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<p style="margin: 0pt"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">1. <u>ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES</u></p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">Bluegate Corporation (“Bluegate”
or the “Company") is a Nevada Corporation that consists of the networking service (carrier/circuit) business. It provides
internet connectivity to corporate clients on a subscription basis; essentially operating as a value added provider.</p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">The Company was originally incorporated as
Solis Communications, Inc. on July 23, 2001 and adopted a name change to Crescent Communications Inc. upon completion of a reverse
acquisition of Berens Industries, Inc. In 2004, we changed our name to Bluegate Corporation.</p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">Following is a summary of the Company's significant
accounting policies:</p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"><u>SIGNIFICANT ESTIMATES</u></p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of revenues and expenses during the periods. Actual results could
differ from estimates making it reasonably possible that a change in the estimates could occur in the near term.</p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"><u>RECLASSIFICATIONS</u></p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">Certain prior year amounts have been reclassified
to conform to the current year presentation.</p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"><u>CASH AND CASH EQUIVALENTS</u></p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">The Company considers all highly liquid short-term
investments with an original maturity of three months or less when purchased, to be cash equivalents.</p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"><u>ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL
ACCOUNTS</u></p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">Accounts receivable are amounts due on sales,
are unsecured and are carried at their estimated collectible amounts. Credit is generally extended on a short-term basis; thus
accounts receivable do not bear interest although a finance charge may be applied to such receivables that are more than thirty
days past due. Accounts receivable are periodically evaluated for collectability based on past credit history with clients. Provisions
for losses on accounts receivable are determined on the basis of loss experience, known and inherent risk in the account balance
and current economic conditions. In February 2008, as a result of the transaction described in footnote 5 – note payable
to related party and footnote 8 – stockholders’ deficit, as condition to and as additional consideration for SAI Corporation’s
(“SAIC”) agreement to lend funds to the Company, the Company granted SAIC a security interest in its assets as more
specifically detailed in the Promissory Note and Security Agreement.</p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"><u>INCOME TAXES</u></p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">The Company uses the liability method of accounting
for income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years of temporary
differences between the tax basis of assets and liabilities and their financial amounts at year-end. The Company provides a valuation
allowance to reduce deferred tax assets to their net realizable value.</p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"><u>STOCK-BASED COMPENSATION</u></p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">ASC 718, “Accounting for Stock-Based
Compensation" 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, Bluegate implemented
ASC 718, and accordingly, Bluegate accounts for compensation cost for stock option plans in accordance with ASC 718.</p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">Bluegate accounts for share based payments
to non-employees in accordance with ASC 505-50 “Accounting for Equity Instruments Issued to Non-Employees for Acquiring,
or in Conjunction with Selling, Goods or Services.”</p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"><u>EMBEDDED CONVERSION FEATURES</u></p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">Bluegate evaluates embedded conversion features
within convertible debt and convertible preferred stock under ASC 815-15 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 ASC 815-15, the instrument is evaluated under ASC 470-20
and ASC 470-20 for consideration of any beneficial conversion feature.</p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"><u>DERIVATIVE FINANCIAL INSTRUMENTS</u></p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">Bluegate does not use derivative instruments
to hedge exposures to cash flow, market, or foreign currency risks. Bluegate evaluates all of it financial instruments to determine
if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments
that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued
at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based derivative financial
instruments, Bluegate uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent
valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities
or as equity, is re-assessed at the end of each reporting period. Derivative instrument liabilities are classified in the balance
sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within
12 months of the balance sheet date.</p>
<p style="font: 12pt Times New Roman, Times, Serif; margin: 0 0 0 20pt; text-align: justify; text-indent: 0.5in"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">On December 29, 2011 we received notification
that the remaining 6,000,000 warrants with an anti-dilutive provision issued to related party, SAI Corporation, were to be canceled;
therefore there were no derivative financial instruments outstanding at December 31, 2012 and 2011.</p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"><u>REVENUE RECOGNITION</u></p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">Revenue is recognized when persuasive evidence
of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability
is reasonably assured.</p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">Revenue is recognized based upon contractually
determined monthly service charges to individual customers. Some services are billed in advance and, accordingly, revenues are
deferred until the period in which the services are provided. At December 31, 2012 and 2011, deferred service revenue was $7,813
and $16,207 respectively.</p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"><u>LOSS PER SHARE</u></p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">Basic and diluted net loss per share is computed
on the basis of the weighted average number of shares of common stock outstanding during each period. Potentially dilutive options
that were outstanding during 2012 and 2011 were not considered in the calculation of diluted earnings per share because the Company's
net loss rendered their impact anti-dilutive. Accordingly, basic and diluted losses per share were identical for the years ended
December 31, 2012 and 2011.</p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"><u>RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS</u></p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">The Company does not expect any recent accounting
pronouncements to have a material impact to its financial position or result of operations.</p>
<p style="margin: 0pt 0pt 0pt 20pt"></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify"><u>INCOME TAXES</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">The Company uses the liability
method of accounting for income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences on
future years of temporary differences between the tax basis of assets and liabilities and their financial amounts at year-end.
The Company provides a valuation allowance to reduce deferred tax assets to their net realizable value.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify"><u>STOCK-BASED COMPENSATION</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">ASC 718, “Accounting
for Stock-Based Compensation" 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, Bluegate implemented ASC 718, and accordingly, Bluegate accounts for compensation cost for stock option plans in accordance
with ASC 718.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">Bluegate accounts for share
based payments to non-employees in accordance with ASC 505-50 “Accounting for Equity Instruments Issued to Non-Employees
for Acquiring, or in Conjunction with Selling, Goods or Services.”</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify"><u>CASH AND CASH EQUIVALENTS</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">The Company considers all
highly liquid short-term investments with an original maturity of three months or less when purchased, to be cash equivalents.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify"><u>DERIVATIVE FINANCIAL
INSTRUMENTS</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">Bluegate does not use derivative
instruments to hedge exposures to cash flow, market, or foreign currency risks. Bluegate evaluates all of it financial instruments
to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial
instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then
re-valued at each reporting date, with changes in the fair value reported as charges or credits to income. For option-based derivative
financial instruments, Bluegate uses the Black-Scholes option-pricing model to value the derivative instruments at inception and
subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded
as liabilities or as equity, is re-assessed at the end of each reporting period. Derivative instrument liabilities are classified
in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be
required within 12 months of the balance sheet date.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; text-align: justify; margin-right: 0; margin-left: 0.25in">On December
29, 2011 we received notification that the remaining 6,000,000 warrants with an anti-dilutive provision issued to related party,
SAI Corporation, were to be canceled; therefore there were no derivative financial instruments outstanding at December 31, 2012
and 2011.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify; text-indent: 0.25in"><u>REVENUE
RECOGNITION</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">Revenue is recognized when
persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable,
and collectability is reasonably assured.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">Revenue is recognized based
upon contractually determined monthly service charges to individual customers. Some services are billed in advance and, accordingly,
revenues are deferred until the period in which the services are provided. At December 31, 2012 and 2011, deferred service revenue
was $7,813 and $16,207 respectively.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify"><u>LOSS PER SHARE</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">Basic and diluted net loss
per share is computed on the basis of the weighted average number of shares of common stock outstanding during each period. Potentially
dilutive options that were outstanding during 2012 and 2011 were not considered in the calculation of diluted earnings per share
because the Company's net loss rendered their impact anti-dilutive. Accordingly, basic and diluted losses per share were identical
for the years ended December 31, 2012 and 2011.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify"><u>RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">The Company does not expect
any recent accounting pronouncements to have a material impact to its financial position or result of operations.</p>
<p style="margin: 0pt"></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">2. <u>GOING CONCERN CONSIDERATIONS</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">During the years ended
December 31, 2012 and 2011, 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 and loans from a related party. We experienced negative financial
results as follows:</p>
<table cellspacing="0" cellpadding="0" style="width: 100%; font: 8pt Courier New, Courier, Monospace; border-collapse: collapse">
<tr style="vertical-align: top">
<td style="width: 57%; padding-left: 0.25in; line-height: 115%"> </td>
<td style="width: 3%; border-bottom: windowtext 1pt solid; padding-left: 0.25in; line-height: 115%"> </td>
<td style="width: 18%; border-bottom: windowtext 1pt solid; padding-left: 0.25in; line-height: 115%">2012</td>
<td style="width: 4%; border-bottom: windowtext 1pt solid; padding-left: 0.25in; line-height: 115%"> </td>
<td style="width: 18%; border-bottom: windowtext 1pt solid; padding-left: 0.25in; line-height: 115%">2011</td></tr>
<tr style="vertical-align: top">
<td style="line-height: 115%">Net loss</td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">(528,397)</td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">(473,319)</td></tr>
<tr style="vertical-align: top">
<td style="line-height: 115%">Negative cash flow from operations</td>
<td style="padding-left: 0.25in; line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%; text-align: right">(47,175)</td>
<td style="padding-left: 0.25in; line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%; text-align: right">(34,276)</td></tr>
<tr style="vertical-align: top">
<td style="line-height: 115%">Negative working capital</td>
<td style="padding-left: 0.25in; line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%; text-align: right">(2,225,947)</td>
<td style="padding-left: 0.25in; line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%; text-align: right">(1,697,550)</td></tr>
<tr style="vertical-align: top">
<td style="line-height: 115%">Stockholders’ deficit</td>
<td style="padding-left: 0.25in; line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%; text-align: right">(2,225,947)</td>
<td style="padding-left: 0.25in; line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%; text-align: right">(1,697,550)</td></tr>
</table>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.5in; text-align: justify"> </p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">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.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">We have supported current
operations by obtaining loans from a related party.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">These steps have provided
us with the cash flows to continue our business, but have not resulted in significant improvement in our financial position. We
are considering alternatives to address our cash flow situation that include:</p>
<p style="font: 11pt/115% Calibri, Helvetica, Sans-Serif; margin: 0 0 10pt 49.5pt; text-align: justify; text-indent: 0in"><font style="font: 8pt Courier New, Courier, Monospace">o</font><font style="font: 7pt Times New Roman, Times, Serif">         
</font><font style="font: 8pt Courier New, Courier, Monospace">Raising capital through additional sale of our common stock and/or
debt securities</font></p>
<p style="font: 11pt/115% Calibri, Helvetica, Sans-Serif; margin: 0 0 10pt 49.5pt; text-align: justify; text-indent: 0in"><font style="font: 8pt Courier New, Courier, Monospace">o</font><font style="font: 7pt Times New Roman, Times, Serif">         
</font><font style="font: 8pt Courier New, Courier, Monospace">Reducing cash operating expenses to levels that are in line with
current revenues.</font></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">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:</p>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 11pt/115% Calibri, Helvetica, Sans-Serif; margin-top: 0; margin-bottom: 10pt"><tr style="vertical-align: top">
<td style="width: 36pt"></td><td style="width: 63pt"><font style="font: 8pt Courier New, Courier, Monospace">o</font></td><td style="text-align: justify"><font style="font: 8pt Courier New, Courier, Monospace">Our ability to locate sources of debt or
equity funding to meet current commitments and near-term future requirements.</font></td></tr></table>
<table cellpadding="0" cellspacing="0" style="width: 100%; font: 11pt/115% Calibri, Helvetica, Sans-Serif; margin-top: 0; margin-bottom: 10pt"><tr style="vertical-align: top">
<td style="width: 36pt"></td><td style="width: 63pt"><font style="font: 8pt Courier New, Courier, Monospace">o</font></td><td style="text-align: justify"><font style="font: 8pt Courier New, Courier, Monospace">Our ability to achieve profitability and
ultimately generate sufficient cash flow from operations to sustain our continuing operations.</font></td></tr></table>
<p style="margin: 0pt"></p>
<table cellspacing="0" cellpadding="0" style="width: 100%; font: 8pt Courier New, Courier, Monospace; border-collapse: collapse">
<tr style="vertical-align: top">
<td style="width: 57%; padding-left: 0.25in; line-height: 115%"> </td>
<td style="width: 3%; border-bottom: windowtext 1pt solid; padding-left: 0.25in; line-height: 115%"> </td>
<td style="width: 18%; border-bottom: windowtext 1pt solid; padding-left: 0.25in; line-height: 115%">2012</td>
<td style="width: 4%; border-bottom: windowtext 1pt solid; padding-left: 0.25in; line-height: 115%"> </td>
<td style="width: 18%; border-bottom: windowtext 1pt solid; padding-left: 0.25in; line-height: 115%">2011</td></tr>
<tr style="vertical-align: top">
<td style="line-height: 115%">Net loss</td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">(528,397)</td>
<td style="line-height: 115%">$</td>
<td style="line-height: 115%; text-align: right">(473,319)</td></tr>
<tr style="vertical-align: top">
<td style="line-height: 115%">Negative cash flow from operations</td>
<td style="padding-left: 0.25in; line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%; text-align: right">(47,175)</td>
<td style="padding-left: 0.25in; line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%; text-align: right">(34,276)</td></tr>
<tr style="vertical-align: top">
<td style="line-height: 115%">Negative working capital</td>
<td style="padding-left: 0.25in; line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%; text-align: right">(2,225,947)</td>
<td style="padding-left: 0.25in; line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%; text-align: right">(1,697,550)</td></tr>
<tr style="vertical-align: top">
<td style="line-height: 115%">Stockholders’ deficit</td>
<td style="padding-left: 0.25in; line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%; text-align: right">(2,225,947)</td>
<td style="padding-left: 0.25in; line-height: 115%; text-align: right"> </td>
<td style="line-height: 115%; text-align: right">(1,697,550)</td></tr>
</table>
-2225947
-1697550
-2225947
-1697550
46033565
257487
2243377
1712642
7813
16207
438051
134241
1245000
1200000
20837
30212
519241
320664
12435
11318
17430
15092
10435
6587
3762
5937
10213
46034
46034
22400286
22400286
-24672267
-24143870
-2225947
-1697550
26034
46034
46034
22160286
22400286
22400286
-23670551
-24143870
-24672267
-1484231
17430
15092
46033565
26143154
-0.01
-0.02
22000
303810
293760
-224587
-201559
247590
277084
23003
75525
120331
147233
143334
222758
-8394
5000
303810
293760
198577
181572
-8258
-32357
-3848
10275
-665
2793
-22000
45000
30000
45000
30000
-2175
-4276
260000
10
10
26033565
46033565
46033565
48
48
48
10
-528397
-473319
-473319
-528397
20000000
260000
20000
240000
<table cellspacing="0" cellpadding="0" style="width: 100%; font: 8pt Courier New, Courier, Monospace; border-collapse: collapse">
<tr style="vertical-align: top">
<td style="width: 69%; padding-bottom: 10pt; line-height: 115%"> </td>
<td style="width: 2%; padding-bottom: 10pt; line-height: 115%"> </td>
<td style="width: 13%; border-bottom: windowtext 1pt solid; padding-bottom: 10pt; text-align: center; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">2012</font></td>
<td style="width: 3%; padding-bottom: 10pt; line-height: 115%"> </td>
<td style="width: 13%; border-bottom: windowtext 1pt solid; padding-bottom: 10pt; text-align: center; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">2011</font></td></tr>
<tr style="vertical-align: top">
<td style="padding-bottom: 10pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">Accounts receivable</font></td>
<td style="padding-bottom: 10pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">$</font></td>
<td style="padding-bottom: 10pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">3,281</font></td>
<td style="padding-bottom: 10pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">$</font></td>
<td style="padding-bottom: 10pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">2,616</font></td></tr>
<tr style="vertical-align: top">
<td style="padding-bottom: 10pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">Less allowance for bad debts</font></td>
<td style="padding-bottom: 10pt; line-height: 115%"> </td>
<td style="border-bottom: windowtext 1pt solid; padding-bottom: 10pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">(48)</font></td>
<td style="padding-bottom: 10pt; line-height: 115%"> </td>
<td style="border-bottom: windowtext 1pt solid; padding-bottom: 10pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">(48)</font></td></tr>
<tr style="vertical-align: top">
<td style="padding-bottom: 10pt; line-height: 115%"> </td>
<td style="padding-bottom: 10pt; line-height: 115%"> </td>
<td style="border-bottom: windowtext 1.5pt double; padding-bottom: 10pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">3,233</font></td>
<td style="padding-bottom: 10pt; line-height: 115%"> </td>
<td style="border-bottom: windowtext 1.5pt double; padding-bottom: 10pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">2,568</font></td></tr>
</table>
48
48
3233
2568
3281
2616
<table cellspacing="0" cellpadding="0" style="font: 8pt Courier New, Courier, Monospace; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="width: 75%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 10%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">12/31/2012</font></td>
<td nowrap="nowrap" style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 11%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">12/31/2011</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: justify"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">During November 2009, Bluegate entered into an Asset Sale and Purchase Agreement to sell certain assets to SLLC, and as a result, these balances represent funds collected by Bluegate on behalf of SLLC. </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">98,741 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$ </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">97,664 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: justify"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">As a result of the November 2009 transaction, commencing January 1, 2010, Bluegate had no employees and agreed to pay SLLC a monthly amount of $15,000 for management, accounting and administrative services, as well as, infrastructure and network engineering support. In August 2012 the monthly amount was $18,500 and beginning September 2012 the monthly amount was revised to $15,500 to reflect support for a new project engagement.</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">455,500 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">270,000 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: justify"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">From July 1, 2010 through July 31, 2011, SLLC agreed to pay Bluegate a monthly amount of $4,000 for office space and associated services for the Sperco entities.</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">(52,000)</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">(52,000)</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: justify"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">Commencing August 1, 2011, SLLC and Bluegate moved from Suite 600 to Suite 350 and Bluegate agreed to pay SLLC $1,000 rent on a month-to-month basis.</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">17,000 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">5,000 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="border-bottom: windowtext 1.5pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">519,241 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="border-bottom: windowtext 1.5pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">320,664 </font></td></tr>
</table>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt">5. <u>NOTE PAYABLE TO RELATED PARTY</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify">Note payable at December 31, 2012
and 2011 is summarized below:</p>
<table cellspacing="0" cellpadding="0" style="font: 8pt Courier New, Courier, Monospace; width: 100%; border-collapse: collapse">
<tr>
<td style="vertical-align: bottom; width: 74%; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: justify"> </td>
<td style="vertical-align: top; width: 2%; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"> </td>
<td style="vertical-align: bottom; width: 11%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">12/31/2012</font></td>
<td style="vertical-align: bottom; width: 3%; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"> </td>
<td style="vertical-align: bottom; width: 10%; border-bottom: windowtext 1pt solid; padding-right: -5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">12/31/2011</font></td></tr>
<tr>
<td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt">
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify"><font style="color: black"><u>Secured
note payable to related party:</u> During 2007, the Company entered into a line of credit agreement with SAI Corporation ("SAIC"),
a corporation controlled by our CEO, Stephen J. Sperco, to borrow up to $500,000. The line of credit has been amended several times
due to Bluegate’s need to borrow funds for working capital purposes and has been increased to $1,250,000.</font> <font style="color: black">As
a condition to and as additional consideration for SAIC’s agreement to lend additional funds to the Company, the Company
granted SAIC a security interest in its assets as more specifically detailed in the Promissory Note and Security Agreement. </font>Principal
and interest is due on demand. Interest is at the rate of 15% per <font style="color: black">annum and </font>payments are due
and payable monthly at the end of each month until the outstanding principal balance is paid in full. The Company agreed to pay
a late charge in the amount of $10,000 on any interest payment more than fifteen days delinquent.<font style="color: black"> During
2012, Bluegate borrowed $45,000 for working capital purposes.</font></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify"> </p></td>
<td style="vertical-align: bottom; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="vertical-align: bottom; border-bottom: windowtext 1.5pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">1,245,000 </font></td>
<td style="vertical-align: bottom; padding-right: -5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="vertical-align: bottom; border-bottom: windowtext 1.5pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">1,200,000</font></td></tr>
</table>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt"> </p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 4.75pt">4. <u>ACCOUNTS PAYABLE TO RELATED PARTY</u>				</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 4.75pt">The accounts payable to related party balance
is owed to Sperco, LLC ("SLLC") (an entity controlled by Stephen J. Sperco, Bluegate's CEO/President/Director) and is
summarized below:				</p>
<table cellspacing="0" cellpadding="0" style="font: 8pt Courier New, Courier, Monospace; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="width: 75%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 10%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">12/31/2012</font></td>
<td nowrap="nowrap" style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 11%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">12/31/2011</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: justify"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">During November 2009, Bluegate entered into an Asset Sale and Purchase Agreement to sell certain assets to SLLC, and as a result, these balances represent funds collected by Bluegate on behalf of SLLC. </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">98,741 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$ </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">97,664 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: justify"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">As a result of the November 2009 transaction, commencing January 1, 2010, Bluegate had no employees and agreed to pay SLLC a monthly amount of $15,000 for management, accounting and administrative services, as well as, infrastructure and network engineering support. In August 2012 the monthly amount was $18,500 and beginning September 2012 the monthly amount was revised to $15,500 to reflect support for a new project engagement.</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">455,500 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">270,000 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: justify"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">From July 1, 2010 through July 31, 2011, SLLC agreed to pay Bluegate a monthly amount of $4,000 for office space and associated services for the Sperco entities.</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">(52,000)</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">(52,000)</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: justify"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">Commencing August 1, 2011, SLLC and Bluegate moved from Suite 600 to Suite 350 and Bluegate agreed to pay SLLC $1,000 rent on a month-to-month basis.</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">17,000 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">5,000 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="border-bottom: windowtext 1.5pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">519,241 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="border-bottom: windowtext 1.5pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">320,664 </font></td></tr>
</table>
<table cellspacing="0" cellpadding="0" style="font: 8pt Courier New, Courier, Monospace; width: 100%; border-collapse: collapse">
<tr>
<td style="vertical-align: bottom; width: 74%; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: justify"> </td>
<td style="vertical-align: top; width: 2%; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"> </td>
<td style="vertical-align: bottom; width: 11%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">12/31/2012</font></td>
<td style="vertical-align: bottom; width: 3%; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"> </td>
<td style="vertical-align: bottom; width: 10%; border-bottom: windowtext 1pt solid; padding-right: -5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">12/31/2011</font></td></tr>
<tr>
<td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt">
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify"><font style="color: black"><u>Secured
note payable to related party:</u> During 2007, the Company entered into a line of credit agreement with SAI Corporation ("SAIC"),
a corporation controlled by our CEO, Stephen J. Sperco, to borrow up to $500,000. The line of credit has been amended several times
due to Bluegate’s need to borrow funds for working capital purposes and has been increased to $1,250,000.</font> <font style="color: black">As
a condition to and as additional consideration for SAIC’s agreement to lend additional funds to the Company, the Company
granted SAIC a security interest in its assets as more specifically detailed in the Promissory Note and Security Agreement. </font>Principal
and interest is due on demand. Interest is at the rate of 15% per <font style="color: black">annum and </font>payments are due
and payable monthly at the end of each month until the outstanding principal balance is paid in full. The Company agreed to pay
a late charge in the amount of $10,000 on any interest payment more than fifteen days delinquent.<font style="color: black"> During
2012, Bluegate borrowed $45,000 for working capital purposes.</font></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify"> </p></td>
<td style="vertical-align: bottom; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="vertical-align: bottom; border-bottom: windowtext 1.5pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">1,245,000 </font></td>
<td style="vertical-align: bottom; padding-right: -5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="vertical-align: bottom; border-bottom: windowtext 1.5pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">1,200,000</font></td></tr>
</table>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt">6. <u>ACCRUED LIABILITIES TO RELATED PARTIES</u></p>
<table cellspacing="0" cellpadding="0" style="font: 8pt Courier New, Courier, Monospace; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="width: 72%; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">The accrued liabilities to related parties is summarized below:</font></td>
<td nowrap="nowrap" style="width: 4%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 11%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">12/31/2012</font></td>
<td nowrap="nowrap" style="width: 3%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 10%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">12/31/2011</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">Accrued interest on the note payable to SAIC</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">394,132 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$ </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">90,322 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">Fees accrued through March 31, 2009 to former Board of Director, Dale Geary </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">20,419 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">20,419 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">Fees accrued through March 31, 2009 to Board of Director, Stephen J. Sperco</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">17,500 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">17,500 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">Vehicle allowance accrued through December 31, 2008 to Stephen J. Sperco</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">6,000 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">6,000 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">438,051 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">134,241 </font></td></tr>
</table>
<p style="font: 8pt/115% Calibri, Helvetica, Sans-Serif; margin: 0 0 10pt 0.25in"> </p>
<table cellspacing="0" cellpadding="0" style="font: 8pt Courier New, Courier, Monospace; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="width: 72%; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">The accrued liabilities to related parties is summarized below:</font></td>
<td nowrap="nowrap" style="width: 4%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 11%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">12/31/2012</font></td>
<td nowrap="nowrap" style="width: 3%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 10%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">12/31/2011</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">Accrued interest on the note payable to SAIC</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">394,132 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$ </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">90,322 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">Fees accrued through March 31, 2009 to former Board of Director, Dale Geary </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">20,419 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">20,419 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">Fees accrued through March 31, 2009 to Board of Director, Stephen J. Sperco</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">17,500 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">17,500 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">Vehicle allowance accrued through December 31, 2008 to Stephen J. Sperco</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">6,000 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">6,000 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">438,051 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">134,241 </font></td></tr>
</table>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in">7. <u>INCOME TAXES</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in">The composition of deferred tax assets at December
31, 2012 and 2011 were as follows:</p>
<table cellspacing="0" cellpadding="0" style="font: 8pt Courier New, Courier, Monospace; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="width: 73%; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; line-height: 115%"> </td>
<td style="width: 3%; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; line-height: 115%"> </td>
<td style="width: 11%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">2012</font></td>
<td style="width: 2%; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; line-height: 115%"> </td>
<td style="width: 11%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">2011</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; text-decoration: underline; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace"><u>Deferred tax assets</u></font></td>
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"> </td>
<td style="padding-right: 0.05in; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; line-height: 115%"> </td>
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"> </td>
<td style="padding-right: 4.2pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">Benefit from carryforward of net operating loss</font></td>
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">$</font></td>
<td style="border-top: windowtext 1pt solid; padding-right: 0.05in; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">2,323,000</font></td>
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">$</font></td>
<td style="border-top: windowtext 1pt solid; padding-right: 4.2pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">2,237,000</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">Less valuation allowance</font></td>
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"> </td>
<td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">(2,323,000)</font></td>
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; text-align: right; line-height: 115%"> </td>
<td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">(2,237,000)</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">Net deferred tax asset</font></td>
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">$</font></td>
<td nowrap="nowrap" style="border-bottom: windowtext 1.5pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">-</font></td>
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">$</font></td>
<td nowrap="nowrap" style="border-bottom: windowtext 1.5pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">-</font></td></tr>
</table>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify"> </p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">The difference between
the income tax benefit in the accompanying statement of operations and the amount that would result if the U.S. Federal statutory
rate of 34% were applied to pre-tax loss for 2012 and 2011 is attributable to the valuation allowance.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">At December 31, 2012, for
federal income tax and alternative minimum tax reporting purposes, the Company has $6,834,000 in unused net operating losses available
for carryforward to future years which will expire in various years through 2032. The majority of the unused net operating loss
carryforward is limited to an annual amount of approximately $270,000 due to the change in control on June 28, 2007 (see below
footnote 8 - Series C Preferred Stock).</p>
<table cellspacing="0" cellpadding="0" style="font: 8pt Courier New, Courier, Monospace; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="width: 73%; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; line-height: 115%"> </td>
<td style="width: 3%; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; line-height: 115%"> </td>
<td style="width: 11%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">2012</font></td>
<td style="width: 2%; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; line-height: 115%"> </td>
<td style="width: 11%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">2011</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; text-decoration: underline; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace"><u>Deferred tax assets</u></font></td>
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"> </td>
<td style="padding-right: 0.05in; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; line-height: 115%"> </td>
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"> </td>
<td style="padding-right: 4.2pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; line-height: 115%"> </td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">Benefit from carryforward of net operating loss</font></td>
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">$</font></td>
<td style="border-top: windowtext 1pt solid; padding-right: 0.05in; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">2,323,000</font></td>
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">$</font></td>
<td style="border-top: windowtext 1pt solid; padding-right: 4.2pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">2,237,000</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">Less valuation allowance</font></td>
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"> </td>
<td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">(2,323,000)</font></td>
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; text-align: right; line-height: 115%"> </td>
<td style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">(2,237,000)</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">Net deferred tax asset</font></td>
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">$</font></td>
<td nowrap="nowrap" style="border-bottom: windowtext 1.5pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">-</font></td>
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">$</font></td>
<td nowrap="nowrap" style="border-bottom: windowtext 1.5pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 0.25in; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">-</font></td></tr>
</table>
2323000
2237000
2323000
2237000
0
0
6834000
2032
<p style="margin: 0pt"></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify">10. <u>COMMITMENTS AND CONTINGENCIES</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify"><u>Lease Commitment</u></p>
<table cellspacing="0" cellpadding="0" style="font: 8pt Courier New, Courier, Monospace; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="width: 71%; padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt Courier New, Courier, Monospace; color: black">Currently Bluegate pays rent on a month-to-month basis. Rent expense is summarized below:</font></td>
<td nowrap="nowrap" style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 12%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt Courier New, Courier, Monospace; color: black">12/31/2012</font></td>
<td nowrap="nowrap" style="width: 3%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 12%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt Courier New, Courier, Monospace; color: black">12/31/2011</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt Courier New, Courier, Monospace; color: black">From January 1, 2011 through July 31, 2011, Bluegate paid $4,000 on a month-to-month basis</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">- </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">$ </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">28,000 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt Courier New, Courier, Monospace; color: black">From January 1, 2011 through July 31, 2011, SLLC agreed to pay Bluegate a monthly amount of $4,000 for office space and associated services for the Sperco entities</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">- </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">(28,000)</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt Courier New, Courier, Monospace; color: black">Commencing August 1, 2011, SLLC and Bluegate moved from Suite 600 to Suite 350 and Bluegate agreed to pay SLLC $1,000 rent on a month-to-month basis</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">12,000 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">- </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">12,000 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">- </font></td></tr>
</table>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify"> </p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify"><u>Contingencies</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify">We were party in the following
litigation:</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify">In September 2010, Bluegate Corporation
received notice that a prior client of Bluegate, Renaissance Healthcare Systems, Inc. through the Chapter 7 Trustee, filed a summons
in an adversary proceeding against Bluegate Corporation while in bankruptcy under the recovery of money/property fraudulent transfer
clause, attempting to reach back two years prior to the petition date. The amount in question was $68,480, (specifically four monthly
payments Bluegate received from its client in the ordinary course of business from March 18, 2008 through June 13, 2008), plus
pre-judgment and post judgment interest, costs and attorneys fees. On November 19, 2010, an entry of default was entered. We believed
the case was without merit; however, the parties agreed that they believed it to be in their mutual best interests to eliminate
further expense of litigation and the inherent risk involved with contested litigation by settling all of their disputed and contested
issues. In March 2011, both parties executed a trustee’s settlement agreement for a total payment by Bluegate Corporation
of $30,000 ($20,000 due upon the execution of the agreement and ten (10) additional equal monthly installments of $1,000 each).
As of September 22, 2011, we paid $30,000 to the Trustee and received from the bankruptcy court the “Unopposed Request to
Set Aside Clerk’s Entry of Default and Dismiss Adversary Proceeding” dated September 22, 2011.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify">In November 2010, Bluegate Corporation
filed a lawsuit against Electronic Medical Resources, LLC, ET. AL (“EMR”); In the C.C.C.L. No. 3 Harris County, Texas.
We filed this lawsuit claiming breach of contract for services provided. In January 2011, the defendants filed a counterclaim.
We believed the counterclaim was without merit; however, the parties agreed that they believed it to be in their mutual best interests
to eliminate further expense of litigation and the inherent risk involved with contested litigation by settling all of their disputed
and contested issues. In March 2011, all parties to both lawsuits executed a compromise settlement agreement and joint and mutual
release with no amounts due to or from any party.</p>
<p style="margin: 0pt"></p>
<table cellspacing="0" cellpadding="0" style="font: 8pt Courier New, Courier, Monospace; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="width: 71%; padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt Courier New, Courier, Monospace; color: black">Currently Bluegate pays rent on a month-to-month basis. Rent expense is summarized below:</font></td>
<td nowrap="nowrap" style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 12%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt Courier New, Courier, Monospace; color: black">12/31/2012</font></td>
<td nowrap="nowrap" style="width: 3%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 12%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt Courier New, Courier, Monospace; color: black">12/31/2011</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt Courier New, Courier, Monospace; color: black">From January 1, 2011 through July 31, 2011, Bluegate paid $4,000 on a month-to-month basis</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">- </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">$ </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">28,000 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt Courier New, Courier, Monospace; color: black">From January 1, 2011 through July 31, 2011, SLLC agreed to pay Bluegate a monthly amount of $4,000 for office space and associated services for the Sperco entities</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">- </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">(28,000)</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt Courier New, Courier, Monospace; color: black">Commencing August 1, 2011, SLLC and Bluegate moved from Suite 600 to Suite 350 and Bluegate agreed to pay SLLC $1,000 rent on a month-to-month basis</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">12,000 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">- </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">12,000 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">- </font></td></tr>
</table>
12000
0
03-31-2011
03-31-2011
U.S. Bankruptcy Court
C.C.C.L. No. 3 Harris County, Texas
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify">In September 2010, Bluegate Corporation
received notice that a prior client of Bluegate, Renaissance Healthcare Systems, Inc. through the Chapter 7 Trustee, filed a summons
in an adversary proceeding against Bluegate Corporation while in bankruptcy under the recovery of money/property fraudulent transfer
clause, attempting to reach back two years prior to the petition date. The amount in question was $68,480, (specifically four monthly
payments Bluegate received from its client in the ordinary course of business from March 18, 2008 through June 13, 2008), plus
pre-judgment and post judgment interest, costs and attorneys fees. On November 19, 2010, an entry of default was entered. We believed
the case was without merit; however, the parties agreed that they believed it to be in their mutual best interests to eliminate
further expense of litigation and the inherent risk involved with contested litigation by settling all of their disputed and contested
issues. In March 2011, both parties executed a trustee’s settlement agreement for a total payment by Bluegate Corporation
of $30,000 ($20,000 due upon the execution of the agreement and ten (10) additional equal monthly installments of $1,000 each).
As of September 22, 2011, we paid $30,000 to the Trustee and received from the bankruptcy court the “Unopposed Request to
Set Aside Clerk’s Entry of Default and Dismiss Adversary Proceeding” dated September 22, 2011.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify">In November 2010, Bluegate Corporation
filed a lawsuit against Electronic Medical Resources, LLC, ET. AL (“EMR”); In the C.C.C.L. No. 3 Harris County, Texas.
We filed this lawsuit claiming breach of contract for services provided. In January 2011, the defendants filed a counterclaim.
We believed the counterclaim was without merit; however, the parties agreed that they believed it to be in their mutual best interests
to eliminate further expense of litigation and the inherent risk involved with contested litigation by settling all of their disputed
and contested issues. In March 2011, all parties to both lawsuits executed a compromise settlement agreement and joint and mutual
release with no amounts due to or from any party.</p>
<p style="margin: 0pt"></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify">11. <u>RELATED PARTY TRANSACTIONS</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify">During the years ended December
31, 2012 and 2011, the Company engaged in related party transactions as follows:</p>
<table cellspacing="0" cellpadding="0" style="font: 8pt Courier New, Courier, Monospace; width: 100%; border-collapse: collapse">
<tr>
<td style="vertical-align: bottom; width: 74%; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: justify"> </td>
<td style="vertical-align: top; width: 2%; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"> </td>
<td style="vertical-align: bottom; width: 11%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">12/31/2012</font></td>
<td style="vertical-align: bottom; width: 3%; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"> </td>
<td style="vertical-align: bottom; width: 10%; border-bottom: windowtext 1pt solid; padding-right: -5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">12/31/2011</font></td></tr>
<tr>
<td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt">
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify"><font style="color: black"><u>Secured
note payable to related party:</u> During 2007, the Company entered into a line of credit agreement with SAI Corporation ("SAIC"),
a corporation controlled by our CEO, Stephen J. Sperco, to borrow up to $500,000. The line of credit has been amended several times
due to Bluegate’s need to borrow funds for working capital purposes and has been increased to $1,250,000.</font> <font style="color: black">As
a condition to and as additional consideration for SAIC’s agreement to lend additional funds to the Company, the Company
granted SAIC a security interest in its assets as more specifically detailed in the Promissory Note and Security Agreement. </font>Principal
and interest is due on demand. Interest is at the rate of 15% per <font style="color: black">annum and </font>payments are due
and payable monthly at the end of each month until the outstanding principal balance is paid in full. The Company agreed to pay
a late charge in the amount of $10,000 on any interest payment more than fifteen days delinquent.<font style="color: black"> During
2012, Bluegate borrowed $45,000 for working capital purposes.</font></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify"> </p></td>
<td style="vertical-align: bottom; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="vertical-align: bottom; border-bottom: windowtext 1.5pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">1,245,000 </font></td>
<td style="vertical-align: bottom; padding-right: -5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="vertical-align: bottom; border-bottom: windowtext 1.5pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">1,200,000</font></td></tr>
</table>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify"> </p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify">During 2012 and 2011, the Company
incurred interest expense on the related party note payable debt of $303,810 and $293,760, respectively. At December 31, 2012 and
December 31, 2011, $394,132 and $90,322, respectively is payable to SAIC and included under the caption accrued liabilities to
related parties on the balance sheet.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify"><u>Accounts payable to related
parties:</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify">The accounts payable to related
party balance is owed to Sperco, LLC ("SLLC") (an entity controlled by Stephen J. Sperco, Bluegate's CEO/President/Director)
and is summarized below:</p>
<table cellspacing="0" cellpadding="0" style="font: 8pt Courier New, Courier, Monospace; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="width: 75%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 10%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">12/31/2012</font></td>
<td nowrap="nowrap" style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 11%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">12/31/2011</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: justify"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">During November 2009, Bluegate entered into an Asset Sale and Purchase Agreement to sell certain assets to SLLC, and as a result, these balances represent funds collected by Bluegate on behalf of SLLC. </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">98,741 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$ </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">97,664 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: justify"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">As a result of the November 2009 transaction, commencing January 1, 2010, Bluegate had no employees and agreed to pay SLLC a monthly amount of $15,000 for management, accounting and administrative services, as well as, infrastructure and network engineering support. In August 2012 the monthly amount was $18,500 and beginning September 2012 the monthly amount was revised to $15,500 to reflect support for a new project engagement.</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">455,500 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">270,000 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: justify"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">From July 1, 2010 through July 31, 2011, SLLC agreed to pay Bluegate a monthly amount of $4,000 for office space and associated services for the Sperco entities.</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">(52,000)</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">(52,000)</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: justify"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">Commencing August 1, 2011, SLLC and Bluegate moved from Suite 600 to Suite 350 and Bluegate agreed to pay SLLC $1,000 rent on a month-to-month basis.</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">17,000 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">5,000 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="border-bottom: windowtext 1.5pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">519,241 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="border-bottom: windowtext 1.5pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">320,664 </font></td></tr>
</table>
<p style="font: 11pt/115% Calibri, Helvetica, Sans-Serif; margin: 0 0 10pt"> </p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt"><u>Lease Commitment:</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt">Currently Bluegate pays rent on a month-to-month basis.
Rent expense is summarized below:</p>
<table cellspacing="0" cellpadding="0" style="font: 8pt Courier New, Courier, Monospace; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="width: 71%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 12%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt Courier New, Courier, Monospace; color: black">12/31/2012</font></td>
<td nowrap="nowrap" style="width: 3%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 12%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt Courier New, Courier, Monospace; color: black">12/31/2011</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt Courier New, Courier, Monospace; color: black">From January 1, 2011 through July 31, 2011, Bluegate paid $4,000 on a month-to-month basis</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">- </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">$ </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">28,000 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt Courier New, Courier, Monospace; color: black">From January 1, 2011 through July 31, 2011, SLLC agreed to pay Bluegate a monthly amount of $4,000 for office space and associated services for the Sperco entities</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">- </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">(28,000)</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt Courier New, Courier, Monospace; color: black">Commencing August 1, 2011, SLLC and Bluegate moved from Suite 600 to Suite 350 and Bluegate agreed to pay SLLC $1,000 rent on a month-to-month basis</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">12,000 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">- </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">12,000 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace; color: black">- </font></td></tr>
</table>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify"> </p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify"><u>Accrued liabilities to related
parties:</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify">The accrued liabilities to related
parties is summarized below:</p>
<table cellspacing="0" cellpadding="0" style="font: 8pt Courier New, Courier, Monospace; width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="width: 72%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 4%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 11%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">12/31/2012</font></td>
<td nowrap="nowrap" style="width: 3%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 10%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">12/31/2011</font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">Accrued interest on the note payable to SAIC</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">394,132 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$ </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">90,322 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">Fees accrued through March 31, 2009 to former Board of Director, Dale Geary </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">20,419 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">20,419 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">Fees accrued through March 31, 2009 to Board of Director, Stephen J. Sperco</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">17,500 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">17,500 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">Vehicle allowance accrued through December 31, 2008 to Stephen J. Sperco</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">6,000 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">6,000 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">438,051 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">134,241 </font></td></tr>
</table>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify"> </p>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">12. <u>CUSTOMERS AND VENDORS</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">Major Customers. During
2012, our top five customers accounted for 35% of our service revenue and no single customer accounted for more than 10% of service
revenue.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">Major Vendors. During 2012,
our top five vendors accounted for 88% of our purchases and no single vendor accounted for more than 50% of purchases.</p>
<p style="margin: 0pt"></p>
<p style="margin: 0pt"></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">8. <u>STOCKHOLDERS’
DEFICIT </u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify"><u>SERIES C PREFERRED STOCK</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">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.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">On June 28, 2007, we sold
8 shares of Series C preferred stock for $100,000 in cash to SAI Corporation ("SAIC"), a corporation controlled by Stephen
Sperco ("Sperco"). We also granted to SAIC warrants to purchase up to 1,000,000 common shares at $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 common shares at $0.17 per share expiring in June 2012. Mr. Sperco is our CEO and a
director. On February 14, 2008, as a result of an equity transaction described below in Common Stock item (2), certain adjustment
provisions in these warrant agreements were triggered. Pursuant to the adjustment provisions, the exercise price of the previously
issued warrants to purchase 6,000,000 common shares at $0.17 per share was reduced to $0.0333334 per share.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">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.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">Bluegate analyzed the conversion
feature associated with the preferred stock for derivative accounting consideration under ASC 815-20 Accounting for Derivative
Instruments and Hedging Activities and ASC 815-15 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 ASC 815-20 and ASC 815-15.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">In accordance with ASC
470-20, Application of Issue No. 98-5 Accounting for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, which provides guidance on the calculation of a beneficial conversion feature on a convertible instrument,
Bluegate has determined that the Series C shares issued had an aggregate beneficial conversion feature of $500,000 as of the date
of issuance, resulting in a total discount of $600,000. Bluegate recorded this beneficial conversion feature as a deemed dividend
upon issuance.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 4.5pt 10pt 0.25in; text-align: justify">The warrants issued
in this transaction were subject to a registration rights agreement which required Bluegate to register the underlying shares by
September 28, 2007 or pay liquidated damages of 1.5% of the purchase price of the investment each month the shares were not registered.
We filed with the Securities and Exchange Commission a Registration Statement which was effective as of August 30, 2007 with respect
to these securities. There is no liability related to the registration rights agreements.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 4.5pt 10pt 0.25in; text-align: justify">As a result of this
transaction, net operating losses accumulated up through the change in control are limited by Internal Revenue Code Section 382
due to the change in control (see above footnote 7 – Income Taxes).</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify"><u>SERIES D PREFERRED STOCK</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">In May 2010, Bluegate’s
board of directors approved the issuance of 10 shares of Series D voting convertible non-redeemable preferred stock with a par
value of $.001 per share and a liquidation value of $8,725 per share. Each share of Series D convertible preferred stock may be
converted, at the option of the shareholder, into 25,000 shares of common stock or a total of 250,000 shares of common stock. Each
share of preferred stock has 150 times the number of votes its conversion-equivalent number of shares of common stock, or 3,750,000
votes per share of preferred stock. The 10 shares of preferred stock will have an aggregate of 37,500,000 million votes.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">On <font style="color: black">May
22, 2010, we sold 10 shares of Series D preferred stock to SAI Corporation (“SAIC”), a corporation controlled by Stephen
Sperco </font>by modifying the existing Promissory Note and Security Agreement as follows: (1) SAIC's waiver of accrued interest
of $84,740 for the period from February 1, 2010 through May 22, 2010, and (2) SAIC's waiver of any applicable interest payments
for the period from May 23, 2010 through December 31, 2010 (estimated to be up to $109,973 without any present value effect). See
footnote 5.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify"><u>STOCK OPTION PLANS</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">The Company had adopted
the 2002 Stock and Stock Option Plan under which incentive stock options for up to 450,000 common shares may be awarded to officers,
directors and key employees. The plan was designed to attract and reward key executive personnel. As of December 31, 2007, Bluegate
has granted all 450,000 options and the 2002 stock plan is not active.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">Stock options granted pursuant
to the 2002 plan expire as determined by the board of directors. All of the options granted were at an option price equal to the
fair market value of the common stock at the date of grant.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">In 2005 the Company adopted
the 2005 Stock and Stock Option Plan. The purpose of the 2005 plan is to further our interests, our Subsidiaries and our stockholders
by providing incentives in the form of stock options to key employees, consultants, directors and others who contribute materially
to our success and profitability. The grants recognize and reward outstanding individual performances and contributions and will
give such persons a proprietary interest in us, thus enhancing their personal interest in our continued success and progress. The
2005 Plan also assists us and our subsidiaries in attracting and retaining key employees and Directors and is administered by the
Board of Directors. The Board of Directors has the exclusive power to select the participants, to establish the terms of the stock
and options granted to each participant, provided that all options granted shall be granted at an exercise price equal to at least
85% of the fair market value of the common stock covered by the option on the grant date and to make all determinations necessary
or advisable under the 2005 plan. The maximum aggregate number of shares of common stock that may be granted or optioned and sold
under the plan is 3,000,000 shares. As of December 31, 2012, 1,132,685 shares of common stock have been granted.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">When applicable, Bluegate
uses the Black-Scholes option pricing model to value stock options and warrants and the simplified method of calculating expected
term as described in ASC 718.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in"><u>SUMMARY OF STOCK OPTIONS</u></p>
<table cellspacing="0" cellpadding="0" style="width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="width: 43%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Non-statutory Stock Options</font></td>
<td nowrap="nowrap" style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 12%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">Shares</font></td>
<td style="width: 3%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 16%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">Weighted Average Exercise Price</font></td>
<td style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 22%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">Weighted Average Remaining Contractual Term (Years)</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Outstanding at January 1, 2011</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">6,905,433 </font></td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">$</font></td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.29 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Forfeited</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">(5,900,101)</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.39 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Outstanding at January 1, 2012</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">1,005,332 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.29 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Forfeited</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">(982,000)</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.29 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Outstanding and exercisable at December 31, 2012</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">23,332 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-bottom: windowtext 2.25pt double; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.02 </font></td></tr>
</table>
<p style="font: 11pt/115% Calibri, Helvetica, Sans-Serif; margin: 0 0 10pt"> </p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt">There was no aggregate intrinsic value of options outstanding
or exercisable at December 31, 2012.</p>
<table cellspacing="0" cellpadding="0" style="width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="width: 27%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">Options Outstanding</font></td>
<td style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 20%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">Options Currently Exercisable</font></td>
<td style="width: 3%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 15%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">Remaining Contractual Term (Months)</font></td>
<td style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 12%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">Exercise Price ($)</font></td>
<td style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 17%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">Vesting Date</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">3,750 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">3,750 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">January 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">3,750 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">3,750 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">February 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">3,750 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">3,750 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">March 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">3,750 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">3,750 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">April 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">2,917 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">2,917 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">May 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">2,917 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">2,917 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">June 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">417 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">417 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">July 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">417 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">417 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">August 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">417 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">417 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">September 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">417 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">417 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">October 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">417 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">417 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">November 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">413 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">413 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">December 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">23,332 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">23,332 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
</table>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt"> </p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt"><u>SUMMARY OF STOCK WARRANTS</u></p>
<table cellspacing="0" cellpadding="0" style="width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="width: 33%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 15%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">NUMBER OF SHARES UNDER WARRANTS</font></td>
<td style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 13%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">EXERCISE PRICES ($)</font></td>
<td nowrap="nowrap" style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 18%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">WEIGHTED AVERAGE EXERCISE PRICE ($)</font></td>
<td nowrap="nowrap" style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 13%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">WEIGHTED AVERAGE REMAINING CONTRACTUAL TERM (YEARS)</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Outstanding at January 1, 2011</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">16,241,133 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.03 - 1.00 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.31 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Forfeited</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">(15,186,133)</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.03 – 1.00 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.29 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Outstanding at January 1, 2012</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">1,055,000 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.03 - 1.00 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.68 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Forfeited or Canceled</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">(925,000)</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.03 - 1.00 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.75 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
<tr style="vertical-align: bottom">
<td style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Outstanding and Exercisable at December 31, 2012</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-bottom: windowtext 2.25pt double; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">130,000 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.17 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.17 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-bottom: windowtext 2.25pt double; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.06 </font></td></tr>
</table>
<p style="font: 11pt/115% Calibri, Helvetica, Sans-Serif; margin: 0 0 10pt"> </p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt">There was no aggregate intrinsic value of the warrants
at December 31, 2012.</p>
<table cellspacing="0" cellpadding="0" style="width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="width: 32%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">NUMBER OF COMMON STOCK EQUIVALENTS</font></td>
<td style="width: 3%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 14%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">CURRENTLY EXERCISABLE</font></td>
<td style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 15%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">EXPIRATION DATE</font></td>
<td nowrap="nowrap" style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 17%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">REMAINING CONTRACTUAL LIFE (MONTHS)</font></td>
<td style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 13%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">EXERCISE PRICE ($)</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">130,000 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">130,000 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">January 2013</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.17 </font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">130,000 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">130,000 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
</table>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in"> </p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in"><u>Conversion of Debt to Equity:</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; text-align: justify; margin-right: 0; margin-left: 0.25in">On December
29, 2011 we issued 20,000,000 shares of common stock for the cancellation of 7,500,000 warrants and the partial settlement of the
related party promissory note for $30,000 and the waiving of accrued interest payable of $230,000, for a total of $260,000. The
debt and interest was relieved and the company would have reported a gain except that the transaction was with a related party.
SAI Corporation, an entity controlled by Stephen Sperco, Director and CEO, received 20,000,000 shares.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">As of December 31, 2012,
the company has outstanding: (i) 46,033,565 shares of common stock; (ii) 130,000 warrants; (iii) 23,332 options; and, (iv) preferred
stock that are convertible into 1,450,000 shares of common stock, resulting in on a fully diluted basis, 47,636,897 shares of common
stock. The company has 50,000,000 shares of common stock authorized by our Articles of Incorporation.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">When applicable, Bluegate
uses the Black-Scholes option pricing model to value stock options and warrants and the simplified method of calculating expected
term as described in ASC 718.</p>
<p style="margin: 0pt"></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">Bluegate analyzed the conversion
feature associated with the preferred stock for derivative accounting consideration under ASC 815-20 Accounting for Derivative
Instruments and Hedging Activities and ASC 815-15 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 ASC 815-20 and ASC 815-15.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">In accordance with ASC
470-20, Application of Issue No. 98-5 Accounting for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios, which provides guidance on the calculation of a beneficial conversion feature on a convertible instrument,
Bluegate has determined that the Series C shares issued had an aggregate beneficial conversion feature of $500,000 as of the date
of issuance, resulting in a total discount of $600,000. Bluegate recorded this beneficial conversion feature as a deemed dividend
upon issuance.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 4.5pt 10pt 0.25in; text-align: justify">The warrants issued
in this transaction were subject to a registration rights agreement which required Bluegate to register the underlying shares by
September 28, 2007 or pay liquidated damages of 1.5% of the purchase price of the investment each month the shares were not registered.
We filed with the Securities and Exchange Commission a Registration Statement which was effective as of August 30, 2007 with respect
to these securities. There is no liability related to the registration rights agreements.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 4.5pt 10pt 0.25in; text-align: justify">As a result of this
transaction, net operating losses accumulated up through the change in control are limited by Internal Revenue Code Section 382
due to the change in control (see above footnote 7 – Income Taxes).</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 4.5pt 10pt 0.25in; text-align: justify">When applicable, Bluegate
uses the Black-Scholes option pricing model to value stock options and warrants and the simplified method of calculating expected
term as described in ASC 718.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 4.5pt 10pt 0.25in; text-align: justify"></p>
<table cellspacing="0" cellpadding="0" style="width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="width: 43%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Non-statutory Stock Options</font></td>
<td nowrap="nowrap" style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 12%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">Shares</font></td>
<td style="width: 3%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 16%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">Weighted Average Exercise Price</font></td>
<td style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 22%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">Weighted Average Remaining Contractual Term (Years)</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Outstanding at January 1, 2011</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">6,905,433 </font></td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">$</font></td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.29 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Forfeited</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">(5,900,101)</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.39 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Outstanding at January 1, 2012</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">1,005,332 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.29 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Forfeited</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">(982,000)</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.29 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Outstanding and exercisable at December 31, 2012</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">23,332 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-bottom: windowtext 2.25pt double; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.02 </font></td></tr>
</table>
<table cellspacing="0" cellpadding="0" style="width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td style="width: 27%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">Options Outstanding</font></td>
<td style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 20%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">Options Currently Exercisable</font></td>
<td style="width: 3%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 15%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">Remaining Contractual Term (Months)</font></td>
<td style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 12%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">Exercise Price ($)</font></td>
<td style="width: 2%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 17%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">Vesting Date</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">3,750 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">3,750 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">January 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">3,750 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">3,750 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">February 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">3,750 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">3,750 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">March 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">3,750 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">3,750 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">April 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">2,917 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">2,917 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">May 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">2,917 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">2,917 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">June 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">417 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">417 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">July 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">417 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">417 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">August 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">417 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">417 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">September 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">417 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">417 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">October 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">417 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">417 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">November 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">413 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">413 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">1</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.25 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">December 2008</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">23,332 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-top: windowtext 1pt solid; border-bottom: windowtext 2.25pt double; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">23,332 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
</table>
<table cellspacing="0" cellpadding="0" style="width: 100%; border-collapse: collapse">
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="width: 36%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="width: 1%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 13%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">NUMBER OF SHARES UNDER WARRANTS</font></td>
<td style="width: 1%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 11%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">EXERCISE PRICES ($)</font></td>
<td nowrap="nowrap" style="width: 1%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 16%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">WEIGHTED AVERAGE EXERCISE PRICE ($)</font></td>
<td nowrap="nowrap" style="width: 1%; padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td style="width: 11%; border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace">WEIGHTED AVERAGE REMAINING CONTRACTUAL TERM (YEARS)</font></td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Outstanding at January 1, 2011</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">16,241,133 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.03 - 1.00 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.31 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Forfeited</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">(15,186,133)</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.03 – 1.00 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.29 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Outstanding at January 1, 2012</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">1,055,000 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.03 - 1.00 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.68 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
<tr style="vertical-align: bottom">
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Forfeited or Canceled</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">(925,000)</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.03 - 1.00 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.75 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td></tr>
<tr style="vertical-align: bottom">
<td style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"><font style="font: 8pt/115% Courier New, Courier, Monospace">Outstanding and Exercisable at December 31, 2012</font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-bottom: windowtext 2.25pt double; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">130,000 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"><p style="margin-top: 0; margin-bottom: 0"> </p>
<p style="margin-top: 0; margin-bottom: 0"> </p></td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.17 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.17 </font></td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="border-bottom: windowtext 2.25pt double; font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"><font style="font: 8pt/115% Courier New, Courier, Monospace">0.06 </font></td></tr>
<tr style="vertical-align: bottom">
<td style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"> </td></tr>
<tr style="vertical-align: bottom">
<td style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center">NUMBER
OF COMMON STOCK EQUIVALENTS</td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center">CURRENTLY EXERCISABLE</td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center">EXPIRATION DATE</td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center">REMAINING
CONTRACTUAL LIFE (MONTHS)</td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center">EXERCISE
PRICE ($) </td></tr>
<tr style="vertical-align: bottom">
<td style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right">130,000</td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right">130,000</td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right">January 2013</td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: center"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center">1</td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center">0.17</td></tr>
<tr style="vertical-align: bottom">
<td style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; border-top: Black 1pt solid; border-bottom: Black 1pt double">130,000</td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; border-top: Black 1pt solid; border-bottom: Black 1pt double">130,000</td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt; text-align: center"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"> </td>
<td nowrap="nowrap" style="padding-right: 5.4pt; padding-left: 5.4pt"> </td>
<td nowrap="nowrap" style="font: 8pt/115% Courier New, Courier, Monospace; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: center"> </td></tr>
</table>
0.25
0.29
0.29
0.25
0.25
0.25
0.25
0.25
0.25
0.25
0.25
0.25
0.25
0.25
0.25
0
0
-982000
-5900101
0
0
3750
3750
3750
3750
2917
2917
417
417
417
417
417
413
0
0
0
0
P0Y1M
3750
3750
3750
3750
2917
2917
417
417
417
417
417
413
130000
1055000
16241133
0.17
0.31
0.68
0.68
-925000
-15186133
0.75
0.29
P0Y1M
2013-01
2012-06
0.001
0.001
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.
<p style="margin: 0">Each share of preferred stock has 150 times the number
of votes its conversion-equivalent number of shares of common stock, or 3,750,000 votes per share of preferred stock. The 10 shares
of preferred stock will have an aggregate of 37,500,000 million votes.</p>
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 Series D convertible preferred stock may be converted, at
the option of the shareholder, into 25,000 shares of common stock or a total of
250,000 shares of common stock.
2007-06-28
450000
3000000
0.03
0.03
1.00
1.00
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">9. <u>DERIVATIVE LIABILITY</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify"><u>Embedded feature of
equity-linked financial instrument:</u></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">In June 2008, the FASB
finalized ASC 815-15, "Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock".
ASC 815-15 lays out a procedure to determine if an equity-linked financial instrument (or embedded feature) is indexed to its own
common stock. ASC 815-15 is effective for fiscal years beginning after December 15, 2008. 9,034,800 of Bluegate’s outstanding
warrants that were previously classified in equity were reclassified to derivative liabilities on January 1, 2009 as a result of
ASC 815-15.  Bluegate estimated the fair value of these liabilities as of January 1, 2009 to be $84,000 by recording a reduction
of $4,600,000 to Additional Paid In Capital and $4,516,000 to Accumulated Deficit. The effect of this adjustment is recorded as
a cumulative effect of change in accounting principle in our consolidated statement of stockholders’ deficit. On December
29, 2011 we received notification that the remaining 6,000,000 warrants with an anti-dilutive provision issued to related party,
SAI Corporation, were to be canceled. Due to the cancelation, there were no derivative financial instruments outstanding at December
31, 2011 and therefore, the fair value of these liabilities was -0- at December 31, 2011. The $22,000 change in fair value from
2010 is reported in our statement of operations as a gain on derivative financial instruments.</p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt 0.25in; text-align: justify">Bluegate used the Black-Scholes
option pricing model to value the embedded feature of the liability using the following assumptions: number of options as set forth
in the option agreements; no expected dividend yield; expected volatility of 340%; risk-free interest rates of 5.0%; and expected
terms based on the contractual term.</p>
<table cellspacing="0" cellpadding="0" style="font: 8pt Courier New, Courier, Monospace; width: 100%; border-collapse: collapse">
<tr>
<td style="vertical-align: bottom; width: 74%; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: justify"> </td>
<td style="vertical-align: top; width: 2%; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"> </td>
<td style="vertical-align: bottom; width: 11%; border-bottom: windowtext 1pt solid; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">12/31/2012</font></td>
<td style="vertical-align: bottom; width: 3%; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"> </td>
<td style="vertical-align: bottom; width: 10%; border-bottom: windowtext 1pt solid; padding-right: -5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">12/31/2011</font></td></tr>
<tr>
<td style="vertical-align: top; padding-right: 5.4pt; padding-left: 5.4pt">
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify"><font style="color: black"><u>Secured
note payable to related party:</u> During 2007, the Company entered into a line of credit agreement with SAI Corporation ("SAIC"),
a corporation controlled by our CEO, Stephen J. Sperco, to borrow up to $500,000. The line of credit has been amended several times
due to Bluegate’s need to borrow funds for working capital purposes and has been increased to $1,250,000.</font> <font style="color: black">As
a condition to and as additional consideration for SAIC’s agreement to lend additional funds to the Company, the Company
granted SAIC a security interest in its assets as more specifically detailed in the Promissory Note and Security Agreement. </font>Principal
and interest is due on demand. Interest is at the rate of 15% per <font style="color: black">annum and </font>payments are due
and payable monthly at the end of each month until the outstanding principal balance is paid in full. The Company agreed to pay
a late charge in the amount of $10,000 on any interest payment more than fifteen days delinquent.<font style="color: black"> During
2012, Bluegate borrowed $45,000 for working capital purposes.</font></p>
<p style="font: 8pt/115% Courier New, Courier, Monospace; margin: 0 0 10pt; text-align: justify"> </p></td>
<td style="vertical-align: bottom; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="vertical-align: bottom; border-bottom: windowtext 1.5pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">1,245,000 </font></td>
<td style="vertical-align: bottom; padding-right: -5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; line-height: 115%; text-align: center"><font style="font: 8pt/115% Courier New, Courier, Monospace; color: black">$</font></td>
<td nowrap="nowrap" style="vertical-align: bottom; border-bottom: windowtext 1.5pt double; padding-right: 5.4pt; padding-bottom: 10pt; padding-left: 5.4pt; text-align: right; line-height: 115%"><font style="font: 8pt/115% Courier New, Courier, Monospace">1,200,000</font></td></tr>
</table>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0">3. <u>ACCOUNTS RECEIVABLE, NET</u></p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0">Accounts receivable, net consists of the following at December
31, 2012 and 2011:</p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0"> </p>
<table cellspacing="0" cellpadding="0" style="font: 8pt Courier New, Courier, Monospace; width: 100%; border-collapse: collapse">
<tr style="vertical-align: top">
<td style="width: 70%; padding-right: 0.45pc; padding-left: 0.45pc"> </td>
<td style="width: 2%; padding-right: 0.45pc; padding-left: 0.45pc"> </td>
<td style="width: 13%; border-bottom: windowtext 1pt solid; padding-right: 0.45pc; padding-left: 0.45pc; text-align: center"><font style="font: 8pt Courier New, Courier, Monospace">2012</font></td>
<td style="width: 2%; padding-right: 0.45pc; padding-left: 0.45pc"> </td>
<td style="width: 13%; border-bottom: windowtext 1pt solid; padding-right: 0.45pc; padding-left: 0.45pc; text-align: center"><font style="font: 8pt Courier New, Courier, Monospace">2011</font></td></tr>
<tr style="vertical-align: top">
<td style="padding-right: 0.45pc; padding-left: 0.45pc"><font style="font: 8pt Courier New, Courier, Monospace">Accounts receivable</font></td>
<td style="padding-right: 0.45pc; padding-left: 0.45pc"><font style="font: 8pt Courier New, Courier, Monospace">$</font></td>
<td style="padding-right: 0.45pc; padding-left: 0.45pc; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace">3,281</font></td>
<td style="padding-right: 0.45pc; padding-left: 0.45pc"><font style="font: 8pt Courier New, Courier, Monospace">$</font></td>
<td style="padding-right: 0.45pc; padding-left: 0.45pc; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace">2,616</font></td></tr>
<tr style="vertical-align: top">
<td style="padding-right: 0.45pc; padding-left: 0.45pc"><font style="font: 8pt Courier New, Courier, Monospace">Less allowance for bad debts</font></td>
<td style="padding-right: 0.45pc; padding-left: 0.45pc"> </td>
<td style="border-bottom: windowtext 1pt solid; padding-right: 0.45pc; padding-left: 0.45pc; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace">(48)</font></td>
<td style="padding-right: 0.45pc; padding-left: 0.45pc"> </td>
<td style="border-bottom: windowtext 1pt solid; padding-right: 0.45pc; padding-left: 0.45pc; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace">(48)</font></td></tr>
<tr style="vertical-align: top">
<td style="padding-right: 0.45pc; padding-left: 0.45pc"> </td>
<td style="padding-right: 0.45pc; padding-left: 0.45pc"> </td>
<td style="border-bottom: windowtext 1.5pt double; padding-right: 0.45pc; padding-left: 0.45pc; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace">3,233</font></td>
<td style="padding-right: 0.45pc; padding-left: 0.45pc"> </td>
<td style="border-bottom: windowtext 1.5pt double; padding-right: 0.45pc; padding-left: 0.45pc; text-align: right"><font style="font: 8pt Courier New, Courier, Monospace">2,568</font></td></tr>
</table>
<p style="font: 8pt Times New Roman, Times, Serif; margin: 0"> </p>
<p style="margin: 0pt"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt"><u>ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS</u></p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">Accounts receivable are amounts due on sales, are unsecured and
are carried at their estimated collectible amounts. Credit is generally extended on a short-term basis; thus accounts receivable
do not bear interest although a finance charge may be applied to such receivables that are more than thirty days past due. Accounts
receivable are periodically evaluated for collectability based on past credit history with clients. Provisions for losses on accounts
receivable are determined on the basis of loss experience, known and inherent risk in the account balance and current economic
conditions.  In February 2008, as a result of the transaction described in footnote 5 – note payable to related
party and footnote 8 – stockholders’ deficit, as condition to and as additional consideration for SAI Corporation’s
(“SAIC”) agreement to lend funds to the Company, the Company granted SAIC a security interest in its assets as more
specifically detailed in the Promissory Note and Security Agreement.</p>
<p style="margin: 0pt"></p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"><u>SIGNIFICANT ESTIMATES</u></p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of revenues and expenses during the periods. Actual results could
differ from estimates making it reasonably possible that a change in the estimates could occur in the near term.</p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"><u>RECLASSIFICATIONS</u></p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">Certain prior year amounts have been reclassified
to conform to the current year presentation.</p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"><u>EMBEDDED CONVERSION FEATURES</u></p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify"> </p>
<p style="font: 8pt Courier New, Courier, Monospace; margin: 0 0 0 20pt; text-align: justify">Bluegate evaluates embedded conversion features
within convertible debt and convertible preferred stock under ASC 815-15 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 ASC 815-15, the instrument is evaluated under ASC 470-20
and ASC 470-20 for consideration of any beneficial conversion feature.</p>
Asset Purchase & Sale Agreement entered into with SLLC during November, 2009
Owed to former Board Director, Dale Geary.
Owed to Director, Stephen J. Sperco.
Accrued through December 31, 2008
Accrued through March 31, 2009.
The majority of the unused net operating loss carryforward is limited to an annual amount of $270,000 due to the change in control on June 28, 2007.
Total settlement of $30,000; $20,000 paid on September 22, 2011; Balance due in 10 equal monthly installments of $1,000.
No single customer accounted for more than 10% of service revenue
No single vendor accounted for more than 50% of purchases.
Series C Preferred Stock sold for cash to SAI Corporation ("SAIC)", a corporation controlled by Stephen Sperco ("Sperco").
Pursuant to the adjustment provisions, the exercise price of the previously issued warrants to purchase 6,000,000 common shares at $0.17 per share was reduced to $0.0333334 per share.
Sold to SAIC in conjunction with the modification of an existing Promissory Note and Security Agreement. See Note 5.
On January 1, 2009, as a result of ASC 815, 9,034,800 of Bluegate's outstanding warrants that were previously classified as equity were reclassified to derivative liabilities.