WASHINGTON,
        D.C. 20549
 
 FORM
        10-QSB
 
 
 T
        QUARTERLY
        REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
 OF
        1934
 
 For
        the
        quarterly period ended September 30, 2007
 
 o
        TRANSITION REPORT
        PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE
        ACT OF 1934
 
 Commission
        file number: 000-22711
 
 BLUEGATE
        CORPORATION
 (Exact
        name of registrant as specified in its charter)
 
 Nevada
              
              76-0640970(State
                  or Other Jurisdiction of Incorporation or Organization)
              
              (I.R.S.
                  Employer Identification No.)
  701
        North
        Post Oak, Road, Suite 600, Houston, Texas 77024
 (Address
        of Principal Executive Office)
 
 (713)
        686-1100
 (Issuer’s
        Telephone Number, Including Area Code)
 
 
 Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the registrant was required to file such reports), and (2) has been
        subject
        to such filings requirements for the past 90 days. Yes T  No
        o
 
 Indicate
        by check mark whether the Registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes o  No T
 
 APPLICABLE
        ONLY TO CORPORATE ISSUERS
 
 State
        the
        number of shares outstanding of each the issuer's classes of common equity,
        as
        of the latest practicable date: 14,963,565 common shares outstanding as of
        October 31, 2007.
 
 Transitional
        Small Business Disclosure Format (Check One): Yes o  No T
  
 
  BLUEGATE
        CORPORATION
 TABLE
        OF
        CONTENTS
 
 
 PART
        I.   FINANCIAL INFORMATION
 
 ITEM
                  1.
              FINANCIAL
                  STATEMENTSUnaudited
                  Consolidated Financial
                  Statements
              F-1Consolidated
                  Balance Sheets as of September 30, 2007 and
                  December 31, 2006 .
              F-1Consolidated
                  Statements of Operations for the three months and
                  nine months ended September 30, 2007 and 2006
              F-2Consolidated
                  Statement of Stockholders’ Deficit for the nine
                  months ended September 30, 2007
              F-3Consolidated
                  Statements of Cash Flows for the nine months
                  ended September 30, 2007 and 2006
              F-4Notes
                  to Consolidated Financial
                  Statements
              F-5ITEM
                  2
              MANAGEMENT'S
                  DISCUSSION AND ANALYSIS
              I-1ITEM
                  3.
              CONTROLS
                  AND PROCEDURES
              I-6PART
                  II.OTHER
                  INFORMATIONITEM
                  1.
              LEGAL
                  PROCEEDINGS
              II-1ITEM
                  2.
              UNREGISTERED
                  SALES OF EQUITY SECURITIES AND USE OF
                  PROCEEDS
              II-1ITEM3.
              DEFAULTS
                  UPON SENIOR SECURITIES
              II-1ITEM4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS
              II-1ITEM5.
              OTHER
                  INFORMATION
              II-1ITEM
                  6
              EXHIBITS
              II-1SIGNATURES
              II-2CERTIFICATIONS
              II-3
  *Table
            of Contents*
  ITEM  1.   FINANCIAL
        STATEMENTS
 **BLUEGATE
                  CORPORATION****CONSOLIDATED
                  BALANCE SHEETS****UNAUDITED****September
                  30,**
              
              
              **December
                  31,****2007**
              
              
              **2006****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              30,018
              
              
              $
              256,121Accounts
                  receivable, net
              
              
              358,802
              
              
              
              280,353Inventory
              
              
              -
              
              
              
              15,652Prepaid
                  expenses and other
              
              
              14,133
              
              
              
              33,295Total
                  current assets
              
              
              402,953
              
              
              
              585,421Property
                  and equipment, net
              
              
              73,935
              
              
              
              92,033Intangibles,
                  net
              
              
              9,169
              
              
              
              12,301Total
                  assets
              
              $
              486,057
              
              
              $
              689,755**LIABILITIES
                  AND STOCKHOLDERS’ DEFICIT**Current
                  liabilities:Accounts
                  payable
              
              $
              199,949
              
              
              $
              256,567Accounts
                  payable to related party
              
              
              127,118
              
              
              
              40,000Accrued
                  liabilities
              
              
              190,780
              
              
              
              85,626Notes
                  payable
              
              
              12,800
              
              
              
              12,800Notes
                  payable to related parties
              
              
              161,836
              
              
              
              122,174Bank
                  line of credit payable
              
              
              -
              
              
              
              44,590Deferred
                  revenue
              
              
              473,405
              
              
              
              1,189,236Total
                  current liabilities
              
              
              1,165,888
              
              
              
              1,750,993Commitments
                  and contingenciesStockholders’
                  deficit:Undesignated
                  preferred stock, $.001 par value, 9,999,952 shares authorized,
                  none issued
                  and outstandingSeries
                  C Convertible Non-Redeemable  Preferred stock, $.001 par value,
                  48 shares authorized, 48 and -0- shares issued and outstanding
                  at
                  September 30, 2007 and December 31, 2006, respectively; $12,500
                  per share
                  liquidation preference ($600,000 aggregate liquidation preference
                  at
                  September 30, 2007)
              
              
              -
              
              
              
              -Common
                  stock, $.001 par value, 50,000,000 shares authorized, 14,963,565
                  and
                  12,130,311 shares issued and outstanding at September 30, 2007
                  and
                  December 31, 2006, respectively
              
              
              14,964
              
              
              
              12,130Additional
                  paid-in capital
              
              
              24,420,264
              
              
              
              19,627,159Accumulated
                  deficit
              
              
              (25,115,059
              )
              
              
              (20,700,527
              )Total
                  stockholders’ deficit
              
              
              (679,831
              )
              
              
              (1,061,238
              )Total
                  liabilities and stockholders’ deficit
              
              $
              486,057
              
              
              $
              689,755
  See
        accompanying notes to consolidated financial statements
  F-1
 *Table
            of Contents*
 **BLUEGATE
                    CORPORATION****CONSOLIDATED
                    STATEMENTS OF OPERATIONS****UNAUDITED****Three
                    Months Ended September  30,**
                
                
                **Nine
                    Months Ended September 30,****2007**
                
                
                **2006**
                
                
                **2007**
                
                
                **2006**Service
                    revenue
                
                $
                1,280,525
                
                
                $
                944,537
                
                
                $
                4,448,847
                
                
                $
                2,695,032Cost
                    of services
                
                
                717,873
                
                
                
                408,596
                
                
                
                2,461,360
                
                
                
                1,175,487Gross
                    profit
                
                
                562,652
                
                
                
                535,941
                
                
                
                1,987,487
                
                
                
                1,519,545Selling,
                    general and administrative expenses
                
                
                154,816
                
                
                
                309,918
                
                
                
                1,435,960
                
                
                
                1,186,606Compensation
                    expense
                
                
                1,646,903
                
                
                
                1,623,425
                
                
                
                4,906,386
                
                
                
                3,643,048Loss
                    from operations
                
                
                (1,239,067
                )
                
                
                (1,397,402
                )
                
                
                (4,354,859
                )
                
                
                (3,310,109
                )Interest
                    expense
                
                
                (11,267
                )
                
                
                (262,014
                )
                
                
                (58,781
                )
                
                
                (743,262
                )Other
                    income (expense)
                
                
                (958
                )
                
                
                2,947
                
                
                
                (892
                )
                
                
                10,529Net
                    loss
                
                
                (1,251,292
                )
                
                
                (1,656,469
                )
                
                
                (4,414,532
                )
                
                
                (4,042,842
                )Deemed
                    dividend on preferred stock
                
                
                -
                
                
                
                -
                
                
                
                (600,000
                )
                
                
                -Net
                    loss attributable to common shareholders
                
                $
                (1,251,292
                )
                
                $
                (1,656,469
                )
                
                $
                (5,014,532
                )
                
                $
                (4,042,842
                )Net
                    loss attributable to common shareholders per common share - basic
                    and
                    diluted
                
                $
                (0.09
                )
                
                $
                (0.18
                )
                
                $
                (0.37
                )
                
                $
                (0.50
                )Basic
                    and diluted weighted average shares outstanding
                
                
                14,333,705
                
                
                
                9,046,291
                
                
                
                13,567,314
                
                
                
                8,060,017
 
 See
        accompanying notes to consolidated financial statements
  F-2
 *Table
            of Contents*
  
 
 **BLUEGATE
                  CORPORATION****CONSOLIDATED
                  STATEMENTS OF STOCKHOLDERS' DEFICIT****NINE
                  MONTHS ENDED SEPTEMBER 30, 2007****UNAUDITED**ADDITIONALCOMMON
                  STOCK
              
              
              PREFERRED
                  STOCK
              
              
              PAID-IN
              
              
              ACCUMULATEDSHARES
              
              
              CAPITAL
              
              
              SHARES
              
              
              CAPITAL
              
              
              CAPITAL
              
              
              DEFICIT
              
              
              TOTALBalance
                  at December 31, 2006
              
              
              12,130,311
              
              
              $
              12,130
              
              
              
              -
              
              
              $
              -
              
              
              $
              19,627,159
              
              
              $
              (20,700,527
              )
              
              $
              (1,061,238
              )Issuance
                  of common stock and warrants for cash
              
              
              1,400,000
              
              
              
              1,400
              
              
              
              
              
              
              
              
              
              
              
              698,600
              
              
              
              
              
              
              
              700,000Issuance
                  of common stock for employee compensation
              
              
              150,000
              
              
              
              150
              
              
              
              
              
              
              
              
              
              
              
              142,350
              
              
              
              
              
              
              
              142,500Issuance
                  of common stock for outside services
              
              
              421,773
              
              
              
              422
              
              
              
              
              
              
              
              
              
              
              
              329,103
              
              
              
              
              
              
              
              329,525Issuance
                  of preferred stock and common stock warrants for cash
              
              
              
              
              
              
              
              
              
              
              48
              
              
              
              -
              
              
              
              600,000
              
              
              
              
              
              
              
              600,000Beneficial
                  conversion feature embedded in preferred stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              600,000
              
              
              
              
              
              
              
              600,000Deemed
                  dividend on preferred stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (600,000
              )
              
              
              
              
              
              
              (600,000
              )Common
                  stock options issued for employee services
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,678,827
              
              
              
              
              
              
              
              2,678,827Issuance
                  of common stock for delay in filing a registration
                  statement
              
              
              191,728
              
              
              
              192
              
              
              
              
              
              
              
              
              
              
              
              98,463
              
              
              
              
              
              
              
              98,655Issuance
                  of common stock and warrants for:-
                  accounts payable
              
              
              130,000
              
              
              
              130
              
              
              
              
              
              
              
              
              
              
              
              39,872
              
              
              
              
              
              
              
              40,002-
                  services
              
              
              120,000
              
              
              
              120
              
              
              
              
              
              
              
              
              
              
              
              172,730
              
              
              
              
              
              
              
              172,850Contingent
                  shares issued for Trilliant acquisition accounted for as
                  compensation
              
              
              419,753
              
              
              
              420
              
              
              
              
              
              
              
              
              
              
              
              33,160
              
              
              
              
              
              
              
              33,580Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,414,532
              )
              
              
              (4,414,532
              )Balance
                  at September 30, 2007
              
              
              14,963,565
              
              
              $
              14,964
              
              
              
              48
              
              
              $
              -
              
              
              $
              24,420,264
              
              
              $
              (25,115,059
              )
              
              $
              (679,831
              )
  See
        accompanying notes to consolidated financial statements
  F-3
 *Table
            of Contents*
 
 **BLUEGATE
                  CORPORATION****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****UNAUDITED****Nine
                  Months Ended****September
                  30,****2007**
              
              
              **2006**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (4,414,532
              )
              
              $
              (4,042,842
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Amortization
                  of debt discount
              
              
              -
              
              
              
              271,800Depreciation
                  and amortization
              
              
              50,331
              
              
              
              64,726Common
                  stock and warrants issued for registration rights
                  extension
              
              
              -
              
              
              
              350,743Common
                  stock issued for outside services
              
              
              329,525
              
              
              
              166,721Common
                  stock options issued for services
              
              
              2,678,827
              
              
              
              1,394,659Issuance
                  of common stock for delay in filing a registration
                  statement
              
              
              98,655
              
              
              
              -Common
                  stock warrants issued for extension of note repayment
              
              
              -
              
              
              
              392,063Impairment
                  of subscription receivable
              
              
              -
              
              
              
              15,007Contingent
                  shares issued for Trilliant acquisition accounted for as
                  compensation
              
              
              33,580
              
              
              
              271,662Common
                  stock issued for employee compensation
              
              
              142,500
              
              
              
              -Common
                  stock and warrants issued for services
              
              
              172,850
              
              
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (78,449
              )
              
              
              85,175Prepaid
                  expenses and other current assets
              
              
              34,814
              
              
              
              (5,089
              )Accounts
                  payable and accrued liabilities
              
              
              48,539
              
              
              
              (164,597
              )Accounts
                  payable to related party
              
              
              127,118
              
              
              
              -Deferred
                  revenue
              
              
              (715,831
              )
              
              
              (59,095
              )Net
                  cash used in operating activities
              
              
              (1,492,073
              )
              
              
              (1,259,067
              )Cash
                  flows from investing activities:Payment
                  received on note receivable
              
              
              -
              
              
              
              32,000Purchase
                  of property and equipment
              
              
              (29,102
              )
              
              
              (28,361
              )Net
                  cash provided by (used in) investing activities
              
              
              (29,102
              )
              
              
              3,639Cash
                  flows from financing activities:Change
                  in bank overdraft
              
              
              -
              
              
              
              (9,620
              )Proceeds
                  from related party short term debt
              
              
              595,117
              
              
              
              885,412Payments
                  on related party short term debt
              
              
              (555,455
              )
              
              
              (471,047
              )Net
                  change in bank line of credit
              
              
              (44,590
              )
              
              
              45,218Proceeds
                  from note payable from individual
              
              
              315,000
              
              
              
              100,000Repayment
                  of note payable from individual
              
              
              (315,000
              )
              
              
              -Common
                  stock and warrants issued for cash
              
              
              700,000
              
              
              
              870,000Preferred
                  stock and common stock warrants issued for cash
              
              
              600,000
              
              
              
              -Net
                  cash provided by financing activities
              
              
              1,295,072
              
              
              
              1,419,963Net
                  increase (decrease) in cash and cash equivalents
              
              
              (226,103
              )
              
              
              164,535Cash
                  and cash equivalents at beginning of period
              
              
              256,121
              
              
              
              27,791Cash
                  and cash equivalents at end of period
              
              $
              30,018
              
              
              $
              192,326Non
                  Cash Transactions:Deemed
                  dividend from beneficial conversion feature on preferred
                  stock
              
              $
              600,000
              
              
              $
              -Issuance
                  of common stock and warrants for conversion of accounts
                  payable
              
              
              40,002
              
              
              
              -Conversion
                  of preferred stock for common stock
              
              
              -
              
              
              
              1,419Contingent
                  shares issued for Trilliant acquisition accounted for as
                  goodwill
              
              
              -
              
              
              
              29,819Debt
                  discount from warrants issued with note payable
              
              
              -
              
              
              
              29,484Supplemental
                  information:Cash
                  paid for interest
              
              
              58,781
              
              
              
              58,430
  See
        accompanying notes to consolidated financial statements
 
 F-4
 *Table
            of Contents*
 
 BLUEGATE
        CORPORATION
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 UNAUDITED
 
 1.   BASIS
        OF PRESENTATION
 
 The
        accompanying unaudited interim financial statements of Bluegate Corporation,
        have been prepared in accordance with accounting principles generally accepted
        in the United States of America and the rules of the Securities and Exchange
        Commission, and should be read in conjunction with the audited financial
        statements and notes thereto contained in Bluegate's Annual Report filed
        with
        the SEC on Form 10-KSB.  In the opinion of management, all
        adjustments, consisting of normal recurring adjustments, necessary for a
        fair
        presentation of financial position and the results of operations for the
        interim
        periods presented have been reflected herein.  The
        results of operations for interim periods are not necessarily indicative
        of the
        results to be expected for the full year.  Notes to the financial
        statements which substantially duplicate the disclosure contained in the
        audited
        financial statements for fiscal 2006 as reported in the Form 10-KSB have
        been
        omitted.
 
 EMBEDDED CONVERSION FEATURES
 
 Bluegate
        evaluates embedded conversion features within convertible debt and convertible
        preferred stock under paragraph 12 of SFAS 133 and EITF 00-19 to determine
        whether the embedded conversion feature should be bifurcated from the host
        instrument and accounted for as a derivative at fair value with changes
        in fair value recorded in earnings.  If the conversion feature
        does not require derivative treatment under SFAS 133 and EITF 00-19, the
        instrument is evaluated under EITF 98-5 and EITF 00-27 for consideration
        of any
        beneficial conversion feature.
 
 RECLASSIFICATIONS
 
 We
        have
        reclassified certain prior-year amounts to conform to the current year’s
        presentation.
 
 2.   GOING
        CONCERN CONSIDERATIONS
 
 During
        the nine months ended September 30, 2007 and 2006, Bluegate has been unable
        to
        generate cash flows sufficient to support its operations and has been dependent
        on debt and equity raised from qualified individual investors. In addition
        to
        negative cash flow from operations, Bluegate has experienced recurring net
        losses, and has a negative working capital and shareholders’
deficit.
 
 These
        factors raise substantial doubt about Bluegate’s ability to continue as a going
        concern. The consolidated financial statements do not include any adjustments
        that might be necessary if Bluegate is unable to continue as a going
        concern.
 
 3.   NOTES
        PAYABLE
 
 Notes
                  payable at September 30, 2007 and December 31, 2006 are summarized
                  below:
              
              9/30/2007
              
              
              12/31/2006**Unsecured
                  notes payable:**10% note payable due upon demand
              
              $
              12,800
              
              
              $
              12,800**Unsecured
                  notes payable to related
                  parties:******
                During
                  2006, the Company entered into a line of credit agreement with
                  each of two
                  related parties, Manfred Sternberg, Chief Strategy Officer and
                  William Koehler, President and COO, for Bluegate to borrow up to
                  $500,000 each. During the nine months ended September 30, 2007,
                  we
                  borrowed $595,117 from related parties, with interest rates ranging
                  from
                  7.35% to 29.99% on their underlying credit cards. During the same
                  period,
                  we made payments of $555,455 on related party notes.Notes
                  payable to William Koehler due on demand
              
              $
              39,682
              
              
              $
              41,910Notes
                  payable to Manfred Sternberg due on demand
              
              
              122,154
              
              
              
              80,264$
              161,836
              
              
              $
              122,174**Unsecured
                  bank line of credit:**
                The
                  Company has a bank line of credit to borrow up to $50,000 and as
                  of
                  September 30, 2007 the interest rate was 11%. In July 2007, the
                  line of
                  credit balance and accrued interest totaling $44,923 was paid in
                  full.
              
              $
              -
              
              
              $
              44,590
  F-5
 *Table
            of Contents*
 
 4.   EQUITY
        TRANSACTIONS
 
 During
        the nine months ended September 30, 2007, Bluegate completed the following
        equity transactions:
 
 PREFERRED
        STOCK:
 
 In
        June
        2007 Bluegate's board of directors approved the issuance of 48 shares of
        Series
        C voting convertible non-redeemable preferred stock with a par value of $0.001
        per share and a liquidation value of $12,500 per share. Each share of Series
        C
        convertible preferred stock may be converted, at the option of the shareholder,
        into 25,000 shares of common stock or a total of 1,200,000 shares of common
        stock. Each share of preferred stock has 15 times the number of votes its
        conversion-equivalent number of shares of common stock, or 375,000 votes
        per
        share of preferred stock. The 48 shares of preferred stock will have an
        aggregate of 18 million votes.
 
 Effective
        June 28, 2007, we sold 8 shares of Series C preferred stock for $100,000
        in cash
        to SAI Corporation ("SAI"), a corporation controlled by Stephen Sperco
        ("Sperco"). We also granted to SAI warrants to purchase up to 1,000,000 shares
        of our common stock at an exercise price of $0.17 per share expiring in June
        2012. On the same day we sold 40 shares of Series C preferred stock for $500,000
        in cash to Sperco. We also granted to Sperco warrants to purchase up to
        5,000,000 shares of our common stock at an exercise price of $0.17 per share
        expiring in June 2012. Mr. Sperco is our CEO and a director.
 
 Based
        upon the $600,000 investment in Series C preferred stock, we allocated the
        relative fair value of $100,000 to preferred stock and $500,000 to the
        warrants.
 
 Bluegate
        analyzed the conversion feature associated with the preferred stock for
        derivative accounting consideration under SFAS No. 133 Accounting for Derivative
        Instruments and Hedging Activities and EITF 00-19 Accounting for Derivative
        Financial Instruments Indexed to, and Potentially Settled in, a Company's
        Own
        Stock. Bluegate determined the conversion feature met the criteria for
        classification in equity and did not require derivative treatment under
        SFAS 133 and EITF 00-19.
 
 In
        accordance with EITF 00-27, Application of Issue No. 98-5 Accounting for
        Convertible Securities with Beneficial Conversion Features or Contingently
        Adjustable Conversion Ratios, which provides guidance on the calculation
        of a
        beneficial conversion feature on a convertible instrument, Bluegate has
        determined that the Series C shares issued had an aggregate beneficial
        conversion feature of $500,000 as of the date of issuance, resulting in a
        total
        discount of $600,000. Bluegate recorded this beneficial conversion feature
        as a
        deemed dividend upon issuance.
 
 The
        warrants issued in this transaction were subject to a registration rights
        agreement which required Bluegate to register the underlying shares by September
        28, 2007 or pay liquidated damages of 1.5% of the purchase price of the
        investment each month the shares were not registered. We filed with the
        Securities and Exchange Commission a Registration Statement which was effective
        as of August 30, 2007 with respect to these securities. As of September 30,
        2007
        there is no liability related to the registration rights
        agreements.
 
 As
        a
        result of this transaction, net operating losses accumulated up through the
        change in control will be limited by Internal Revenue Code Section 382 due
        to
        the change in control.
 
 COMMON
        STOCK:
 
 Issuance
        of common stock and warrants for cash:
 
 (1) 
          During the quarter ended March 31, 2007, we issued 800,000 shares of
        common stock, warrants for 800,000 shares of our common stock at an exercise
        price of $0.75 per share and warrants for 400,000 shares of our common stock
        at
        an exercise price of $1.00 per share, for $400,000 in connection with a private
        placement of our securities. The relative fair value of the stock and warrants
        in these transactions were $108,576 and $291,424, respectively.
 
 (2)  
         In July 2007, we issued 600,000 shares of common stock and warrants for
        1,500,000 shares of our common stock at an exercise price of $0.17 per share
        for
        $300,000 in connection with a private sale of our securities to two officers
        of
        Bluegate, Manfred Sternberg, Chief Strategy Officer and William Koehler,
        President and COO and one other investor. The fair value of the warrants
        was
        $553,805 on the date of issuance. Because the warrants were granted to related
        parties and the exercise price on the grant date was below the market price
        of
        our stock, we expensed $553,805 in July 2007 related to these
        transactions.
 
 (3)  
         In September 2007, as a result of the preferred stock transaction
        described above, certain adjustment provisions in Bluegate’s previous
        convertible note agreements and warrant agreements issued in September 2005
        and
        subsequently, were triggered. Pursuant to the adjustment provisions, the
        exercise price of the previously issued warrants to purchase 1,534,800 shares
        of
        our common stock at $0.50 per share was reduced to $0.17 per share.
 
 Issuance
        of common stock foremployeecompensation:
 
 (4) 
          In January 2007, we issued 150,000 shares of common stock to an employee
        for compensation. The common stock had a market value of $142,500 based on
        the
        closing price of the stock on the date of grant. We expensed $142,500 in
        quarter
        ending March 31, 2007 related to this transaction.
  F-6
 *Table
            of Contents*
  
 Issuance
        of common stock foroutsideservices:
 
 (5)  
         In January 2007, we issued 300,000 shares of common stock to a consultant
        for services rendered. The common stock had a market value of $225,000 based
        on
        the closing price of the stock on the date of grant. We expensed $225,000
        in the
        quarter ending March 31, 2007 related to this transaction.
 
 (6) 
          In February and March 2007, we issued 21,773 shares of common stock
        valued at $19,525 based on the closing price of the stock on the date of
        grant
        as payment to a consultant and two vendors for services rendered. We expensed
        $19,525 in the quarter ending March 31, 2007 related to this
        transaction.
 
 (7) 
          In March 2007, we issued 100,000 shares of common stock to a
        consultant for services rendered. The common stock had a market value of
        $85,000
        based on the closing price of the stock on the date of grant. We expensed
        $85,000 in quarter ending March 31, 2007 related to this
        transaction.
 
 Issuance
        of common stock for delay in filing a registration statement:
 
 (8)  
         The warrants issued in the transactions recorded in the period January 1,
        2006 through June 30, 2006 were subject to registration rights agreements
        which
        required Bluegate to register the underlying shares by November 30, 2006
        or pay
        liquidated damages of 1.5% of the purchase price of the investment each month
        the shares were not registered. In May 2007, we paid liquidated damages of
        $29,250 by issuing 36,585 restricted shares of common stock covering the
        period
        from December 1, 2006 through May 31, 2007. In August 2007, we paid liquidated
        damages of $4,875 by issuing 10,031 restricted shares of common stock covering
        the period from June 1, 2006 through August 31, 2007. The amount of liquidated
        damages totaling $34,125 was recorded as compensation expense.
 
 (9) 
          The warrants issued in the transactions recorded in the period from July
        1, 2006 through March 31, 2007 were subject to a registration rights agreement
        which required Bluegate to register the underlying shares by June 30, 2007
        or
        pay liquidated damages of 1.5% of the purchase price of the investment each
        month the shares were not registered. In August 2007, we paid liquidated
        damages
        of $64,530 by issuing 145,112 restricted shares of common stock covering
        the
        period from July 1, 2006 through August 31, 2007. Among those investors were
        four affiliates who received the following amounts of stock as liquidated
        damages: 13,500 shares to SAI Corporation; 6,750 shares to Stephen Sperco;
        7,493
        shares to Manfred Sternberg; 6,750 shares to William Koehler. The liquidated
        damages of $64,530 were recorded as compensation expense.
 
 We
        filed
        with the Securities and Exchange Commission a Registration Statement which
        was
        effective as of August 30, 2007 with respect to these securities. As of
        September 30, 2007 there is no liability related to the registration rights
        agreements.
 
 Issuance
        of common stock and warrants for services and accounts payable:
 
 (10) 
        In February 2007, we issued 90,000 shares of our common stock, warrants to
        purchase 90,000 shares of our common stock at an exercise price of $0.75
        per
        share and warrants to purchase 45,000 shares of our common stock at an exercise
        price of $1.00 per share. The fair value of the shares and warrants issued
        was
        $146,145 based upon the closing price of the stock on the date of grant and
        the
        Black-Scholes valuation of the warrants. $15,000 of common stock and warrants
        was issued to settle prior year accounts payable and $131,145 was expensed
        in
        the current year. The warrants vest immediately and expire in February
        2012.
 
 (11) 
        In May 2007, we issued 60,000 shares of our common stock, warrants to purchase
        60,000 shares of our common stock at an exercise price of $0.75 per share
        and
        warrants to purchase 30,000 shares of our common stock at an exercise price
        of
        $1.00 per share. The fair value of the shares and warrants issued was $41,705
        based upon the closing price of the stock on the date of grant and the
        Black-Scholes valuation of the warrants. The warrants vest immediately and
        expire in May 2012.
 
 (12) 
        In September 2007, we issued 100,000 shares of our common stock to a consultant
        to settle a prior year accounts payable. The common stock had a market value
        of
        $25,002 based on the closing price of the stock on the date of
        grant.
 
 Contingent
        shares issued for Trilliant acquisition:
 
 (13) 
        Effective September 30, 2007, we recorded the issuance of 419,753 shares
        of
        common stock valued at $33,580 to Trilliant Corporation in accordance with
        the
        asset sale and purchase agreement dated September 15, 2005, pertaining to
        the
        acquired business’ revenue after the second year. As a result of this
        transaction, $33,580 was recorded as an expense.
  F-7
 *Table
            of Contents*
 
 Stock
        options issued for services:
 
 (14)  During
        the nine months ended September 30, 2007, Bluegate expensed $1,824,949 related
        to previously issued stock options that vested during the period.
 
 (15)  The
        following table summarizes stock options issued to employees during the nine
        months ended September 30, 2007:
 
 
 **Exercise**
              
              **Fair**
              
              **Expiration**
              
              **Vesting**
              
              **2007****Options**
              
              **Price**
              
              **Value**
              
              **Date**
              
              **Period**
              
              **Expense**50,000
              
              $
                  0.80
              
              $
                  35,858
              
              1/15/2012
              
              Through
                  12/08
              
              $  13,44675,000
              
              0.75
              
              50,426
              
              2/2/2012
              
              Through
                  1/08
              
              33,616100,000
              
              0.75
              
              67,234
              
              2/5/2012
              
              Immediately
              
              67,23450,000
              
              0.86
              
              38,548
              
              2/19/2012
              
              Immediately
              
              38,54850,000
              
              0.82
              
              36,755
              
              3/19/2012
              
              Immediately
              
              36,75550,000
              
              0.80
              
              35,858
              
              4/16/2012
              
              Through
                  1/08
              
              21,51610,000
              
              0.50
              
              4,482
              
              5/15/2012
              
              Immediately
              
              4,482150,000
              
              0.50
              
              67,234
              
              6/25/2012
              
              Immediately
              
              67,23425,000
              
              0.50
              
              11,206
              
              6/29/2012
              
              Immediately
              
              11,20610,000
              
              0.39
              
              3,496
              
              7/15/2012
              
              Immediately
              
              3,49610,000
              
              0.19
              
              1,703
              
              9/17/2012
              
              Immediately
              
              1,7035,000
              
              0.25
              
              837
              
              9/24/2012
              
              Through
                  12/08
              
              837585,000
              
              
              
              $353,637
              
              
              
              
              
              $
                  300,073
  
 Bluegate
        used the Black-Scholes option pricing model to value stock options and warrants
        using the following assumptions: number of options as set forth in the option
        agreements; no expected dividend yield; expected volatility of 202%; risk-free
        interest rates of 5.0%; and the average of the option terms as set forth
        in the
        options agreements.
 
 5.  SUBSEQUENT
        EVENT
 
 During
        October 2007, the Company entered into a line of credit agreement with SAI
        Corporation for Bluegate to borrow up to $150,000 at a 12% annual interest
        rate.
        SAI Corporation is a corporation controlled by Stephen Sperco our CEO. On
        October 12, 2007 Bluegate borrowed $75,000 from SAI Corporation for working
        capital purposes.
  F-8
 *Table
            of Contents*
  ITEM  2.   MANAGEMENT’S
        DISCUSSION AND
        ANALYSIS
 
 
 FORWARD
        LOOKING STATEMENT
 
 This
        Management's Discussion and Analysis of Financial Condition and Results of
        Operations as of September 30, 2007 and for the nine months then ended, should
        be read in conjunction with the audited financial statements and notes
        thereto set forth in our annual report on Form 10-KSB for
        2006.
 
 Certain
        statements contained in this report, including, without limitation, statements
        containing the words, "likely", "forecast", "project", "believe", "anticipate",
        "expect", and other words of similar meaning, constitute "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.
        Such forward-looking statements involve known and unknown risks, uncertainties
        and other factors which may cause our actual results, performance or
        achievements to be materially different from any future results, performance,
        or
        achievements expressed or implied by such forward-looking statements. Given
        these uncertainties, readers are cautioned not to place undue reliance on
        such
        factors or to announce publicly the results of any revision of the
        forward-looking statements contained or incorporated by reference herein
        to
        reflect future events or developments. In addition to the forward-looking
        statements contained in this Form 10-QSB, the following forward-looking factors
        could cause our future results to differ materially from our forward-looking
        statements: competition, capital resources, credit resources, funding,
        government compliance and market acceptance of our products and
        services.
 
 ABOUT
        US
 Bluegate
        provides the nation's only Medical Grade Network® that facilitates physician and
        clinical integration between hospitals and physicians in a secure private
        environment.  As a leader in providing the healthcare industry
        outsourced Information Technology (IT) solutions and remote IT management
        services, Bluegate provides hospitals and physicians with a single source
        solution for all of their clinical integration and IT
        needs.  Additionally Bluegate provides IT and telecommunications
        consulting through its professional services organization.
 
 CONSULTING
        PRACTICE
 Healthcare
        institutions have very unique requirements not found in a
        typical commercial environment.  Our Healthcare consulting practice
        works with medical facilities and systems on evaluation, procurement and
        implementation of healthcare related voice, data, video, infrastructure and
        applications for the healthcare environment with a particular emphasis on
        the deployment of Electronic Medical Record applications. Our
        IT/Telecommunications consulting practice works in various industry verticals
        providing evaluation, procurement and implementation of IT/Telecommunications
        solutions for our clients.  Our Applications consulting practice
        provides specific applications development, enhancement, coding and integration
        work for various industry verticals.
 
 OUTSOURCING
 Our
        outsourcing offering includes help desk support and break-fix operations
        as well
        as acquisition and special financing of equipment and services.  It
        also can include provisions for technology refresh, change management, and
        level of service agreements.  Our target market for such services
        consists of private-practice physicians whose office staffs typically lack
        the in-house technical expertise to support mission-critical computer
        systems and associated hardware.  In many cases, these private-practice
        physicians are affiliated with our larger medical facility clients,
        creating a logical foundation for Bluegate to establish and maintain long-term
        business relationships.
 
 SYSTEMS
        INTEGRATION AND MANAGED SECURITY SOLUTIONS
 Our
        systems integration and managed security group enables
        secure, HIPAA-compliant data communication between hospitals, medical
        facilities and physician practices from all locations via the services of
        our Bluegate Medical Grade Network® - ultimately enhancing patient care. We
        also provide affordable access to compatible medical-focused content and
        applications over a secure IT infrastructure to improve practice efficiency
        and
        service. We extend IT Best Practices to the edge of the healthcare network
        ensuring every access point for the physician and healthcare location is as
        secure as the hospital itself.
 
 MARKET
        OPPORTUNITY IN HEALTHCARE
 Electronic
        data communication networks have vast potential for enhancing the quality
        of patient care, mitigating the soaring costs of healthcare, and protecting
        patient privacy.  To harness this potential, the
        current administration, Congress, and administrative agencies are
        advocating that all physicians get connected to the NHIN, the proposed
        national health information system.  A NHIN is expected to enable
        physicians to write electronic prescriptions (eRx) and securely share
        patient electronic health records (EHR), including medical images, with
        other healthcare providers at hospitals, clinics, and individual physician
        offices.
  I-1
 *Table
            of Contents*
 
 In
        order
        to access and use the NHIN, individual physicians must have the appropriate
        IT environment at their offices, and the hospitals where they admit
        patients.  Further, the hospitals credentialed physicians must be on a
        common HIPAA compliant network.  Once the hospital has installed the
        necessary secure electronic connectivity behind their firewall, the "last
        mile" of connectivity, the figurative distance from the telecommunication
        provider's switch to an end user (i.e. the physician), still presents a
        major challenge.  In addition to being HIPAA-compliant, the
        networks also need to be interoperable, which requires assessing and
        augmenting physicians' existing IT equipment and
        resources.  Adequate training and technical support is necessary
        to ensure the highest possible network availability and security and the
        ability to move and manage information back and forth.
 
 The
        Administrative Simplification provisions of Title II of HIPAA require
        the United States Department of Health and Human Services to establish
        national standards for electronic healthcare transactions and national
        identifiers for providers, health plans, and employers. It also addresses
        the security and privacy of health data.  Adopting these standards
        will improve the efficiency and effectiveness of the nation's healthcare
        system by encouraging the widespread use of electronic data interchange in
        healthcare.  As the result of increasing pressure for healthcare providers
        to adopt electronic health records and the favorable healthcare IT environment
        created by the Stark Law exceptions there is rapidly increasing demand for
        Bluegate’s networks, technologies, remote management, and professional IT
        services.
 
 BLUEGATE
        STRATEGY
 *Healthcare*
 Our
        current short term strategies are to: (1) increase our market penetration
        and dominance of the Houston hospital, centralized healthcare, and
        physician markets; (2) increase our market penetration of the Chicago
        hospital, centralized healthcare, and physician markets; (3) commence
        deployment of services in other Texas cities; and, (4) commence deployment
        of
        services in other cities in the U.S.  Our long term strategy is
        fivefold: (1) fill as much of the national HIPAA-compliant secured
        communications void that exists between the physician and the hospital as
        we can; (2)  sell our services to the physicians that join
        our  Medical Grade Network®, enabling them to choose Bluegate as
        their electronic health solutions firm and as the IT outsource firm of
        choice for all of their technology needs; (3) to be "THE" IT
        solutions resource to medical institutions,  healthcare
        facilities, regional health information organizations (RHIOs), and
        centralized healthcare organizations (HCOs) for all their IT needs; (4)
        partner with a wide array of third party providers of software, managed
        systems, pharmacy benefits, and many other applications that must run on
        electronic networks and be installed in hospitals, HCOs and medical
        practices; and (5) become the premier “boutique” consulting practice supporting
        the deployment of Electronic Medical Record systems and services.
 
 *Professional
        Services*
 In
        addition to the Professional Services initiatives in Healthcare, Bluegate
        intends to continue to grow in the following three areas through its Trilliant
        Technology Group organization:  (1) Further establish its reputation
        as one of the top Telecommunications consulting organizations in the U.S.;
        (2)
        expand its IT Infrastructure consulting base; and (3) increase the scope
        and
        depth of its Applications Development practice.
 
 COMPETITION
 We
        are
        not aware of any completely direct competitors at this time. However,
        competition may include vendors of HIPAA software and Internet
        Protocol ("IP") networks whose security may or may not comply with the
        terms of the HIPAA confidentiality compliance requirements.
 
 The
        IT
        services market is extremely competitive, highly fragmented and has grown
        dramatically in recent years. The market is characterized by the absence of
        significant barriers to entry and rapidly changing applications and
        technology.  Other competitors may be:
 -
              Access
                  and content providers, such as AOL, Microsoft, EarthLink and Time
                  Warner;
 -
              Professional
                  Service organizations, such as IBM, CSC, Perot Systems, and
                  EDS;
 -
              Regional,
                  national and international telecommunications companies, such as
                  AT&T, Verizon, Qwest, and
                  Sprint;
 -
              On-line
                  services offered by incumbent cable providers such as Comcast and
                  Cox;
 -
              DSL
                  providers such as the RBOC’s and
                  CLEC’s.
 
 Most
        of
        our competitors have greater financial and other resources than we have,
        and there is no assurance that we will be able to successfully
        compete.
 
 Our
        web
        site is www.bluegate.com.
  I-2
 *Table
            of Contents*
 
 CRITICAL
        ACCOUNTING POLICIES AND ESTIMATES
 
 Our
        discussion and analysis of our financial condition and results of operations
        are
        based upon financial statements which have been prepared in accordance with
        generally accepted accounting principles in the United States. The preparation
        of these financial statements requires us to make estimates and judgments
        that
        affect the reported amounts of assets, liabilities, revenue and expenses,
        and
        related disclosure of contingent assets and liabilities. On an ongoing basis,
        we
        evaluate these estimates. We base our estimates on historical experience
        and on
        assumptions that are believed to be reasonable. These estimates and assumptions
        provide a basis for making judgments about the carrying values of assets
        and
        liabilities that are not readily apparent from other sources. Actual results
        may
        differ from these estimates under different assumptions or conditions, and
        these
        differences may be material.
 
 We
        believe that the following critical accounting policies affect our more
        significant judgments and estimates used in the preparation of our consolidated
        financial statements.
 
 REVENUE
        RECOGNITION
 Revenue,
        which includes licensing revenue, is recognized based upon contractually
        determined monthly service charges to individual customers. Services are
        billed
        in advance and, accordingly, revenues are deferred until the period in which
        the
        services are provided.
 
 STOCK-BASED
        COMPENSATION
 Financial
        Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS
        No. 123R") established financial accounting and reporting standards for
        stock-based employee compensation plans.  It defines a fair value
        based method of accounting for an employee stock option or similar equity
        instrument.  In January 2006, we implemented SFAS No. 123R, and
        accordingly, Bluegate accounts for compensation cost for stock option plans
        in
        accordance with SFAS No. 123R.
 
 GOING
        CONCERN
 We
        remain
        dependent on outside sources of funding for continuation of our operations.
        Our
        independent auditors included a going concern qualification in their report
        dated March 12, 2007 (included in our annual report on Form 10-KSB for the
        year
        ended December 31, 2006), which raises substantial doubt about our ability
        to
        continue as a going concern.
 
 During
        the nine months ended September 30, 2007, and the year ended December 31,
        2006,
        we have been unable to generate cash flows sufficient to support our operations
        and have been dependent on debt and equity raised from qualified individual
        investors.
 
 During
        the nine months ended September 30, 2007 and 2006, we experienced negative
        financial results as follows:
  Nine
                  Months Ended September 30,2007
              
              
              2006Net
                  loss attributable to common shareholders
              
              $
              (5,014,532
              )
              
              $
              (4,042,842
              )Negative
                  cash flow from operations
              
              
              (1,492,073
              )
              
              
              (1,259,067
              )Negative
                  working capital
              
              
              (762,935
              )
              
              
              (1,442,454
              )Stockholders'
                  deficit
              
              
              (679,831
              )
              
              
              (1,233,730
              )
 
 These
        factors raise substantial doubt about our ability to continue as a going
        concern.  The financial statements contained herein do not include any
        adjustments relating to the recoverability and classification of recorded
        asset
        amounts or amounts and classification of liabilities that might be necessary
        should we be unable to continue in existence.  Our ability to continue
        as a going concern is dependent upon our ability to generate sufficient cash
        flows to meet our obligations on a timely basis, to obtain additional financing
        as may be required,  and ultimately to attain profitable
        operations.  However, there is no assurance that profitable operations
        or sufficient cash flows will occur in the future.
 
 We
        have
        supported current operations by: (1) raising additional operating cash through
        the private sale of our preferred and common stock, (2) selling convertible
        debt
        and common stock to certain key stockholders and (3) issuing stock and options
        as compensation to certain employees and vendors in lieu of cash
        payments.
 
 These
        steps have provided us with the cash flows to continue our business plan,
        but
        have not resulted in significant improvement in our financial position. We
        are
        considering alternatives to address our cash flow situation that include:
        (1)
        raising capital through additional sale of our common stock and/or debt
        Securities and (2) reducing cash operating expenses to levels that are in
        line
        with current revenues.
 
 These
        alternatives could result in substantial dilution of existing stockholders.
        There can be no assurance that our current financial position can be improved,
        that we can raise additional working capital or that we can achieve positive
        cash flows from operations. Our long-term viability as a going concern is
        dependent upon the following:
 
 -
              Our
                  ability to locate sources of debt or equity funding to meet current
                  commitments and near-term future
                  requirements.
 
 -
              Our
                  ability to achieve profitability and ultimately generate sufficient
                  cash
                  flow from operations to sustain our continuing
                  operations.
  I-3
 *Table
            of Contents*
 
 Our
        operations are located in Houston, Texas. Bluegate provides the nation's
        only
        Medical Grade Network® that facilitates physician and clinical integration
        between hospitals and physicians in a secure private environment.  As
        a leader in providing the healthcare industry outsourced Information Technology
        (IT) solutions and remote IT management services, Bluegate provides hospitals
        and physicians with a single source solution for all of their clinical
        integration and IT needs.  Additionally Bluegate provides IT and
        telecommunications consulting through its professional services
        organization.
 
 RESULTS
        OF OPERATIONS
 
 THREE
        MONTHS ENDED SEPTEMBER 30, 2007 AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER
        30, 2006
  During
        the three months ended September 30, 2007, our revenue was $1,280,525 versus
        $944,537 for the three month period ended September 30, 2006. This represents
        an
        increase of $335,988 and is primarily attributable to our professional service
        business and our efforts to market our Medical Grade Network®
business.
  Our
        cost
        of services for the three months ended September 30, 2007 was $717,873 compared
        to $408,596 for the three months ended September 30, 2006. The increases
        in cost
        of services of $309,277 is due to the increase in the costs associated with
        the
        increase in our professional service business and interconnect fees and costs
        associated with the expansion of our Medical Grade Network®
services.
  Our
        gross
        profit for the three months ended September 30, 2007 was $562,652 compared
        to
        $535,941 for the three months ended September 30, 2006. Our gross profit
        as a
        percentage of sales decreased to 44% for the three months ended September
        30,
        2007 from 57% for the three months ended September 30, 2006 due to an increase
        in the cost of products and services purchased in the third quarter of
        2007.
  We
        incurred selling, general and administrative expenses (SG&A) of $154,816 for
        the three months ended September 30, 2007 compared to $309,918 for the three
        months ended September 30, 2006. The decrease in SG&A of $155,102 was due
        primarily as a result of implementing our cost reduction measures during
        the
        third quarter of 2007.
 
 We
        incurred compensation expense of $1,646,903 for the three months ended September
        30, 2007 compared to $1,623,425 for the three months ended September 30,
        2006.
        The increase in compensation expense of $23,478 is primarily due to
        recording the fair value of warrants granted where the market price of our
        stock
        was greater than the exercise price partially offset by the effects of a
        reduction in options granted to employees.
  We
        incurred a net loss of $1,251,292 for the three months ended September 30,
        2007
        compared to a net loss of $1,656,469 for the three months ended September
        30,
        2006. The decrease of $405,177 is attributable to a reduction in interest
        expense and implementation of our cost reduction measures during the third
        quarter of 2007.
 
 NINE
        MONTHS ENDED SEPTEMBER 30, 2007 AS COMPARED TO THE NINE MONTHS
        ENDED SEPTEMBER 30, 2006
 
 During
        the nine months ended September 30, 2007 our revenue was $4,448,847 versus
        $2,695,032 for the nine month period ended September 30, 2006.
        This represents an increase of $1,753,815 and is primarily
        attributable to our professional service business and our efforts to market
        our
        Medical Grade Network® business.
 
 Our
        cost
        of services for the nine months ended September 30, 2007 was $2,461,360 compared
        to $1,175,487 for the nine months ended September 30, 2006. The increases
        in
        cost of services of $1,285,873 is due to the increase in the costs associated
        with the increase in our professional service business and interconnect fees
        and
        costs associated with the expansion of our Medical Grade Network®
services.
 
 Our
        gross
        profit for the nine months ended September 30, 2007 was $1,987,487 compared
        to $1,519,545 for the nine months ended September 30, 2006. Our
        gross profit as a percentage of sales decreased to 45% for the nine months
        ended September 30, 2007 from 56% for the nine months ended September 30,
        2006 due to an increase in the cost of products and services purchased during
        the nine months ending September 30, 2007.
 
 We
        incurred SG&A of $1,435,960 for the nine months ended September 30, 2007
        compared to $1,186,606 for the nine months ended September 30, 2006. The
        increase in SG&A of $249,354 was due primarily to the expansion of our sales
        and marketing efforts partially offset by the implementation of our cost
        reduction measures during the third quarter of 2007.
 
 We
        incurred compensation expense of $4,906,386 for the nine months ended September
        30, 2007 compared to $3,643,048 for the nine months ended September 30, 2006.
        The increase in compensation expense of $1,263,338 is primarily due
        to recording the fair value of warrants granted where the market price of
        our stock was greater than the exercise price, as well as additional personnel
        costs associated with the expansion of our Medical Grade Network® and
        professional services.
 
 We
        incurred a net loss of $4,414,532 for the nine months ended September 30,
        2007
        compared to a net loss of $4,042,842 for the nine months ended September
        30,
        2006. The increase of $371,690 is due to the expansion of our sales and
        marketing efforts, an increase in stock option expenses and partially offset
        by
        the decrease in interest expense and the implementation our cost reduction
        measures during the third quarter of 2007.
  I-4
 *Table
            of Contents*
  The
        net
        loss attributable to common shareholders was $5,014,532 for the nine months
        ended September 30, 2007 due to a deemed dividend of $600,000 on preferred
        shares and common stock warrants issued during the second quarter of
        2007.
 
 FORECAST
        FOR OUR CUSTOMER BASE
 The
        increased reliance on IT and Telecommunications to manage costs and deploy
        enhanced business solutions has created an ideal business environment for
        Bluegate in 2007 and beyond.  This trend is particularly evident in
        Healthcare where the roll-out of Electronic Medical Records and cost control
        initiatives are National priorities.
 
 *Medical
        Grade Network®*
 During
        2006 we commenced our national marketing efforts to hospital systems and
        were
        successful in securing two initial projects for hospitals outside of Texas.
        We
        expect additional successes in the near future and, as a result, we believe
        that
        our revenue growth will increase in 2008.
 
 At
        September 30, 2007, we had approximately 1,100 Medical Grade Network® customers
        which we forecast will remain constant through the remainder of 2007. In
        October
        2007, one of the healthcare systems that we contracted with to provide managed
        security services to their physicians, notified their physicians that effective
        January 1, 2008 they would no longer subsidize those costs. Through a joint
        effort with that healthcare system, we are in the process of contacting those
        physicians and offering uninterrupted service for their practices. We anticipate
        the effects of this effort will not be known until the first quarter of
        2008.
 
 *Professional
        Services*
 Our
        Professional Services organization has been growing in both Healthcare and
        other
        industry verticals.  We have put particular focus on the delivery of
        Implementation Project Management service.
 
 LIQUIDITY
        AND CAPITAL RESOURCES
 Operations
        for the nine months ended September 30, 2007 have been funded by the issuance
        of
        preferred and common stock and options for cash in private transactions and
        loans from related parties. Bluegate has continued to take steps to reduce
        its
        monthly operating expenses relating to its core business and
        has expanded its efforts in creating a market for its Professional
        Services organization.
 
 As
        of
        September 30, 2007, our cash on hand was $30,018; total current assets were
        $402,953, total current liabilities were $1,165,888 and total stockholders’
deficit was $679,831. Until the company achieves a net positive cash flow
        from
        operations, three of the company’s executive officers have agreed not to cash
        their payroll or expense reimbursement checks issued to them since July 1,
        2007.
        As of September 30, 2007 approximately $117,000 of payroll and expense
        reimbursement checks have not been cashed and is included under the caption
        accrued liabilities totaling $190,780 on the balance sheet.
 
 We
        intend
        to use debt to cover the anticipated negative cash flow during the Fourth
        Quarter of 2007.  By March 2008 we project to be operating in a
        positive cash flow mode.  We are seeking additional capital to fund
        potential costs associated with expansion and/or acquisitions. We believe
        that
        future funding may be obtained from public or private offerings of equity
        securities, debt or convertible debt securities or other sources. Stockholders
        should assume that any additional funding will likely be dilutive.
 
 Our
        ability to achieve profitability will depend upon our ability to execute
        and
        deliver high quality, reliable connectivity services, expand participation
        in
        our Medical Grade Network® and grow our Professional Service
        organization.
 
 Our
        growth is dependent on attaining profit from our operations and our raising
        additional capital either through the sale of stock or borrowing.  There is
        no assurance that we will be able to raise any equity financing or sell any
        of
        our products at a profit.
 
 Our
        future capital requirements will depend upon many factors, including the
        following:
 -
              The
                  cost of operating delivering the Medical Grade Network®
                  services
 -
              The
                  cost of sales and marketing
 -
              The
                  rate at which we expand our
                  operations
 -
              Attractive
                  acquisition opportunities
 -
              The
                  response of competitors
 -
              Capital
                  expenditures
  I-5
 *Table
            of Contents*
  ITEM  3.  CONTROLS
          AND
          PROCEDURES
  a)    Evaluation
            of disclosure controls and procedures.
 
 Based
            on
            their evaluation of our disclosure controls and procedures (as defined in
            Rule 13a-15e under the Securities Exchange Act of 1934), our principal
            executive officer and principal financial officer have concluded that
            as of the end of the period covered by this quarterly report on Form
            10-QSB such disclosure controls and procedures were not effective to
            ensure that information required to be disclosed by us in reports that
            we file or submit under the Exchange Act is recorded,
            processed, summarized and reported within the time periods specified
            in Securities and Exchange Commission rules and forms, because of certain
            adjustments required by our auditors in the area of equity. Specifically,
            our
            independent auditors identified deficiencies in our internal controls
            and disclosure controls related to recording stock-based compensation
            expense.
            Appropriate adjustments have been recorded and disclosed in our Interim
            Report on Form 10-QSB. We are in the process of improving our
            internal controls in an effort to remediate these deficiencies. Our
            Chief Financial Officer has implemented revisions and instituted certain
            checks and balances to our accounting system. Additionally, he has
            addressed tighter controls over all aspects of financial revenue and
            expense recognition, as well as improving supervision and training of
            our accounting staff. We are continuing our efforts to enhance,
            improve and strengthen our control processes and procedures. Our management
            and directors will continue to work with our auditors and other outside
            advisors to ensure that our controls and procedures are adequate and
            effective.
 
 (b) 
             Changes in internal control over financial reporting.
 
 During
            the quarter under report, our Chief Financial Officer has implemented
            revisions
            and instituted certain checks and balances to our accounting system.
            Additionally, he continues to address tighter controls over all aspects
            of
            financial revenue and expense recognition, as well as improving supervision
            and
            training of our accounting staff.
 
 The
            evaluation of our disclosure controls included a review of whether there
            were any significant deficiencies in the design or operation of such
            controls and procedures, material weaknesses in such controls and
            procedures, any corrective actions taken with regard to such deficiencies
            and weaknesses and any fraud involving management or other employees
            with a significant role in such controls and procedures.
 
 I-6
 *Table
              of Contents*
 
 PART
          II.   OTHER INFORMATION
 
 ITEM
          1.   LEGAL PROCEEDINGS
 
 NONE.
 
 ITEM
          2.   UNREGISTERED SALES OF EQUITY SECURITIES
          AND USE OF PROCEEDS
 
 (1) During
          the third quarter of 2006, we issued an option to purchase 10,000 shares of
          our common stock at an exercise price of $0.39 per share to an employee.
          The
          option had a market value of $3,496 on the date of grant, vested
          immediately and expires in July 2012. We expensed $3,496 during the quarter
          ended September 30, 2006 related to this option.  This transaction was
          made in reliance upon exemptions from registration under Section 4(2) of
          the
          Securities Act. Each certificate issued for unregistered securities
          contained a legend stating that the securities have not been registered
          under the Securities Act and setting forth the restrictions on
          the transferability and the sale of the securities.
 
 (2) During
          the third quarter of 2006, we issued an option to purchase 5,000 shares of
          our common stock at an exercise price of $0.25 per share to an employee.
          The
          option had a market value of $837 on the date of grant, vests through
          December 2008 and expires in September 2012. We expensed $837 during the
          quarter ended September 30, 2006 related to this option.  This
          transaction was made in reliance upon exemptions from registration under
          Section
          4(2) of the Securities Act. Each certificate issued for unregistered
          securities contained a legend stating that the securities have not
          been registered under the Securities Act and setting forth the restrictions
          on the transferability and the sale of the securities.
 
 (3)
          Warrants to purchase shares of our common stock issued in certain transactions
          recorded in the period from January 1, 2006 through March 31, 2007 were
          subject
          to a registration rights agreement which required Bluegate to register
          the
          underlying shares by certain dates or pay liquidated damages of 1.5% of
          the
          purchase price of the investment each month the shares were not registered.
          During the third quarter of 2006, we paid liquidated damages of $69,405
          by
          issuing 155,143 restricted shares of common stock covering the period from
          June
          1, 2006 through August 31, 2007. Among those investors were four affiliates
          who
          received the following amounts of stock as liquidated damages: 13,500 shares
          to
          SAI Corporation; 6,750 shares to Stephen Sperco; 7,493 shares to Manfred
          Sternberg; 6,750 shares to William Koehler. The liquidated damages of $69,405
          were recorded as compensation expense. This transaction was made in reliance
          upon exemptions from registration under Section 4(2) of the Securities Act.
          Each certificate issued for unregistered securities contained a legend
          stating that the securities have not been registered under the Securities
          Act and setting forth the restrictions  on thetransferability and the sale
          of the securities.
 
 ITEM
          3.   DEFAULTS UPON SENIOR SECURITIES
 
 NONE
 
 ITEM
          4.   SUBMISSION OF MATTERS TO A VOTE OF
          SECURITY HOLDERS
 
 NONE
 
 ITEM
          5.   OTHER INFORMATION
 
 NONE
 
 ITEM
          6.   EXHIBITS
  Exhibit
                  Number
                Name
  31.1
                  Certification
                      pursuant to Section 13a-14 of CEO
 
 31.2
                  Certification
                      pursuant to Section 13a-14 of CFO
 
 32.1
                  Certification
                      pursuant to Section 1350 of CEO
 
 32.2
                  Certification
                      pursuant to Section 1350 of
                      CFO
 II-1
 *Table
            of Contents*
  SIGNATURES
 
 In
        accordance with the Exchange Act, the registrant caused this report to be signed
        on
        its behalf by the undersigned, thereunto duly authorized
  
 Bluegate
                  CorporationDate:  November
                  6, 2007
              /s/
              Stephen J. SpercoStephen J. Sperco,Chief
                  Executive Officer
  
 Bluegate
                  CorporationDate:  November
                  6, 2007
              /s/
              Charles E. LeiboldCharles E. Leibold,Chief
                  Financial Officer andPrincipal
                  Accounting Officer






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