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 March 31, 2007
 
  ̈ 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  ̈
 
 Indicate
        by check mark whether the Registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes  ̈ 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: 13,592,084 common shares outstanding as
        of
        April 24, 2007.
 
 Transitional
        Small Business Disclosure Format (Check One):  Yes  ̈ No x
  
 
  BLUEGATE
        CORPORATION
 TABLE
        OF
        CONTENTS
 __________
 
 PART
        I.   FINANCIAL INFORMATION
 
 ITEM
                  1.
              FINANCIAL
                  STATEMENTSUnaudited
                  Consolidated Financial Statements
              F-1Unaudited
                  Consolidated Balance Sheets as of March 31, 2007and
                  December 31, 2006
              F-1Unaudited
                  Consolidated Statements of Operations for the
                  three months ended March 31, 2007 and 2006
              F-2Unaudited
                  Consolidated Statement of Stockholders’
                  Deficit for the three months ended March 31, 2007
              F-3Unaudited
                  Consolidated Statements of Cash Flows for the three
                  months ended March 31, 2007 and 2006
              F-4Notes
                  to Unaudited Consolidated Financial
                  Statements
              F-5ITEM
                  2.
              MANAGEMENT'S
                  DISCUSSION AND ANALYSIS
              I-1ITEM
                  3.
              CONTROLS
                  AND PROCEDURES
              I-6
 
 PART
        II.   OTHER INFORMATION
 
 ITEM
                  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****March
                    31,**
                
                **December
                    31,****2007**
                
                **2006****ASSETS**
                
                
                
                ****Current
                    assets:Cash
                    and cash equivalents
                
                $
                209,058
                
                $
                256,121Accounts
                    receivable, net
                
                
                448,977
                
                
                280,353Inventory
                
                
                6,297
                
                
                15,652Prepaid
                    expenses and other
                
                
                26,034
                
                
                33,295Total
                    current assets
                
                
                690,366
                
                
                585,421Property
                    and equipment, net
                
                
                93,749
                
                
                92,033Intangibles,
                    net
                
                
                13,953
                
                
                12,301Total
                    assets
                
                $
                798,068
                
                $
                689,755**LIABILITIES
                    AND STOCKHOLDERS’ DEFICIT**Current
                    liabilities:Accounts
                    payable
                
                $
                210,780
                
                $
                296,567Accrued
                    liabilities
                
                
                117,986
                
                
                85,626Note
                    payable to individual
                
                
                315,000
                
                
                -Note
                    payable
                
                
                12,800
                
                
                12,800Notes
                    payable to related parties
                
                
                150,481
                
                
                122,174Bank
                    line of credit payable
                
                
                44,546
                
                
                44,590Deferred
                    revenue
                
                
                1,054,593
                
                
                1,189,236Total
                    current liabilities
                
                
                1,906,186
                
                
                1,750,993Commitments
                  and contingenciesStockholders’
                    deficit:Series
                    A Convertible Non-Redeemable Preferred stock, $.001 par value,
                    20,000,000
                    shares authorized; no shares issued and outstanding
                
                
                -
                
                
                -Series
                    B Convertible Non-Redeemable Preferred stock, $.001 par value,
                    10,000,000
                    shares authorized;****no
                    shares issued and outstanding
                
                
                -
                
                
                -Common
                    stock, $.001 par value, 50,000,000 shares authorized, 13,592,084
                    and
                    12,130,311 shares issued and outstanding at March 31, 2007 and
                    December
                    31, 2006, respectively
                
                
                13,592
                
                
                12,130Additional
                    paid-in capital
                
                
                21,655,023
                
                
                19,627,159Accumulated
                    deficit
                
                
                (22,776,733
                )
                
                (20,700,527
                )Total
                    stockholders’ deficit
                
                
                (1,108,118
                )
                
                (1,061,238
                )Total
                    liabilities and stockholders’ deficit
                
                $
                798,068
                
                $
                689,755
 
 See
        accompanying notes to consolidated financial statements
  F-1
 *Table
            of Contents*
 
 **BLUEGATE
                    CORPORATION****CONSOLIDATED
                    STATEMENTS OF OPERATIONS****THREE
                    MONTHS ENDED MARCH 31, 2007 AND 2006****UNAUDITED****March
                    31,****2007**
                
                **2006**Service
                    revenue
                
                $
                1,361,067
                
                $
                935,649Cost
                    of services
                
                
                733,512
                
                
                422,740Gross
                    profit
                
                
                627,555
                
                
                512,909Selling,
                    general and administrative expenses
                
                
                867,459
                
                
                477,899Compensation
                    expense
                
                
                1,797,125
                
                
                788,374Loss
                    from operations
                
                
                (2,037,029
                )
                
                (753,364
                )Interest
                    expense
                
                
                (39,177
                )
                
                (263,385
                )Other
                    income
                
                
                -
                
                
                4,213Net
                    loss
                
                $
                (2,076,206
                )
                $
                (1,012,536
                )Basic
                    and diluted loss per common share:
                
                $
                (0.16
                )
                $
                (0.15
                )Weighted
                    average shares outstanding
                
                
                12,708,063
                
                
                6,889,515
 
 See
        accompanying notes to consolidated financial statements
  F-2
 *Table
            of Contents*
  **BLUEGATE
                    CORPORATION****CONSOLIDATED
                    STATEMENTS OF STOCKHOLDERS' DEFICIT****THREE
                    MONTHS ENDED MARCH 31, 2007****UNAUDITED**ADDITIONALCOMMON
                    STOCK
                
                PAID-IN
                
                ACCUMULATEDSHARES
                
                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
                
                
                800,000
                
                
                800
                
                
                399,200
                
                
                
                
                
                400,000Issuance
                    of common stock for compensation
                
                
                150,000
                
                
                150
                
                
                142,350
                
                
                
                
                
                142,500Issuance
                    of common stock for services
                
                
                421,773
                
                
                422
                
                
                329,103
                
                
                
                
                
                329,525Common
                    stock options issued for services
                
                
                
                
                
                
                
                
                1,011,156
                
                
                
                
                
                1,011,156Issuance
                    of common stock and warrants accounted for:-
                    accounts payable
                
                
                30,000
                
                
                30
                
                
                14,970
                
                
                
                
                
                15,000-
                    services
                
                
                60,000
                
                
                60
                
                
                131,085
                
                
                
                
                
                131,145Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                (2,076,206
                )
                
                (2,076,206
                )Balance
                    at March 31, 2007
                
                
                13,592,084
                
                $
                13,592
                
                $
                21,655,023
                
                $
                (22,776,733
                )
                $
                (1,108,118
                )
  See
        accompanying notes to consolidated financial statements
  F-3
 *Table
            of Contents*
 **BLUEGATE
                    CORPORATION****CONSOLIDATED
                    STATEMENTS OF CASH FLOWS****THREE
                    MONTHS ENDED MARCH 31, 2007 AND 2006****UNAUDITED****March
                    31,****2007**
                
                **2006**Cash
                    flows from operating activities:Net
                    loss
                
                $
                (2,076,206
                )
                $
                (1,012,536
                )Adjustments
                    to reconcile net loss to net cash used in operating
                    activities:Amortization
                    of debt discount
                
                
                -
                
                
                242,316Depreciation
                    and amortization
                
                
                13,918
                
                
                20,151Common
                    stock issued for services
                
                
                329,525
                
                
                16,220Common
                    stock options issued for services
                
                
                1,011,156
                
                
                294,926Common
                    stock issued for compensation
                
                
                142,500
                
                
                -Common
                    stock and warrants issued for services
                
                
                131,145
                
                
                -Accounts
                    receivable
                
                
                (168,623
                )
                
                85,118Prepaid
                    expenses and other current assets
                
                
                16,615
                
                
                (2,741
                )Accounts
                    payable and accrued liabilities
                
                
                (38,426
                )
                
                (25,311
                )Deferred
                    revenue
                
                
                (134,644
                )
                
                151,948Net
                    cash used in operating activities
                
                
                (773,040
                )
                
                (229,909
                )Cash
                    flows from investing activities:Proceeds
                    from note receivable
                
                
                -
                
                
                32,000Purchase
                    of property and equipment
                
                
                (17,287
                )
                
                (1,457
                )Net
                    cash (used in) provided by investing activities
                
                
                (17,287
                )
                
                30,543Cash
                    flows from financing activities:Change
                    in bank overdraft
                
                
                -
                
                
                68,365Proceeds
                    from related party short term debt
                
                
                241,753
                
                
                375,394Payments
                    on related party short term debt
                
                
                (213,445
                )
                
                (111,099
                )Net
                    change in bank line of credit
                
                
                (44
                )
                
                -Proceeds
                    from note payable
                
                
                315,000
                
                
                -Common
                    stock and warrants issued for cash
                
                
                400,000
                
                
                195,000Net
                    cash provided by financing activities
                
                
                743,264
                
                
                527,660Net
                    (decrease) increase in cash and cash equivalents
                
                
                (47,063
                )
                
                328,294Cash
                    and cash equivalents at beginning of period
                
                
                256,121
                
                
                27,791Cash
                    and cash equivalents at end of period
                
                $
                209,058
                
                $
                356,085Non
                    Cash Transactions:Issuance
                    of common stock and warrants for conversion of accounts
                    payable
                
                $
                15,000
                
                $
                -Supplemental
                    information:Cash
                    paid for interest
                
                
                7,677
                
                
                21,069
 
 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.
  RECLASSIFICATIONS
 
 We
        have
        reclassified certain prior-year amounts to conform to the current year’s
        presentation.
 
 2.
              GOING
                  CONCERN CONSIDERATIONS
  During
        the three months ended March 31, 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 the Company’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 March 31, 2007 and December 31, 2006 are summarized
                    below:
                
                3/31/2007
                
                12/31/2006**Secured
                    note payable:**On
                    March 8, 2007, we borrowed $315,000 and issued a note payablesecured
                    by Bluegate’s accounts receivable. The $315,000 note plus $31,500 is due
                    on May 15, 2007. The $31,500 was recorded as interest
                    expense.
                
                $
                315,000
                
                $
                -$
                315,000
                
                $
                -**Unsecured
                    notes payable:**10%
                    note payable due upon demand
                
                $
                12,800
                
                $
                12,800$
                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, our CEO Manfred Sternberg and our President
                    William
                    Koehler, for Bluegate to borrow up to $500,000 each. During the
                    three
                    months ended March 31, 2007, we borrowed $241,753 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 $213,445
                    on
                    related party notes.Notes
                    payable to William Koehler due on demand
                
                $
                51,587
                
                $
                41,910Notes
                    payable to Manfred Sternberg due on demand
                
                
                98,894
                
                
                80,264$
                150,481
                
                $
                122,174**Unsecured
                    bank line of credit:**The
                    Company has a bank line of credit to borrow up to $50,000. As
                    of March 31,
                    2007, the Company had an outstanding payable balance of $44,546
                    and an
                    available balance to borrow of $5,454. The interest rate was
                    11% as of
                    March 31, 2007.
                
                $
                44,546
                
                $
                44,590$
                44,546
                
                $
                44,590
  F-5
 *Table
            of Contents*
  4.
              EQUITY
                  TRANSACTIONS
  During
        the quarter ended March 31, 2007, Bluegate completed the following equity
        transactions:
 
 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.
 
 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 on the date
        of
        issuance. 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 on the
        date
        of issuance. 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 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.
 
 (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 on the
        date of
        issuance. We expensed $85,000 in quarter ending March 31, 2007 related to
        this
        transaction.
 
 Issuance
        of common stock and warrants for services and accounts payable:
 
 (6)
        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, for prior year accounts payable of $15,000 and current year
        services of $131,145 to a consultant. The warrants vest immediately and expire
        in February 2012.
 
 Stock
        options issued for services:
 
 (7)
        During the quarter ended March 31, 2007, Bluegate expensed $838,340 related
        to
        previously issued stock options that vested during the period.
 
 (8)
        The
        following table summarizes stock options issued to employees during the quarter
        ended March 31, 2007:
 **Options**
                
                **Exercise**
                  **Price**
                
                **Fair**
                  **Value**
                
                **Expiration**
                  **Date**
                
                **Vesting**
                  **Period**
                
                **2007**
                  **Expense**50,000
                
                $
                0.80
                
                $
                39,871
                
                
                1/15/2012
                
                Through
                    12/08
                
                $
                4,98375,000
                
                
                0.75
                
                
                56,069
                
                
                2/2/2012
                
                Through
                    1/08
                
                
                9,344100,000
                
                
                0.75
                
                
                74,759
                
                
                2/5/2012
                
                Immediately
                
                
                74,75950,000
                
                
                0.86
                
                
                42,862
                
                
                2/19/2012
                
                Immediately
                
                
                42,86250,000
                
                
                0.82
                
                
                40,868
                
                
                3/19/2012
                
                Immediately
                
                
                40,868325,000
                
                
                
                
                $
                254,429
                
                
                
                
                
                
                
                $
                172,816
  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 260%; risk-free
        interest rates of 5.0%; and option terms as set forth in the options
        agreements.
 
 5.
              SUBSEQUENT
                  EVENT
 
 In
        April
        2007, we issued an option to purchase 50,000 shares of our common stock
        at
        an exercise price of $0.80 per share to an employee. The option had a market
        value of $39,871 on the date of grant, vests through January 2008 and expires in
        April
        2012. We expensed
        $3,987 during the month of April 2007 related to this option.
  F-6
 *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 March 31, 2007 and for the three 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 network to
        healthcare and other industries.
 
 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 three months ended March 31, 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 three months ended March 31, 2007 and 2006, we experienced negative financial
        results as follows:
  Three
                  Months Ended March 31,2007
              
              2006Net
                  loss
              
              $
              (2,076,206
              )
              $
              (1,012,536
              )Negative
                  cash flow from operations
              
              
              (773,040
              )
              
              (229,909
              )Negative
                  working capital
              
              
              (1,215,820
              )
              
              (1,414,013
              )Stockholders'
                  deficit
              
              
              (1,108,118
              )
              
              (1,217,435
              )
 
 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 and providing IT consulting and
        HIPAA compliant, turnkey managed security and interoperability solutions
        across
        our network to healthcare and other industries.
 
 RESULTS
        OF OPERATIONS
 
 THREE
        MONTHS ENDED MARCH 31, 2007 AS COMPARED TO THE THREE MONTHS ENDED MARCH 31,
        2006
 
 During
        the three months ended March 31, 2007 our revenue was $1,361,067 versus $935,649
        for the three month period ended March 31, 2006. This represents an increase
        of
        $425,418 and is primarily attributable to our
        acquisition of the assets of Trilliant Corp. and our efforts to market Medical
        Grade Network®,
        our core business.
 
 Our
        cost
        of services for the three months ended March 31, 2007 was $733,512 compared
        to
        $422,740 for the three months ended March 31, 2006. The increase in cost
        of
        services of $310,772 is due to higher interconnect fees and costs associated
        with the expansion of our Medical Grade Network® services.
 
 Our
        gross
        profit for the three months ended March 31, 2007 was $627,555 compared to
        $512,909 for the three months ended March 31, 2006. Our gross profit as a
        percentage of sales decreased to 46% for the three months ended March 31,
        2007
        from 55% for the three months ended March 31, 2006 due to higher
        interconnect fees and costs associated with the expansion of our Medical
        Grade Network® services.
 
 We
        incurred selling, general and administrative expenses (SG&A) of $867,459 for
        the three months ended March 31, 2007 compared to $477,899 for the three
        months
        ended March 31, 2006. The increase in SG&A of $389,560 is primarily
        attributable to the expansion of our sales and marketing efforts.
 
 We
        incurred compensation expense of $1,797,125 for the three months ended March
        31,
        2007 compared to $788,374 for the three months ended March 31, 2006. The
        increase in compensation expense of $1,008,751 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 $2,076,206 for the three months ended March 31, 2007
        compared to a net loss of $1,012,536 for the three months ended March 31,
        2006.
        The increase of $1,063,670 is due primarily 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.
  I-4
 *Table
            of Contents*
  FORECAST
        OF GROWTH IN OUR MEDICAL GRADE NETWORK ® CUSTOMER
        BASE
 
 At
        March
        31, 2007, we had approximately 1,075 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 March 31, 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
        March 31, 2007, our cash on hand was $209,058; total current assets were
        $690,366, total current liabilities were $1,906,186 and total stockholders’
deficit was $1,108,118.
 
 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.
 
 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
  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, predominantly in the area of debt and
        equity. Specifically, our independent auditors identified deficiencies in
        our
        internal controls and disclosure controls related to the term and volatility
        components included in the calculation of the expense pertaining to warrants
        and
        options. 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
 
 In
        April
        2007, we issued an option to purchase 50,000 shares of our common stock at
        an
        exercise price of $0.80 per share to an employee. The option had a market
        value
        of $39,871 on the date of grant, vests through January 2008 and expires in
        April
        2012. We expensed
        $3,987 during the month of April 2007 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.
  ITEM
                  5.
              OTHER
                  INFORMATION
 
 NONE
 
 ITEM
                  6.
              EXHIBITS
 
 Exhibit
                  Number
              
              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:
                  April 24, 2007
              /s/
              Stephen
                  J. SpercoStephen
                  J. Sperco,Chief
                  Executive OfficerBluegate
                  CorporationDate:
                  April 24, 2007
              /s/
              Charles
                  E. LeiboldCharles
                  E. Leibold,Chief
                  Financial Officer






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