##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-KSB
 (Mark One)
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For
the transition period
from            to
           .
 Commission File Number 000-29129
 
 Innuity, Inc.
 (Name of small business issuer in its charter)
 Utah(State or other jurisdiction of incorporation or organization)
    
    87-0370820(I.R.S. Employer
Identification No.)
 8644 154th Avenue NE
Redmond, WA(Address of principal executive offices)
    
    98052(Zip Code)
 Issuers telephone number:
(425) 497-9909
 Securities registered under Section 12(b) of the Exchange Act:
 None
 Securities registered under Section 12(g) of the Exchange Act:
 Title of Class
 
  
 o
 þ o
 þ
 o þ
  o
   
 DOCUMENTS INCORPORATED BY REFERENCE
  o þ




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##### 



TABLE OF CONTENTS
 INNUITY, INC.
 FORM 10-KSB
 PagePART IItem 1.
    
    Description of Business
    
    
    3Item 2.
    
    Description of Property
    
    
    16Item 3.
    
    Legal Proceedings
    
    
    16Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    17PART IIItem 5.
    
    Market for Common Equity and Related Stockholder Matters
    
    
    18Item 6.
    
    Managements Discussion and Analysis or Plan of Operation
    
    
    19Item 7.
    
    Financial Statements
    
    
    43Item 8.
    
    Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    43Item 8A.
    
    Controls and Procedures
    
    
    43Item 8B.
    
    Other Information
    
    
    43PART IIIItem 9.
    

Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act
    
    
    43Item 10.
    

Executive Compensation
    
    
    43Item 11.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    43Item 12.
    
    Certain Relationships and Related Transactions
    
    
    43Item 13.
    
    Exhibits
    
    
    44Item 14.
    
    Principal Accountant Fees and Services
    
    
    46EXHIBIT 3.2EXHIBIT 10.1EXHIBIT 10.20EXHIBIT 21.0EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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PART I
  This Annual Report on Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended. We use words such as anticipates, believes, estimates, may,
intends, expects and similar expressions to identify forward-looking statements. Discussions
containing forward-looking statements may be found in the material set forth under Business,
Managements Discussion and Analysis or Plan of Operation and in other sections of the report.
All forward-looking statements, including, but not limited to, statements regarding the benefits
and risks associated with our recent combination with Vista.com, Inc., our future operating
results, financial position, and business strategy, expectations regarding our growth and the
growth of the industry in which we operate, and plans and objectives of management for future
operations, such as plans to develop or acquire certain applications or services or to build a
Productivity division for our business, are inherently uncertain as they are based on our
expectations and assumptions concerning future events. Any or all of our forward-looking statements
in this report may turn out to be inaccurate. We have based these forward-looking statements
largely on our current expectations and projections about future events and financial trends that
we believe may affect our financial condition, results of operations, business strategy and
financial needs. They may be affected by inaccurate assumptions we might make or by known or
unknown risks and uncertainties, including the risks, uncertainties and assumptions described in
the section entitled Risk Factors and elsewhere in this report. In light of these risks,
uncertainties and assumptions, the forward-looking events and circumstances discussed in this
report may not occur as contemplated, and our actual results could differ materially from those
anticipated or implied by the forward-looking statements. All forward-looking statements in this
report are made as of the date hereof, based on information available to us as of the date hereof,
and we assume no obligation to update any forward-looking statement.
 
 Item 1. Description of Business
 Overview
    Market Overview
   3




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Products & Services Overview
      Strategy Overview
  
    
    expanding our sales, marketing and distribution efforts, both through private label partners and on a direct basis;
    
    focusing on key vertical markets, such as retail, restaurant and hospitality, and real estate services;
    
    expanding and integrating the applications that we will offer in our three
divisions (Promotion, Commerce, and Productivity);
    
    enabling integration of third-party onsite systems and applications with our Internet technology platform; and
    
    increasing the number of applications and services used by our customers.
 4




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Marketing & Sales Overview
  www.innuitydirect.com
  History
    bbench@innuity.com
 Industry Background
  5




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Our Solution
  6




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##### Table of Contents



Velocity Internet Technology Platform
 Internet technology solutions
  
    
    Promotion division  we deliver an Internet marketplace to the small business
owner by providing a web presence, marketing tools and sales leads. Applications
include search engine optimization, pay-per-click campaign management, affiliate
marketing management, search engine submission, permission email marketing, web
analytics tools and management, domain name registration, business and eCommerce
websites, and custom website design services.
    
    Commerce division  we are able to process, manage, and support commercial
transactions between small businesses, their online and offline customers, vendors
and business partners. Applications include point-of-sale hardware, software and
related services, and merchant accounts and payment processing services for credit
cards, automated clearinghouse transactions, bill presentment and payment, and
business cash advances.
 Business Strategy
  Expand Our Sales, Marketing and Distribution Efforts, Both Through Customer-Acquisition
Partners and on a Direct Basis www.innuitydirect.com
   7




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Focus on Key Vertical Markets
  Expand and Integrate Our Internet Technology Solutions Offerings
  Integrate Legacy Third-Party Onsite Systems and Applications with Our Velocity Internet
Technology Platform .
 Increase the Number of Applications and Services Used by Our Customers .
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Products and Services
  Promotion Division.
 Website Services.
  
    
    Business Websites Design, implementation, and delivery of websites to
effectively market businesses online and provide successful customer interaction.
    
    Ecommerce Websites Design, implementation, and delivery of websites with safe
and secure online stores; and creation and maintenance of compelling online
storefronts  easily and reliably.
    
    Advanced Website Reporting Deeper insight into consumer interaction with a
small business website  including lead sourcing (where leads come from); consumer
exploring (where consumers are going); conversion tracking (how many visitors become
buyers); and general traffic trends.
    
    Design Services Professional design from website creation to logo design,
flash, and all design elements impacting a sites look and feel. (Full-Service
Websites only)
   Lead Generation Services.
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
    
    Pay-Per-Click Purchases advertising space on search engines for specified
keywords and keyword phrases (search terms) and quickly delivers leads.
    
    Search Engine Submission Supplies a URL to a search engine company to make the
search engine aware of a site or page with the goal of getting our customers
displayed in search engine results.
    
    Link Recruitment Produces links from other websites to the customers site so
as to generate direct traffic to the customers site from other websites, achieve
higher rankings in search engines, and deliver a steady stream of qualified leads to
the customers website.
  
    
    Search Engine Optimization Designed to deliver front page organic, natural
search results for relevant keyword searches at a fraction of the cost that one
would pay for premium, paid keyword search engine placement. Continuous
optimization that transforms websites into long-term assets.
    
    Pay-Per-Click Purchases advertising space on search engines and quickly
delivers paid results from search engines for relevant keywords and keyword phrases.
    
    Affiliate Marketing Helps businesses generate new sales via an extensive
network of affiliate websites.
    
    Conversion Enhancement Analyzes a viewers real-time behavior on a website and
makes recommendations for increasing customer conversion rates, such as adding a
form, modifying navigation, creating graphics or text, and adapting the shopping
cart.
    
    Permission Email Marketing Helps customers create and send their own branded or
private label email campaigns (newsletters, coupons, in-store specials, or
referrals).
    
    Site Analytics Provides Web analytics reporting and management tools designed
to help businesses better understand and improve their online marketing efforts.
    
    Content Creation Utilizing Web analytics, designs and develops website content,
articles, newsletter editorial, and email marketing content.
  Commerce Division.
 Merchant Services.
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
    
    Electronic Check Processing Allows merchants to accept checks from consumers
over the Internet or by phone, including comprehensive online paperless check
processing.
    
    eCommerce Card Processing Provides all of the service and functionality needed
to start accepting major credit cards online, including Visa, MasterCard, American
Express, Discover, Diners Club, and JCB.
    
    Recurring Billing Payment Processing Enables online bill presentment and
payment, providing the ability to apply payments.
   In-Store Systems.
 
    
    Point of Sale (POS)Operates the front end of the hospitality or retail
business, providing cash control and sales mix reporting.
    
    Labor ManagementManages the back end business functions of time keeping and
labor scheduling.
    
    Inventory ManagementManages the back office elements of purchasing, receiving,
product costing, physical accounts, and actual product costs.
  
    
    Help DeskProvides 24x7 call center support to customers/clients.
    
    On-Site ServiceConsultants go to customer/client locations to assess and solve technical needs.
    
    Depot ServiceCustomers/clients mail in systems for technical assessment and
repair. Service teams identify and correct problems and ship back refurbished
systems.
    
    Implementation-InstallationService teams create a database of all needed
customer/client information, train all management and related employees onsite,
install physical placement of hardware, and provide live, in-person, support.
    
    StagingService teams create an integrated system for customers/clients.
  11




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Marketing and Sales
   www.innuitydirect.com
  Competition
  
    
    Website Servicescompanies such as Yahoo Small Business, Microsoft Office Live,
Website Pros, Interland, Go Daddy, Verio, 1&1 and Network Solutions.
    
    Lead Generation Servicescompanies such as Yahoo Small Business, Google,
Microsoft, iCrossing, iProspect, SEO.com, Local Launch!, Marchex (Traffic Leader)
and local SEO companies.
    
    Merchant Servicesonline companies such as Versign, Authorize.net, PayPal,
Heartland Payment Systems, iPayment, CyberSource, Global Payments, Verus (The Sage
Group), and Innovative Merchant Services (Intuit), as well as offline competitors
such as Bank of America, Chase Manhattan Bank, Wells Fargo and small independent
sales organizations.
    
    In-Store Systemsintegrated equipment and software companies such as Micros
Systems, Radiant Systems; independent software vendors such as Positouch, Digital
Dining, and Microsoft Retail Management System; and hardware competitors such as
NCR, IBM, and Dell.
  12




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Technology
  
    
    Support millions of small business customers, processing billions of dollars in
transactions. Our applications, and the information residing in them, are accessible
and controllable by the small business customer. Consumers can find small
businesses, employees can run any application, and owners can manage and track
information.
    
    Centralize service and support. Our centralized service and support capabilities
enable our small business customers to take advantage of an optimized cost
structure, while providing them with a high availability of resources, redundant
systems, and highly monitored security systems, advantages that previously were
available only to larger companies with substantial information technology budgets.
    
    Optimize and leverage hardware. Our hardware is optimized with custom software
applications that achieve high performance with great scalability, giving our small
business customers the direct cost and performance advantages of our centralized
hardware/infrastructure. Our platform dynamically allocates hardware and other
resources to a small business customer only when they are utilizing our
applications, instead of permanently allocating a certain amount of resources,
independent of application usage.
    
    Deliver applications services on demand. Our on-demand and monthly subscription
model enables small businesses to determine what applications services they need,
when they need them, and when it is appropriate for them financially. As result,
they have better operational control and can experience significantly lower costs.
  
    
    Application Architecture. Our application architecture has been designed with
some core principles in mind. First applications are reentrant so that multiple
entities can safely and dependably access our software code simultaneously.
Applications are also stateless, meaning that the states (activities) of the
applications reside in a database. We have designed the architecture so that speed
is optimized for each state, and so that for each state there are set time
parameters to accomplish the related task, with immediate shifts to additional
hardware resources as needed. Additionally, all our applications are designed to
use databases, and our data architecture is designed to index millions of small
businesses and, for each small business, their pertinent business information. Our
applications support XML for data integration, and XML is employed to move data
between applications.
    
    Network Architecture. Our network architecture keeps track of individual
requests, providing session information to the application servers. It is designed
for high security, in order to prevent hackers, prevent denial of service attacks,
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and block unauthorized use of the system. Designed for high availability and
redundancy, the network architecture has no single point of failure.
 
    
    Platform architecture. Our Velocity technology platform has been constructed so
that it will be able to scale to serve millions of customers. Our platform consists
of Intel-based commodity front-end servers utilizing industry standard software
operating systems, languages and APIs (application program interfaces) including
Linux, Apache, PHP, SOAP and XML. These servers run our proprietary software and are
load-balanced with F5 Networks BigIP appliances. The front-end server pool is easily
scalable by adding commodity servers as volume of traffic requires. The front-end
servers connect to the back-end system through CISCO and Extreme Networks switches.
Our back-end system consists of file and Oracle database servers. All of the
back-end systems are built to scale by both upgrading hardware as processor speeds
and capacity continue to increase, and partitioning any single system to multiple
servers.
    
    Data Center.Our technology infrastructure is located in a data center operated
by a third party. Our information systems are backed up daily, and backups are taken
offsite monthly. The data center feeds are dual homed and BGP routed over two main
backbone connections: an OC-48 (155Mb) to ATT US, which is on a SONET ring; and a
100Mb connection to BigPipe, terminating in Canada. The data center has split
physical entry points for the feeds and can route traffic down either circuit in the
event a circuit fails. In the case of an electrical power failure, the data center
has an uninterruptible power supply (UPS) that is dual sourced from public power and
a local diesel generator. The generator starts automatically in the event of public
power failure. The data center maintains an onsite fuel supply to power the
generator during short-term disruptions, and has entered into contracts for priority
fuel deliveries in the event of a major long-term local disruption. All equipment
for routing, switching and data cabinets is also powered from the UPS, allowing
operation without interruption during a public power outage.
    
    Systems Security. Our security systems continuously monitor the Velocity Internet
technology platform for possible vulnerabilities, as well as for possible
intrusions, utilizing a combination of commercially available and open source
software and services, as well as our own internally developed tools. We use
industry standard protocols and systems for network security. Multiple layers of
firewalls are designed to prevent unauthorized access externally and improper access
to confidential information internally. We use standard encryption and
authentication technology, licensed from third parties, to provide secure
transmission of confidential information, such as end-user credit card numbers. Our
Web servers use application-level security, limiting what transactional information
is available.
    
    Consumer Security.Through our customers and service providers, we collect
information from consumers, such as consumer names and email aliases that enable us
to personally identify consumers who visit the websites of our small business
customers. In addition, consumers provide financial information, such as credit card
numbers and bank account numbers, when purchasing products or services from our
small business customers. We have security measures in place to protect the loss,
misuse and alteration of the confidential information under our control. Only our
authorized employees are permitted to have access to a consumers personal
information and such access is limited based upon business need. We generally do not
share financial information with outside parties, except to the extent necessary to
provide consumers with the product or service they have purchased. We may also
release specific personal information in order to comply with applicable laws and
regulations and governmental proceedings, such as criminal investigations, search
warrants, subpoenas or court orders. We take reasonable steps, including using
industry standard encryption technology, in order to protect such personal
information. However, no data transmitted over the Internet or over any wireless
network can be guaranteed to be absolutely secure. As a result, while we strive to
protect the personal and financial information of consumers, we cannot guarantee the
security of any such information.
    
    Customization and Integration. We have developed our business applications and
services to require only slight, if any, customization in order to be useful to most
types of small businesses in our target vertical markets. In the future, we will
continue to pursue this minimal-customization objective, in order to benefit from
cross-market efficiencies. In the event we acquire rather than develop future
applications, we will look for similar efficiency opportunities. We also provide a
developer API for our commerce applications and services so that small businesses
and their vendors can integrate their custom applications with our payment gateway.
Integration options include: SSL POST with name/value pairs and secure socket
connection; and for Windows-based applications, a COM object is also available to
simplify the integration. Sample scripts are available (e.g., Perl, C++, Visual
Basic, ASP) to shorten the learning curve and speed development time.
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Customers
   Intellectual Property
  Small is the new big
   Government Regulation
   15




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Employees
  Website
 www.innuity.com
 
 Item 2. Description of Property
  
 Item 3. Legal Proceedings
   16




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Item 4. Submission of Matters to a Vote of Securities Holders
  
    
    approval of an amendment to our articles of incorporation to change our name to Innuity, Inc; and
    
    approval of the Innuity, Inc. Amended and Restated 1999 Stock Option Plan.
  Matters Submitted for Vote
    
    For
    
    Against
    
    AbstainAmendment to Articles of Incorporation
    
    
    12,260,418
    
    
    
    4
    
    
    
    0Approval of Stock Option Plan
    
    
    12,260,418
    
    
    
    4
    
    
    
    0
  17




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PART II
 
 Item 5. Market For Common Equity and Related Stockholder Matters
 Market Information 
  COMMON STOCK
 PeriodFiscal Year 2005
    
    High Bid
    
    Low BidFirst Quarter
    
    $
    5.00
    
    
    $
    0.75Second Quarter
    
    $
    4.90
    
    
    $
    1.02Third Quarter
    
    $
    5.25
    
    
    $
    3.74Fourth Quarter
    
    $
    4.75
    
    
    $
    3.32
 PeriodFiscal Year 2004
    
    High Bid
    
    Low BidFirst Quarter
    
    $
    1.65
    
    
    $
    0.22Second Quarter
    
    $
    2.05
    
    
    $
    0.80Third Quarter
    
    $
    1.45
    
    
    $
    0.62Fourth Quarter
    
    $
    6.00
    
    
    $
    0.70
 Holders
  Dividends
  Securities Authorized for Issuance under Equity Compensation Plans
  Number ofNumber of
    
    
    
    
    
    securities remainingSecurities to
    
    Weighted-
    
    for future issuancebe issued upon
    
    average exercise
    
    under equityexercise of
    
    price of
    
    compensation plansoutstanding options,
    
    outstanding
    
    (excluding securitieswarrants
    
    options, warrants
    
    reflected inand rights
    
    and rights
    
    column (a))(a)
    
    (b)
    
    (c)Equity compensation
plans approved by security
holders
    
    
    1,980,885
    
    
    

$ 0.38
    
    
    
    350,800Equity compensation plans
not approved by security
holders
    
    
    0
    
    
    
    N/A
    
    
    
    0Total
    
    
    1,980,885
    
    
    
    $ 0.38
    
    
    
    350,800
 18




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Item 6. Managements Discussion and Analysis or Plan of Operation
 The following discussion should be read in conjunction with the audited consolidated financial
statements and the notes to those statements which appear elsewhere in this Annual Report on Form
10-KSB. The following discussion contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. We use words such as anticipates, believes, estimates, may, intends,
expects and similar expressions to identify forward-looking statements. Discussions containing
forward-looking statements may also be found in the material set forth under Business and in
other sections of the report. All forward-looking statements, including, but not limited to,
statements regarding the benefits and risks associated with our recent combination with Vista.com,
Inc., our future operating results, financial position, and business strategy, expectations
regarding our growth and the growth of the industry in which we operate, and plans and objectives
of management for future operations, such as plans to develop or acquire certain applications or
services or to build a Productivity division for our business, are inherently uncertain as they are
based on our expectations and assumptions concerning future events. Any or all of our
forward-looking statements in this report may turn out to be inaccurate. We have based these
forward-looking statements largely on our current expectations and projections about future events
and financial trends that we believe may affect our financial condition, results of operations,
business strategy and financial needs. They may be affected by inaccurate assumptions we might make
or by known or unknown risks and uncertainties, including the risks, uncertainties and assumptions
described in the section entitled Risk Factors and elsewhere in this report. In light of these
risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in
this report may not occur as contemplated, and our actual results could differ materially from
those anticipated or implied by the forward-looking statements. All forward-looking statements in
this report are made as of the date hereof, based on information available to us as of the date
hereof, and we assume no obligation to update any forward-looking statement.
 Company Overview
      19




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Source Energy Corporation
  Merchant Partners.com, LLC
    10x Marketing, LLC
  20




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Jadeon, Inc.
   Critical Accounting Policies
  Revenue Recognition
    Subscriptions and Maintenance Support
 Transaction Processing and Affiliate (Reseller) Programs
 Professional Services
 21




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Systems Sales
 Allowance for Doubtful Accounts
  Long-Lived Assets
  Goodwill
     22




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Stock-Based Compensation
  Results of Operations
 For the year ended December 31, 2005 compared to the year ended December 31, 2004
 Revenues
   Cost of Revenue
  General and Administrative
  23




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Sales and Marketing
  Research and Development
  Royalty Expense
  Amortization of Intangibles
  Interest Expense
  24




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Liquidity and Capital Resources
      New Accounting Pronouncements
   25




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Accounting Changes
and Error Corrections  a replacement of APB Opinion
No. 20 and FASB Statement No. 3.
 Off-Balance Sheet Arrangements
  Contractual Obligations and Commitments
     
    
    We owed a note in the principal amount of $200,000 to a single entity. This note
is a demand note and bears interest at the rate of 8%, and has been outstanding
since February 2002.
    
    We owed $4,726,088 of principal to various entities. These notes accrued
interest at 8% and were convertible at the option of the holders into shares of our
common stock. As of March 22, 2006, all of these notes together with accrued
interest of $198,781 had converted in 3,283,275 shares of our common stock.
    
    On May 25, 2005, we signed a note payable in the amount of $45,000 as payment for
the ability to directly register domain names. As of December 31, 2005, we owed
$15,000 on this note. The note was paid in full on March 17, 2006.
    
    In conjunction with the purchase of Jadeon, we issued a note payable to the
former owner of Jadeon in the principal amount of $572,384, net of discount of
$26,994. This discount is being amortized over the life of the note. The note bears
interest at the rate of 5%, and matures in March 2015. Payments on the note are to
be made quarterly based on
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a formula of 6% of Jadeons gross revenue for the quarter, or 60% of Jadeons net
income plus amortization for the quarter; however, the payment must be not less than
$45,000 per quarter.
 
    
    We also owed a line of credit to a bank, in the amount of $489,515 at December
31, 2005. This line of credit bears interest at a variable rate equal to the banks
prime rate and matures in May 2006.This line of credit is personally guaranteed by
John Wall, our Chief Executive Officer and a member of our Board of Directors.
    
    In conjunction with the conversion and cancellation of the royalty payment
obligations payable to Artesian Management, we owed a note payable at June 30, 2005
of $1,824,471. This note was amended and restated as of August 8, 2005 and we owed
$280,806 plus accrued interest on December 31, 2005. Interest accrues on the note at
the rate of 8% and there is a minimum monthly payment obligation of $13,468. This
note is now held by Seaport Ventures, LLC, Maryanne Dennis and the John and Maryanne
Dennis Foundation. In the event of default, interest on the note accrues at the
rate of 12% and is due and payable in full at the discretion of the note holders.
 Risk Factors
  Risks Related to Our Business
 Our limited operating history makes evaluation of our business difficult.
  We have incurred losses since our inception, and we may not achieve or maintain profitability.
  We have a significant working capital deficit and will need additional funding to support our
operations and capital expenditures; sufficient funding may not be available to us, and the
unavailability of funding could adversely affect our business.
  27




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Expansion in the sales of our Internet technology applications and solutions will depend on the
continued acceptance of the Internet as a communications and commerce platform for small
businesses.
   Our business depends in part on our ability to provide an increasing selection of value-added
Internet technology applications and solutions, many of which we do not currently possess but plan
to develop internally or to provide or obtain through agreements with third parties; and our
business will be harmed if we are unable to develop or offer additional Internet technology
applications and solutions in a timely and cost-effective manner.
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In order to expand our Internet technology solutions offerings, we may need to license or acquire
other technologies or businesses; we may find that it is difficult to identify or conclude such
acquisitions on favorable terms, or to integrate future technology or business acquisitions, which
could limit our growth, disrupt our business and adversely affect our operating results.
   Our ability to integrate successfully the businesses of Jadeon and 10x Marketing with our business
is uncertain.
  
    
    retaining existing customers and strategic partners of the acquired businesses;
    
    combining all service offerings on a common technology platform;
    
    retaining and integrating our management and our other key employees with those of our acquired businesses;
    
    coordination of sales and marketing efforts;
    
    integrating purchasing and procurement operations in multiple locations;
    
    combining service offerings effectively and quickly;
    
    integrating sales efforts so that customers can easily do business with us;
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
    
    transitioning all facilities to a common information technology system;
    
    offering our services and products to each others customers;
    
    incorporating acquired technology and rights into our service offerings;
    
    bringing together our marketing efforts so that the industry receives useful
information about the combined service offerings; and
    
    developing and maintaining uniform standards, controls, procedures, and policies
for operation of the combined businesses.
  
    
    the impairment of relationships with key employees, customers, strategic partners and suppliers;
    
    the potential disruption of our ongoing business and distraction of our management; and
    
    unanticipated expenses related to integration of the companies.
  Our acquisitions of Jadeon and 10x Marketing may fail to achieve the contemplated business benefits
and objectives.
  
    
    our ability to timely introduce new Internet technology applications and
solutions to the small business customers of the respective companies;
    
    the risk that the customers of the respective companies may not purchase the
additional services offered by one of the others or may defer purchasing decisions;
    
    the risk of technical difficulties or failures that would interrupt product and
service offerings;
    
    the risk that strategic distribution partners may terminate their relationship
with us or not expand their distribution relationships, as a result of the
acquisitions; and
    
    the risk that, as a consequence of the acquisitions, it may be more difficult to
retain key management, marketing and technical personnel after the combination.
  We may not realize the anticipated benefits of the merger with Vista.com.
  30




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##### Table of Contents



Our ability to compete successfully will depend upon the continuing development and enhancement of
our Internet technology applications and solutions.
  
    
    identify and anticipate emerging technological and market trends affecting the
small business segment in which we do business;
    
    enhance our current services offerings so as to increase their functionality, features and cost-effectiveness;
    
    develop, license or acquire new applications or services that meet emerging customer needs;
    
    modify our services offerings in response to changing business practices and
technical requirements of our customers, as well as new regulatory requirements;
    
    integrate our current and future services offerings with third-party systems and services; and
    
    create and maintain interfaces to changing customer and third party systems and services.
  We face intense and growing competition from larger, more established companies, as well as new
entrants into our market, and we may not be able to compete effectively, which could reduce demand
for our services.
  
    
    Website Servicescompanies such as Yahoo Small Business, Microsoft Office Live,
Website Pros, Interland, Go
 31




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##### Table of Contents



Daddy, Verio, 1&1 and Network Solutions.
 
    
    Lead Generation Servicescompanies such as Yahoo Small Business, Google,
Microsoft, iCrossing, iProspect, SEO.com, Local Launch!, Marchex (Traffic Leader),
and local search engine optimization companies.
    
    Merchant Servicesonline companies such as Versign, Authorize.net, PayPal,
Heartland Payment Systems, iPayment, CyberSource, Global Payments, Verus (The Sage
Group), and Innovative Merchant Services (Intuit), as well as offline competitors
such as Bank of America, Chase Manhattan Bank, Wells Fargo, and small independent
sales organizations.
    
    In-Store Systemsintegrated equipment and software companies such as Micros
Systems, Radiant Systems; independent software vendors such as Positouch, Digital
Dining, and Microsoft Retail Management System; and hardware competitors such as
NCR, IBM, and Dell.
  Our future revenues may be uncertain because of reliance on third parties for marketing and
distribution.
  We plan to expand our business by entering into additional distribution relationships through which
our strategic partners will private label Innuity applications and market them under their own
brands. If we are unable to maintain our existing private label distribution arrangements or if we
are unable to enter into additional private label distribution arrangements, our future revenues
would be significantly reduced and our expenses would increase.
  32




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##### Table of Contents



Most of our Internet technology applications and solutions are sold individually on a
month-to-month subscription basis, and if our customers either are unable or choose not to continue
to subscribe to our Internet technology applications and solutions, our revenues may decrease.
  Changes to credit card association rules or practices could adversely impact our business.
  Our reliance on suppliers and vendors could adversely affect our ability to provide our services
and products to our small business customers on a timely and cost-efficient basis, which could
reduce our revenues.
 .
 We have faced, and may in the future face, significant chargeback liability if our small business
customers refuse or cannot reimburse chargebacks resolved in favor of their customers, and we may
also face potential liability for merchant or customer fraud; we may not accurately forecast or
protect ourselves against these liabilities.
  33




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##### Table of Contents



On occasion, we experience increases in interchange costs; if we cannot pass these increases along
to our small business customers, our profit margins will be reduced.
  Our ability to effectively improve a websites positioning in search rankings depends on our
ability to determine and manipulate search engine algorithms; a significant change in the way these
algorithms function could negatively affect our success.
  
    
    search engines stop providing critical data used by our internally developed tools;
    
    search engine algorithms arbitrarily prevent new sites from obtaining rankings;
    
    search engine algorithms weigh new factors that are more difficult for us to control;
    
    search engines implement new, anti-manipulation controls; or
    
    search engines switch to an entirely fee-based system, eliminating natural rankings as currently used.
 Margins on pay-per-click advertising may become too low to be profitable.
  Hackers or black-hat search engine optimization companies may negatively impact the publics
perception of the search engine optimization industry, which could impair our ability to maintain
our current customers and attract new customers.
  34




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##### Table of Contents



We have grown quickly and if we fail to manage our growth, our business could suffer.
  The loss of any members of our senior management could harm our current and future operations and
prospects.
 ,
 We face significant competition for a limited supply of qualified software engineers, consultants
and sales and marketing personnel.
  We may be unable to protect our intellectual property adequately or cost-effectively, which may
cause us to lose market share or force us to reduce our prices.
  35




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##### Table of Contents



We may become a party to intellectual property infringement claims, which could harm our business.
   Our Internet technology applications and solutions involve the storage and transmission of our
small business customers proprietary information, as well as the personal information of their
customers.
  Our technical systems are vulnerable to interruption and damage that may be costly and
time-consuming for us to resolve and may harm our business and reputation, and we could be subject
to liability as a result of security breaches, service interruptions by cyber-terrorists or
fraudulent or illegal use of our services.
   36




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##### Table of Contents



We rely heavily on the reliability, security, and performance of our internally developed systems
and operations, and any difficulties in maintaining these systems may result in service
interruptions, decreased customer service, or increased expenditures.
   Our business may be harmed by errors in our software.
  
    
    we may suffer a loss of revenues if, due to software errors, we are temporarily
unable to provide Internet technology applications and solutions to our customers;
    
    we may not be paid for the applications and services provided to a customer that
contain or result in errors, or we may be liable for losses or damages sustained by
a customer or its subscribers as a result of such errors;
 37




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##### Table of Contents




    
    we may incur additional expenses to correct errors in our software, or to fund
product development projects that we may undertake to minimize the occurrence of
such errors in the future;
    
    we may damage our relationships with customers or suffer a loss of reputation within our industry;
    
    we may become subject to litigation or regulatory scrutiny; and
    
    our customers may terminate or fail to renew their agreements with us or reduce
the services they purchase from us.
  If economic or other factors negatively affect the small business sector, our customers may become
unwilling or unable to purchase our Internet technology applications and solutions and related
products, which could cause our revenues to decline and impair our ability to operate profitably.
  If we are unable to respond to the rapid technological changes that are characteristic of our
industry, our Internet technology applications and solutions may not be competitive.
  We and our small business customers must comply with complex and changing laws and regulations.
  Government regulation of the Internet may adversely affect our business and operating results.
  38




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##### Table of Contents




    
    the Digital Millennium Copyright Act and its related safe harbors, are intended
to reduce the liability of online service providers for listing or linking to
third-party websites that include materials that infringe copyrights or other rights
of others;
    
    the Childrens Online Protection Act and the Childrens Online Privacy Protection
Act are intended to restrict the distribution of certain materials deemed harmful to
children, and impose additional restrictions on the ability of online services to
collect user information from minors;
    
    the Protection of Children from Sexual Predators Act of 1998 requires online
service providers to report evidence of violations of federal child pornography laws
under certain circumstances; and
    
    the CAN-SPAM Act of 2003 and certain state laws are intended to regulate
interstate commerce by imposing limitations and penalties on the transmission of
unsolicited commercial electronic mail via the Internet.
   We may be subject to lawsuits for information displayed on our small business customers websites,
which may affect our business.
  State and local governments may in the future be permitted to levy additional taxes on Internet
access and electronic commerce transactions, which could result in a decrease in the attractiveness
of the Internet to our customers and potential customers, and could reduce demand for our Internet
technology applications and solutions.
  If we fail to develop and maintain an effective system of internal controls, we may not be able to
accurately report our financial results or prevent fraud; as a result, current and potential
shareholders could lose confidence in our financial reporting, which
 39




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##### Table of Contents



could harm our business and the trading price of our common stock.
  We will incur increased costs as a public company which may make it more difficult for us to
achieve profitability and an active trading market.
  Risks Related to Our Common Stock
 Shares of our common stock may continue to be subject to price volatility and illiquidity because
our shares may continue to be thinly traded and may never become eligible for trading on Nasdaq or
a national securities exchange.
   40




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##### Table of Contents



Future sales of shares of our common stock may decrease the price for such shares.
  Our stock price may be volatile, and you may lose some or all of your investment.
  
    
    variations in our operating results;
    
    announcements of technological innovations, new services or service enhancements,
or significant agreements, by us or by our competitors;
    
    recruitment or departure of key personnel;
    
    changes in estimates of our operating results, or changes in recommendations by
any securities analysts that may follow us;
    
    sales of our common stock, particularly sales by officers, directors and significant shareholders; or
    
    conditions in our industry, the industries of our customers and the economy as a whole.
 Our stock may be subject to regulation as a penny stock, which could severely limit the liquidity
of your securities.
  As a result of increased trading activity occurring in our common stock prior to the announcement
of the proposed merger of Source Energy and Vista.com, we may be subject to increased scrutiny by
the National Association of Securities Dealers or the SEC, which could divert the attention of our
management, possibly delay the effectiveness of future registration statements, adversely affect
the trading market for our stock, and cause us to incur significant additional expenses.
  41




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##### Table of Contents



Mergers of the type we completed with Vista.com in late 2005 are often heavily scrutinized by the
SEC and we may encounter difficulties or delays in obtaining future regulatory approvals.
  42




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##### Table of Contents



Item 7. Financial Statements
  
 Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 8A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  
 Item 8B. Other Information
  
 PART III
 
 Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
  
 Item 10. Executive Compensation
  
 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  
 Item 12. Certain Relationships and Related Transactions
  43




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##### Table of Contents



Item 13. Exhibits
  ExhibitNumber
    
    
    Notes
    
    
    Description2.1
    
    
    (1)
    
    
    Agreement and Plan of Merger, dated as of October 21, 2005, by and among Source Energy
Corporation, a Utah Corporation, Vista Acquisition Corp., a Washington corporation and
wholly-owned subsidiary of Source Energy Corporation, and Vista.com, Inc., a Washington
corporation.3.1
    
    
    (2)
    
    
    Articles of Incorporation, as amended.3.2
    
    
    
    
    
    Articles of Amendment to Articles of Incorporation.3.3
    
    
    (3)
    
    
    Amended and Restated Bylaws.4.1
    
    
    (3)
    
    
    Form of Warrant to Purchase Common Stock.4.2
    
    
    (3)
    
    
    Form of Warrant to Purchase Common Stock.4.3
    
    
    (3)
    
    
    Form of 8% Convertible Unsecured Promissory Note.4.4
    
    
    (3)
    
    
    Registration Rights Agreement, dated as of June 6, by and among Vista.com, Inc. and certain
parties listed therein.10.1
    
    
    
    
    
    Innuity, Inc. Amended and Restated 1999 Stock Option Plan. *10.2
    
    
    (3)
    
    
    Form of Stock Option Agreement. *10.3
    
    
    (3)
    
    
    Form of Common Stock Purchase Agreement. *10.4
    
    
    (3)
    
    
    Stock Purchase Agreement dated as of May 17, 2005, entered into by and among Vista.com, Inc.,
Jadeon, Inc. and Mark LeMay.10.5
    
    
    (3)
    
    
    Membership Interest Purchase Agreement, dated as of June 6, 2005, by and among Vista.com,
Inc., 10x Marketing, LLC, Paul Allen, Richard Stauffer, Curtis Porritt and Tom Dalton.10.6
    
    
    (3)
    
    
    Amended and Restated Assignment of Rights Agreement dated August 8, 2005, by and among
Vista.com, Inc., Artesian Management, Inc. and other parties listed therein.10.7
    
    
    (3)
    
    
    Lease Agreement dated as of December 23, 2003, entered into by and between Vista.com, Inc. and
TIAA Realty, Inc., as amended as of February 28, 2005.10.8
    
    
    (3)
    
    
    Standard Industrial/Commercial Single-Tenant Lease, dated as of August 1, 2003, by and between
Bedford Investors and Jadeon, Inc.10.9
    
    
    (3)
    
    
    Rental Agreement, dated as of May 26, 2004, by and between Samuel Lucido and Mark LeMay.10.10
    
    
    (3)
    
    
    Lease, dated as of May 9, 2004, by and between Stoutt Executive Services, Inc. and Jadeon, Inc.10.11
    
    
    (3)
    
    
    Lease dated June 6, 2003, by and between Jadeon, Inc. and Bryant Place.10.12
    
    
    (3)
    
    
    Dated July 26, 2005, by and between 10x Marketing, LLC and TCU Properties II, LLC.10.13
    
    
    (3)
    
    
    Loan and Security Agreement, dated as of February 18, 2005, entered into by and between
Vista.com, Inc. and Comerica Bank, as amended.10.14
    
    
    (3)
    
    
    Agreement dated December 16, 2004, as amended, by and between Vista.com, Inc. and BayHill
Group, LC.*10.15
    
    
    (3)
    
    
    Employment Agreement dated June 6, 2005, between Vista.com, Inc. and Curtis R. Porritt.*10.16
    
    
    (3)
    
    
    Employment Agreement dated June 16, 2005, between Vista.com, Inc. and Mark LeMay.*
 44




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##### Table of Contents



ExhibitNumber
    
    
    Notes
    
    
    Description10.17
    
    
    (3)
    
    
    Indemnification Agreement, dated November 9, 2005, by and among Vista.com, Inc., Source Energy
Corporation, Craig Carpenter and Jenson Services, Inc.10.18
    
    
    (3)
    
    
    Lease Option Agreement, dated November 9, 2005, by and between Source Energy Corporation and
Craig Carpenter.10.19
    
    
    (3)
    
    
    Securities Purchase Agreement dated September 24, 2003, by and between The SCO Group, Inc. and
John R. Wall.10.20
    
    
    
    
    
    Asset Purchase Agreement dated March 9, 2006, by and among Innuity, Inc. and Hello Metro
Incorporated, Superfly Advertising, Inc., Treefrog Commerce, Inc. and Clark Scott.21.0
    
    
    
    
    
    Subsidiaries of Innuity, Inc.31.1
    
    
    
    
    
    Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended.31.2
    
    
    
    
    
    Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of
the Securities Exchange Act of 1934, as amended.32.1
    
    
    
    
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    
    
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
    
    Filed herewith.*
    
    Indicates a management contract or compensatory plan.(1)
    
    Incorporated by reference to our Current Report on Form 8-K filed on October 24, 2005.(2)
    
    Incorporated by reference to our Form 10-SB registration statement filed on January 26,
2000.(3)
    
    Incorporated by reference to our Current Report on Form 8-K filed on November 10, 2005. 45




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Item 14. Principal Accountant Fees and Services
  46




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SIGNATURES
  INNUITY, INC.By:
    
    /s/ JOHN R. WALLJohn R. WallChief Executive Officer(Principal Executive Officer)Date: March 22, 2006
  Signature
    
    Title
    
    Date/s/ JOHN R. WALL
    
    Chief Executive Officer (Principal
    
    March 22, 2006John R. Wall
    
    Executive Officer), Chairman of theBoard, Treasurer and Secretary/s/ ROBERT K. BENCH
    
    Chief Financial Officer
    
    March 22, 2006Robert K. Bench
    
    (Principal Financial andAccounting Officer)/s/ KEITH A. CANNON
    
    Director
    
    March 22, 2006Keith A. Cannon/s/ JOHN R. DENNIS
    
    President, Director
    
    March 22, 2006John R. Dennis/s/ HAROLD H. KAWAGUCHI
    
    Director
    
    March 22, 2006Harold H. Kawaguchi/s/ MARVIN A. MALL
    
    Chief Operating Officer, Director
    
    March 22, 2006Marvin A. Mall/s/ GREG M. STEVENSON
    
    Director
    
    March 22, 2006Greg M. Stevenson
 47




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
AND
FINANCIAL STATEMENTS
 December 31, 2005 and 2004
 Hansen,
Barnett & Maxwell   Certified Public Accountants




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##### Table of Contents



PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    
    F-3Consolidated Statements of Operations for the Years Ended
December 31, 2005 and 2004
    
    
    F-4Consolidated Statements of Stockholders Deficit for the Years
Ended December 31, 2004 and 2005
    
    
    F-5Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005 and 2004
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-8
  F-1




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##### Table of Contents



Hansen, Barnett &
MaxwellA Professional CorporationCERTIFIED PUBLIC ACCOUNTANTS
    Registered with
the Public CompanyAND
    Accounting Oversight BoardBUSINESS CONSULTANTS
    

(BAKER TILLY LOGO)5 Triad Center, Suite 750Salt Lake City, UT 84180-1128Phone: (801) 532-2200Fax: (801) 532-7944www.hbmcpas.com
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     HANSEN, BARNETT & MAXWELL
 
 F-2




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 December 31,
    
    2005
    
    
    2004ASSETSCurrent AssetsCash and cash equivalents
    
    $
    696,997
    
    
    $
    187,444Restricted cash
    
    
    
    
    
    
    300,151Settlement deposits
    
    
    529,900
    
    
    
    149,152Settlement receivable, net of allowance for doubtful
accounts of $47,939 and $36,000, respectively
    
    
    254,499
    
    
    
    53,538Trade accounts receivable, net of allowance for doubtful
accounts of $254,106, and $52,000, respectively
    
    
    1,848,819
    
    
    
    365,155Inventories, net of allowance for obsolete inventory of $115,141 and $0, respectively
    
    
    522,600
    
    
    
    Prepaid royalty
    
    
    1,247,246
    
    
    
    Other current assets
    
    
    209,813
    
    
    
    109,954Total Current Assets
    
    
    5,309,874
    
    
    
    1,165,394Property and equipment, net
    
    
    347,724
    
    
    
    224,086Intangible Assets, net
    
    
    2,370,714
    
    
    
    601,890Goodwill
    
    
    1,833,220
    
    
    
    Total Assets
    
    $
    9,861,532
    
    
    $
    1,991,370LIABILITIES AND STOCKHOLDERS DEFICITCurrent LiabilitiesTrade accounts payable
    
    $
    1,595,272
    
    
    $
    462,025Accrued salaries and wages
    
    
    406,036
    
    
    
    168,640Merchant settlement payable
    
    
    774,975
    
    
    
    511,994Accrued liabilities
    
    
    777,190
    
    
    
    683,817Deferred revenues
    
    
    1,575,442
    
    
    
    139,602Line of credit
    
    
    489,515
    
    
    
    Related party notes payable, current portion, net of discount of $2,700 and $0, respectively
    
    
    658,106
    
    
    
    200,000Long-term debt, current portion, net of discount of $0 and $57,088, respectively
    
    
    1,215,000
    
    
    
    1,242,912Capital lease obligations, current portion
    
    
    36,420
    
    
    
    Total Current Liabilities
    
    
    7,527,956
    
    
    
    3,408,990Long-Term LiabilitiesRelated party notes payable, net of discount of $22,944 and $0, respectively
    
    
    1,470,867
    
    
    
    Long-term debt, net of discount of $254,087 and $0, respectively
    
    
    3,397,563
    
    
    
    Capital lease obligations
    
    
    52,102
    
    
    
    Total Long-Term Liabilities
    
    
    4,920,532
    
    
    
    Total Liabilities
    
    
    12,448,488
    
    
    
    3,408,990Commitments and Contingencies (Notes 8, 10 and 11)
    
    
    
    
    
    
    Stockholders DeficitSeries A preferred stock; $1.00 stated value per share; no par value; 5,500,000 shares
authorized; 0 shares and 4,635,948 shares issued and outstanding, respectively;
liquidation preference of $0 and $4,635,948, respectively
    
    
    
    
    
    
    4,387,114Common stock; 35,000,000 shares authorized; par value $0.00025 per share;
16,371,289 shares and 2,597,753 shares issued and outstanding, respectively
    
    
    4,093
    
    
    
    649Additional paid-in capital
    
    
    26,430,420
    
    
    
    13,500,506Deferred compensation
    
    
    (1,013,308
    )
    
    
    (663,758
    )Accumulated deficit
    
    
    (28,008,161
    )
    
    
    (18,642,131
    )Total Stockholders Deficit
    
    
    (2,586,956
    )
    
    
    (1,417,620
    )Total Liabilities and Stockholders Deficit
    
    $
    9,861,532
    
    
    $
    1,991,370
  F-3




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INNUITY, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Years Ended December 31,
    
    2005
    
    2004RevenuesProduct sales
    
    $
    3,849,581
    
    
    $
    Services
    
    
    8,616,020
    
    
    
    4,143,588Total revenues
    
    
    12,465,601
    
    
    
    4,143,588Operating expensesCost of product sales
    
    
    2,743,334
    
    
    
    Cost of services
    
    
    4,106,526
    
    
    
    2,215,052General and administrative
    
    
    7,695,290
    
    
    
    1,323,187Selling and marketing
    
    
    3,484,548
    
    
    
    1,077,947Research and development
    
    
    1,240,527
    
    
    
    734,373Royalty expense
    
    
    1,662,994
    
    
    
    Amortization expense
    
    
    628,893
    
    
    
    1,250,472Impairment of intangibles
    
    
    
    
    
    
    757,278Loss from operations
    
    
    (9,096,511
    )
    
    
    (3,214,721
    )Other income (expense)Gain on sale of assets
    
    
    24,791
    
    
    
    Interest expense
    
    
    (294,310
    )
    
    
    (146,288
    )Total other income (expense)
    
    
    (269,519
    )
    
    
    (146,288
    )Net Loss
    
    $
    (9,366,030
    )
    
    $
    (3,361,009
    )Basic and Diluted Loss Per Common Share
    
    $
    (1.02
    )
    
    $
    (1.32
    )Basic and Diluted Weighted-Average
Common Shares Outstanding
    
    
    9,184,411
    
    
    
    2,542,265
  F-4




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INNUITY, INC. AND SUBSIDIARIES
 
 STATEMENTS OF STOCKHOLDERS DEFICIT

FOR THE YEARS ENDED DECEMBER 31,2004 AND 2005
 Series C, Series B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Totaland Old Series A
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred
    
    Accumu-
    
    Stock-Series A Preferred Stock
    
    Preferred Stock
    
    Common Stock
    
    Additional
    
    Compen-
    
    lated
    
    holdersShares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Paid-In Capital
    
    sation
    
    Deficit
    
    DeficitBalance  January 1, 2004
    
    
    
    
    
    
    
    
    
    
    1,015,422
    
    
    
    6,068,743
    
    
    
    1,582,331
    
    
    
    395
    
    
    
    6,468,777
    
    
    
    (62,856
    )
    
    
    (15,281,122
    )
    
    
    (2,806,063
    )Conversion of Old Series A preferred
stock to common stock
    
    
    
    
    
    
    
    
    
    
    (142,856
    )
    
    
    (90,000
    )
    
    
    142,856
    
    
    
    36
    
    
    
    89,964
    
    
    
    
    
    
    
    
    
    
    
    Conversion of Series B preferred
stock to common stock
    
    
    
    
    
    
    
    
    
    
    (399,308
    )
    
    
    (5,478,743
    )
    
    
    399,308
    
    
    
    100
    
    
    
    5,478,643
    
    
    
    
    
    
    
    
    
    
    
    Conversion of Series C preferred
stock to common stock
    
    
    
    
    
    
    
    
    
    
    (473,258
    )
    
    
    (500,000
    )
    
    
    473,258
    
    
    
    118
    
    
    
    499,882
    
    
    
    
    
    
    
    
    
    
    
    Issuance of Series A preferred stock
for cash, $1.00 per share
    
    
    1,435,500
    
    
    
    1,435,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,435,500Issuance of Series A preferred stock
for conversion of note payable to
shareholder and accrued interest, $1.00 per share
    
    
    2,000,448
    
    
    
    2,000,448
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000,448Issuance of Series A preferred stock
for purchase of Merchant Partners,
$0.79 per share ( Note 14)
    
    
    1,200,000
    
    
    
    951,166
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    951,166Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    362,338
    
    
    
    
    
    
    
    362,338Stock options issued to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    965,789
    
    
    
    (965,789
    )
    
    
    
    
    
    
    Stock options forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,549
    )
    
    
    2,549
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,361,009
    )
    
    
    (3,361,009
    )Balance  December 31, 2004
    
    
    4,635,948
    
    
    
    4,387,114
    
    
    
    
    
    
    
    
    
    
    
    2,597,753
    
    
    
    649
    
    
    
    13,500,506
    
    
    
    (663,758
    )
    
    
    (18,642,131
    )
    
    
    (1,417,620
    )Preferred Series A stock issued for cash
    
    
    25,000
    
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000Issuance of common stock for buyout of royalty
agreement, $0.90 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,500,000
    
    
    
    375
    
    
    
    1,349,625
    
    
    
    
    
    
    
    
    
    
    
    1,350,000Issuance of common stock to Directors and Officers,
$0.90 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,074,789
    
    
    
    769
    
    
    
    2,766,541
    
    
    
    
    
    
    
    
    
    
    
    2,767,310Issuance of common stock for accrued bonus, $0.912 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    209,142
    
    
    
    52
    
    
    
    190,686
    
    
    
    
    
    
    
    
    
    
    
    190,738Issuance of common stock for purchase of Jadeon, Inc.,
$0.912 per share (Note 14)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,134,340
    
    
    
    534
    
    
    
    1,945,984
    
    
    
    
    
    
    
    
    
    
    
    1,946,518Issuance of common stock for purchase of 10X
Marketing, $0.912 per share(Note 14)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    630,000
    
    
    
    158
    
    
    
    574,402
    
    
    
    
    
    
    
    
    
    
    
    574,560Issuance of common stock to Leasing Company,
$1.956 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,000
    
    
    
    18
    
    
    
    136,902
    
    
    
    
    
    
    
    
    
    
    
    136,920Issuance of common stock to Directors and Officers,
$1.956 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,175
    
    
    
    23
    
    
    
    182,227
    
    
    
    
    
    
    
    
    
    
    
    182,250Issuance of common stock for purchase of Source
Energy
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    904,451
    
    
    
    226
    
    
    
    (181,003
    )
    
    
    
    
    
    
    
    
    
    
    (180,777
    )Conversion of Series A Preferred Stock
    
    
    (4,660,948
    )
    
    
    (4,412,114
    )
    
    
    
    
    
    
    
    
    
    
    4,660,948
    
    
    
    1,165
    
    
    
    4,410,949
    
    
    
    
    
    
    
    
    
    
    
    To record beneficial conversion feature on convertible
notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    301,189
    
    
    
    
    
    
    
    
    
    
    
    301,189Stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    10
    
    
    
    13,990
    
    
    
    
    
    
    
    
    
    
    
    14,000Stock warrants exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    456,691
    
    
    
    114
    
    
    
    24,160
    
    
    
    
    
    
    
    
    
    
    
    24,274Stock options issued for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69,122
    
    
    
    
    
    
    
    
    
    
    
    69,122Stock warrants issued for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,332
    
    
    
    
    
    
    
    
    
    
    
    61,332Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    734,258
    
    
    
    
    
    
    
    734,258Stock options issued to employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,557,393
    
    
    
    (1,557,393
    )
    
    
    
    
    
    
    Stock options forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (473,585
    )
    
    
    473,585
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,366,030
    )
    
    
    (9,366,030
    )Balance  December 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,371,289
    
    
    
    4,093
    
    
    
    26,430,420
    
    
    
    (1,013,308
    )
    
    
    (28,008,161
    )
    
    
    (2,586,956
    )
  F-5




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the Year Ending December 31,
    
    2005
    
    2004Cash flows from operating activitiesNet loss
    
    $
    (9,366,030
    )
    
    $
    (3,361,009
    )Adjustments to reconcile net loss to net
cash used in operating activities:Depreciation and amortization
    
    
    865,098
    
    
    
    1,404,807Asset impairment
    
    
    
    
    
    
    757,278Accretion of discount on notes payable
    
    
    105,539
    
    
    
    81,338Amortization of deferred compensation
    
    
    734,258
    
    
    
    362,338Common
stock, warrants and options issued for services
    
    
    3,028,318
    
    
    
    Bad debt provision
    
    
    32,000
    
    
    
    39,000Gain on sale of assets
    
    
    (24,791
    )
    
    
    Changes in assets and liabilities, net of acquisitions:Settlement deposits
    
    
    (380,748
    )
    
    
    (91,693
    )Trade accounts receivable
    
    
    (388,506
    )
    
    
    (89,650
    )Settlement receivable
    
    
    (212,961
    )
    
    
    (92,021
    )Inventories
    
    
    (183,812
    )
    
    
    Prepaid royalty
    
    
    1,662,994
    
    
    
    Other current assets
    
    
    (36,982
    )
    
    
    (61,935
    )Trade accounts payable
    
    
    347,196
    
    
    
    148,430Merchant settlement payable
    
    
    262,981
    
    
    
    107,510Accrued salaries and wages
    
    
    73,238
    
    
    
    (158,032
    )Deferred revenues
    
    
    88,849
    
    
    
    (4,013
    )Accrued liabilities
    
    
    (143,693
    )
    
    
    349,470Total adjustments
    
    
    5,828,978
    
    
    
    2,752,827Net cash used in operating activities
    
    
    (3,537,052
    )
    
    
    (608,182
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (109,320
    )
    
    
    (96,022
    )Change in restricted cash
    
    
    300,151
    
    
    
    Purchase of intangible assets
    
    
    (55,000
    )
    
    
    Cash acquired
in purchase of Jadeon, Inc.
    
    
    498,822
    
    
    
    Cash acquired
in purchase of Source Energy, Inc.
    
    
    144,014
    
    
    
    Cash acquired
in purchase of Merchant Partners
    
    
    
    
    
    
    44,482Cash paid for purhcase of Source Energy
    
    
    (300,000
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    478,667
    
    
    
    (51,540
    )Cash flows from financing activitiesProceeds from related party notes payable
    
    
    
    
    
    
    200,000Proceeds from convertible note
    
    
    3,514,007
    
    
    
    Increase in line of credit
    
    
    489,515
    
    
    
    Payments on related parties notes payable
    
    
    (595,232
    )
    
    
    (100,000
    )Payments on long-term debt
    
    
    (107,508
    )
    
    
    (750,000
    )Payments on capital lease obligations
    
    
    (11,514
    )
    
    
    Proceeds from issuance of Series A preferred stock
    
    
    25,000
    
    
    
    1,435,500Proceeds from exercise of options and warrants
    
    
    30,043
    
    
    
    Common stock issued for cash
    
    
    223,627
    
    
    
    Net cash provided by financing activities
    
    
    3,567,938
    
    
    
    785,500Net increase in cash and cash equivalents
    
    
    509,553
    
    
    
    125,778Cash and cash equivalents at beginning of period
    
    
    187,444
    
    
    
    61,666Cash and cash equivalents at end of period
    
    $
    696,997
    
    
    $
    187,444
  F-6




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
 For the Years Ended December 31,
    
    2005
    
    
    2004Supplemental disclosure of cash flow informationCash paid during the period for interest
    
    $
    42,464
    
    
    $
    2,628Noncash investing and financing activitiesIssuance of options and warrants
    
    $
    1,557,392
    
    
    $
    965,789Stock options forfeited
    
    
    473,584
    
    
    
    2,549Conversion of note payable and accrued interest to series A preferred stock
    
    
    
    
    
    
    2,000,448Conversion of series B preferred stock to common stock
    
    
    
    
    
    
    5,478,743Conversion of series C preferred stock to common stock
    
    
    
    
    
    
    500,000Conversion of old series A preferred stock to common stock
    
    
    
    
    
    
    90,000Exercise of warrants for settlement of liabilities
    
    
    8,231
    
    
    
    Issuance of note payable for purchase of intangible assets
    
    
    45,000
    
    
    
    Note payable issued as prepayment of royalties
    
    
    1,824,471
    
    
    
    Common stock issued as prepayment of royalties
    
    
    1,350,000
    
    
    
    Common stock issued for settlement of certain liabilities
    
    
    230,727
    
    
    
    Series A preferred stock converted to common stock
    
    
    4,412,114
    
    
    
    Discount on notes payable
    
    
    273,497
    
    
    
    Conversion of old note and accrued interest to new convertible note
    
    
    137,644
    
    
    
    Conversion of related party note payable to convertible note
    
    
    1,074,434
    
    
    
    Items lease under capital lease
    
    
    93,179
    
    
    
    Purchase of Merchant Partners (see Note 14)Fair value of assets acquired
    
    
    
    
    
    
    1,591,730Liabilities assumed
    
    
    
    
    
    
    (640,564
    )Series A preferred stock issued
    
    
    
    
    
    
    (951,166
    )Purchase of Jadeon (see Note 14)Fair value of assets acquired
    
    
    5,602,842
    
    
    
    Liabilities assumed
    
    
    (3,656,324
    )
    
    
    Common stock issued
    
    
    (1,946,518
    )
    
    
    Purchase of 10X Marketing (see Note 14)Fair value of assets acquired
    
    
    700,906
    
    
    
    Liabilities assumed
    
    
    (126,346
    )
    
    
    Common stock issued
    
    
    (574,560
    )
    
    
    Purchase of Source Energy (see Note 1)Fair value of assets acquired
    
    
    194,223
    
    
    
    Cash paid for acquisition
    
    
    (300,000
    )
    
    
    Liabilities assumed
    
    
    (75,000
    )
    
    
    Common stock issued
    
    
    180,777
    
    
    
    Sale of Source Energy Assets (see Note 1)Forgiveness of debt
    
    
    (75,000
    )
    
    
    Value of assets sold
    
    
    50,209
    
    
    
    Gain on sale of assets
    
    $
    (24,791
    )
    
    $
    
  F-7




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     Nature of Operations
   Principles of Consolidation
 F-8




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Use of Estimates
 Revenue Recognition
   Subscriptions and Maintenance Support
 Transaction Processing and Affiliate (Reseller) Programs
 Professional Services
 F-9




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Systems Sales
 Cash and Cash Equivalents
 Restricted Cash
 Settlement Accounts
 Trade Account Receivable
 Inventories
  Prepaid Royalty
 F-10




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Property and Equipment
 EstimatedService Livesin YearsInfrastructure  computer equipment
    
    
    3-5Other computer equipment
    
    
    3-5Software
    
    
    2-5Capital leases
    
    
    3Furniture and fixtures
    
    
    2
 Intangible Assets and Goodwill Accounting for Goodwill and Intangible Assets
 Computer Software Costs Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use"
 Advertising costs
 F-11




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Impairment of Long-Lived Assets
 Deferred Revenue
 Stock-Based Compensation Accounting for Stock Issued to Employees" Accounting for
Stock-Based Compensation"
 For the Years Ended December 31,
    
    2005
    
    
    2004Net loss, as reported
    
    $
    (9,366,030
    )
    
    $
    (3,361,009
    )Add: Stock-based employee compensation expense
included in net loss
    
    
    734,258
    
    
    
    362,338Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards
    
    
    (1,015,010
    )
    
    
    (1,664,890
    )Pro forma net loss
    
    $
    (9,646,782
    )
    
    $
    (4,663,561
    )Basic and diluted loss per common share as reported
    
    $
    (1.02
    )
    
    $
    (1.32
    )Basic and diluted loss per common share pro forma
    
    $
    (1.05
    )
    
    $
    (1.83
    )
  2005
    
    
    2004Expected dividend yield
    
    
    
    
    
    
    Risk free interest rate
    
    
    4.15
    %
    
    
    4.26
    %Expected volatility
    
    
    97
    %
    
    
    106
    %Expected life
    
    5.0 years
    
    
    5.0 yearsWeighted average fair value per share
    
    $
    1.33
    
    
    $
    0.95
 F-12




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Income Taxes
 Other Comprehensive Income
 Reclassifications
 Business Segments and Related Information Disclosures about Segments of an
Enterprise and Related Information 
 Concentrations of Risk
 Fair Value of Financial Instruments
 Loss Per Share
 New Accounting Standards Share-Based Payment Accounting for Stock-Based
Compensation
 F-13




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
   Accounting Changes and
Errors Corrections  a replacement of APB Opinion
No. 20 and FASB Statement No. 3.
 NOTE 2  GOING CONCERN
   NOTE 3  PROPERTY AND EQUIPMENT
  F-14




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 2005
    
    
    2004Infrastructure  computer equipment
    
    $
    770,441
    
    
    $
    675,130Other computer equipment
    
    
    54,212
    
    
    
    24,402Software
    
    
    117,786
    
    
    
    2,382Capital lease obligations
    
    
    93,179
    
    
    
    Furniture and fixtures
    
    
    43,282
    
    
    
    17,1431,078,900
    
    
    
    719,057Less: accumulated depreciation
    
    
    731,176
    
    
    
    494,971Property and Equipment, Net
    
    $
    347,724
    
    
    $
    224,086
  NOTE 4  CUSTOMER CONTRACTS
     F-15




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
   NOTE 5  INTANGIBLE ASSETS AND GOODWILL
 Intangible
Assets
 2005
    
    
    2004Gross carrying
    
    
    Accumulated
    
    
    Gross carrying
    
    
    AccumulatedEstimated useful lives
    
    amount
    
    
    Amortization
    
    
    amount
    
    
    AmortizationAcquired software
    
    3-5 years
    
    
    $
    940,900
    
    
    $
    336,558
    
    
    $
    752,362
    
    
    $
    150,472Domain name registration
    
    1 year
    
    
    
    100,000
    
    
    
    58,333
    
    
    
    
    
    
    
    Distribution rights
    
    3 years
    
    
    
    32,000
    
    
    
    5,778
    
    
    
    
    
    
    
    Customer contracts and
relationships
    
    3 years
    
    
    
    2,077,179
    
    
    
    378,696
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    $
    3,150,079
    
    
    $
    779,365
    
    
    $
    752,362
    
    
    $
    150,472
  Year Ending December 31,2006
    
    $
    958,0442007
    
    
    916,3782008
    
    
    496,292Total
    
    $
    2,370,714
 Goodwill
 F-16




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
   NOTE 6  ACCRUED LIABILITIES
  2005
    
    
    2004Customer advance deposits
    
    $
    284,529
    
    
    $
    Accrued interest
    
    
    234,662
    
    
    
    77,030Royalty payments
    
    
    
    
    
    
    220,868IRS penalties and interest
    
    
    
    
    
    
    192,592Merchant reserve
    
    
    175,264
    
    
    
    82,413Settlement payable
    
    
    
    
    
    
    50,000Other
    
    
    82,735
    
    
    
    60,914Total
    
    $
    777,190
    
    
    $
    683,817
 F-17




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 7  LONG-TERM DEBT
  December 31,
    
    2005
    
    
    2004Note payable to an individual, interest at 8%,
converted to new convertible debt in August 2005
    
    $
    
    
    
    $
    100,000Non-interest bearing note payable to an unrelated party,
interest imputed at 8%, payments
due monthly, in default, through September 2005,
net of $0 and $57,088 of unamortized discount, unsecured
    
    
    1,200,000
    
    
    
    1,142,912Convertible notes payable to individuals, interest at 8%, mature
September 2007, net of $254,087 and $0 of unamortized
discount, unsecured
    
    
    3,397,563
    
    
    
    Non-interest bearing note payable to an individual, interest at
10% if monthly payment isnt made, monthly payments of
$5,000 through March 2006, unsecured
    
    
    15,000
    
    
    
    Total debt
    
    $
    4,612,563
    
    
    $
    1,242,912Less current maturities
    
    
    (1,215,000
    )
    
    
    (1,242,912
    )Long-term debt
    
    $
    3,397,563
    
    
    $
    
  Year Ending December 31,2006
    
    $
    1,215,0002007
    
    
    3,651,650Total
    
    $
    4,866,650
 F-18




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  December 31,
    
    2005
    
    
    2004Notes payable to a shareholder, interest at 8%,
due on demand, unsecured
    
    $
    200,000
    
    
    $
    200,000Convertible note payable to a related party, interest
at 8%, matures June 2007, unsecured
    
    
    1,074,434
    
    
    
    Note payable to former owner of Jadeon, interest at 5%,
minimum payment of $45,000 quarterly, matures
June 2016, net of discount of $25,644 and $0,
unsecured
    
    
    573,733
    
    
    
    Note payable to a related party, interest at 8%, matures
December 2009, monthly payments of $13,468 beginning
September 2005, in default, unsecured
    
    
    280,806
    
    
    
    Total related party notes payable
    
    $
    2,128,973
    
    
    $
    200,000Less current maturities
    
    
    (658,106
    )
    
    
    (200,000
    )Long-term related party notes payable
    
    $
    1,470,867
    
    
    $
    
  Year Ending December 31,2006
    
    $
    660,8062007
    
    
    1,254,4342008
    
    
    180,0002009
    
    
    59,378Total
    
    $
    2,154,618
 Line of Credit
 Other Notes
 F-19




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
   NOTE 8  LEASES
  Capital
    
    
    OperatingYear Ending December 31,
    
    Leases
    
    
    Leases2006
    
    $
    42,137
    
    
    $
    252,5262007
    
    
    35,038
    
    
    
    249,9502008
    
    
    20,772
    
    
    
    177,129Total future minimum lease payments
    
    $
    97,947
    
    
    $
    679,605Less: amount representing interest
    
    
    9,425Total capital lease obligations
    
    
    88,522Less: current portion
    
    
    36,420Capital lease obligations, net of current portion
    
    $
    52,102
   NOTE 9  RELATED PARTY TRANSACTIONS
 Related Party Notes Payable
 F-20




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Buyout of Royalty Agreement th
  Common Stock Issued for Services
 Common Stock issued to Officers and Directors
  NOTE 10  COMMITMENTS AND CONTINGENCIES
 Accrued Payroll Tax Liabilities
 F-21




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Claim Against Merchant Partners
 NOTE 11  INCOME TAXES
  2005
    
    
    2004Deferred Income Tax Assets:Amortization of Intangibles
    
    $
    321,193
    
    
    $
    792,891Accrued liabilities
    
    
    92,228
    
    
    
    16,370Reserves for bad debts and inventory obsolescence
    
    
    155,611
    
    
    
    Depreciation
    
    
    9,861
    
    
    
    Net operating loss carryforward
    
    
    7,315,901
    
    
    
    1,105,060Total Deferred Income Tax Assets
    
    
    7,894,794
    
    
    
    1,914,321Valuation allowance
    
    
    (7,894,794
    )
    
    
    (1,914,321
    )Net Deferred Income Tax Asset
    
    $
    
    
    
    $
    
    2005
    
    
    2004Benefit at statutory rate (34%)
    
    $
    (3,184,450
    )
    
    $
    (1,162,153
    )Non-deductible expenses
    
    
    19,892
    
    
    
    152,522Change in valuation allowance
    
    
    3,472,592
    
    
    
    1,122,428State tax benefit, net of federal tax benefit
    
    
    (308,034
    )
    
    
    (112,797
    )Net Benefit from Income Taxes
    
    $
    
    
    
    $
    
 F-22




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 12  STOCKHOLDERS EQUITY
 Reverse Stock Split
 New Series A Preferred Stock
 Exercise of Stock Options
 Common Stock Issued for Conversion of Old Series A Preferred Stock
 Common Stock Issued for Conversion of Series B Preferred Stock
 Common Stock Issued for Conversion of Series C Preferred Stock
 New Series A Preferred Stock Issued
 F-23




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
   Common Stock issued for exercise of warrants
 Common Stock issued for Lease Agreement 
 NOTE 13  STOCK OPTIONS AND WARRANTS
 Stock Option Plan
 Employee Grants
  Non-Employee Grants
 F-24




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
   Weighted
    
    
    
    
    
    
    WeightedAverage Exercise
    
    
    
    
    
    
    Average ExerciseWarrants
    
    
    Price
    
    
    Options
    
    
    PriceOutstanding at January 1, 2004
    
    
    947,920
    
    
    $
    0.022
    
    
    
    299,506
    
    
    $
    0.35Granted
    
    
    
    
    
    
    
    
    
    
    1,077,007
    
    
    
    0.10Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    
    
    
    
    (23,621
    )
    
    
    0.35Forfeited
    
    
    
    
    
    
    
    
    
    
    (13,532
    )
    
    
    0.35Outstanding at December 31, 2004
    
    
    947,920
    
    
    $
    0.022
    
    
    
    1,339,360
    
    
    $
    0.15Granted
    
    
    69,780
    
    
    
    0.750
    
    
    
    1,495,730
    
    
    
    0.44Exercised
    
    
    (456,691
    )
    
    
    0.053
    
    
    
    (40,000
    )
    
    
    0.35Cancelled
    
    
    
    
    
    
    
    
    
    
    (703,374
    )
    
    
    0.10Forfeited
    
    
    (6,686
    )
    
    
    0.350
    
    
    
    (110,831
    )
    
    
    0.29Outstanding at December 31, 2005
    
    
    554,323
    
    
    $
    0.104
    
    
    
    1,980,885
    
    
    $
    0.38Excercisable at December 31, 2004
    
    
    947,920
    
    
    $
    0.022
    
    
    
    189,587
    
    
    $
    0.35Excercisable at December 31, 2005
    
    
    554,323
    
    
    $
    0.104
    
    
    
    620,507
    
    
    $
    0.32
  Options OutstandingWeighted-Average
    
    
    
    
    Options ExercisableRange of
    
    Number of
    
    
    Remaining
    
    Weighted-
    
    
    Number of
    
    
    Weighted-Exercise
    
    Options
    
    
    Contractual
    
    Average
    
    
    Options
    
    
    AveragePrices
    
    Outstanding
    
    
    Life
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$0.10
    
    
    429,476
    
    
    8.75 years
    
    $
    0.10
    
    
    
    186,089
    
    
    $
    0.10$0.35 - $0.50
    
    
    1,551,409
    
    
    9.08 years
    
    
    0.45
    
    
    
    434,418
    
    
    
    0.43$0.10 - $0.50
    
    
    1,980,885
    
    
    9.01 years
    
    $
    0.38
    
    
    
    620,507
    
    
    $
    0.32
 F-25




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Warrants OutstandingWeighted-Average
    
    
    
    
    Warrants ExercisableRange of
    
    Number of
    
    
    Remaining
    
    Weighted-
    
    
    Number of
    
    
    Weighted-Exercise
    
    Warrants
    
    
    Contractual
    
    Average
    
    
    Warrants
    
    
    AveragePrices
    
    Outstanding
    
    
    Life
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$0.007
    
    
    479,543
    
    
    1.39 years
    
    $
    0.007
    
    
    
    479,543
    
    
    $
    0.007$0.50
    
    
    55,000
    
    
    1.29 years
    
    
    0.49
    
    
    
    55,000
    
    
    
    0.49$1.00-$1.50
    
    
    19,780
    
    
    3.69 years
    
    
    1.39
    
    
    
    19,780
    
    
    
    1.39$0.007 - $1.50
    
    
    554,323
    
    
    1.47 years
    
    $
    0.104
    
    
    
    554,323
    
    
    $
    0.104
   2005Expected dividend yield
    
    
    Risk free interest rate
    
    
    3.76
    %Expected volatility
    
    
    100
    %Expected life
    
    2.5 yearsWeighted average fair value per share
    
    $
    0.88
 NOTE 14  ACQUISITIONS
 Merchant Partners Acquisition
  F-26




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
    Current Assets
    
    $
    571,191Property and equipment
    
    
    268,177Intangible assets
    
    
    752,362Total assets acquired
    
    
    1,591,730Current liabilities
    
    
    (640,564
    )Total liabilities assumed
    
    
    (640,564
    )Net Assets Acquired
    
    $
    951,166
 Aloha Webservices acquisition
 10x Marketing Acquisition
  F-27




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
   Current Assets
    
    $
    52,983Property and equipment
    
    
    21,559Intangible assets
    
    
    626,364Total assets acquired
    
    
    700,906Current liabilities
    
    
    (126,346
    )Total liabilities assumed
    
    
    (126,346
    )Net Assets Acquired
    
    $
    574,560
 Jadeon Acquisition
   F-28




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
   Current Assets
    
    $
    1,957,714Property and equipment
    
    
    135,785Intangible assets
    
    
    3,504,393Other assets
    
    
    4,950Total assets acquired
    
    
    5,602,842Current liabilities
    
    
    (2,814,426
    )Other liabilities
    
    
    (841,898
    )Total liabilities assumed
    
    
    (3,656,324
    )Net Assets Acquired
    
    $
    1,946,518
   Supplemental Pro Forma Information
 F-29




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Year
    
    
    Year EndedEnded
    
    
    December 31,December 31, 2005
    
    
    2004Revenue
    
    $
    18,141,705
    
    
    $
    15,294,768Net loss
    
    $
    (9,265,948
    )
    
    $
    (3,429,640
    )Net loss per share
    
    $
    (0.89
    )
    
    $
    (0.64
    )
 NOTE 15  SEGMENT INFORMATION
  Promotion
 Commerce
  Promotion
    
    
    Commerce
    
    
    Intercompany
    
    
    TotalRevenue from external customers
    
    $
    2,987,494
    
    
    $
    9,478,107
    
    
    $
    
    
    
    $
    12,465,601Depreciation and amortization
    
    
    210,563
    
    
    
    654,535
    
    
    
    
    
    
    
    865,098Interest expense
    
    
    112,596
    
    
    
    181,714
    
    
    
    
    
    
    
    294,310Segment loss
    
    
    (4,620,642
    )
    
    
    (4,745,389
    )
    
    
    
    
    
    
    (9,366,030
    )Segment assets
    
    
    6,322,699
    
    
    
    7,257,303
    
    
    
    (3,718,470
    )
    
    
    9,861,532
  Promotion
    
    
    Commerce
    
    
    Intercompany
    
    
    TotalRevenue from external customers
    
    $
    2,274,711
    
    
    $
    1,868,877
    
    
    $
    
    
    
    $
    4,143,588Depreciation and amortization
    
    
    (1,125,387
    )
    
    
    (279,420
    )
    
    
    
    
    
    
    (1,404,807
    )Interest expense
    
    
    (145,463
    )
    
    
    (825
    )
    
    
    
    
    
    
    (146,288
    )Segment loss
    
    
    (2,361,370
    )
    
    
    (999,639
    )
    
    
    
    
    
    
    (3,361,009
    )Segment assets
    
    
    385,606
    
    
    
    1,856,826
    
    
    
    (251,062
    )
    
    
    1,991,370
 F-30




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##### Table of Contents



INNUITY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 16  SUBSEQUENT EVENTS
     F-31