidence of fair value exists for all of the undelivered elements
(most commonly PCS), the residual amount is recognized as revenue and the PCS is
recognized ratable over the PCS term, which is typically 12 months.





A
customer typically prepays maintenance revenues for the first 12 months and the
related maintenance revenues are recognized ratable monthly over the term of the
maintenance contract, which is generally 12 months. Maintenance contracts
include the right to unspecified upgrades on a when-and-if available basis and
ongoing support.





Deferred
revenues include amounts received from customers for which revenue has not yet
been recognized that generally results from deferred maintenance, consulting or
training services not yet rendered and license revenue deferred until all
requirements under SOP 97-2 are met. Revenue is recognized upon delivery of our
products, as services are rendered, or as other requirements requiring deferral
under SOP 97-2 are satisfied.





Based on
our interpretation of SOP 97-2 and SOP 98-9, we believe that our current sales
contract terms and business arrangements have been properly
reported.  However, the American Institute of Certified Public
Accountants and its Software Revenue Recognition Task Force continue to issue
interpretations and guidance for applying the relevant standards to a wide range
of sales contract terms and business arrangements that are prevalent in the
software industry.  Also, the SEC has issued Staff Accounting Bulletin
No. 104, “Revenue Recognition in Financial Statements,” which provides guidance
related to revenue recognition based on interpretations and practices followed
by the SEC.  Future interpretations of existing accounting standards
or changes in our business practices could result in future changes in our
revenue accounting policies that could have a material adverse effect on our
business, financial condition and results of operations.





Concentration
of Credit Risk Policy




For
purposes of the consolidated statement cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. Cash equivalents include money market
accounts and government obligations.  As of July 31, 2008 and 2007,
the Company does not maintain any such cash equivalent accounts.




Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash and cash equivalents and trade receivables. The
Company has substantially all of its cash with two financial institutions. Such
cash balances, at times, may exceed FDIC limits. To date, the Company has not
experienced any losses in such accounts. The Company’s trade receivables
represent a broad customer base, and the Company routinely assesses the
financial strengths of its customers. As a consequence, concentrations of credit
risk are limited.




Capitalized
Software Development Costs




We
capitalize our software development costs when the projects under development
reach technological feasibility as defined by Financial Accounting Standard
(“FAS”) No. 86, and amortize these costs over the products’ estimated useful
lives. Under FAS No. 86, we evaluate our capitalized software costs at each
balance sheet date to determine if the unamortized balance related to any given
product exceeds the estimated net realizable value of that
product.  Any such excess is written off through accelerated
amortization in the quarter it is identified.  Determining net
realizable value as defined by FAS No. 86 requires that we estimate future cash
flows to be generated by the products and use judgment in quantifying the
appropriate amount to write off, if any.  Actual cash flows and
amounts realized from the software products could differ from our
estimates.  Also, any future changes to our product portfolio could
result in significant research and development expenses related to software
asset write-offs.







Return to Table of Contents
 17





Goodwill,
Other Intangible Assets and Other Long-Lived Assets





The
Company performs an evaluation of whether goodwill is impaired annually or when
events occur or circumstances change that would more likely than not reduce the
fair value of the asset below its carrying amount. Fair value is determined
using market comparables for similar businesses or forecasts of discounted
future cash flows. The Company also reviews other intangible assets, which are
all currently amortized over their respective estimated lives and other
long-lived assets when indication of potential impairment exists, such as a
significant reduction in cash flows associated with the assets, significant
changes in the manner or our use of the assets or the strategy for our overall
business and significant negative industry or economic trends. In addition, in
all cases of an impairment review, we will re-evaluate the remaining useful life
of the asset and modify it, as appropriate. Should the fair value of the
Company's long-lived assets decline because of reduced operating performance,
market declines, or other indicators of impairment, a charge to operations for
impairment may be necessary.






































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 18





Results
of Operations




Fiscal
Periods Ended July 31, 2008 and July 31, 2007





Revenues





Total
revenues for the year ended July 31, 2008 amounted to $7,565,185, representing a
decrease of $1,812,069 or 19.3% compared to revenues of $9,377,254 for the year
ended July 31, 2007.





Software
license revenues for the year ended July 31, 2008 amounted to $1,335,818
representing a decrease of $2,105,700 or 61.2%, compared to software license
revenues of $3,441,518 for the year ended July 31, 2007.  Software
license revenue is sold directly through domestic sales executives, indirectly
through distributors and VARs and through OEM partners. Direct sales, indirect
sales and OEM sales amounted to $803,894, $496,028 and $35,896 for the year
ended July 31, 2008, respectively, compared to $2,102,478, $1,256,622 and
$82,418 for the year ended July 31, 2007, respectively.  The decrease
in license revenues, both direct and indirect, resulted from a decrease in our
advanced managed file transfer software sales of $1,639,811. The decrease in
managed file transfer sales was primarily due to a decline in larger dollar
value transactions in fiscal 2008 compared to fiscal 2007.  However,
one fiscal 2008 software license sale with a U.S. government agency amounting to
$900,000 was deferred due to contractual requirements.  The Company
expects to meet certain of the contractual requirements by December 2008, at
which time it will to begin recognizing the associated revenues.





Software
maintenance fees and other increased by $350,631, or 6.1% to $6,122,417 compared
to such fees in fiscal 2007 of $5,771,786. The increase in software maintenance
fees and other is primarily due to an increase in CFI maintenance billings
related to the increase in fiscal 2007 CFI software license sales.





Fees for
professional services for the year ended July 31, 2008 amounted to $106,950
compared to fees for professional services of $163,950 for the year ended July
31, 2007, representing a decrease of $57,000 or 34.8%.The Company does
not generate significant professional service revenue as resources are utilized
for license revenue related activities. Typically, professional services are
related to ad-hoc consulting engagements that are provided in response to
requests for support from existing customers. Consequently, professional service
revenue may vary considerably from period to period.





Operating
Expenses





Operating
expenses increased to $10,147,259 from $8,511,209 for the years ended July 31,
2008 and July 31, 2007 respectively, an increase of $1,636,050 or 19.2%. The
increase in operating expenses is primarily a result of the following
fluctuations:





Cost of
software licenses (which primarily includes amortization of capitalized software
costs) for the year ended July 31, 2008 amounted to $1,556,842 representing a
decrease of $73,854 or 4.5%, compared to cost of software licenses of $1,630,696
for the year ended July 31, 2007.  The decrease in cost of software
licenses is primarily due to the full amortization of certain capitalized
software assets.





Cost of
maintenance fees and other (which principally consists of technical support
payroll and development time attributable to technical support) for the year
ended July 31, 2008 amounted to $1,050,196 representing a decrease of $141,669
or 11.9%, compared to cost of maintenance fees and other of $1,191,865 for the
year ended July 31, 2007. The decrease in cost of maintenance fees and other is
primarily due to a decrease in the allocation of employee related costs
attributable to technical support as such employees are increasingly being
utilized for the research and development of the Company’s future
products.





Commissions
amounted to $849,157 for the year ended July 31, 2008 compared to commissions of
$1,261,814 for the year ended July 31, 2007, representing a decrease of $412,657
or 32.7%. The decrease in commission expense is directly related to the decrease
in direct and international distributor software sales for the year ended July
31, 2008.





Research
and development amounted to $401,578 for the year ended July 31, 2008 compared
to $168,222 for the year ended July 31, 2007, representing an increase of
$233,356 or 138.7%.  The increase in research and development expense
is attributable to increased headcount and resources allocated to the product
development and testing activities of the Company’s future
products.





Selling
and marketing expense for the year ended July 31, 2008 amounted to $2,814,628
representing an increase of $1,038,220 or 58.4%, compared to selling and
marketing expense of $1,776,408 for the year ended July 31, 2007. The increase
in selling and marketing is primarily due to organizational charges consisting
of additional employee and employee related costs amounting to $556,372
(including the addition of an Executive Vice President of Sales in April 2008
and Marketing Manager in July 2007), increased costs of $185,917 for the
retention of a public relations firm and marketing related consulting services,
$38,837 for additional analyst research services, $125,685 for lead generation
programs, $59,880 for customer and distributor visitations and $76,553 for
conference and trade shows attended by the sales organization.







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 19





Severance
expense for the year end July 31, 2008 amounted to $551,053 compared to $0 for
the year ended July 31, 2007.




On July
23, 2008, Kevin M. Kelly, then President and Chief Executive Officer of
Proginet, and a member of the Company’s Board of Directors, notified the Company
that he intended to resign from all of his positions, effective July 31,
2008.  Mr. Kelly and Proginet have acknowledged that Mr. Kelly’s
resignation constitutes a “Termination for Good Reason” under Mr. Kelly’s
employment agreement, and that, as a result, Mr. Kelly is entitled to severance
payments.  Pursuant to Mr. Kelly’s employment agreement and separation
agreement, Mr. Kelly will receive (a) a continuation of annual base salary of
$237,360 for a period of 18 months, payable bi-monthly in 36 installments
according to the Company’s regular payroll practice; (b)  a payment
representing bonus of $51,750, which is equal to 150% of the highest annual
bonus paid to Mr. Kelly during fiscal years 2005, 2006 and 2007, payable
bi-monthly in 36 installments according to the Company’s regular payroll
practice; (c) continued participation from August 1, 2008 to January 31, 2010,
in the Company’s group health and insurance plan, 401(k)plan and any other
benefit plans or programs in which Mr. Kelly was enrolled on the effective date
of his resignation; provided that, recognizing that Mr. Kelly is not entitled to
participate under such plan following his resignation, the Company will provide
to Mr. Kelly 36 semi-monthly payments of $678, with respect to Mr. Kelly’s
entitlement to the Company’s matching contribution under the Company’s 401(k)
plan and the tax benefit of his maximum contribution; (d) a payment of $5,478,
equal to six days of accrued vacation time as of July 31, 2008 (which was paid
on August 22, 2008); and (e) a continued monthly automobile allowance of $612
for the period from August 1, 2008 until January 31, 2010, amounting to a total
of $11,016.  Mr. Kelly waived his right to executive job placement
counseling at the Company’s expense up to a maximum period of 12
months.







On July
28, 2008, Arne Johnson, Senior Vice President of Strategic Planning and
Marketing of the Company, notified the Company that he intended to resign from
his position, effective July 31, 2008.  Mr. Johnson will receive (a) a
continuation of annual base compensation of $167,700 for a period of six months,
and (b) a continuation for a period of 6 months of his participation in the
Company's group health and insurance plans and 401(k) plan and any other benefit
plans or programs of the Company.





Total
severance costs related to Mr. Kelly and Mr. Johnson are summarized as
follows:





AmountBase
      compensation
            $
            439,890Bonus
      compensation
            
            51,750Group
      health and insurance plans
            
            34,534Other
            
            24,879Total
      Accrued Severance
            $
            551,053




General
and administrative expense for the year ended July 31, 2008 amounted to
$2,895,547, representing an increase of $456,490 or 18.7% compared to $2,439,057
in general and administrative expense for the year ended July 31, 2007. The
increase in general and administrative expense is partially due to an increase
in allocated and direct general office costs of $77,545 related to an increase
in employee headcount, a $168,166 increase in professional fees relating to
matters such as the August 2007 tender offer, changes in composition of the
Board of Directors, preparation of proxy materials and otherwise with respect to
the adjourned Special Meeting of Stockholders, responding to a stockholder claim
(more fully described above under ‘Item 3. Legal Proceedings” and below under
the caption “Contingency Relating to Stockholder Claim”) and executive
retirements, an increase in bad debt expense of $227,942 primarily related
to a write-off of one international software sale recorded in fiscal 2007 and a
$77,920 increase in recruitment costs related to hiring new employees, offset by
a $148,318 decrease in employee profit sharing and management discretionary
compensation expense as defined fiscal 2008 financial targets were not
met.




The
Company reported a net loss of $2,479,738 for 2008 compared to a net income of
$936,852 for 2007.







Return to Table of Contents
 20





Liquidity
and Capital Resources




At July
31, 2008, the Company had a cash balance of $2,338,335.




Operating
activities provided cash of $523,140 for the fiscal year ended July 31,
2008.  This resulted from non-cash charges for depreciation and
amortization of $1,516,617, an increase in deferred revenue of $1,042,308
primarily related to the deferral of revenue associated with a $900,000 software
license agreement with a U.S. government agency which was delayed due to
contractual requirements, an increase in accounts payable and accrued expenses
principally related to severance costs of $551,053 due to the retirement of the
Company’s former CEO, Kevin M. Kelly and a Senior Vice President of Strategic
Planning and Marketing, Arne Johnson, offset by the net loss of
$2,479,738.





Investing
activities used cash of $1,644,135 for the fiscal year ended July 31, 2008
primarily for costs associated with the development of the Company’s software
products.





Financing
activities provided cash of $19,342 from the exercise of stock
options.





The
Company maintains its line of credit for $1,000,000 with a bank. The interest
rate is variable based on the bank’s prime rate. The line of credit is
collateralized by accounts receivable of the Company and expires December, 2008,
at which time the Company intends to renew this line of credit.  As of
July 31, 2008, the Company has not borrowed against this line of
credit.





The
Company believes that its present cash, the cash generated from operations and
amounts available under its present line of credit agreements will be sufficient
to meet its cash needs for at least the next twelve months.







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 21





Tabular
Disclosure of Contractual Obligations




The
following table lists the Company’s cash contractual obligations as of July 31,
2008:





Payments
      Due by PeriodContractual
      Obligations:
            Total
            Less
      than 1 year
            1-3
      years
            3-5
      years
            More
      than 5 yearsOperating
      Lease Obligations (1)
            $
            1,539,590
            $
            328,207
            $
            631,576
            $
            579,807
            $
            -





(1) The
Company leases office space in Garden City, New York and Toronto, Ontario and
leases certain computer equipment for technical support efforts and
administrative purposes.





Recent
Accounting Pronouncements




In
February 2007, the FASB issued Statement of Financial Accounting Standard No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities (“FAS 159”). FAS 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently required to be measured at fair value and
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. Unrealized gains and losses on items
for which the fair value option has been elected are reported in earnings. FAS
159 is effective for fiscal years beginning after November 15,
2007.  The Company has determined that the adoption of FAS 159 will
not have a material impact on the Financial Statements.





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“FAS
157”).  FAS 157 defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurement.  This
statement shall be effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Earlier application is encouraged, provided that the reporting entity has
not yet issued financial statements for that fiscal year, including any
financial statements for an interim period within that fiscal year. The
provisions of this statement should be applied prospectively as of the beginning
of the fiscal year in which this statement is initially applied, except in some
circumstances where the statement shall be applied retrospectively. The Company
is currently evaluating the impact, if any, that the adoption of FAS 157 will
have on the Company’s Financial Statements.





In
February 2008, the FASB issued FSP FAS 157-2, Effective date of FASB Statement
No. 157, which defers the effective date of Statement 157 to fiscal
years beginning after November 15, 2008 for nonfinancial assets and
nonfinancial liabilities except for items that are recognized or disclosed at
fair value on a recurring basis at least annually, and amend the scope of
Statement 157. The Company is currently evaluating the impact, if any, that the
adoption of FAS 157-2 will have on the Company’s financial
statements.





Effective
August 1, 2007, we adopted Financial Accounting Standards Board Interpretation
("FIN") No. 48, Accounting for Uncertainty in Income Taxes. FIN 48 prescribes a
more-likely-than-not threshold for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. As
of such date, we did not have any unrecognized tax benefits and there was no
effect on our financial condition or results of operations as a result of
implementing FIN 48. FIN 48 allows the Company to prospectively change its
accounting policy as to where interest expense and penalties on income tax
liabilities are classified. The Company will include interest and penalties in
tax expense if incurred. As of the date of adoption of FIN 48, we did not have
any accrued interest or penalties associated with any unrecognized tax benefits,
nor was any interest expense recognized during the respective
quarters.





In
December 2007, the FASB issued SFAS 141 (revised 2007). “Business Combinations
(“SFAS 141R”). SFAS 141R will significantly change the accounting for business
combinations in a number of areas including the treatment of contingent
considerations, contingencies, acquisition costs, in-process research and
development and restructuring costs. In addition, under SFAS 141R, changes in
deferred tax asset valuation allowances and acquired income tax uncertainties in
a business combination after the measurement period will impact income tax
expense. SFAS 141R is required to be applied prospectively to business
combinations for which the acquisitions date is on or after January 1,
2009.








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 22





Contingency
Relating to Stockholder Claim





In early
April 2008, we received a letter from Red Oak Partners, LLC, which acquired
shares of our common stock in a tender offer completed in August 2007, alleging
that it was damaged because the directors and management of Proginet made
misrepresentations and/or breached their fiduciary duties to Red Oak, Proginet’s
stockholders and the investing public with respect to (i) representations
concerning the existence of contractually committed orders and future financial
performance; (ii) severance  arrangements made with Proginet’s former
CEO and (iii) a claim with respect to Proginet’s having procured directors and
officers insurance from a relative of Proginet’s former CEO.  While
Red Oak has not alleged a specific dollar amount with respect to its damages, it
has asked to be “made whole”.  In connection with its claims, Red Oak
has served a demand to inspect books and records of the Company pursuant to
Section 220 of the Delaware General Corporation Law (the “220
Demand”).  We have responded to the correspondence as well as the 220
Demand, and certain documentation has been offered to Red Oak in response to the
220 Demand.  Management has informed Red Oak that it believes Red
Oak’s claims are meritless.  Although we believe that Red Oak’s claims
are without merit and that we have substantial defenses in this matter, if Red
Oak brings a litigation, we could in the future incur substantial litigation
related expenses, and additional monetary expense if Red Oak prevails in its
claims.  We intend to contest vigorously any litigation that is
commenced.







Return to Table of Contents
 23








Item
7.                      Financial
Statements


PageReport
      of Independent Registered Public Accounting Firm
            25Balance
      Sheets as of July 31, 2008 and 2007
            26Statements
      of Operations for the years ended July 31, 2008 and 2007
            27Statements
      of Stockholders’ Equity for the years ended July 31, 2008 and
      2007
            28Statements
      of Cash Flows for the years ended July 31, 2008 and 2007
            29Notes
      to Financial Statements
            30





Return to Table of Contents
 24





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











Board of
Directors and Stockholders


Proginet
Corporation








We have
audited the accompanying balance sheets of Proginet Corporation as of July 31,
2008 and 2007, and the related statements of operations, stockholders’ equity
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 the 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. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 Proginet Corporation as of July 31,
2008 and 2007, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.










BDO
SEIDMAN, LLP








Melville,
New York


September
10, 2008








Return to Table of Contents
 25




PROGINET
      CORPORATIONBalance
      SheetsJuly
      31Assets
              
              2008
              
              
              2007Current
      assetsCash
              
              $
              2,338,335
              
              
              $
              3,439,988Trade
      accounts receivable, net
              
              
              1,816,388
              
              
              
              1,891,317Prepaid
      expenses
              
              
              262,396
              
              
              
              77,945Total
      current assets
              
              
              4,417,119
              
              
              
              5,409,250Property
      and equipment, net
              
              
              181,226
              
              
              
              167,933Capitalized
      software development costs, net
              
              
              3,660,387
              
              
              
              3,105,982Purchased
      software, net
              
              
              433,558
              
              
              
              733,918Customer
      relationships, net
              
              
              346,170
              
              
              
              585,990Goodwill
              
              
              135,932
              
              
              
              135,932Other
      assets
              
              
              35,870
              
              
              
              35,870$
              9,210,262
              
              
              $
              10,174,875Liabilities
      and Stockholders’ EquityCurrent
      liabilitiesAccounts
      payable
              
              $
              170,557
              
              
              $
              74,860Accrued
      expenses
              
              
              1,054,836
              
              
              
              698,757Deferred
      revenues­
              
              
              3,942,590
              
              
              
              2,924,858Deferred
      rent
              
              
              14,054
              
              
              
              4,541Total
      current liabilities
              
              
              5,182,037
              
              
              
              3,703,016Other
      long-term liabilities, excluding current portion
              
              
              148,497
              
              
              
              150,000Deferred
      revenues
              
              
              68,966
              
              
              
              44,390Deferred
      rent
              
              
              147,838
              
              
              
              161,8925,547,338
              
              
              
              4,059,298Stockholders’
      equityPreferred
      stock, $.01 par value, 10,000,000 shares authorized,none
      issued
              
              
              -
              
              
              
              -Common
      stock, $.001 par value, 40,000,000 shares authorized,16,049,281
      shares issued at July 31, 2008 and 15,873,913 at July 31,
    2007
              
              
              16,050
              
              
              
              15,874Additional
      paid-in capital
              
              
              12,877,948
              
              
              
              12,851,039Treasury
      stock 1,325,226, at cost, at July 31, 2008 and July 31,
    2007
              
              
              (606,023
              )
              
              
              (606,023
              )Accumulated
      deficit
              
              
              (8,625,051
              )
              
              
              (6,145,313
              )Total
      stockholders’ equity
              
              
              3,662,924
              
              
              
              6,115,577$
              9,210,262
              
              
              $
              10,174,875




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








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 26




PROGINET
      CORPORATIONStatements
      of OperationsYear
      ended July 31,2008
              
              
              2007RevenuesSoftware
      licenses
              
              $
              1,335,818
              
              
              $
              3,441,518Software
      maintenance fees and other
              
              
              6,122,417
              
              
              
              5,771,786Professional
      services
              
              
              106,950
              
              
              
              163,9507,565,185
              
              
              
              9,377,254Operating
      ExpensesCosts
      of software licenses
              
              
              1,556,842
              
              
              
              1,630,696Costs
      of maintenance fees and other
              
              
              1,050,196
              
              
              
              1,191,865Costs
      of professional services
              
              
              28,258
              
              
              
              43,147Commissions
              
              
              849,157
              
              
              
              1,261,814Research
      and development
              
              
              401,578
              
              
              
              168,222Selling
      and marketing
              
              
              2,814,628
              
              
              
              1,776,408Severance
              
              
              551,053
              
              
              
              -General
      and administrative
              
              
              2,895,547
              
              
              
              2,439,05710,147,259
              
              
              
              8,511,209(Loss)
      income from operations
              
              
              (2,582,074
              )
              
              
              866,045Other
      incomeInterest
      income
              
              
              102,336
              
              
              
              70,807Net
      (loss) income
              
              $
              (2,479,738
              )
              
              $
              936,852Basic
      and diluted (loss) income per common share
              
              $
              (0.17
              )
              
              $
              0.06Weighted
      average common shares outstanding - basic
              
              
              14,689,365
              
              
              
              14,478,031Weighted
      average common shares outstanding - diluted
              
              
              14,689,365
              
              
              
              15,486,239





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








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 27




PROGINET
      CORPORATIONStatements
      of Stockholders’ EquityYears
      ended July 31, 2008 and 2007Common
      stock
              
              
              Additional
              
              
              
              
              
              Accum-paid-
      in
              
              
              Treasury
              
              
              ulatedShares
              
              
              Amount
              
              
              capital
              
              
              stock
              
              
              deficit
              
              
              TotalBalance
      – August 1, 2006
              
              
              15,739,613
              
              
              $
              15,740
              
              
              $
              12,786,929
              
              
              $
              (606,023
              )
              
              $
              (7,082,165
              )
              
              $
              5,114,481Exercise
      of common stock
                options
      and warrants
              
              
              134,300
              
              
              
              134
              
              
              
              27,354
              
              
              
              
              
              
              
              
              
              
              
              27,488Stock
      Based Compensation
              
              
              
              
              
              
              
              
              
              
              79,756
              
              
              
              
              
              
              
              
              
              
              
              79,756Private
      placement common
                stock
      issuance, net
              
              
              
              
              
              
              
              
              
              
              (43,000
              )
              
              
              
              
              
              
              
              
              
              
              (43,000
              )Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              936,852
              
              
              
              936,852Balance
      – July 31, 2007
              
              
              15,873,913
              
              
              
              15,874
              
              
              
              12,851,039
              
              
              
              (606,023
              )
              
              
              (6,145,313
              )
              
              
              6,115,577Exercise
      of common stock options
              
              
              97,700
              
              
              
              98
              
              
              
              19,244
              
              
              
              
              
              
              
              
              
              
              
              19,342Stock
      based compensation
              
              
              77,668
              
              
              
              78
              
              
              
              7,665
              
              
              
              
              
              
              
              
              
              
              
              7,743Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,479,738
              )
              
              
              (2,479,738
              )Balance
      – July 31, 2008
              
              
              16,049,281
              
              
              $
              16,050
              
              
              $
              12,877,948
              
              
              $
              (606,023
              )
              
              $
              (8,625,051
              )
              
              $
              3,662,924





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






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 28




PROGINET
      CORPORATIONStatements
      of Cash FlowsYear
      ended July 31,2008
              
              
              
              2007Cash
      flows from operating activitiesNet
      (loss) income
              
              $
              (2,479,738
              )
              
              $
              936,852Adjustments
      to reconcile net (loss) income to cash provided by operating
      activitiesDepreciation
      and amortization
              
              
              1,516,617
              
              
              
              1,629,999Provision
      for bad debt allowance, net
              
              
              216,942
              
              
              
              11,000Stock
      based compensation
              
              
              7,743
              
              
              
              79,756Deferred
      revenue
              
              
              1,042,308
              
              
              
              (167,999
              )Deferred
      rent
              
              
              (4,541
              )
              
              
              4,649Changes
      in operating assets and liabilitiesTrade
      accounts receivable
              
              
              (142,013
              )
              
              
              (739,828
              )Prepaid
      expenses and other assets
              
              
              (184,451
              )
              
              
              (40,318
              )Accounts
      payable and accrued expenses
              
              
              450,273
              
              
              
              177,787Net
      cash provided by operating activities
              
              
              423,140
              
              
              
              1,891,898Cash
      flows from investing activitiesPurchase
      of net assets of Blockade Systems Corp
              
              
              -
              
              
              
              (12,271
              )Capitalized
      software development costs
              
              
              (1,472,792
              )
              
              
              (937,857
              )Purchase
      of property and equipment
              
              
              (71,343
              )
              
              
              (30,790
              )Net
      cash used in investing activities
              
              
              (1,544,135
              )
              
              
              (980,918
              )Cash
      flows from financing activitiesProceeds
      from exercise of common stock options
              
              
              19,342
              
              
              
              27,488Net
      cash provided by financing activities
              
              
              19,342
              
              
              
              27,488Net
      (decrease) increase in cash and cash equivalents
              
              
              (1,101,653
              )
              
              
              938,468Cash
      at beginning of the year
              
              
              3,439,988
              
              
              
              2,501,520Cash
      at end of the year
              
              $
              2,338,335
              
              
              $
              3,439,988Supplemental
      Disclosures of Cash Flow InformationCash
      paid during the year for:Interest
              
              $
              -
              
              
              $
              -Non-cash
      financing activity:Accrued
      private placement costs
              
              $
              -
              
              
              $
              43,000The accompanying notes are an
      integral part of these financial
  statements.





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 29





PROGINET
CORPORATION




NOTES
TO FINANCIAL STATEMENTS




JULY
31, 2008 AND 2007




(1)                 Nature
of Business and Summary of Significant Accounting Policies




Nature
of Business


Proginet
Corporation ("Proginet" or the "the Company") is a security software company
focused on critical aspects of data security and identity security, addressing
the security and protection of data while it is both in motion and at
rest.  The benefits of Proginet's solutions enable companies to
securely automate, schedule, and audit the transfer of data between all types of
computers, both internal and external to the company, and to secure, control,
and manage enterprise user communities and their access to corporate resources
and information assets – all while facilitating the corporate requirement to
satisfy regulatory mandates.  The Company maintains a philosophy of
internally developing products, coupled with the acquisition of key technology,
the integration of the two, and the establishment of a network of strategic
alliances with key technology partners. The Company sells its products in North
America through its direct sales force, VARs, and internationally through a
global network of distributors.  The Company also sells its products
through Original Equipment Manufacturer (OEM) partners in the United States and
Europe.  The Company operates and is managed as one reportable
segment.




Generally
Accepted Accounting Principles


The
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“US GAAP”).





Revenue
Recognition


We
recognize revenue in accordance with Statement of Position, or SOP, 97-2,
“Software Revenue Recognition,” and SOP 98-9, “Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions.” We
recognize software license revenues when all of the following criteria are met:
persuasive evidence of an arrangement exists, the fee is fixed or determinable,
collectability is probable, delivery of the product has occurred and the
customer has accepted the product (including the expiration of an acceptance
period) if the terms of the contract include an acceptance requirement. In
instances when any of the criteria are not met, we will either defer recognition
of the software license revenue until the criteria are met or we will recognize
the software license revenue on a ratable basis, as required by SOPs 97-2 and
98-9.  We generally utilize written contracts as the means to
establish the terms and conditions by which our products, support and services
are sold to our customers. Our revenues are derived from direct sales
executives, distributors and OEM partners.  Revenues from sales
through distributors are recorded at the gross amount charged based on the
economic risks and ongoing product support responsibilities we
assume.





We
consider a non-cancelable agreement signed by us and the customer to be evidence
of an arrangement. Delivery is considered to occur when media containing the
licensed programs is provided to a common carrier, or the customer is given
electronic access to the licensed software. Our typical end user license
agreements do not contain acceptance clauses. We consider the fee to be fixed or
determinable if the fee is not subject to refund or adjustment. If the fee is
not fixed or determinable, we recognize revenue as the amounts become due and
payable. Probability of collection is based upon our assessment of the
customer’s financial condition through review of its current financial
statements or credit reports. Collection is deemed probable if we expect that
the customer will be able to pay amounts under the arrangement as payments
become due. For follow-on sales to existing customers, prior payment history is
also used to evaluate probability of collection. If we determine that collection
is not probable, we defer the revenue and recognize the revenue upon cash
collection.







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 30




PROGINET
CORPORATION




NOTES
TO FINANCIAL STATEMENTS




JULY
31, 2008 AND 2007





When
software licenses contain multiple elements, revenue is allocated to each
element based on the relative fair values of the elements. Multiple element
arrangements generally include post-contract support (PCS or support), software
products, and in some cases, service. Revenue from multiple-element arrangements
is allocated to undelivered elements of the arrangement, such as PCS, based on
the relative fair values of the specific elements. The Company’s determination
of fair value of each element in multi-element arrangements is based on
vendor-specific objective evidence, which is generally determined by sales of
the same element or service to third parties or by reference to a renewal rate
specified in the related arrangement.




Where
vendor-specific objective evidence of fair value exists for all undelivered
elements, but evidence does not exist for one or more delivered elements, the
Company accounts for the delivered elements in accordance with the “Residual
Method” prescribed by SOP 98-9. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement
fee is recognized as revenue. In most cases, the bundled multiple elements
include PCS and the software product. In such cases, when vendor-specific
objective evidence of fair value exists for all of the undelivered elements
(most commonly PCS), the residual amount is recognized as revenue and the PCS is
recognized ratably over the PCS term, which is typically
12 months.




A
customer typically prepays maintenance revenues and such maintenance revenues
are recognized ratably monthly over the term of the maintenance contract, which
is generally 12 months. Maintenance contracts include the right to
unspecified upgrades on a when-and-if available basis, and ongoing
support.




Deferred
revenues include amounts received from customers for which revenue has not yet
been recognized that generally results from agreements where all necessary
revenue recognition requirements have not been met, deferred maintenance,
consulting or training services not yet rendered and license revenue deferred
until all requirements under SOP 97-2 are met. Deferred revenue is recognized
upon delivery of our products, as services are rendered, or as other
requirements requiring deferral under SOP 97-2 are satisfied.





Commission Expense


Commission
expense is recorded at the time of sale. Commission rates to direct sales people
are based on a graduating scale, ranging from 5% to 15% of the sale, dependent
upon the revenue volume generated by the sales executive. Distributors are
typically compensated at a commission rate of 40% to 50% and VARs are
compensated at a commission rate of 25% to 40% of the license revenue generated.
The rates vary based upon their level of effort, resources assigned and products
sold. The OEM arrangements include a commission structure similar to
distributors and also may include specific fixed pricing for the number of
“users” the product is licensed for.





Accounts
Receivable


The
Company continually reviews accounts for collectability and establishes an
allowance for doubtful accounts.  As of July 31, 2008 and 2007, there
was an allowance for doubtful accounts of $45,000 and $5,000, respectively. On a
periodic basis, the Company evaluates its accounts receivable and establishes an
allowance for doubtful accounts, when deemed necessary, based on its history of
past write-offs and collections and current credit conditions.




Property
and Equipment


Property
and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is provided using a straight-line method over the
assets’ useful lives, ranging from three to five years.  Leasehold
improvements are amortized over the lesser of the economic life of the asset,
which is generally seven years, or the lease term.  Property and
equipment is retired from the balance sheet when fully depreciated.




Income
Taxes





Effective
August 1, 2007, we adopted Financial Accounting Standards Board Interpretation
("FIN") No. 48, Accounting for Uncertainty in Income Taxes. FIN 48 prescribes a
more-likely-than-not threshold for financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. As
of such date, we did not have any unrecognized tax benefits and there was no
effect on our financial condition or results of operations as a result of
implementing FIN 48.





FIN 48
allows the Company to prospectively change its accounting policy as to where
interest expense and penalties on income tax liabilities are classified. The
Company will include interest and penalties in tax expense if incurred. As of
the date of adoption of FIN 48, we did not have any accrued interest or
penalties associated with any unrecognized tax benefits, nor was any interest
expense recognized during the respective quarters.








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 31


PROGINET
CORPORATION




NOTES
TO FINANCIAL STATEMENTS




JULY
31, 2008 AND 2007





Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the tax bases of assets and liabilities and
their financial reporting amounts based on enacted tax laws and statutory tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.  The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.  Valuation allowances are
established when necessary to reduce deferred tax assets to the amount more
likely than not to be realized.












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 32





PROGINET
CORPORATION




NOTES
TO FINANCIAL STATEMENTS




JULY
31, 2008 AND 2007





Fair
Value of Financial Instruments




The fair
values of the Company’s financial instruments, consisting of cash, trade
accounts receivable, prepaids, accounts payable and accrued expenses, and
deferred revenues approximate their carrying values in the financial statements
because of the short-term maturity of these instruments.




Goodwill,
Other Intangible Assets and Other Long-Lived Assets





The
Company performs an evaluation of whether goodwill is impaired annually or when
events occur or circumstances change that would more likely than not reduce the
fair value of the asset below its carrying amount. Fair value is determined
using market comparables for similar businesses or forecasts of discounted
future cash flows. The Company also reviews other intangible assets, which are
all currently amortized over their respective estimated lives, and other
long-lived assets when indication of potential impairment exists, such as a
significant reduction in cash flows associated with the assets, significant
changes in the manner or our use of the assets or the strategy for our overall
business and significant negative industry or economic trends. In addition, in
all cases of an impairment review, we will re-evaluate the remaining useful life
of the asset and modify it, as appropriate. Should the fair value of the
Company's long-lived assets decline because of reduced operating performance,
market declines, or other indicators of impairment, a charge to operations for
impairment may be necessary.





Research
and Development Costs and Capitalized Software Development Costs





Research
and development costs consist of salaries and other costs related to the
development and enhancement of computer software programs.  Software
development costs are capitalized upon the establishment of product
technological feasibility until the product is available for general release to
the public.  The establishment of technological feasibility and the
ongoing assessment of recoverability of capitalized software development costs
require considerable judgment by management with respect to certain factors
including, but not limited to, the timing of technological feasibility,
anticipated future gross revenues, estimated economic life and changes in
software and hardware technologies.  Software development costs not
capitalized are expensed as research and development.





Amortization
of capitalized software development costs is provided on a product-by-product
basis at the greater of the amount computed using the ratio of current gross
revenues for a product to the total of current and anticipated future gross
revenues or the straight-line method over the remaining estimated economic life
of the product.




Amortization
commences once a product becomes available for sale to
customers.  Generally, an original estimated economic life of five
years is assigned to capitalized software development costs. Amortization
expense charged to operations was $918,393 and $1,029,686 in fiscal 2008 and
2007, respectively.  Capitalized software development costs were net
of accumulated amortization of $9,435,093 and $8,516,699 at July 31, 2008 and
2007, respectively.  Estimated amortization expense for the succeeding
five years is $1,192,967 in fiscal 2009, $820,580 in fiscal 2010, $691,105 in
fiscal 2011, $531,329 in fiscal 2012, and $404,258 in fiscal
2013.   Capitalized software development costs are retired from
the balance sheet when fully amortized.







Return to Table of Contents
 33





PROGINET
CORPORATION




NOTES
TO FINANCIAL STATEMENTS




JULY
31, 2008 AND 2007





Income
(Loss) Per Share





(Loss)
income per common share (“EPS”) is computed by dividing net (loss) income by the
weighted average number of common shares outstanding and diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock.





The
following table sets forth the computation of basic and diluted (loss) income
per share:




Year
      endedJuly
      31,2008
              
              
              2007NumeratorNet
      (loss) income
              
              $
              (2,479,738
              )
              
              $
              936,852DenominatorWeighted
      average numberof
      common shares (basic)
              
              
              14,689,365
              
              
              
              14,478,031Effect
      of dilutive securities:Stock
      options
              
              
              -
              
              
              
              988,654Warrants
              
              
              -
              
              
              
              19,554-
              
              
              
              1,008,208Weighted
      average numberof
      common shares (diluted)
              
              
              14,689,365
              
              
              
              15,486,239Basic
      and diluted (loss) income per share
              
              $
              (0.17
              )
              
              $
              0.06





Potential
common shares of 2,526,000 and 1,003,467 at July 31, 2008 and 2007,
respectively, issuable upon exercise of stock options and warrants are excluded
in computing basic and diluted net (loss) income per share for fiscal 2008 and
2007, as their effects would be anti-dilutive.





Stock
Options and Stock Based Compensation





Effective
August 1, 2006, Proginet adopted the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS
No.123R) requiring that compensation cost relating to share-based payment
transactions be recognized in the financial statements. The cost is measured at
the grant date, based on the calculated fair value of the award, and is
recognized as an expense over the employee’s requisite service period (generally
the vesting period of the equity award). Prior to August 1, 2006, Proginet
accounted for share-based compensation to employees in accordance with
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (APB No. 25), and related interpretations. Proginet also followed the
disclosure requirements of Statement of Financial Accounting Standards No. 123,
“Accounting for Stock-Based Compensation”, as amended by Statement of Financial
Accounting Standards No. 148, “Accounting for Stock-Based
Compensation-Transition and Disclosure”. Because the Company previously adopted
the pro forma disclosure provisions of SFAS 123, it will recognize compensation
cost relating to the unvested portion of awards granted prior to the date of
adoption, using the same estimate of the grant-date fair value and the same
attribution method used to determine the pro forma disclosures under SFAS 123,
except that forfeitures rates will be estimated for all options, as required by
SFAS 123R. Proginet adopted SFAS No. 123R using the modified prospective
method.





Return to Table of Contents
 34




PROGINET
CORPORATION




NOTES
TO FINANCIAL STATEMENTS




JULY
31, 2008 AND 2007





Use
of Estimates


The
preparation of financial statements in conformity with US GAAP requires
management to make 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.  Actual results could differ
from those estimates.




Statement
of Cash Flows and Liquidity


The
Company considers all highly liquid debt instruments with a maturity of three
months or less at the time of purchase to be cash equivalents.  There
were no cash equivalents at July 31, 2008 and at July 31, 2007.  There
were no income taxes paid during the years ended July 31, 2008 and
2007.




Recent
Accounting Pronouncements


In
December 2007, the FASB issued SFAS 141 (revised 2007). “Business Combinations
(“SFAS 141R”). SFAS 141R will significantly change the accounting for business
combinations in a number of areas including the treatment of contingent
considerations, contingencies, acquisition costs, in-process research and
development and restructuring costs. In addition, under SFAS 141R, changes in
deferred tax asset valuation allowances and acquired income tax uncertainties in
a business combination after the measurement period will impact income tax
expense. SFAS 141R is required to be applied prospectively to business
combinations for which the acquisitions date is on or after January 1,
2009.





In
February 2007, the FASB issued Statement of Financial Accounting Standard No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities (“FAS 159”). FAS 159 permits
entities to choose to measure many financial instruments and certain other items
at fair value that are not currently required to be measured at fair value and
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. Unrealized gains and losses on items
for which the fair value option has been elected are reported in earnings. FAS
159 is effective for fiscal years beginning after November 15,
2007.  The Company has determined that the adoption of FAS 159 will
not have a material impact on the Financial Statements.





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“FAS
157”).  FAS 157 defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurement.  This
statement shall be effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Earlier application is encouraged, provided that the reporting entity has
not yet issued financial statements for that fiscal year, including any
financial statements for an interim period within that fiscal year. The
provisions of this statement should be applied prospectively as of the beginning
of the fiscal year in which this statement is initially applied, except in some
circumstances where the statement shall be applied retrospectively. The Company
is currently evaluating the impact, if any, that the adoption of FAS 157 will
have on the Company’s Financial Statements.





In
February 2008, the FASB issued FSP FAS 157-2, Effective date of FASB Statement
No. 157, which defers the effective date of Statement 157 to fiscal
years beginning after November 15, 2008 for nonfinancial assets and
nonfinancial liabilities except for items that are recognized or disclosed at
fair value on a recurring basis at least annually, and amend the scope of
Statement 157. The Company is currently evaluating the impact, if any, that the
adoption of FAS 157-2 will have on the Company’s financial
statements.




Reclassifications


Certain
prior year’s balances have been reclassified to conform to the current year’s
presentation.







Return to Table of Contents
 35




PROGINET
      CORPORATION




NOTES
      TO FINANCIAL STATEMENTS




JULY
31, 2008 AND 2007





(2)
            Acquisition





On
January 10, 2005, the Company entered into and closed an Asset Purchase
Agreement (the “Agreement”) between the Company and Blockade Systems Corp.
("Blockade"), a privately-held Canadian identity management software
corporation. Pursuant to the Agreement, Proginet acquired certain assets and the
business of Blockade and assumed certain Blockade liabilities, for a cash
purchase price of $2,389,643. The assets acquired by Proginet include
complimentary intellectual property, customer contracts, equipment and other
tangible personal property.  The Agreement also provides for
contingent payments to Blockade, payable annually over three years following the
acquisition, upon the acquired Blockade business meeting certain revenue
thresholds, including up to a maximum contingent payment of $1,300,000 in
aggregate for meeting either software or maintenance revenue thresholds and a
50% contingent payment for net revenues generated from annual sales of identity
management tokens, as defined in the Agreement. As of April 30, 2008, the
Company is no longer liable to Blockade for such contingent
payments.





In
accordance with SFAS No. 141, “Business Combinations,” the acquisition has been
accounted for under the purchase method of accounting. The total purchase price
was allocated to the net tangible assets and intangible assets acquired based on
estimates of fair value at the date of acquisition. The allocation of the total
purchase price to the acquired technology and other intangible assets, including
maintenance contracts, was based on management’s best estimate. As of July 31,
2008, the Company has allocated $135,932 of the total purchase price to
goodwill, which is amortizable over fifteen years for income tax
purposes.






(3)                
Purchased Software and Customer Relationships




Purchased
software and customer relationships include software and customer relationships
purchased in connection with the Blockade acquisition for an original cost of
$1,501,774 and $1,199,078, respectively.  Purchased software is net of
accumulated amortization of $433,558 and $767,856 at July 31, 2008 and July 31,
2007, respectively. Customer relationships are net of accumulated amortization
of $346,170 and $613,088 at July 31, 2008 and July 31, 2007,
respectively.  Purchased software and customer relationships are being
amortized over a period of five years. Amortization expense charged to
operations for purchased software is $300,360 for the years ended July 31, 2008
and 2007. Amortization expense charged to operations for customer relationships
is $239,820 for the years ended July 31, 2008 and 2007. Estimated amortization
expense for customer relationships and purchased software for the succeeding two
years is $239,820 and $300,360 for fiscal 2009, $106,350 and $133,198 for fiscal
2010, respectively.







(4)                 Property
and Equipment




Property
and equipment consist of the following at July 31:




2008
              
              
              2007Computer
      and other equipment
              
              $
              202,430
              
              
              $
              131,087Furniture
      and fixtures
              
              
              154,963
              
              
              
              154,963Leasehold
      improvements
              
              
              52,938
              
              
              
              52,938410,331
              
              
              
              338,988Less
      accumulated depreciationand
      amortization
              
              
              (229,105
              )
              
              
              (171,055
              )$
              181,226
              
              
              $
              167,933




Depreciation
and amortization expense for the years ended July 31, 2008 and 2007 was $58,050
and $60,132, respectively.  Property and equipment are retired from
the balance sheet when fully depreciated.







Return to Table of Contents
 36




PROGINET
      CORPORATION




NOTES
      TO FINANCIAL STATEMENTS




JULY
31, 2008 AND 2007





(5)                  Accrued
Expense





For
      the Year Ended July 312008
            
            
            2007Salaries,
      commissions and benefits
            
            $
            299,527
            
            
            $
            455,924Severance
            
            
            551,053
            
            
            
            -Private
      placement costs
            
            
            150,000
            
            
            
            150,000Professional
      fees
            
            
            111,100
            
            
            
            113,500Other
            
            
            91,653
            
            
            
            129,333Total
      Accrued Expense
            
            
            1,203,333
            
            
            
            848,757Current
      portion
            
            
            1,054,836
            
            
            
            698,757Long
      term portion
            
            $
            148,497
            
            
            $
            150,000







(6)                 Credit
Lines




The
Company maintains its line of credit for $1,000,000 with a bank. The interest
rate is variable based on the bank’s prime rate. The line of credit is
collateralized by accounts receivable of the Company and expires December, 2008,
at which time the Company intends to renew this line of credit.  As of
July 31, 2008, the Company has not borrowed against this line of
credit.







(7)                 Severance
Obligation




On July
23, 2008, Kevin M. Kelly, then President and Chief Executive Officer of
Proginet, and a member of the Company’s Board of Directors, notified the Company
that he intended to resign from all of his positions, effective July 31,
2008.  Mr. Kelly and Proginet have acknowledged that Mr. Kelly’s
resignation constitutes a “Termination for Good Reason” under Mr. Kelly’s
employment agreement, and that, as a result, Mr. Kelly is entitled to severance
payments.  Pursuant to Mr. Kelly’s employment agreement and separation
agreement, Mr. Kelly will receive (a) a continuation of annual base salary of
$237,360 for a period of 18 months, payable bi-monthly in 36 installments
according to the Company’s regular payroll practice; (b)  a payment
representing bonus of $51,750, which is equal to 150% of the highest annual
bonus paid to Mr. Kelly during fiscal years 2005, 2006 and 2007, payable
bi-monthly in 36 installments according to the Company’s regular payroll
practice; (c) continued participation from August 1, 2008 to January 31, 2010,
in the Company’s group health and insurance plan, 401(k)plan and any other
benefit plans or programs in which Mr. Kelly was enrolled on the effective date
of his resignation; provided that, recognizing that Mr. Kelly is not entitled to
participate under such plan following his resignation, the Company will provide
to Mr. Kelly 36 semi-monthly payments of $678, with respect to Mr. Kelly’s
entitlement to the Company’s matching contribution under the Company’s 401(k)
plan and the tax benefit of his maximum contribution; (d) a payment of $5,478,
equal to six days of accrued vacation time as of July 31, 2008 (which was paid
on August 22, 2008); and (e) a continued monthly automobile allowance of $612
for the period from August 1, 2008 until January 31, 2010, amounting to a total
of $11,016.  Mr. Kelly waived his right to executive job placement
counseling at the Company’s expense up to a maximum period of 12
months.





On July
28, 2008, Arne Johnson, Senior Vice President of Strategic Planning and
Marketing of the Company, notified the Company that he intended to resign from
his position, effective July 31, 2008.  Mr. Johnson will receive (a) a
continuation of annual base compensation of $167,700 for a period of six months,
and (b) a continuation for a period of 6 months of his participation in the
Company's group health and insurance plans and 401(k) plan and any other benefit
plans or programs of the Company.







Return to Table of Contents
 37




PROGINET
CORPORATION
  NOTES
TO FINANCIAL STATEMENTS
  JULY
31, 2008 AND 2007


Total
severance costs related to Mr. Kelly and Mr. Johnson are summarized as
follows:





AmountBase
      compensation
            
            $
            439,890Bonus
      compensation
            
            
            51,750Group
      health and insurance plans
            
            
            34,534Other
            
            
            24,879Total
      Accrued Severance
            
            $
            551,053







Return to Table of Contents
 38





PROGINET
CORPORATION




NOTES
      TO FINANCIAL STATEMENTS




JULY
31, 2008 AND 2007






(8)                 Income
Taxes




There was
no current or deferred tax expense (benefit) recorded for the year ended July
31, 2008 and 2007.  The following is a reconciliation of the tax
provision with the amount obtained by applying the statutory U.S. Federal income
tax rate to the income before income taxes:




2008
            
            
            2007Federal
      tax expense at statutory rate
            
            $
            (842,000
            )
            
            $
            317,000State
      tax expense at statutory rate
            
            
            (143,000
            )
            
            
            54,000Increases
      (reductions) in taxes due to:Nondeductible
      expenses
            
            
            11,000
            
            
            
            6,000Change
      in valuation allowance
            
            
            974,000
            
            
            
            (377,000
            )Income
      tax provision
            
            $
            -
            
            
            $
            -





At July
31, 2008, the Company had available Federal NOL carry forwards amounting to
approximately $6,938,000 and research and development tax credit carry forwards
of approximately $332,000, which expire in fiscal years 2017 through
2028.  Under current tax law, utilization of net operating losses will
be restricted if an ownership change were to occur.  In addition,
their use is limited to future earnings of the Company.




There are
no federal or state income tax audits in process as of July 31, 2008. Open tax
years related to federal and state income tax filings are for the years ended
July 31, 2007, 2006 and 2005.




At July
31, 2008, the Company had available federal net operating loss (NOL)
carryforwards expiring in the following fiscal years:




Year
      ending July 31,
            
            Amount2017
            
            $
            645,0002018
            
            
            3,427,0002020
            
            
            645,0002023
            
            
            517,0002024
            
            
            297,0002028
            
            
            1,407,000Total
      NOL carryforward
            $
            6,938,000







Return to Table of Contents
 39





PROGINET
CORPORATION




NOTES
      TO FINANCIAL STATEMENTS




JULY
      31, 2008 AND 2007




The types
of temporary differences, which represent items that are reflected in the
financial statements and the tax return at different times that give rise to a
significant portion of the deferred tax asset (liability), and their approximate
tax effects are as follows:




2008
              
              
              2007Deferred
      tax assetsNet
      operating loss carryforward
              
              $
              2,760,000
              
              
              $
              2,203,000Deferred
      revenue
              
              
              1,596,000
              
              
              
              1,181,000Bad
      debt
              
              
              18,000
              
              
              
              2,000Purchased
      software
              
              
              496,000
              
              
              
              476,000Property
      and equipment
              
              
              30,000
              
              
              
              22,000Severance
              
              
              180,000
              
              
              
              -Research
      and development carryforward
              
              
              330,000
              
              
              
              330,000Stock
      based compensation
              
              35,000
              
              
              
              32,000Unbilled
      rent
              
              
              64,000
              
              
              
              66,000Gross
      deferred tax asset
              
              
              5,509,000
              
              
              
              4,312,000Valuation
      allowance
              
              
              (4,041,000
              )
              
              
              (3,067,000
              )Deferred
      tax asset
              
              
              1,468,000
              
              
              
              1,245,000Deferred
      tax liabilitiesCapitalized
      software development costs
              
              
              1,457,000
              
              
              
              1,236,000Accounts
      receivable
              
              
              -
              
              
              
              1,000Other
              
              
              11,000
              
              
              
              8,000Deferred
      tax liability
              
              
              1,468,000
              
              
              
              1,245,000Net
      deferred tax liability
              
              $
              -
              
              
              $
              -




At July
31, 2008 and 2007, the Company has provided a valuation allowance against its
net deferred tax assets as the Company does not believe realization is more
likely than not in light of the Company’s operating results in recent years,
however it is reasonably possible these estimates may change.







Return to Table of Contents
 40





PROGINET
      CORPORATION




NOTES
      TO FINANCIAL STATEMENTS




JULY
      31, 2008 AND 2007




(9)                 Stock
Option Plans




Under the
1997 Stock Option Plan and 1995 Equity Incentive Plan (the “prior Plans”), as
amended, the Company had reserved an aggregate of 2,000,000 shares of common
stock for grants to employees, directors and consultants.  In June
2000, the Board of Directors authorized the increase of the number of shares
reserved under the 1997 Stock Option Plan to 2,500,000.  In October
2000, the Board of Directors approved the 2000 Stock Option Plan (the “2000
Plan”) which limits the aggregate number of shares available under the 2000 Plan
and the prior Plans to 2,500,000. At the Company’s Annual Stockholders’ Meeting
on November 14, 2000, the stockholders approved the 2000 Plan and the increase
in the number of shares reserved under the prior Plans, up to an aggregate of
2,500,000. At the Company’s Annual Stockholder’s Meeting on November 22, 2005,
the stockholders approved a 500,000 share increase in the number of shares
reserved under the 2000 Plan, up to an aggregate of 3,000,000.  Grants
under the 2000 Plan can be in the form of qualified or non-qualified stock
options.  Qualified stock options (which are intended to qualify as
incentive stock options under Section 422A of the United States Internal Revenue
Code) may be awarded only to employees of the Company and must have an exercise
price of not less than 100% of the fair market value of the Company’s common
stock on the grant date (110% for qualified options granted to any 10% or
greater stockholder of the Company).  The 2000 Plan provides Board of
Directors of the Company or by a committee selected by the Board of Directors
will administer the 2000 Plan and have full authority to determine the identity
of the recipients of the options and the number of shares subject to each
option.  The term of any option may be fixed by the Board of Directors
or by the committee but in no event shall exceed 10 years from the date of
grant.
  On
November 30, 2007, the Board of Directors granted options to non-employee
directors to purchase 425,000 shares of common stock (the “425,000 Grant”), at
an exercise price of $1.38, which represented the fair market value of the
underlying common stock on the date of grant.  On February 14, 2008,
the Board of Directors approved a grant of options to purchase 500,000 shares of
common stock (the “500,000 Grant”) to the Executive Vice President of Sales and
Marketing (currently, the President and CEO) at an exercise price of $.90 which
represented the fair market value of the underlying common stock on April 8,
2008, in accordance with his employment letter. Of the total 500,000 grant,
300,000 will vest through April 8, 2010 and 200,000 will vest upon the
achievement of certain performance based measures.  Additionally the
Board of Directors approved a grant of options to purchase 100,000 shares of
common stock (the“100,000 Grant”) at exercise price as of October 31, 2008. Such
options will vest upon the achievement of certain performance based measures.
The 425,000 Grant, the 500,000 Grant and 100,000 Grant (the “Grants”) are
conditioned upon obtaining stockholder approval of amendments to the 2000 Stock
Option Plan of Proginet Corporation increasing the aggregate share limit
authorized for issuance under, and the extension of the term of, such option
plan.
 
 
 The
Company has not recorded any compensation expense in connection with Grants.
Grant as accounting rules do not permit compensation cost to be recognized prior
to receiving all necessary stockholder approvals.




Transactions
involving the 2000 Plan and the prior Plans are summarized as
follows:




Shares
      subject to option
            
            Exercise
      price per share
            
            Weighted
      average exercise price
            Weighted
      average intrinsic valueOutstanding
      at August 1, 2006
            
            2,690,000
            
            $0.16-$1.85
            
            $0.76Exercised
            
            (34,300)
            
            $0.16
            
            $0.16Forfeited
            
            (32,000)
            
            $1.50
            
            $1.50Outstanding
      at July 31, 2007
            
            2,623,700
            
            $0.16-$1.85
            
            $0.75Exercised
            
            (97,700)
            
            $0.16-$0.30
            
            $0.20
            $49,048Outstanding
      and exercisable at
              July
      31, 2008
            
            2,526,000
            
            $0.16-$1.85
            
            $0.78
            $174,580





Return to Table of Contents
 41




PROGINET
      CORPORATION




NOTES
      TO FINANCIAL STATEMENTS




JULY
      31, 2008 AND 2007




(10)               Restricted
Stock Awards




During
the quarter ended January 31, 2007, the Company awarded 19,417 shares of
restricted Proginet common stock to each of 4 out of 5 of its non-employee
directors for their services as members of the Board of
Directors.  The restricted stock awards contain time based vesting
provisions and vest on August 21, 2007.  Additionally, all
restrictions on the awards will lapse upon certain situations including death or
disability of the director and a change in control of the
Company.  The awards may not be sold, assigned or transferred during
the restriction period and are subject to a repurchase right by the Company
should the director cease to remain a director of the Company before the
restricted awards are vested.




The fair
value of the restricted stock award at the time of grant was $1.03 per share and
was expensed on a straight line basis in general and administrative expenses
over the vesting period, 217 days.  Total compensation expense related
to the restricted stock awards of $7,743 was recognized for the twelve months
ended July 31, 2008.




A summary
of the status of the Company’s restricted stock awards as of July 31, 2008 and
changes during fiscal 2008 is presented below:






Nonvested
      Restricted Stock Awards
            
            Shares
            
            Weighted-Average
              Grant-Date
              Fair
      ValueNonvested
      at August 1, 2007
            
            77,668
            
            $1.03Granted
            
            -
            
            -Vested
            
            77,668
            
            $1.03Forfeited
            
            -
            
            -Nonvested
      at July 31, 2008
            
            -
            
            -








Return to Table of Contents
 42





PROGINET
      CORPORATION




NOTES
      TO FINANCIAL STATEMENTS




JULY
      31, 2008 AND 2007




(11)              Commitments
and Contingencies




Leases


The
Company leases office space under noncancelable operating leases expiring
through fiscal 2013 and certain computer equipment for technical support efforts
and administrative purposes.  The following is a schedule of future
minimum payments, by year and in the aggregate, under noncancelable operating
leases with initial or remaining terms of one year or more at July 31,
2008:




Year
      ending July 31,
            
            
            Operating
      leases2009
            
            $
            328,0002010
            
            
            330,0002011
            
            
            301,0002012
            
            
            312,0002013
            
            
            268,000Total
      minimum lease payments
            $
            1,539,000







Rental
expense charged to operations was $318,816 and $314,321 in the fiscal years
ended July 31, 2008 and 2007, respectively.




Litigation
and Claims





The
Company is involved in various claims and legal actions in the ordinary course
of business.  It is the opinion of Management that the outcome of such
litigation will not have a material adverse effect on the Company’s financial
condition and results of operations.





In
addition, in early April 2008, we received a letter from Red Oak Partners, LLC,
which acquired shares of our common stock in a tender offer completed in August
2007, alleging that it was damaged because the directors and management of
Proginet made misrepresentations and/or breached their fiduciary duties to Red
Oak, Proginet’s stockholders and the investing public with respect to (i)
representations concerning the existence of contractually committed orders and
future financial performance; (ii) severance  arrangements made with
Proginet’s former CEO and (iii) a claim with respect to Proginet’s having
procured directors and officers insurance from a relative of Proginet’s former
CEO.  While Red Oak has not alleged a specific dollar amount with
respect to its damages, it has asked to be “made whole”.  In
connection with its claims, Red Oak has served a demand to inspect books and
records of the Company pursuant to Section 220 of the Delaware General
Corporation Law (the “220 Demand”).  We have responded to the
correspondence as well as the 220 Demand, and certain documentation has been
offered to Red Oak in response to the 220 Demand.  Management has
informed Red Oak that it believes Red Oak’s claims are
meritless.  Although we believe that Red Oak’s claims are without
merit and that we have substantial defenses in this matter, if Red Oak brings a
litigation, we could in the future incur substantial litigation related
expenses, and additional monetary expense if Red Oak prevails in its
claims.  We  intend to contest vigorously any litigation
that is commenced.







(12)                 Concentration
of Risks




Software
license revenues for the years ended July 31, 2008 and 2007 included sales in
foreign countries of approximately $496,028 and $1,256,622
respectively.  In fiscal 2008, two customers represented approximately
38% of total software license revenue.  In fiscal 2007, two customers
represented approximately 35% of total software license revenue.  No
one customer represented 10% or more of total revenues in the years ended July
31, 2008 and 2007.




At July
31, 2008, one customer amounted to approximately 57% of total trade accounts
receivable. At July 31, 2007, three customers amounted to approximately 61% of
total trade accounts receivables.






(13)                 Retirement
Plan




The
Company maintains a 401(k) savings plan which covers all full-time employees.
Employees become eligible for participation in the plan after three months of
service and attainment of age twenty-one. Under the plan, employees may
contribute up to 100% of their salary to the plan, subject to the dollar limit
set by law. The Company may match up to 100%, as determined by the Board of
Directors. The Company’s contributions were $104,662 and $91,084 for the years
ended July 31, 2008 and 2007, respectively.







Return to Table of Contents
 43





Item 8.          Changes In
and Disagreements with Accountants on Accounting and Financial
Disclosure




None.





Item 8A(T).  Controls and Procedures




Evaluation
of Disclosure Controls and Procedures




The
Company’s management, including its Chief Executive Officer (“CEO”) and Chief
Financial Officer (“CFO”), has evaluated the effectiveness of the Company’s
disclosure controls and procedures, as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) as of July 31, 2008.  Based on that evaluation, the
Company’s CEO and CFO have concluded that the Company’s disclosure controls and
procedures are effective in recording, processing, summarizing and reporting,
within the time periods specified in the SEC’s rules and forms, information
required to be disclosed by the Company in the reports it files and submits
under the Exchange Act, and in ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act is collected and conveyed to the Company’s management, including its CEO and
CFO, to allow timely decisions to be made regarding required
disclosure.




Management’s
Report on Internal Control Over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting.  The Company's internal control over
financial reporting has been designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of the Company’s
financial statements for external reporting purposes in accordance with
accounting principles generally accepted in the United States of
America.




Our
internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that accurately and fairly reflect, in
reasonable detail, transactions and dispositions of assets; and provide
reasonable assurances that: (1) transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States; (2) receipts and expenditures are being
made only in accordance with authorizations of management and the directors of
Proginet; and (3) unauthorized acquisitions, use, or disposition of Proginet’s
assets that could have a material effect on Proginet’s financial statements are
prevented or timely detected.




All
internal control systems, no matter how well designed, have inherent
limitations.  Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparations and presentations.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.




Our
management conducted an assessment of the effectiveness of our internal control
over financial reporting as of July 31, 2008, utilizing the framework
established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).  The
COSO framework summarizes each of the components of a company’s internal control
system, including (i) the control environment, (ii) risk assessment, (iii)
control activities, (iv) information and communication, and (v)
monitoring.  Based on this assessment, our management has determined
that our internal control over financial reporting as of July 31, 2008 was
effective.




Changes
in Internal Control Over Financial Reporting




During
our most recent fiscal quarter, there has not occurred any change in our
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.




Auditor
Attestation




This
annual report does not include an attestation report of Proginet’s registered
public accounting firm regarding internal control over financial
reporting.  Management's report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only management's report in this annual
report.




Item 8B.
            Other
      Information




None.





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 44




Part III




Item
      9.
            Directors,
      Executive Officers, Promoters, Control Persons and Corporate Governance;
      Compliance with Section 16(a) of the Exchange
  Act.




Except as
set forth below, the information called for by this Item is included under the
captions “Information about Nominees”, Information about Non-Director Executive
Officers”, “Audit Committee” and “Section 16(a) Beneficial Ownership Reporting
Compliance” in the Proxy Statement for the Annual Meeting of Stockholders to be
held on November 18, 2008 and is incorporated herein by reference.




Code of
Ethics




The
Company has adopted a “Code of Business Conduct and Ethics” that applies to all
Proginet employees and members of its Board of Directors, including Proginet’s
principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions.  A
copy of the Company’s Code of Business Conduct and Ethics was attached as an
exhibit to the annual report on Form 10-KSB for the year ended July 31,
2004.  The Company posts the Code of Business Conduct and Ethics and
related amendments or waivers, if any, on its website at www.proginet.com.  Information
contained on the Company’s website is not a part of this
report.  Copies of the Company’s Code of Business Conduct and Ethics
will be provided free of charge upon written request to Proginet Corporation,
200 Garden City Plaza, Garden City, New York 11530, Attention:  Debra
A. DiMaria, CFO.




Item 10.         
Executive Compensation




The
information called for by this Item is set forth under the caption “Executive
Compensation” in the Proxy Statement for the Annual Meeting of Stockholders to
be held on November 18, 2008, and is incorporated herein by
reference.




Item 11.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters




The
information called for by this Item is set forth under the caption “Security
Ownership of Certain Beneficial Owners and Management” in the Proxy Statement
for the Annual Meeting of Stockholders to be held on November 18, 2008 and is
incorporated herein by reference.




Item 12.
            Certain
      Relationships and Related Transactions and Director
      Independence




The
information called for by this Item is set forth under the caption “Certain
Relationships and Related Transactions” in the Proxy Statement for the Annual
Meeting of Stockholders to be held on November 18, 2008 and is incorporated
herein by reference.







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 45





Item 13.
            Exhibits




Unless
otherwise noted, the exhibits below are incorporated by reference to the
Company's Registration Statement on Form 10-SB/A, filed with the SEC on July 18,
2000:




Exhibit
      No.
            Exhibit
      Name3(i)
            Certificate
      of Incorporation3(i)(a)
            Certificate
      of Amendment of Certificate of Incorporation dated December 2,
      19963(ii)
            Amended
      and Restated Bylaws of the Registrant (II)4.10
            Form
      of Specimen Stock Certificate (I)10.1
            Form
      of Employee Confidential Information and Non-Competition
      Agreement10.1
            Blockade
      Agreement dated January 10, 2005 (V)10.2
            Form
      of Confidential Information and Non-Competition Agreement For
      Consultants10.4
            Form
      of Software License Agreement10.5
            Form
      of Distributor Agreement10.6
            Form
      of OEM Agreement10.7
            Management
      Continuity Agreement - Kevin M. Kelly, Chief Executive Officer and
      President  (III)+10.8
            Management
      Continuity Agreement - Debra A. DiMaria, Chief Financial Officer and
      Corporate Secretary  (III)+10.9
            Management
      Continuity Agreement – Arne Johnson, Senior Vice President for Strategic
      Planning & Alliances (III)+10.10
            Management
      Continuity Agreement – Thomas Bauer, Chief Technology Officer
      (III)+10.11
            Management
      Continuity Agreement – Kevin Bohan, Chief Information Officer
      (III)+10.12
            Independent
      Directors Stock Option Plan, amended and restated as of February 21, 1995
      (VI)+10.13
            1995
      Equity Incentive Plan, amended and restated as of December 5, 1995 (VI)
      +10.14
            Form
      of Incentive Stock Option Agreement (VI) +10.17
            1997
      Stock Option Plan, as amended and restated as of November 14, 2000
      (VI)+10.18
            2000
      Stock Option Plan as amended September 26, 2005 (IV)+10.19
            Offer
      letter from the Company to Sandy Weil signed on  April 4, 2008
      (VII)+10.20
            Agreement,
      dated September __, 2008, between Proginet Corporation and Kevin M. Kelly
      (IX)+10.21
            Consultant
      Agreement, effective August 1, 2008, between Proginet Corporation and
      Kevin M. Kelly (IX)+10.22
            Support
      Agreement, effective August 1, 2008, between Proginet Corporation and
      Kevin M. Kelly (IX)+99.1
            Code
      of Business Conduct and Ethics (III)23
            Consent of BDO Seidman, LLP
      (IX)31.1
            Rule 13a-14(a)/15d-14(a)
      Certification Section 302 Certification (Chief Executive Officer)
      (IX)31.2
            Rule 13a-14(a)/15d-14(a)
      Certification Section 302 Certification (Chief Financial Officer)
      (IX)32.1
            Section 1350 Certification of Chief
      Executive Officer (IX)32.2
            Section 1350 Certification of Chief
      Financial Officer (IX)




(I)
            Incorporated
      by reference to the Company’s Form SB-2 Amendment No. 1 filed with SEC on
      June 22, 2005(II)
            Incorporated
      by reference to the Company’s Form 10-KSB filed with the SEC on September
      18, 2002(III)
            Incorporated
      by reference to the Company’s Form 10-KSB filed with the SEC on October 3,
      2003(IV)
            Incorporated
      by reference to the Company’s Proxy Statement dated October 3,
      2005(V)
            Incorporated
      by reference to the Company's form 8-K filed with SEC on January 14,
      2005(VI)
            Incorporated
      by reference to the Company’s form 10-SB/12(g) filed with the SEC on March
      29, 2000(VII)
            Incorporated
      by reference to the Company's Current Report on Form 8-K filed with the
      SEC on April 10, 2008(VIII)
            Incorporated
      by reference to the Company's Current Report on Form 8-K filed with the
      SEC on September [29], 2008(IX)
            Filed
      herewith+
            Management
      contract or compensatory plan








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 46





Item
14.          Principal
Accountant Fees and Services




The
information called for by this item is set forth under the caption “Principal
Accountant Fees and Services” in the Proxy Statement for the Annual Meeting of
Stockholders to be held on November 18, 2008 and is incorporated herein by
reference.







SIGNATURES




In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.







PROGINET
      CORPORATIONBy:
            /s/Sandy
      WeilSandy
      WeilPresident
      and Chief Executive OfficerDate:
            October
      2, 2008





In
accordance with the Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.





NAME
            TITLE
            DATE/s/Sandy
      Weil
              _____________________
              Sandy
      Weil
            President,
      Chief Executive Officer and Director
            October
      2, 2008/s/Debra A.
      DiMaria
              _____________________
              Debra
      A. DiMaria
            Corporate
      Secretary and Chief Financial and Accounting Officer
            October
      2, 2008/s/Dr. E. Kelly
      Hyslop
              _____________________
              Dr.
      E. Kelly Hyslop
            Chairman
            October
      2, 2008/s/Amit
      Basak
              _____________________
              Amit
      Basak
            Director
            October
      2, 2008/s/George T.
      Hawes
              _____________________
              George
      T. Hawes
            Director
            October
      2, 2008/s/Stephen
      Kezirian
              ____________________
              Stephen
      Kezirian
            Director
            October
      2, 2008/s/Allen
      Wolpert
              ____________________
              Allen
      Wolpert
            Director
            October
      2, 2008






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47