U.S.
        SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON,
        D.C. 20549
 
 FORM
        10-QSB
 
 
 x  QUARTERLY
        REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934
 
 For
        the
        quarterly period ended June 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 x    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 x
 
 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: 14,288,669 common shares outstanding as of
        July
        31, 2007.
 
 Transitional
        Small Business Disclosure Format (Check One): Yes  o    No
x
  
 
 BLUEGATE
          CORPORATION
 TABLE
          OF
          CONTENTS
   PART
                    I.   FINANCIAL INFORMATIONITEM
                    1.
                
                FINANCIAL
                    STATEMENTSUnaudited
                    Consolidated Financial Statements
                
                F-1Consolidated
                    Balance Sheets as of June 30, 2007 and December
                    31, 2006
                
                F-1Consolidated
                    Statements of Operations for the three months and
                    six months ended June 30, 2007 and 2006
                
                F-2Consolidated
                    Statement of Stockholders’ Deficit for the six
                    months ended June 30, 2007
                
                F-3Consolidated
                    Statements of Cash Flows for the six months ended
                    June 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-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****June
                    30,**
                
                
                **December
                    31,****2007**
                
                
                **2006****ASSETS**Current
                    assets:Cash
                    and cash equivalents
                
                $
                19,378
                
                
                $
                256,121Accounts
                    receivable, net
                
                
                459,387
                
                
                
                280,353Inventory
                
                
                -
                
                
                
                15,652Prepaid
                    expenses and other
                
                
                18,902
                
                
                
                33,295Total
                    current assets
                
                
                497,667
                
                
                
                585,421Property
                    and equipment, net
                
                
                89,853
                
                
                
                92,033Intangibles,
                    net
                
                
                11,561
                
                
                
                12,301Total
                    assets
                
                $
                599,081
                
                
                $
                689,755**LIABILITIES
                    AND STOCKHOLDERS’ DEFICIT**Current
                    liabilities:Accounts
                    payable
                
                $
                403,860
                
                
                $
                256,567Accounts
                    payable to related party
                
                
                111,525
                
                
                
                40,000Accrued
                    liabilities
                
                
                136,960
                
                
                
                85,626Notes
                    payable
                
                
                327,800
                
                
                
                12,800Notes
                    payable to related parties
                
                
                172,857
                
                
                
                122,174Bank
                    line of credit payable
                
                
                44,723
                
                
                
                44,590Deferred
                    revenue
                
                
                669,179
                
                
                
                1,189,236Total
                    current liabilities
                
                
                1,866,904
                
                
                
                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 June 30,
                    2007 and December 31, 2006, respectively; $12,500 per share liquidation
                    preference ($600,000 aggregate liquidation preference at June
                    30,
                    2007)
                
                
                -
                
                
                
                -Common
                    stock, $.001 par value, 50,000,000 shares authorized, 13,688,669
                    and
                    12,130,311 shares issued and outstanding at  June 30, 2007 and
                    December 31, 2006, respectively
                
                
                13,689
                
                
                
                12,130Additional
                    paid-in capital
                
                
                23,082,255
                
                
                
                19,627,159Subscription
                    receivable
                
                
                (500,000
                )
                
                
                -Accumulated
                    deficit
                
                
                (23,863,767
                )
                
                
                (20,700,527
                )Total
                    stockholders’ deficit
                
                
                (1,267,823
                )
                
                
                (1,061,238
                )Total
                    liabilities and stockholders’ deficit
                
                $
                599,081
                
                
                $
                689,755
  See
          accompanying notes to consolidated financial statements
  F-1
 *Table
              of Contents*
 
 **BLUEGATE
                    CORPORATION****CONSOLIDATED
                    STATEMENTS OF OPERATIONS****UNAUDITED****Three
                    Months Ended**
                  **June
                    30,**
                
                
                **Six
                    Months Ended**
                  **June
                    30,****2007**
                
                
                **2006**
                
                
                **2007**
                
                
                **2006**Service
                    revenue
                
                $
                1,807,255
                
                
                $
                814,846
                
                
                $
                3,168,322
                
                
                $
                1,750,495Cost
                    of services
                
                
                1,009,975
                
                
                
                344,151
                
                
                
                1,743,487
                
                
                
                766,891Gross
                    profit
                
                
                797,280
                
                
                
                470,695
                
                
                
                1,424,835
                
                
                
                983,604Selling,
                    general and administrative expenses
                
                
                413,685
                
                
                
                393,870
                
                
                
                1,281,144
                
                
                
                871,769Compensation
                    expense
                
                
                1,462,358
                
                
                
                1,236,168
                
                
                
                3,259,483
                
                
                
                2,024,542Loss
                    from operations
                
                
                (1,078,763
                )
                
                
                (1,159,343
                )
                
                
                (3,115,792
                )
                
                
                (1,912,707
                )Interest
                    expense
                
                
                (8,337
                )
                
                
                (217,863
                )
                
                
                (47,514
                )
                
                
                (481,248
                )Other
                    income
                
                
                66
                
                
                
                3,369
                
                
                
                66
                
                
                
                7,582Net
                    loss
                
                
                (1,087,034
                )
                
                
                (1,373,837
                )
                
                
                (3,163,240
                )
                
                
                (2,386,373
                )Deemed
                    dividend on preferred stock
                
                
                (600,000
                )
                
                
                -
                
                
                
                (600,000
                )
                
                
                -Net
                    loss attributable to common shareholders
                
                $
                (1,687,034
                )
                
                $
                (1,373,837
                )
                
                $
                (3,763,240
                )
                
                $
                (2,386,373
                )Net
                    loss attributable to common shareholders per common share - basic
                    and
                    diluted
                
                $
                (0.12
                )
                
                $
                (0.17
                )
                
                $
                (0.29
                )
                
                $
                (0.32
                )Basic
                    and diluted weighted average shares outstanding
                
                
                13,650,035
                
                
                
                8,226,115
                
                
                
                13,181,331
                
                
                
                7,561,039
  See
          accompanying notes to consolidated financial statements
  F-2
 *Table
              of Contents*
 
 **BLUEGATE
                    CORPORATION****CONSOLIDATED
                    STATEMENTS OF STOCKHOLDERS' DEFICIT****SIX
                    MONTHS ENDED JUNE 30, 2007****UNAUDITED**ADDITIONALCOMMON
                    STOCK
                
                
                PREFERRED
                    STOCK
                
                
                PAID-IN
                
                
                SUBSCRIPTION
                
                
                ACCUMULATEDSHARES
                
                
                CAPITAL
                
                
                SHARES
                
                
                CAPITAL
                
                
                CAPITAL
                
                
                RECEIVABLE
                
                
                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
                
                
                800,000
                
                
                
                800
                
                
                
                
                
                
                
                
                
                
                
                399,200
                
                
                
                
                
                
                
                
                
                
                
                400,000Issuance
                    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
                
                
                
                (500,000
                )
                
                
                
                
                
                
                100,000Beneficial
                    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
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,767,530
                
                
                
                
                
                
                
                
                
                
                
                1,767,530Issuance
                    of common stock for delay in filing a registration
                    statement
                
                
                36,585
                
                
                
                37
                
                
                
                
                
                
                
                
                
                
                
                29,213
                
                
                
                
                
                
                
                
                
                
                
                29,250Issuance
                    of common stock and warrants for:
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                --
                    accounts payable
                
                
                30,000
                
                
                
                30
                
                
                
                
                
                
                
                
                
                
                
                14,970
                
                
                
                
                
                
                
                
                
                
                
                15,000-
                    services
                
                
                120,000
                
                
                
                120
                
                
                
                
                
                
                
                
                
                
                
                172,730
                
                
                
                
                
                
                
                
                
                
                
                172,850Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (3,163,240
                )
                
                
                (3,163,240
                )Balance
                    at June 30, 2007
                
                
                13,688,669
                
                
                $
                13,689
                
                
                
                48
                
                
                $
                -
                
                
                $
                23,082,255
                
                
                $
                (500,000
                )
                
                $
                (23,863,767
                )
                
                $
                (1,267,823
                )
 
 See
          accompanying notes to consolidated financial statements
  F-3
 *Table
              of Contents*
  **BLUEGATE
                    CORPORATION****CONSOLIDATED
                    STATEMENTS OF CASH FLOWS****UNAUDITED****Six
                    Months Ended****June
                    30,****2007**
                
                
                **2006**Cash
                    flows from operating activities:Net
                    loss
                
                $
                (3,163,240
                )
                
                $
                (2,386,373
                )Adjustments
                    to reconcile net loss to net cash used in operating
                    activities:Amortization
                    of debt discount
                
                
                -
                
                
                
                242,316Depreciation
                    and amortization
                
                
                32,019
                
                
                
                42,959Common
                    stock and warrants issued for registration rights
                    extension
                
                
                -
                
                
                
                350,743Common
                    stock issued for services
                
                
                329,525
                
                
                
                84,220Common
                    stock options issued for services
                
                
                1,767,530
                
                
                
                -Issuance
                    of common stock for delay in filing a registration
                    statement
                
                
                29,250
                
                
                
                -Common
                    stock warrants issued for extension of note repayment
                
                
                -
                
                
                
                177,735Impairment
                    of subscription receivable
                
                
                -
                
                
                
                15,007Common
                    stock issued for compensation
                
                
                142,500
                
                
                
                -Common
                    stock and warrants issued for services
                
                
                172,850
                
                
                
                570,927Changes
                    in operating assets and liabilities:Accounts
                    receivable
                
                
                (179,034
                )
                
                
                58,865Prepaid
                    expenses and other current assets
                
                
                30,045
                
                
                
                (3,041
                )Accounts
                    payable and accrued liabilities
                
                
                213,627
                
                
                
                (21,029
                )Accounts
                    payable to related party
                
                
                71,525
                
                
                
                -Deferred
                    revenue
                
                
                (520,055
                )
                
                
                (15,959
                )Net
                    cash used in operating activities
                
                
                (1,073,458
                )
                
                
                (883,630
                )Cash
                    flows from investing activities:Payment
                    received on note receivable
                
                
                -
                
                
                
                32,000Purchase
                    of property and equipment
                
                
                (29,101
                )
                
                
                (8,978
                )Net
                    cash (used in) provided by investing activities
                
                
                (29,101
                )
                
                
                23,022Cash
                    flows from financing activities:Change
                    in bank overdraft
                
                
                -
                
                
                
                35,177Proceeds
                    from related party short term debt
                
                
                428,934
                
                
                
                730,330Payments
                    on related party short term debt
                
                
                (378,250
                )
                
                
                (331,611
                )Net
                    change in bank line of credit
                
                
                132
                
                
                
                45,507Proceeds
                    from note payable from individual
                
                
                315,000
                
                
                
                -Common
                    stock and warrants issued for cash
                
                
                400,000
                
                
                
                375,000Preferred
                    stock and common stock warrants issued for cash
                
                
                100,000
                
                
                
                -Net
                    cash provided by financing activities
                
                
                865,816
                
                
                
                854,403Net
                    (decrease) in cash and cash equivalents
                
                
                (236,743
                )
                
                
                (6,205
                )Cash
                    and cash equivalents at beginning of period
                
                
                256,121
                
                
                
                27,791Cash
                    and cash equivalents at end of period
                
                $
                19,378
                
                
                $
                21,586Non
                    Cash Transactions:Deemed
                    dividend from beneficial conversion feature on preferred
                    stock
                
                $
                600,000
                
                
                $
                -Subscription
                    receivable
                
                
                500,000
                
                
                
                -Issuance
                    of common stock and warrants for conversion of accounts
                    payable
                
                
                15,000
                
                
                
                -Conversion
                    of preferred stock for common stock
                
                
                -
                
                
                
                1,419Supplemental
                    information:Cash
                    paid for interest
                
                
                47,514
                
                
                
                40,228
  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 six months ended June 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 June 30, 2007 and December 31, 2006 are summarized
                    below:
                
                6/30/2007
                
                
                12/31/2006**Secured
                    note payable:**
                  On
                    March 8, 2007, we borrowed $315,000 and issued a note payable
                    secured by
                    Bluegate’s accounts receivable. The $315,000 note plus $31,500 was due
                    on
                    May 15, 2007 and the $31,500 was recorded as interest expense
                    for the
                    quarter ending March 31, 2007. On May 15, 2007 we paid the $31,500
                    and
                    extended the payment of the $315,000 plus an additional $4,025
                    interest
                    amount until June 30, 2007. The $4,025 was recorded as interest
                    expense
                    for the quarter ending June 30, 2007. On July 2, 2007 the note
                    and accrued
                    interest totaling $319,025 was paid in full.
                
                $
                315,000
                
                
                $
                -**Unsecured
                    notes payable:**
                  10%
                    note payable due upon demand
                
                
                12,800
                
                
                
                12,800$
                327,800
                
                
                $
                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 six months ended June 30, 2007, we borrowed $428,934
                    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
                    $378,250 on related party notes.Notes
                    payable to William Koehler due on demand
                
                $
                51,470
                
                
                $
                41,910Notes
                    payable to Manfred Sternberg due on demand
                
                
                121,387
                
                
                
                80,264$
                172,857
                
                
                $
                122,174**Unsecured
                    bank line of credit:**
                  The
                    Company has a bank line of credit to borrow up to $50,000. As
                    of June 30,
                    2007, the Company had an outstanding payable balance of $44,723
                    and an
                    available balance to borrow of $5,277. The interest rate was
                    11% as of
                    June 30, 2007. In July 2007, the line of credit balance and accrued
                    interest totaling $44,723 was paid in full.
                
                $
                44,723
                
                
                $
                44,590
  F-5
 *Table
              of Contents*
 
 4.
                EQUITY
                    TRANSACTIONS
 
 During
          the six months ended June 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.
 
 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 $600,000 as of the date of issuance. Bluegate recorded
          this beneficial conversion feature as a deemed dividend upon
          issuance.
 
 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.
 
 The
          warrants issued in this transaction are subject to a registration rights
          agreement which requires 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 are not registered. As of June 30, 2007
          there
          is no liability related to the registration rights agreements. As of June
          30,
          2007 if the shares remain unregistered for the remainder of the months
          applicable to these investments, Bluegate may be required pay total liquidated
          damages of $189,000 in the form of common stock.
 
 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.
 
 The
          warrants issued in the transactions recorded in the period from July 1,
          2006
          through March 31, 2007 are 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 are not registered. As of June 30, 2007 there is no liability
          related
          to the registration rights agreements recorded in the period July 1, 2006
          through March 31, 2007. As of June 30, 2007 if the shares remain unregistered
          for the remainder of the months applicable to these investments, Bluegate
          may be
          required pay total liquidated damages of $464,655 in the form of common
          stock.
 
 Issuance
          of common stock for compensation:
 
 (2)
          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.
 
 Issuance
          of common stock for services:
 
 (3)
          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.
 
 (4)
          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.
  F-6
 *Table
              of Contents*
 
 (5)
          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:
 
 (6)
          The
          warrants issued in the transactions recorded in the period January 1, 2006
          through June 30, 2006 are 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 are not registered. In May 2007, we paid liquidated damages of
          $29,250 ($325,000 investment x 1.5% x 6 months) by issuing 36,585 restricted
          shares of common stock covering the period from December 1, 2006 through
          May 31,
          2007 as consideration for the delay in filing the registration statement
          beyond
          the November 30, 2006 date.
 
 As
          of
          June 30, 2007 the liability related to the registration rights agreements
          covering the period from January 1, 2006 through June 30, 2006 was $4,875
          ($325,000 x 1.5% x 1 month)****and recorded in these
          financial statements. As of June 30, 2007 if the shares remain unregistered
          for
          the remainder of the months applicable to these investments, Bluegate may
          be
          required pay total liquidated damages of $44,250 in the form of common
          stock.
 
 Issuance
          of common stock and warrants for services and accounts payable:
 
 (7)
          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.
 
 (8)
          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.
 
 Stock
          options issued for services:
 
 (9)
          During the six months ended June 30, 2007, Bluegate expensed $1,505,821
          related
          to previously issued stock options that vested during the period.
 
 (10)
          The
          following table summarizes stock options issued to employees during the
          six
          months ended June 30, 2007:
 
 **Exercise**
                
                
                **Market**
                
                **Expiration**
                **Vesting**
                
                **2007****Options**
                
                
                **Price**
                
                
                **Value**
                
                **Date**
                **Period**
                
                **Expense**50,000
                
                
                $
                0.80
                
                
                $
                35,858
                
                1/15/2012
                Through
                    12/08
                
                $
                8,96475,000
                
                
                
                0.75
                
                
                
                50,426
                
                2/2/2012
                Through
                    1/08
                
                
                21,010100,000
                
                
                
                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
                
                
                10,758150,000
                
                
                
                0.50
                
                
                
                67,234
                
                6/25/2012
                Immediately
                
                
                67,23425,000
                
                
                
                0.50
                
                
                
                11,206
                
                6/29/2012
                Immediately
                
                
                11,206550,000
                
                
                
                
                
                
                $
                343,119
                
                
                
                
                $
                261,709
 
 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
 
 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.
  F-7
 *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 June 30, 2007 and for the six 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 allows hospitals and
          physicians to achieve physician and clinical integration by communicating
          in a
          secure private environment, improving patient care. As a leader in the
          healthcare industry of outsourced IT solutions and remote management services,
          Bluegate provides hospitals and physicians with a single source solution
          for all
          clinical integration and IT needs. Additionally Bluegate provides IT consulting
          through its professional services division and HIPAA-compliant, turnkey
          managed
          security services and interoperability solutions across its Medical Grade
          Network® for hospitals, physicians and other healthcare facilities.
 
 CONSULTING
          PRACTICE
 Health
          care institutions have very unique requirements not found in a
          typical commercial  environment. Our consulting practice works with
          medium to large medical facilities and systems  on evaluation,
          procurement and implementation of voice, data, video, infrastructure and
 applications for the health care environment. Our applications group
          also performs specific  applications development, enhancement, coding and
          integration work for these projects when requested by our
          customers.
 
 OUTSOURCING
 Our
          outsourcing offering includes help desk support and break-fix
          arrangements 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 our
          Bluegate Medical Grade Network® - ultimately enhancing patient care.
 We also provide affordable access to compatible medical-focused
          content and applications  over the infrastructure to improve practice
          efficiency and service. We extend IT best practices to the edge of the
          health care network ensuring every access point for the  physician and
          health care location is as secure as the hospital itself.
 
 TWO-FOLD
          MARKET OPPORTUNITY
 
 HIPAA
          COMPLIANCE FOR PHYSICIAN PRACTICES
 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 health  care 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 health care system by encouraging the widespread use of electronic
          data interchange in health care. There is rapidly increasing demand for our
 networks, technologies, remote management and professional IT services,
          largely as the result  of increasing pressure for health care providers to
          adopt electronic health records and the  favorable health care IT
          environment created by the Stark Law exceptions.
  I-1
 *Table
              of Contents*
  FACILITATE
          PARTICIPATION IN NATIONAL HEALTHCARE INFORMATION NETWORK (NHIN)
 Electronic
          data communication networks have vast potential for enhancing the quality
          of patient care, mitigating the soaring costs of health care,
          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
          health care providers at hospitals, clinics, and individual physician
          offices.
 
 In
          order
          to access and use the NHIN, individual physicians must have the appropriate
          information technology 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.
 
 Today,
          Bluegate’s offering singularly solves a particularly vexing piece of
          the  HIPAA requirement and the “last mile” challenges of a NHIN by
          connecting the individual  physician's practice to this secured
          network. As a result, Bluegate is positioning itself,  through its
          Medical Grade Network®, to provide HIPAA compliant connectivity to the
          NHIN  linking physician practices, hospitals and insurance companies
          to a secure network. As a  result, Bluegate, has acquired and deployed
          significant resources towards this national  opportunity. Bluegate
          began its business installing Medical Grade Networks® in
          Houston,  Texas in late 2004 and 2005.  We are in active
          contract negotiations with health care  entities in Texas
          and   around the country to design, develop and deploy networks
          that  are based upon the success of those deployed in Houston,
          Texas.
 
 BLUEGATE
          STRATEGY
 
 Our
          current short term strategies are to: (1) increase our market penetration
          and dominance of the Houston hospital, centralized health care and
          physician markets; (2) commence systems in other Texas cities; and, (3)
          commence systems in other cities in the U.S.  Our long term
          strategy is fourfold: (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,  health care
          facilities, regional health information organizations (RHIOs) and
          centralized health care organizations (HCOs) for all their information
          technology needs; and, (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.
 
 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
          Internet, VPN and data 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 the
          rapid growth in Internet and VPN usage among customers. Other competitors
          may be:
 
 -
                Access
                    and content providers, such as AOL, Microsoft, EarthLink and
                    Time
                    Warner;
 -
                Local,
                    regional and national Internet service providers, such as Megapath,
                    EarthLink, XO Communications and
                    Mindspring;
 -
                Regional,
                    national and international telecommunications companies, such as
                    AT&T, MCI and Allegiance
                    Telecom;
 -
                On-line
                    services offered by incumbent cable providers such as
                    Time Warner;
 -
                DSL
                    providers such as Covad.
  I-2
 *Table
              of Contents*
  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.
 
 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 six months ended June 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 six months ended June 30, 2007 and 2006, we experienced negative financial
          results as follows:
  Six
                    Months Ended June 30,2007
                
                
                2006Net
                    loss attributable to common shareholders
                
                $
                (3,763,240
                )
                
                $
                (2,386,373
                )Negative
                    cash flow from operations
                
                
                (1,073,458
                )
                
                
                (883,630
                )Negative
                    working capital
                
                
                (1,369,237
                )
                
                
                (1,705,074
                )Stockholders'
                    deficit
                
                
                (1,267,823
                )
                
                
                (1,523,785
                )
 
 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 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.
  I-3
 *Table
              of Contents*
  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.
 
 Our
          operations are located in Houston, Texas. Our business consists of the
           sales and marketing of our HIPAA compliant VPN and HIPAA application
          software  and related services.
 
 RESULTS
          OF OPERATIONS
 
 THREE
          MONTHS ENDED JUNE 30, 2007 AS COMPARED TO THE THREE MONTHS ENDED  JUNE
          30, 2006
  During
          the three months ended June 30, 2007, our revenue was
          $1,807,255  versus $814,846 for the three month period ended June 30,
          2006. This  represents an increase of $992,409 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 June 30, 2007 was
          $1,009,975  compared to $344,151 for the three months ended June
          30,2006. The increase  in cost of services of $665,824 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
          margin for the three months ended June 30, 2007 was $797,280  compared
          to $470,695 for the three months ended June 30, 2006. Our
          gross  margin as a percentage of sales decreased to 44% for the three
          months ended  June 30, 2007 from 58% for the three months ended June
          30, 2006 due to an  increase in the cost of products and services
          purchased in the second quarter  of 2007.
  We
          incurred selling, general and administrative expenses (SG&A) of
          $413,685  for the three months ended June 30, 2007 compared to
          $393,870 for the three  months ended June 30, 2006. The increase in
          SG&A of $19,815 was negligible.
 
 We
          incurred compensation expense of $1,462,358 for the three months ended
           June 30, 2007 compared to $1,236,168 for the three months ended June 30,
          2006.  The increase in compensation expense of $226,190 is primarily due to
          the  expansion of our sales and marketing efforts and recording stock
          option  expenses as a result of our adoption of SFAS No. 123R in
          2006.
  We
          incurred a net loss of $1,087,034 for the three months ended June 30,
          2007  compared to a net loss of $1,373,837 for the three months ended
          June 30, 2006.  The decrease of $286,803 is primarily attributable to
          a decrease in interest  expense.
 
 The
          net
          loss attributable to common shareholders was $1,687,034 for the
          three  months ended June 30, 2007 due to a deemed dividend of $600,000
          on preferred  shares and common stock warrants issued.
 
 SIX
          MONTHS ENDED JUNE 30, 2007 AS COMPARED TO THE SIX MONTHS ENDED JUNE 30,
          2006
 
 During
          the six months ended June 30, 2007 our revenue was $3,168,322 versus
          $1,750,495 for the six month period ended June 30, 2006. This represents an
          increase of $1,417,827 and is and is primarily attributable to
          our  professional service business and our efforts to market our
          Medical Grade  Network® business.
 I-4
 *Table
                of Contents*
 
 Our
          cost
          of services for the six months ended June 30, 2007 was $1,743,487  compared
          to $766,891 for the six months ended June 30, 2006. The increase  in cost
          of services of $976,596 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 six months ended June 30, 2007 was $1,424,835 compared to
          $983,604 for the six months ended June 30, 2006. Our gross profit as a
          percentage of sales decreased to 45% for the six months ended June 30, 2007
          from 56% for the six months ended June 30, 2006 due to an  increase in
          the cost of products and services purchased in the second quarter  of
          2007.
 
 We
          incurred SG&A of $1,281,144 for the six months ended June 30, 2007 compared
 to $871,769 for the six months ended June 30, 2006. The increase in
          SG&A of $409,375  is primarily attributable to the expansion of our
          sales and marketing efforts.
 
 We
          incurred compensation expense of $3,259,483 for the six months ended  June
          30, 2007 compared to $2,024,542 for the six months ended June 30, 2006.
           The increase in compensation expense of $1,234,941 is primarily due to
          the
 expansion of our sales and marketing efforts and recording stock option
           expenses as a result of our adoption of SFAS No. 123R in
          2006.
 
 We
          incurred a net loss of $3,163,240 for the six months ended June 30, 2007
           compared to a net loss of $2,386,373 for the six months ended June 30,
          2006.   The increase of $776,867 is due to a decrease in interest
          expense and to the  expansion of our sales and marketing efforts and an
          increase in stock option  expenses as a result of our adoption of SFAS No.
          123R in 2006.
 
 The
          net
          loss attributable to common shareholders was $3,763,240 for the
          six  months ended June 30, 2007 due to a deemed dividend of $600,000
          on preferred  shares and common stock warrants issued.
 
 FORECAST
          OF GROWTH IN OUR MEDICAL GRADE NETWORK® CUSTOMER BASE
 
 At
          June
          30, 2007, we had approximately 1,100 Medical Grade Network®
customers.   We are forecasting an increase in the number of
          Medical Grade Network® customers  through 2007.
 
 During
          2006 we commenced our national marketing efforts to hospital systems
          and  recently have been successful in securing two initial projects
          for hospitals outside  of Texas. We expect to announce additional
          successes in the near future and, as a  result, we believe that our
          revenue growth will accelerate in 2007.
 
 The
          exceptions to the Stark Law that were made in the latter part of 2006 are
          creating  an ideal business environment for Bluegate in 2007 and beyond,
          and are contributing to  the continued expansion of our sales pipeline for
          our Medical Grade Network® and health  care IT services and solutions to
          healthcare systems and physician practices.
 
 As
          projected in early 2006, we made our first expansion outside the state
          of Texas
          in 2006  and we continued our growth within Texas with the addition of
          several clients. Our operational  focus for 2007 continues to be the build
          out of the Houston market and strategic expansion to  additional markets in
          Texas and other regions of the country. There is rapidly increasing  demand
          for our networks, technologies, remote management and professional IT services,
          largely  as the result of increasing pressure for health care providers to
          adopt electronic health  records and the favorable health care IT
          environment created by the Stark Law exceptions.
 
 LIQUIDITY
          AND CAPITAL RESOURCES
 
 Operations
          for the three months ended June 30, 2007 have been funded by
          the   issuance of 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 the health care industry.
 
 As
          of
          June 30, 2007, our cash on hand was $19,378; total current assets
          were  $497,667, total current liabilities were $1,866,904 and total
          stockholders’ deficit  was $1,267,823.
 
 We
          are
          seeking additional capital to fund expected operating costs. 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.
 
 If
          we are
          unable to raise additional funding, we may have to limit our operations
          to an
          extent that we cannot presently determine. The effect of this on our business
          may include the sale of certain assets, reduction in the scope
          of  current operations or the cessation of business
          operations.
  I-5
 *Table
              of Contents*
  Our
          ability to achieve profitability will depend upon our ability to raise
          additional operating  capital, the continued growth in demand for
          connectivity services  and our ability to execute and deliver high
          quality, reliable connectivity services.
 
 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 our VPN
 -
                The
                    cost of third-party software
 -
                The
                    cost of sales and marketing
 -
                The
                    rate at which we expand our
                    operations
 -
                The
                    response of competitors
 -
                Capital
                    expenditures
 
 
 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 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. 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
 
 In
          July
          2007, Manfred Sternberg, a Director, gave us $200,000 in cash for the purchase
          of 400,000 shares of common stock at a purchase price of $0.50 per share
          and for
          the purchase of 1,000,000 warrants to purchase common stock at an exercise
          price
          of $0.17 per share expiring in July 2012.  We issued these securities
          in reliance on Section 4(2) of the Securities Act. This transaction did
          not
          involve a public offering.  The investors were knowledgeable about our
          operations and financial condition. The investors had knowledge and experience
          in financial and business matters that allowed them to evaluate the merits
          and
          risk of receipt of these securities.  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. No underwriter participated
          in, nor did we pay any commissions or fees to any underwriter in connection
          with
          any of these transactions.
 
 In
          July
          2007, William Koehler, a Director, gave us $50,000 in cash for the purchase
          of
          100,000 shares of common stock at a purchase price of $0.50 per share and
          for
          the purchase of 250,000 warrants to purchase common stock at an exercise
          price
          of $0.17 per share expiring in July 2012.  We issued these securities
          in reliance on Section 4(2) of the Securities Act. This transaction did
          not
          involve a public offering.  The investors were knowledgeable about our
          operations and financial condition. The investors had knowledge and experience
          in financial and business matters that allowed them to evaluate the merits
          and
          risk of receipt of these securities.  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. No underwriter participated
          in, nor did we pay any commissions or fees to any underwriter in connection
          with
          any of these transactions.
 
 In
          July
          2007, Albert Koehler, the brother of William Koehler, gave us $50,000 in
          cash
          for the purchase of 100,000 shares of common stock at a purchase price
          of $0.50
          per share and for the purchase of 250,000 warrants to purchase common stock
          at
          an exercise price of $0.17 per share expiring in July 2012.  We issued
          these securities in reliance on Section 4(2) of the Securities Act. This
          transaction did not involve a public offering.  The investors were
          knowledgeable about our operations and financial condition. The investors
          had
          knowledge and experience in financial and business matters that allowed
          them to
          evaluate the merits and risk of receipt of these securities.  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.
          No
          underwriter participated in, nor did we pay any commissions or fees to
          any
          underwriter in connection with any of these transactions.
  ITEM
                    5.
                OTHER
                    INFORMATION
 
 NONE
  ITEM
                    6.
                EXHIBITS
 
 ExhibitNumber
                
                Name31.1
                
                Certification
                    pursuant to Section 13a-14 of CEO31.2
                
                Certification
                    pursuant to Section 13a-14 of CFO32.1
                
                Certification
                    pursuant to Section 1350 of CEO32.2
                
                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:  July
                    31, 2007
                
                /s/
                Stephen
                    J. SpercoStephen
                    J. Sperco,Chief
                    Executive OfficerBluegate
                    CorporationDate:  July
                    31, 2007
                
                /s/
                Charles
                    E. LeiboldCharles
                    E. Leibold,Chief
                    Financial Officer
   II-2