UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549










FORM
10-Q








(MARK
      ONE)x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended December 31,
      2009ORo
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from  ______________ to
      ______________





COMMISSION
FILE NUMBER: 0-28749





Rahaxi,
Inc.


(Exact
Name of Company as Specified in Its Charter)





Nevada
            88-0446457(State
      or Other Jurisdiction of Incorporation or Organization)
            (I.R.S.
      Employer Identification No.)





Wicklow
Enterprise Centre, The Murrough,


Wicklow
Town,  County Wicklow, Republic of Ireland


(Address
of Principal Executive Offices)





353-404-66433


(Company's
Telephone Number)





______________________________________________________________________


(Former
Name, Former Address, and Former Fiscal Year, if Changed Since Last
Report)





Securities
registered under Section 12 (b) of the Exchange Act: None





Securities
registered under Section 12(g) of the Exchange Act:


Common
Stock - $0.001 par value





Check
whether the issuer has (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period the Company was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes xNoo





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes r    No r [Not Applicable to
Smaller Reporting Companies]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of "accelerated filer and large accelerated filer in Rule 12b-2 of
the Exchange Act. (Check one):





Large
accelerated filero
Accelerated filero
Non-accelerated filero Smaller reporting companyx





Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2of the Exchange Act. Yeso  Nox





APPLICABLE
ONLY TO CORPORATE ISSUERS





As
of  February 16, 2010 there were 537,317,413shares (post reverse split) of Common Stock issued and
outstanding.


Table of Contents





TABLE OF
CONTENTS





PAGEPART IFINANCIAL
      INFORMATIONITEM
      1.
            FINANCIAL STATEMENTS
      (UNAUDITED)
            F-1CONDENSED CONSOLIDATED BALANCE
      SHEETS AS OF DECEMBER 31, 2009 AND JUNE
      30, 2009
            F-1CONDENSED CONSOLIDATED
      STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31,
      2009 AND 2008
            F-2CONDENSED CONSOLIDATED
      STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER 31, 2009 AND
      2008
            F-3NOTES TO CONDENSED CONSOLIDATED
      FINANCIAL STATEMENTS
            F-4 to
      F-17ITEM
      2.
            MANAGEMENT'S DISCUSSION AND ANALYSIS
      OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
            3ITEM
      3
            QUANTITATIVE  AND
      QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            13ITEM
      4.
            CONTROLS AND
      PROCEDURES
            13PART IIOTHER
      INFORMATIONITEM
      1.
            LEGAL
      PROCEEDINGS
            14ITEM
      1A
            RISK
    FACTORS
            15ITEM
      2.
            UNREGISTERED SALES OF EQUITY
      SECURITIES AND USE OF PROCEEDS
            20ITEM
      3.
            DEFAULTS UPON SENIOR
      SECURITIES
            20ITEM
      4.
            SUBMISSION OF MATTERS TO A VOTE OF
      SECURITY HOLDERS
            20ITEM
      5.
            OTHER
      INFORMATION
            20ITEM
      6.
            EXHIBITS
            20SIGNATURES
            21





Table of Contents


RAHAXI, INC.


CONDENSED CONSOLIDATED BALANCE

SHEETS




December
      31,
            
            
            June
      30,ASSETS
            
            2009
            
            
            2009(Unaudited)Current
      assets:Cash
      and cash equivalents
            
            $
            318,047
            
            
            $
            345,842Accounts
      receivable, net of allowance for doubtful accounts of
    $125,461and
      $87,113 at December 31, 2009 and June 30, 2009,  respectively
      (note 2)
            
            
            451,012
            
            
            
            612,463Other
      current assets (note 3)
            
            
            173,394
            
            
            
            136,585Inventory
      (note 4)
            
            
            531,003
            
            
            
            562,875Total
      current assets
            
            
            1,473,456
            
            
            
            1,657,765Property,
      plant and equipment, net of accumulated depreciation and amortization
      of$367,235
      and $328,119 at December 31, 2009 and June 30, 2009, respectively (note
      5)
            
            
            53,719
            
            
            
            84,766Customer
      relationships and contracts, net of accumulated amortization of
      $1,623,293and
      $1,468,333 at December 31, 2009 and June 30, 2009, respectively (note
      6)
            
            
            1,325,956
            
            
            
            1,480,916Other
      assets
            
            
            28,085
            
            
            
            -Total
      assets
            
            $
            2,881,216
            
            
            $
            3,223,447LIABILITIES
      AND DEFICITCurrent
      liabilities:Accounts
      payable and accrued expenses (note 7)
            
            $
            4,471,551
            
            
            $
            4,132,127Notes
      payable, current portion (note 8)
            
            
            725,485
            
            
            
            50,000Notes
      payable - related parties, current portion (note 8, 9)
            
            
            -
            
            
            
            611,000Due
      to related parties (note 9)
            
            
            578,343
            
            
            
            193,446Deferred
      revenue
            
            
            326,865
            
            
            
            246,341Total
      current liabilities
            
            
            6,102,244
            
            
            
            5,232,914Long-term
      portion of notes payable
            
            
            887,977
            
            
            
            457,419Total
      liabilities
            
            
            6,990,221
            
            
            
            5,690,333Commitments
      and contingenciesDeficit:  (notes
      10, 11)Convertible
      preferred stock, total authorized 10,000,000 shares
    (1,000,000designated
      series A; 4,000,000 designated series
      B; 5,000,000 undesignatedConvertible preferred stock, series A,
      $0.001 par value, 1,000,000 sharesand outstanding at December 31, 2009 and June 30, 2009
            
            
            1,000
            
            
            
            1,000Convertible
      preferred stock, series B,
      $0.001 par value,no shares and outstanding at December 31, 2009 and June 30,
      2009
            
            
            -
            
            
            
            -Additional
      paid-in capital - preferred stock
            
            
            432,058
            
            
            
            432,058Common
      stock, $0.001 par value, 1,000,000,000 shares
      authorized;  517,055,413and
      454,312,663 shares issued and outstanding at December 31,
    2009and
      June 30, 2009, respectively
            
            
            517,054
            
            
            
            454,312Additional
      paid-in capital - common stock
            
            
            111,925,510
            
            
            
            110,720,243Common
      stock subscriptions receivable
            
            
            (25,620
            )
            
            
            (25,620
            )Common
      stock subscribed
            
            
            460,777
            
            
            
            660,777Accumulated
      deficit
            
            
            (118,152,243
            )
            
            
            (115,552,958
            )Accumulated
      other comprehensive gain
            
            
            238,680
            
            
            
            310,517Total
      Rahaxi stockholders' equity
            
            
            (4,602,784
            )
            
            
            (2,999,671
            )Non-controlling
      interest
            
            
            493,779
            
            
            
            532,785Total
      deficit
            
            
            (4,109,005
            )
            
            
            (2,466,886
            )Total
      liabilities and deficit
            
            $
            2,881,216
            
            
            $
            3,223,447





The
accompany notes form an integral part of these unaudited condensed consolidated
financial statements.  F-1
 Table of Contents




RAHAXI, INC.


CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


FOR
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2009 AND 2008


(Unaudited)




For
      the Three
            
            
            For
      the Three
            
            
            For
      the Six
            
            
            For
      the SixMonths
      Ended
            
            
            Months
      Ended
            
            
            Months
      Ended
            
            
            Months
      EndedDecember
      31,
            
            
            December
      31,
            
            
            December
      31,
            
            
            December
      31,2009
            
            
            2008
            
            
            2009
            
            
            2008RevenueTransaction
      processing
            
            $
            581,904
            
            
            $
            494,349
            
            
            $
            1,050,615
            
            
            $
            1,058,762Consulting
      services
            
            
            379,996
            
            
            
            523,227
            
            
            
            752,054
            
            
            
            1,041,576Hardware
      and related
            
            
            474,256
            
            
            
            358,192
            
            
            
            871,429
            
            
            
            521,915Total
      revenue
            
            
            1,436,156
            
            
            
            1,375,768
            
            
            
            2,674,098
            
            
            
            2,622,253Cost
      of revenueTransaction
      processing
            
            
            258,045
            
            
            
            274,293
            
            
            
            461,891
            
            
            
            627,307Consulting
      services
            
            
            316,307
            
            
            
            295,599
            
            
            
            515,770
            
            
            
            536,489Hardware
      and related
            
            
            192,166
            
            
            
            100,428
            
            
            
            431,228
            
            
            
            236,881Total
      cost of sales
            
            
            766,518
            
            
            
            670,320
            
            
            
            1,408,889
            
            
            
            1,400,677Gross
      profit (loss)
            
            
            669,638
            
            
            
            705,448
            
            
            
            1,265,209
            
            
            
            1,221,576Selling,
      general and administrative expenses
            
            
            2,111,499
            
            
            
            4,753,853
            
            
            
            3,741,417
            
            
            
            8,545,749Loss
      from operations
            
            
            (1,441,861
            )
            
            
            (4,048,405
            )
            
            
            (2,476,208
            )
            
            
            (7,324,173
            )Other
      income (expenses):Financing
      cost
            
            
            -
            
            
            
            (1,131,590
            )
            
            
            -
            
            
            
            (1,131,590
            )Interest
      income/(expense)
            
            
            (96,153
            )
            
            
            (19,603
            )
            
            
            (170,306
            )
            
            
            (32,187
            )Loss
      before income taxes and non-controlling  interest in
      subsidiaries
            
            
            (1,538,014
            )
            
            
            (5,199,598
            )
            
            
            (2,646,514
            )
            
            
            (8,487,950
            )Income
      taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      Loss
            
            
            (1,538,014
            )
            
            
            (5,199,598
            )
            
            
            (2,646,514
            )
            
            
            (8,487,950
            )Net
      loss attributable to non-controlling interest
            
            
            (71,008
            )
            
            
            (8
            )
            
            
            (47,229
            )
            
            
            63,612Net
      loss attributable to Rahaxi shareholders
            
            
            (1,467,006
            )
            
            
            (5,199,590
            )
            
            
            (2,599,285
            )
            
            
            (8,551,562
            )Loss
      per share - basic and diluted
            
            $
            (0.00
            )
            
            $
            (0.03
            )
            
            $
            (0.01
            )
            
            $
            (0.06
            )Weighted
      average shares outstanding - basic
            
            
            494,455,784
            
            
            
            149,321,431
            
            
            
            484,303,734
            
            
            
            143,775,652Weighted
      average shares outstanding - diluted
            
            
            494,455,784
            
            
            
            149,321,431
            
            
            
            484,303,734
            
            
            
            143,775,652




Net
      loss
            
            
            (1,538,014
            )
            
            
            (5,199,598
            )
            
            
            (2,646,514
            )
            
            
            (8,487,950
            )Other
      comprehensive income (loss), net of tax
            
            
            (15,767
            )
            
            
            30,596
            
            
            
            (71,837
            )
            
            
            203,871Comprehensive
      loss
            
            
            (1,553,781
            )
            
            
            (5,169,002
            )
            
            
            (2,718,351
            )
            
            
            (8,284,079
            )Net
      income (loss) applicable to non-controlling interests
            
            
            (71,008
            )
            
            
            (8
            )
            
            
            (47,229
            )
            
            
            63,612Other
      comprehensive income (loss) applicable to non-controlling
      interests
            
            
            426
            
            
            
            79
            
            
            
            6,082
            
            
            
            2,728Comprehensive
      loss applicable to Rahaxi
            
            $
            (1,483,199
            )
            
            $
            (5,169,073
            )
            
            $
            (2,677,204
            )
            
            $
            (8,350,419
            )




The
accompany notes form an integral part of these unaudited condensed consolidated
financial statements.




F-2
 Table of Contents




RAHAXI,
INC.


CONDENSED CONSOLIDATED STATEMENTS OF 
CASH
FLOWS


FOR
THE SIX MONTHS ENDED DECEMBER 31, 2009 AND 2008


(Unaudited)




For
      the Six
            
            
            For
      the SixMonths
      Ended
            
            
            Months
      EndedDecember
      31,
            
            
            December
      31,2009
            
            
            2008Cash
      flows used for operating activities:Net
      loss
            
            $
            (2,646,514
            )
            
            $
            (8,487,950
            )Adjustments
      to reconcile net loss to net cashprovided
      by (used by) operating activities:Bad
      debt expense
            
            
            -
            
            
            
            (30,353
            )Depreciation
      and amortization
            
            
            189,974
            
            
            
            188,854Non-cash
      financing cost
            
            
            -
            
            
            
            1,131,590Non-cash
      compensation
            
            
            707,885
            
            
            
            4,828,255Changes
      in assets and liabilities:(Increase)
      decrease in assetsAccounts
      receivable
            
            
            149,330
            
            
            
            545,023Inventory
            
            
            23,489
            
            
            
            81,645Other
      assets
            
            
            (65,272
            )
            
            
            (25,213
            )Increase
      (decrease) in liabilitiesAccounts
      payable and accrued expenses
            
            
            396,024
            
            
            
            (190,087
            )Deferred
      revenue
            
            
            80,524
            
            
            
            (11,810
            )Accrual
      of salary to officers
            
            
            339,140
            
            
            
            124,421Total
      adjustments
            
            
            1,773,865
            
            
            
            6,705,937Net
      cash used by operating activities
            
            
            (825,420
            )
            
            
            (1,845,625
            )Cash
      flows provided by investing activities:Purchase
      of fixed assets
            
            
            (2,380
            )
            
            
            -Net
      cash used by investing activities
            
            
            (2,380
            )
            
            
            -Cash
      flows provided by financing activities:Proceeds
      from sale of common stock
            
            
            137,562
            
            
            
            -Proceeds
      from issuance of notes payable
            
            
            450,359
            
            
            
            311,000Proceeds
      from issuance of notes payable - related party
            
            
            45,757
            
            
            
            300,000Proceeds
      from exercise of stock options/warrants
            
            
            222,562
            
            
            
            824,012Cash
      contributed by officer of subsidiary
            
            
            -
            
            
            
            35,857Net
      cash provided by financing activities
            
            
            856,240
            
            
            
            1,470,869Net
      increase (decrease) in cash and cash equivalents
            
            
            28,440
            
            
            
            (374,756
            )Foreign
      currency translation adjustments
            
            
            (56,235
            )
            
            
            405,165Cash
      and cash equivalents, beginning of period
            
            
            345,842
            
            
            
            692,802Cash
      and cash equivalents, end of period
            
            $
            318,047
            
            
            $
            723,211Supplemental
      disclosure of cash flow information:Interest
      paid
            
            $
            92,262
            
            
            $
            -Income
      tax paid
            
            $
            -
            
            
            $
            -Common
      stock issued to consultants for services
            
            $
            449,600
            
            
            $
            -Common
      stock issued to employees as compensation
            
            $
            21,780
            
            
            $
            168,000Common
      stock issued to director
            
            $
            -
            
            
            $
            125,000Fair
      value of options issued to consultants and employees
            
            $
            236,505
            
            
            $
            716,906Common
      stock issued to a director for services
            
            $
            -
            
            
            $
            3,818,348Common
      stock issued for rent
            
            $
            -
            
            
            $
            72,000Common
      stock issued as financing cost
            
            $
            -
            
            
            $
            1,131,590





The
accompany notes form an integral part of these unaudited condensed consolidated
financial statements.


F-3
 Table of Contents




RAHAXI,
INC.


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009


(UNAUDITED)





1.
BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS





Basis Of
Presentation





The
accompanying unaudited condensed consolidated financial statements of Rahaxi,
Inc., a Nevada corporation ("Company"), have been prepared in accordance with
the instructions to Form 10-Q and do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete consolidated financial statements. These
condensed consolidated financial statements and related notes should be read in
conjunction with the Company's Form 10-K for the fiscal year ended June 30,
2009. In the opinion of management, these unaudited condensed consolidated
financial statements reflect all adjustments that are of a normal recurring
nature and which are necessary to present fairly the financial position of the
Company as of December 31, 2009, and the results of operations for the three and
six months ended December 31, 2009 and 2008, and cash flows for six months ended
December 31, 2009 and 2008. The results of operations for the three and six
months ended December 31, 2009 are not necessarily indicative of the results
that may be expected for the entire fiscal year.





Nature Of Business
Operations





The
Company was formed on November 17, 1999 as a Nevada corporation. The Company is
a provider of payment services and processing. Its principal offices are in
Wicklow, Ireland; the Company also has offices in Helsinki, Finland; and
Santo Domingo, the Dominican Republic.  On November 21, 2008, we
filed a Certificate of Amendment to our Articles of Incorporation with the
Nevada Secretary of State changing our name to “Rahaxi, Inc.” and implementing a
one-for-three reverse stock split of our common stock.





The  Company  derives  revenues  from  its
core  payment  processing products,  which
include:  (1) Authorization / Transaction Fees:  transaction
fees it receives from processing point of sale terminal
transactions;  (2) Hardware Sales / Point of Sale Terminals: sales of
“Point of Sale” terminals and related maintenance and service initiation fees;
(3) Dynamic  Currency  Conversion:  in addition to
transaction authorization, the Company offers certain clients real-time, dynamic
currency conversion, allowing a customer to pay for a product or service with
their credit card in their local currency;  (4) Private
Label Cards:  transaction  management services
provided for a private label card issuer;  (5) Consulting Fees: consulting
services provided to financial institutions and merchants;
and (6)  Electronic PIN distribution application for point of
sale solutions in association with some of the most important telecommunications
companies in the Dominican Republic and Haiti.





Going
Concern





The
accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the Company as a
going concern. However, the Company has reported a net loss of
$1,538,014 and $2,646,514 for the three and six months ended December 31,
2009, respectively, and $17,983,146 for the year ended June 30, 2009, and had an
accumulated deficit of $118,152,243 as of December 31, 2009.





The
Company believes that anticipated revenues from operations will be insufficient
to satisfy its ongoing capital requirements for the next 12
months.  If the Company’s financial resources are insufficient, the
Company will require additional financing in order to execute its operating plan
and continue as a going concern. The Company cannot predict whether this
additional financing will be in the form of equity or debt, or be in another
form. The Company may not be able to obtain the necessary additional capital on
a timely basis, on acceptable terms, or at all.  In any of these
events, the Company may be unable to implement its current plans for expansion,
repay its debt obligations as they become due, or respond to competitive
pressures, any of which circumstances would have a material adverse effect on
its business, prospects, financial condition and results of
operations.





F-4
 Table of Contents




RAHAXI,
INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009


(UNAUDITED)





Management
is pursuing all available options to provide the Company with the
ability to continue as a going concern.  The Company continues to
pursue financing through the sale of its stock in private placements to
individual investors.  However, given the challenges presented by the
current capital markets, as well as the decline in the Company’s stock price and
the Company’s continued losses, management is considering a broader range of
options, which may include a registered offering for investors, additional debt
issuances or financings at the subsidiary level, such as the sale of a portion
of Rahaxi Processing Oy. The Company may also pursue the
acquisition of certain strategic industry partners where
appropriate.





Revenue
Recognition





The
Company recognizes revenues from contracts in which the Company provides only
consulting services as the services are performed. The contractual terms of the
agreements dictate the recognition of revenue by the Company. Payments received
in advance are deferred until the service is provided.





Contract
costs include all direct equipment, material, and labor costs and those indirect
costs related to contract performance, such as indirect labor. Selling, general
and administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in contract performance, contract conditions, and
estimated profitability that may result in revisions to costs and income are
recognized in the period in which the revisions are determined.





For
revenue from product sales, the Company recognizes revenue in accordance with
Financial Accounting Standards Board (“FASB) Accounting Standards Codification
(“ASC”) 605-15-15 (formerly referred to as Staff Accounting Bulletin ("SAB") No.
104, "Revenue Recognition," which superseded SAB No. 101, "Revenue Recognition
in Financial Statements.") ASC 605-15-15 requires that four basic criteria must
be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred; (3) the selling price is fixed
and determinable; and (4) collectability is reasonably assured. Determination of
criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the selling prices of the products delivered and the collectability of
those amounts. Provisions for discounts and rebates to customers, estimated
returns and allowances, and other adjustments are provided for in the same
period the related sales are recorded. The Company defers any revenue for which
the product has not been delivered or is subject to refund until such time that
the Company and the customer jointly determine that the product has been
delivered or no refund will be required. ASC 605-15-15 incorporates ASC
605-25-05 (formerly referred to as Emerging Issues Task Force ("EITF") No.
00-21, "Multiple-Deliverable Revenue Arrangements.") ASC 605-15-15 addresses
accounting for arrangements that may involve the delivery or performance of
multiple products, services and/or rights to use assets. The effect of
implementing ASC 605-25-05 on the Company's consolidated financial position and
results of operations was not significant. This issue addresses determination of
whether an arrangement involving more than one deliverable contains more than
one unit of accounting and how the arrangement consideration should be measured
and allocated to the separate units of accounting. ASC 605-25-05 became
effective for revenue arrangements entered into in periods beginning after June
15, 2003. For revenue arrangements occurring on or after August 1, 2003, the
Company revised its revenue recognition policy to comply with the provisions of
ASC 605-25-05.





F-5
 Table of Contents


RAHAXI,
INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009


(UNAUDITED)





For those
contracts which contain multiple deliverables, management must first determine
whether each service,  or deliverable, meets the separation criteria
of ASC 605-25-05.  In general, a deliverable (or a group of
deliverables) meets the separation criteria if the deliverable has standalone
value to the customer and if there is objective and reliable evidence of the
fair value of the remaining deliverables in the arrangement.  Each
deliverable that meets the separation criteria is considered a “separate unit of
accounting.”  Management allocates the total arrangement consideration
to each separate unit of accounting based on the relative fair value of each
separate unit of accounting.  The amount of arrangement consideration
that is allocated to a unit of accounting that has already been delivered is
limited to the amount that is not contingent upon the delivery of another
separate unit of accounting.  After the arrangement consideration has
been allocated to each separate unit of accounting, management applies the
appropriate revenue recognition method for each separate unit of accounting as
described previously based on the nature of the arrangement.  All
deliverables that do not meet the separation criteria of ASC 605-25-05 are
combined into one unit of accounting, and the appropriate revenue recognition
method is applied under ASC 605-15-15.  Processing fee revenue is
earned based upon the actual number of transactions processed through the
Company’s processing system.  Transaction processing fees are
recognized in the period that the service is performed.  These fees
are typically charged on a per transaction basis, depending on the arrangement
with the customer.  Maintenance fees for processing terminals are
recognized over the period for which maintenance is provided.





The
Company’s subsidiary Rahaxi Processing Oy, charges certain customers for
one-time initiation fees and annual maintenance
fees.    These fees are charged to deferred revenue when
billed, and  revenue from these fees is recognized straight-line over
the billing coverage period, typically twelve months.





Stock Based
Compensation





Effective
January 1, 2006, the Company adopted ASC 718-10 (formerly referred to as SFAS
No. 123 (revised), “Share-Based Payment” (SFAS 123R)) utilizing the modified
prospective approach.





Aggregate
intrinsic value of options outstanding and options exercisable at December 31,
2009 was $0. Aggregate intrinsic value represents the difference between the
Company's closing stock price on the last trading day of the fiscal period,
which was $0.02 as of December 31, 2009, and the exercise price multiplied by
the number of options outstanding.  As of September 30, 2009, total
unrecognized stock-based compensation expense related to non-vested stock
options was $0. The total fair value of options vested was $0 for the three and
six month periods ended December 31, 2009 and 2008.





Capitalized Software
Development Costs





In
accordance with ASC 985-20-15 (formerly referred to as Statement of Financial
Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed,") the Company capitalizes
certain costs related to the development of new software products or the
enhancement of existing software products for use in our transaction processing
software. These costs are capitalized from the point in time that technological
feasibility has been established, as evidenced by a working model or detailed
working program design to the point in time that the product is available for
general release to customers. Capitalized development costs are amortized on a
straight-line basis over the estimated economic lives of the products, beginning
when the product is placed into service. Research and development costs incurred
prior to establishing technological feasibility and costs incurred subsequent to
general product release to customers are charged to expense as incurred. The
Company periodically evaluates whether events or circumstances have occurred
that indicate that the remaining useful lives of the capitalized software
development costs should be revised or that the remaining balance of such assets
may not be recoverable.


F-6
 Table of Contents


RAHAXI,
INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009


(UNAUDITED)





The
Company often has under development several discreet design features or
enhancements, each of which may be completed and released to customers at
different times. During the year ended June 30, 2008, the Company recognized an
impairment of its software and software licenses in the amount of
$4,086,502.  The total net book value of software in service at
December 31, 2009 is $0.  Total amortization expense related to
software and software licenses charged to operations for the three and six
months ended December 31, 2009 and 2008 was $0.





Impairment of Long-Lived
Assets





The
Company has adopted ASC 360-10-15 (formerly referred to as Statement of
Financial Accounting Standards No. 144 (SFAS 144)).  The
Statement   requires that long-lived assets and certain
identifiable intangibles held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.  Events relating to recoverability
may include significant unfavorable changes in business conditions, recurring
losses, or a forecasted inability to achieve break-even operating results over
an extended period. The Company evaluates the recoverability of long-lived
assets based upon forecasted undercounted cash flows. Should impairment in value
be indicated, the carrying value of intangible assets will be adjusted, based on
estimates of future discounted cash flows resulting from the use and ultimate
disposition of the asset.  ASC 360-10-15 also requires assets to be
disposed of be reported at the lower of the carrying amount or the fair value
less costs to sell.





During
the year ended June 30, 2009, the Company management performed an evaluation of
its intangible assets (capitalized software) for purposes of determining the
implied fair value of the assets at June 30, 2009. The test indicated that the
recorded remaining book value of its intellectual property exceeded its fair
value, as determined by discounted cash flows.  As a result, upon
completion of the assessment, management recorded a non-cash impairment charge
of $4,086,502, net of tax, or $0.042  per share (post reverse-split)
during the year ended June 30, 2009 to reduce the carrying value of the
capitalized software to $0. Considerable management judgment is necessary to
estimate the fair value.  Accordingly, actual results could vary
significantly from management’s estimates.





Inventories





Inventory
is stated at the lower of cost or market determined by the first-in, first-out
method. Inventories consist primarily of equipment held for resale.





Noncontrolling
Interest




Non-controlling
interest consists of the minority owned portion of the Company’s 50% owned
subsidiary PLC Partners.





The
adoption of ASC 810-10-65 did not have a material effect on the Company’s
financial condition, results of operations or cash flows as of December 31, 2009
and June 30, 2009, respectively. However, as a result of the retrospective
presentation and disclosure requirements of ASC 810-10-65, the adoption of ASC
810-10-65 did affect the presentation and disclosure of noncontrolling
interests.





ASC
810-10-65 establishes new standards that govern the accounting for and reporting
of (1) noncontrolling interest in partially owned consolidated subsidiaries and
(2) the loss of control of subsidiaries. Significant changes to the
accounting for noncontrolling interests include (a) the inclusion of
noncontrolling interests in the equity section of the controlling entity’s
condensed consolidated balance sheet rather than in the mezzanine section and
(b) the requirement that changes in the controlling entity’s interest in
the noncontrolling interest, without a change in control, be recognized in the
controlling entity’s equity rather than being accounted for by the purchase
method, which accounting under the purchase method would have given rise to
goodwill.





Additionally,
the adoption of ASC 810-10-65 requires that net income, as previously reported
prior to the adoption of ASC 810-10-65, be adjusted to include the net income
attributable to the noncontrolling interest, and that a new separate caption for
net income attributable to common shareholders be presented in the condensed
consolidated statements of operations. ASC 810-10-65 also requires similar
disclosure regarding comprehensive income.





New Accounting
Pronouncements





The
following accounting guidance has been issued and will be effective for the
Company in or after fiscal year 2009:


F-7
 Table of Contents




RAHAXI,
INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009


(UNAUDITED)




In
October 2009, the FASB issued Accounting Standard Update (“ASU”)
No. 2009-13 on Topic 605, Revenue Recognition–Multiple Deliverable Revenue
Arrangements – a consensus of the FASB Emerging Issues Task Force(“ASU
2009-13”).The
objective of ASU 2009-13 is to address the accounting for multiple-deliverable
arrangements to enable vendors to account for products or services
(deliverables) separately rather than as a combined unit. Vendors often provide
multiple products or services to their customers. Those deliverables often are
provided at different points in time or over different time periods. ASU 2009-13
provides amendments to the criteria in Subtopic 605-25, Multiple-Element Arrangements
(“Subtopic 605-25”) for separating consideration in multiple-deliverable
arrangements. The amendments in ASU 2009-13 establish a selling price hierarchy
for determining the selling price of a deliverable. The selling price used for
each deliverable will be based on vendor specific objective evidence if
available, third-party evidence if vendor-specific objective evidence is not
available, or estimated selling price if neither vendor specific objective
evidence nor third-party evidence is available. The amendments in ASU 2009-13
also will replace the term fair value in the revenue allocation guidance with
selling price to clarify that the allocation of revenue is based on
entity-specific assumptions rather than assumptions of a marketplace
participant. ASU 2009-13 is effective for fiscal years beginning on or after
June 15, 2010. Early adoption is permitted and can be applied prospectively
or retrospectively. The Company is currently evaluating the impact, if any,
ASU 2009-13 will have on its consolidated financial
statements.





In
October 2009, the FASB issued ASU No. 2009-14 on Topic 985, Software – Certain Revenue Arrangements That
Include Software Elements – a consensus of the FASB Emerging Issues Task Force(“ASU 2009-14”).The objective of ASU 2009-14 is to address the accounting for revenue
arrangements that contain tangible products and software. Currently, products
that contain software that is “more than incidental” to the product as a whole
are within the scope of the software revenue guidance in Subtopic 985-605, Software – Revenue Recognition(“Subtopic 985-605”). Subtopic 985-605 requires a vendor to use a
vendor-specific objective evidence of selling price to separate deliverables in
a multiple-element arrangement. A vendor must sell or intend to sell a
particular element separately to assert vendor-specific objective evidence for
that element. If a vendor does not have vendor-specific objective evidence for
the undelivered elements in an arrangement, the revenue associated with both the
delivered and undelivered elements is combined into one unit of accounting. Any
revenue attributable to the delivered products is then deferred and recognized
at a later date, which in many cases is as the undelivered elements are
delivered by the vendor. The amendments in ASU 2009-14 will change the
accounting model for revenue arrangements that include both tangible products
and software elements. Tangible products containing software components and
nonsoftware components that function together to deliver the tangible product’s
essential functionality are no longer within the scope of the software revenue
guidance in Subtopic 985-605. In addition, the amendments in ASU 2009-14 require
that hardware components of the tangible product containing software components
always be excluded from the software revenue guidance. ASU 2009-14 is effective
for fiscal years beginning on or after June 15, 2010. Early adoption
is permitted and can be applied prospectively or retrospectively. The
Company is currently evaluating the impact, if any, of ASU 2009-14 will
have on its consolidated financial statements.





2.
ACCOUNTS RECEIVABLE





Accounts
receivable consists of the following:





December
      31,
            
            
            June
      30,2009
            
            
            2009Amounts
      receivable from customers
            
            $
            576,473
            
            
            $
            699,576Less:
      Reserve for doubtful accounts
            
            
            (125,461
            )
            
            
            (87,113
            )Accounts
      receivable, net
            
            $
            451,012
            
            
            $
            612,463





3.  OTHER
CURRENT ASSETS





Other
current assets  consist of the following:





December
      31,
            
            
            June
      30,2009
            
            
            2009Prepaid
      expenses
            
            $
            3,040
            
            
            $
            2,979Employee
      salary advances
            
            
            4,611
            
            
            
            2,480Other
      receivables
            
            
            18,640
            
            
            
            --Deposits
            
            
            147,103
            
            
            
            131,126Total
            
            $
            173,394
            
            
            $
            136,585





F-8
 Table of Contents


RAHAXI,
INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009


(UNAUDITED)





4.
INVENTORY





Inventory
consists of the Company's Point of Sale Terminals which have been purchased from
third party manufacturers. Components of inventories are as
follows:





December
      31,
            
            
            June
      30,2009
            
            
            2009Finished
      goods
            
            $
            531,003
            
            
            $
            562,875Total
            
            $
            531,003
            
            
            $
            562,875





5.
PROPERTY AND EQUIPMENT





A summary
of property and equipment is as follows:





December
      31,
            
            
            June
      30,2009
            
            
            2009Computer
      equipment
            
            $
            212,771
            
            
            $
            207,445Furniture
      and office equipment
            
            
            208,183
            
            
            
            205,440Less:
      accumulated depreciation
            
            
            (367,235
            )
            
            
            (328,119
            )Property
      and equipment, net
            
            $
            53,719
            
            
            $
            84,766





Total
depreciation and amortization expense for property and equipment amounted to
$94,887 and $95,120 for the three months ended December 31, 2009 and
2008, respectively. Total depreciation and amortization expense for property and
equipment amounted to $189,709 and $189,241 for the six months ended
December 31, 2009 and 2008, respectively.





6.
ACQUISITION OF INTANGIBLE ASSETS





The costs
to acquire intangible assets have been allocated to the assets acquired
according to the estimated fair values. The Company has adopted ASC 350-10-05
(formerly referred to as SFAS No. 142, Goodwill and Other Intangible Assets),
whereby the Company periodically tests its intangible assets for impairment. On
an annual basis, and when there is reason to suspect that their values have been
diminished or impaired, these assets are tested for impairment, and write-downs
will be included in results from operations.





The
identifiable intangible assets acquired and their carrying values at December
31, 2009 are:





Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            
            Net
            
            
            Residual
      Value
            
            
            Average
              Amortization
      YearsAmortizable
      Intangible Assets:Software
      and related development costs
            
            $
            1,542,315
            
            
            $
            1,542,315
            
            
            $
            -
            
            
            $
            -
            
            
            
            -Customer
      Relationships and Contracts
            
            $
            2,949,249
            
            
            $
            1,623,293
            
            
            $
            1,325,956
            
            
            $
            -
            
            
            
            10.0Software
      Licenses
            
            $
            1,194,422
            
            
            $
            1,194,422
            
            
            $
            -
            
            
            $
            -
            
            
            
            -





F-9
 Table of Contents


RAHAXI,
INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009


(UNAUDITED)





The
identifiable intangible assets acquired and their carrying values at June 30,
2009 are:





Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            
            Net
            
            
            Residual
      Value
            
            
            Average
              Amortization
      YearsAmortizable
      Intangible Assets:Software
      and related development costs
            
            $
            1,542,315
            
            
            $
            1,542,315
            
            
            $
            -
            
            
            $
            -
            
            
            
            -Customer
      Relationships and Contracts
            
            $
            2,949,249
            
            
            $
            1,468,333
            
            
            $
            1,480,916
            
            
            $
            -
            
            
            
            10.0Software
      Licenses
            
            $
            1,194,422
            
            
            $
            1,194,422
            
            
            $
            -
            
            
            $
            -
            
            
            
            -





Customer
relationships and contracts amortization expense charged to operations for the
six months ended December 31, 2009 and 2008 was $154,960 for each
period.





7.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES





Accounts
payable and accrued liabilities at December 31, 2009 and June 30, 2009 are as
follows:





December
      31,
            
            
            June
      30,2009
            
            
            2009Accounts
      payable and accrued expenses
            
            $
            3,705,434
            
            
            $
            3,567,973Accrued
      payroll and related expenses
            
            
            623,768
            
            
            
            491,755Accrued
      interest
            
            
            142,349
            
            
            
            72,399Total
            
            $
            4,471,551
            
            
            $
            4,132,127





8.    NOTES
PAYABLE





Convertible
Notes





In July
and August 2008, the Company signed four notes payable (the “Convertible
Notes”) in the aggregate principal amount of $611,000. The Convertible Notes
were originally due six months from the date of the notes, and bear interest at
the rate of 6% per annum.  In January and February 2009,
the Convertible Notes were extended to August 2009.  In August
2009, these notes were extended to February 10, 2010.   The Company
has the option to either repay the principal and accrued interest due under
the Convertible Notes in cash or in common stock.  If paid
in the form of common stock, the price will be 80% of the closing price of the
Company’s common stock on the date of the notes, which ranged from $0.150 to
$0.171.  During the three and six months ended December 31, 2009, the
Company accrued interest in the amount of $9,891 and $19,636,
respectively,  on the Convertible Notes.  At December 31,
2009, the principal and accrued interest of the Convertible Notes are
convertible into a total of 5,227,023 shares (post reverse split) of the
Company’s common stock.


F-10
 Table of Contents


RAHAXI,
INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009


(UNAUDITED)





April – May
Notes





In April
and May, 2009, the Company signed two notes payable (the “April –
May  Notes”) in the amount of €350,000 and
$50,000,  respectively.  The Company valued the €350,000
note at $457,419 on the date of the note.  The Company revalued
("foreign currency translation") the €350,000 note at December 31, 2009 to
the amount of $501,648.   The April – May  Notes bear
interest at the rate of 40% and 20%, respectively, and  have a term of
five years and one year, respectively.   These notes are
collateralized by an aggregate 9,062,000 shares (post reverse split) of common
stock of the Company.  During the three and six months ended December
31, 2009, the Company accrued interest in the total amount of $48,638 and
$102,644, respectively, the April – May Notes.





August – September
Notes





In August
and September, 2009, the Company signed two notes payable (the “August –
September Notes”).   The first note has two separately stated
principle amounts: $200,000 and €130,000.  The Company revalued
the €130,000 at December 31, 2009 in the amount of $186,329, for an aggregate
principal in the amount of U.S. dollars of $386,329.  The second note
is in the principal amount of $64,485.  The August – September
Notes bear interest at the rate of 20% per annum and have a term of two years
and one year, respectively.  During the three and six ended December
31, 2009, the Company accrued interest in the total amount of $22,894 and
$32,900, respectively, the August – September Notes.





9.
            DUE
      TO RELATED PARTIES





The
Company’s President and Chief Executive Officer (“CEO”) and the Company’s
Chief Financial Officer (“CFO”) occasionally forego taking their salary payments
in order to conserve the Company’s cash. The Company’s CEO and CFO have
also advanced funds to the Company.  These advances accrue interest at
the rate of 7% per annum.  The CEO and CFO also each receive a car
allowance in the amount of $2,140 per month.  These car allowances
have not yet been paid.





The
Company owed the following to these executives for accrued salaries,
advances, accrued interest, and car allowance at December 31,
2009:





CEO
            
            
            CFO
            
            
            TotalAccrued
      Salary
            
            $
            174,797
            
            
            $
            208,181
            
            
            $
            382,978Advances
            
            
            52,362
            
            
            
            48,973
            
            
            
            101,335Accrued
      Interest
            
            
            1,210
            
            
            
            6,700
            
            
            
            7,910Accrued
      Car Allowance
            
            
            19,473
            
            
            
            66,647
            
            
            
            86,120Total
            
            $
            247,842
            
            
            $
            330,502
            
            
            $
            578,343





F-11
 Table of Contents


RAHAXI,
INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009


(UNAUDITED)


At June
30, 2009:





CEO
            
            
            CFO
            
            
            TotalAccrued
      Salary
            
            $
            -
            
            
            $
            80,396
            
            
            $
            80,396Advances
            
            
            -
            
            
            
            48,971
            
            
            
            48,971Accrued
      Interest
            
            
            -
            
            
            
            4,969
            
            
            
            4,969Accrued
      car allowance
            
            
            6,441
            
            
            
            52,669
            
            
            
            59,110Total
            
            $
            6,441
            
            
            $
            187,005
            
            
            $
            193,446





10.
EQUITY





Increase in Authorized
Shares





Effective
September 21, 2009, the Company filed an amendment to its Articles of
Incorporation with the Secretary of State of Nevada to increase the Company’s
authorized Common Stock to one billion (1,000,000,000) shares and increase the
Company’s authorized Preferred Stock to ten million (10,000,000)
shares.  The amendment was approved by holders of a majority of the
outstanding shares of the Company through a Proxy Statement (written consent
solicitation) that was previously mailed to stockholders on August 10, 2009 and
filed with the Securities and Exchange Commission.





Reverse Split of Common
Stock





Effective
November 21, 2008, we implemented a one-for-three reverse-split of our common
stock. There were 426,671,694 shares of stock outstanding immediately before the
reverse-split, and 142,222,898 shares outstanding immediately after the
reverse-split.  All share and per share information in these financial
statements have been adjusted to reflect the effects of this reverse
split.





Non-controlling
interest





Non-controlling
interest consists of the minority owned portion of the Company’s 50% owned
subsidiary PLC Partners.





Sales Of
Securities





During
the six months ended December 31, 2009, the Company issued the following shares
of common stock:





The
Company issued 5,140,000 shares (post-reverse split) of common stock with a fair
value of $121,380 to consultants for services provided, and to employees as
compensation.





The
Company issued 20,000,000 shares (post-reverse split) of common stock for cash
proceeds in the amount of $200,000, previously accrued.





The
Company issued 13,500,000 shares (post reverse split) of common stock with a
fair value of $350,000 to consultants for services provided.





The
Company issued 7,801,375 shares (post reverse split) of common stock for cash
proceeds in the amount of $137,562, of which $15,000 was previously
accrued.





The
Company issued 16,301,375 shares (post reverse split) of common stock pursuant
to the exercise of options for cash proceeds of $222,562.




F-12
 Table of Contents





RAHAXI,
INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009


(UNAUDITED)





11.  STOCK
OPTIONS AND WARRANTS





Non-Employee Stock
Options





The
following table summarizes the changes in options outstanding and the related
prices for the shares (post reverse-split) of the Company's common stock issued
to the Company consultants. These options were granted in lieu of cash
compensation for services performed (amounts have been adjusted to reflect the
reverse stock split and other adjustments):





Exercise
      Prices
            
            
            Number
      of Shares
              Outstanding
            
            
            Weighted
      Average
              Remaining
      Contractual
              Life
      (years)
            
            
            Weighted
      Average
              Exercise
      Price of
              Outstanding
      Options
            
            
            Number
      of Shares
              Exercisable
            
            
            Weighted
      Average
              Exercise
      Price of
              Options$
            0.45
            
            
            
            55,555
            
            
            
            5.7
            
            
            $
            0.45
            
            
            
            55,555
            
            
            $
            0.450.60
            
            
            
            450,000
            
            
            
            6.8
            
            
            
            0.60
            
            
            
            450,000
            
            
            
            0.601.47
            
            
            
            252,101
            
            
            
            3.2
            
            
            
            1.47
            
            
            
            252,101
            
            
            
            1.472.10
            
            
            
            252,101
            
            
            
            3.2
            
            
            
            2.10
            
            
            
            252,101
            
            
            
            2.101,009,757
            
            
            
            5.0
            
            
            $
            1.18
            
            
            
            1,009,757
            
            
            $
            1.18





Transactions
involving stock options issued to non-employees are summarized as
follows:





Number
      of Shares
            
            
            Weighted
      Average
              Exercise
      PriceOptions
      exercisable at June 30, 2009
            
            
            1,009,757
            
            
            $
            1.18Granted
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -Cancelled
      / Expired
            
            
            -
            
            
            
            -Options
      exercisable at September 30, 2009
            
            
            1,009,757
            
            
            $
            1.18Granted
            
            
            16,301,375
            
            
            
            0.01Exercised
            
            
            (16,301,375
            )
            
            
            0.01Cancelled
      / Expired
            
            
            -
            
            
            
            -Options
      exercisable at December 31, 2009
            
            
            1,009,757
            
            
            $
            1.18





The
non-employee stock-based compensation expense recognized in the unaudited
condensed consolidated statements of operations for the three months ended
December 31, 2009 and 2008 was $236,505 and $639,814, respectively. The
non-employee stock-based compensation expense recognized in the unaudited
condensed consolidated statements of operations for the six months ended
December 31, 2009 and 2008 was $236,505 and $716,906, respectively.





F-13
 Table of Contents


RAHAXI,
INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009


(UNAUDITED)





The
weighted-average fair value of stock options granted to non-employees during the
three months ended December 31, 2009 and the weighted average
significant assumptions used to determine those fair values, using a
Black-Scholes option pricing model are as follows:





Significant
      Assumptions (weighted-average):
            
            2010
            
            
            2009Risk-free
      interest rate at grant date
            
            
            0.16
            %
            
            
            0.32%-
      3.00
            %Expected
      stock price volatility
            
            
            173%-
      196
            %
            
            
            121%
      - 246
            %Expected
      dividend payout
            
            
            -
            
            
            
            -Expected
      option life (in years)
            
            
            1
            
            
            
            1





Employee Stock
Options





The
following table summarizes the changes to employee stock options outstanding and
the related prices of the Company's common stock options issued to employees
under a non-qualified stock option plan (amounts have been adjusted to reflect
the reverse stock split and other adjustments):





Exercise
      Prices
            
            
            Number
      of
              Shares
      Outstanding
            
            
            Weighted
      Average
              Remaining
      Contractual
              Life
      (years)
            
            
            Weighted
      Average
              Exercise
      Price of
              Outstanding
      Options
            
            
            Number
      of
              Shares
      Exercisable
            
            
            Weighted
      Average
              Exercise
      price of
              Exercisable
      options$
            0.42
            
            
            
            166,667
            
            
            
            7.7
            
            
            $
            0.42
            
            
            
            166,667
            
            
            $
            7.70.45
            
            
            
            66,666
            
            
            
            6.4
            
            
            
            0.45
            
            
            
            66,666
            
            
            
            6.41.41
            
            
            
            125,000
            
            
            
            6.3
            
            
            
            1.41
            
            
            
            125,000
            
            
            
            6.3358,333
            
            
            
            7.0
            
            
            $
            0.77
            
            
            
            358,333
            
            
            $
            7.0





Transactions
involving stock options issued to employees are summarized as
follows:





Number
      of Shares
            
            
            Weighted
      Average Exercise PriceOptions
      outstanding at June 30, 2009
            
            
            358,333
            
            
            $
            0.77Granted
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -Cancelled
      / Expired
            
            
            -
            
            
            
            -Options
      outstanding at September 30, 2009
            
            
            358,333
            
            
            $
            0.77Granted
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -Cancelled
      / Expired
            
            
            -
            
            
            
            -Options
      outstanding at December 31, 2009
            
            
            358,333
            
            
            $
            0.77Non-vested
      at December 31, 2009
            
            
            -
            
            
            $
            -Exercisable
      at December 31, 2009
            
            
            358,333
            
            
            $
            0.77





F-14
 Table of Contents


RAHAXI,
INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009


(UNAUDITED)





The
employee stock based compensation expense recognized in the unaudited condensed
consolidated statements of operations for the three  and six months
ended December 31, 2009 and 2008 was $0.





Warrants





The
following table summarizes the changes in warrants outstanding and the related
prices of the Company’s common stock issued to non-employees of the Company.
These warrants were granted instead of cash compensation for services performed
and settlement of legal dispute (amounts have been adjusted to reflect the
reverse stock split and other adjustments):





Exercise
      Prices
            
            
            Number
      of
              Shares
      Outstanding
            
            
            Weighted
      Average
              Remaining
      Contractual
              Life
      (Years)
            
            
            Weighted
      Average
              Exercise
      Price of
              Outstanding
      Warrants
            
            
            Number
      of
              Shares
      Exercisable
            
            
            Weighted
      Average
              Exercise
      Price of
              Exercisable
      Warrants$
            2.94
            
            
            
            214,286
            
            
            
            3.0
            
            
            $
            2.94
            
            
            
            214,286
            
            
            $
            2.94214,286
            
            
            
            3.0
            
            
            $
            2.94
            
            
            
            214,286
            
            
            $
            2.94





Transactions
involving stock warrants issued are summarized as follows:





Number
      of Shares
            
            
            Weighted
      Average
              Exercise
      PriceWarrants
      exercisable at June 30, 2009
            
            
            8,547,619
            
            
            $
            11.66Granted
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -Cancelled
      / Expired
            
            
            (8,333,333
            )
            
            
            11.88Warrants
      exercisable at September 30, 2009
            
            
            214,286
            
            
            $
            2.94Granted
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -Cancelled
      / Expired
            
            
            -
            
            
            
            -Warrants
      exercisable at December 31, 2009
            
            
            214,286
            
            
            $
            2.94





F-15
 Table of Contents


RAHAXI,
INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009


(UNAUDITED)





12.
SEGMENT INFORMATION





The
Company currently operates three business segments: (1) the sale of its hardware
terminals and in the Dominican Republic (Dominicana); (2) transaction processing
fees and hardware sales generated through its wholly owned subsidiary, Rahaxi
Processing Oy; and (3) consulting services offered through its 50% owned
subsidiary PLC Partners, LTD.  All intercompany transactions,
including receivables and payables, are eliminated in consolidation and
from the segment amounts presented below.





Three
      months ended December 31,
            
            
            Six
      months ended December 31,2009
            
            
            2008
            
            
            2009
            
            
            2008Sales
      to external customers:Corporate
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Dominicana
            
            
            45,387
            
            
            
            141,456
            
            
            
            200,320
            
            
            
            141,612Rahaxi
            
            
            1,044,789
            
            
            
            732,658
            
            
            
            1,755,739
            
            
            
            1,502,030PLC
            
            
            345,980
            
            
            
            501,654
            
            
            
            718,039
            
            
            
            978,611Total
      sales to external customers:
            
            $
            1,436,156
            
            
            $
            1,375,768
            
            
            $
            2,674,098
            
            
            $
            2,622,253Depreciation
      and amortization:Corporate
            
            $
            82,403
            
            
            $
            80,911
            
            
            $
            161,538
            
            
            $
            161,431Dominicana
            
            
            3,002
            
            
            
            3,292
            
            
            
            5,960
            
            
            
            6,645Rahaxi
            
            
            9,825
            
            
            
            10,132
            
            
            
            22,122
            
            
            
            20,393PLC
            
            
            (343
            )
            
            
            182
            
            
            
            354
            
            
            
            385Total
      depreciation and amortization:
            
            $
            94,887
            
            
            $
            94,517
            
            
            $
            189,974
            
            
            $
            188,854General
      and administrative expense:(not
      including depreciation and amortization)Corporate
            
            $
            837,470
            
            
            $
            3,604,472
            
            
            $
            1,377,280
            
            
            $
            6,231,382Dominicana
            
            
            230,894
            
            
            
            128,876
            
            
            
            369,833
            
            
            
            272,098Rahaxi
            
            
            776,212
            
            
            
            724,766
            
            
            
            1,508,013
            
            
            
            1,538,958PLC
            
            
            172,036
            
            
            
            201,222
            
            
            
            296,317
            
            
            
            314,457Total
      general and administrative expense(excluding
      depreciation and amortization)
            
            $
            2,016,612
            
            
            $
            4,659,336
            
            
            $
            3,551,443
            
            
            $
            8,356,895Capital
      expenditures:Corporate
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Dominicana
            
            
            2,380
            
            
            
            -
            
            
            
            2,380
            
            
            
            -Rahaxi
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -PLC
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      capital expenditures
            
            $
            2,380
            
            
            $
            -
            
            
            $
            2,380
            
            
            $
            -Operating
      income (loss):Corporate
            
            $
            (919,873
            )
            
            $
            (3,685,383
            )
            
            $
            (1,538,818
            )
            
            $
            (6,392,813
            )Dominicana
            
            
            (188,456
            )
            
            
            (47,516
            )
            
            
            (263,694
            )
            
            
            (194,091
            )Rahaxi
            
            
            (191,511
            )
            
            
            (320,157
            )
            
            
            (579,293
            )
            
            
            (864,549
            )PLC
            
            
            (142,021
            )
            
            
            4,651
            
            
            
            (94,403
            )
            
            
            127,280Total
      operating income (loss)
            
            $
            (1,441,861
            )
            
            $
            (4,048,405
            )
            
            $
            (2,476,208
            )
            
            $
            (7,324,173
            )


F-16
 Table of Contents


RAHAXI,
INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2009


(UNAUDITED)





Interest
      Expense, Net:Corporate
            
            $
            87,831
            
            
            $
            11,314
            
            
            $
            156,908
            
            
            $
            18,578Dominicana
            
            
            1,872
            
            
            
            2,335
            
            
            
            3,223
            
            
            
            4,799Rahaxi
            
            
            6,450
            
            
            
            5,954
            
            
            
            10,175
            
            
            
            8,810PLC
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      Interest Expense
            
            $
            96,153
            
            
            $
            19,603
            
            
            $
            170,306
            
            
            $
            32,187Segment
      assets:Corporate
            
            $
            359,812
            
            
            $
            708,836
            
            
            $
            359,812
            
            
            $
            708,836Dominicana
            
            
            262,146
            
            
            
            341,091
            
            
            
            262,146
            
            
            
            341,091Rahaxi
            
            
            885,946
            
            
            
            926,215
            
            
            
            885,946
            
            
            
            926,215PLC
            
            
            1,373,312
            
            
            
            1,576,302
            
            
            
            1,373,312
            
            
            
            1,576,302Total
      segment assets
            
            $
            2,881,216
            
            
            $
            3,552,444
            
            
            $
            2,881,216
            
            
            $
            3,552,444





13.
SUBSEQUENT EVENTS








Subsequent
to December 31, 2009, the Company issued a total of 4,000,000 shares (post
reverse-split) of common stock to two consultants for services; a total of
4,000,000 shares (post reverse-split) of common stock to a director for
services; a total of 1,200,000 shares (post reverse-split) of common stock to
two employees as bonuses; and a total of 7,812,000 shares (post reverse-split)
of common stock as loan collateral.  The Company also
sold  3,250,000  shares of common stock (post reverse-split)
to an investor for cash proceeds of $65,000.


F-17
 Table of Contents





ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.





Special
Note About Forward-Looking Statements





This Form
10-Q contains "forward looking statements" within the meaning of Rule 175 of the
Securities Act of 1933, as amended, and Rule 3b-6 of the Securities Exchange Act
of 1934, as amended. When used in this Form 10-Q, the words "expects,"
"anticipates," "believes," "plans," "will" and similar expressions are intended
to identify forward-looking statements. These are statements that relate to
future periods and include, but are not limited to, statements regarding our
adequacy of capital resources, need and ability to obtain additional financing,
the features and benefits of our services, our operating losses and negative
cash flow, and our critical accounting policies.





Forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, those discussed above, as well as
the risks set forth under "Risk Factors". These forward-looking statements speak
only as of the date hereof. The Company expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in its expectations with
regard thereto or any change in events, conditions or circumstances on which any
such statement is based.





The
following discussion and analysis of the Company's financial condition and
results of operations is based upon, and should be read in conjunction with, its
unaudited condensed consolidated financial statements and related notes included
elsewhere in this Form 10-Q.





Overview





We are a
provider of electronic payment processing services, including credit and debit
card transaction processing, point-of-sale related software applications and
other value-added services. For the twelve months ended June 30, 2009, we
processed an average of approximately 1,840,000 transactions per month. During
the three and six months ended December 31, 2009, we processed an average of
approximately 2,180,000 and 2,338,000  transactions per month,
respectively.  We serve in excess of 2,600 merchant locations. We
provide transaction processing support for all major credit cards, including
Visa, MasterCard, American Express, Diners Club and JCB, and all bank-issued
Finnish debit cards. We enable merchants and financial institutions to accept,
and their consumers to utilize, electronic payments using credit and debit cards
to purchase goods and services. Our role is to serve as an intermediary in the
exchange of information and funds that must occur between parties so that a
payment transaction can be completed. We provide merchants with various
transaction processing services, including authorizing card transactions at the
merchant’s retail location (also known as the point-of-sale), and capturing and
transmitting transaction data. Through agreements with Hypercom
Corporation, the world's second largest manufacturer of payment terminals,
and Spectra Technologies, a leading Chinese electronic payment solution
provider, we also offer our customers point-of-sale terminals, which are
integrated with our software products to provide merchants with a complete
solution for credit and debit card transaction processing.





Our role
in a transaction is to serve as a link between the merchant and the merchant's
bank, known as the acquiring bank, and the bank that issued the consumer’s
credit or debit card, known as the issuing bank. The electronic authorization
process for a credit card transaction begins when the merchant "swipes" or
inserts the card into its point-of-sale terminal and enters the amount of the
purchase. After capturing the data, the point-of-sale terminal transmits the
authorization request through our switching center, where the data is
routed to the issuing bank (typically via the Interchange Network, a
telecommunication network operated by international card corporations) for
authorization. The issuing bank confirms that the credit card is authentic and
whether a transaction will cause the cardholder to exceed defined limits. The
approval or disapproval of the transaction is transmitted back to our switching
center, where it is routed to the appropriate merchant’s acquiring
bank.





Recently,
we have developed and certified in the Dominican Republic an electronic PIN
distribution application for point of sale solutions in association with some of
the most important telecommunications companies in the Dominican Republic and
Haiti. Our product is distributed to customers directly and indirectly through
our affiliated merchant's sales channels.




3
 Table of Contents





We were
originally organized on August 2, 1997, under the laws of the State of Delaware
as Interstate Capital Corporation. On November 17, 1999, we merged into a newly
formed Nevada corporation, Freedom Surf, Inc., for the purpose of changing the
corporate domicile to Nevada. On February 24, 2003, we filed a Certificate of
Amendment to our Articles of Incorporation with the Nevada Secretary of State
changing our name to "Freestar Technology Corporation". On September 10, 2002,
we entered into an agreement with Heroya Investments Limited for the acquisition
of Rahaxi Processing Oy through a combination of cash and stock. The agreement
with Heroya was subsequently amended three times to increase the stock
consideration and decrease the cash component. Rahaxi, our wholly owned
subsidiary, is based in Helsinki, Finland.  On November 21, 2008, we
filed a Certificate of Amendment to our Articles of Incorporation with the
Nevada Secretary of State changing our name to “Rahaxi, Inc” and
implementing  a one-for-three reverse split of our common stock. On
September 21, 2009, we filed a Certificate of Amendment to our Articles of
Incorporation with the Secretary of State of Nevada to (i) increase our
authorized Common Stock from 500 Million shares to One Billion shares and (ii)
increase our authorized preferred stock from Five Million to Ten Million
shares.





Management
believes that our primary short and medium-term growth opportunities will be
derived from Finland and the Dominican Republic, and a significant portion
of our resources, both financial and personnel, will be directed towards
developing those opportunities. We believe that our anticipated growth and
ultimate profitability will depend in large part on the ability to promote our
services, gain clients and expand our relationship with current clients.
Accordingly, we intend to invest in marketing, strategic relationships, and
development of our client base.





Our
switching and transaction processing platform is operated by our
wholly-owned subsidiary, Rahaxi Processing Oy, which is located in Finland. We
are one of the leading players in the Finnish transaction processing market,
serving approximately 2,600 merchants each day; for the twelve months
ended June 30, 2009, we processed an average of approximately 1,840,000
transactions per month. During the three and six months ended December 31, 2009,
we processed an average of approximately 2,180,000 and
2,338,000  transactions per month, respectively.




Until
recently, our primary source of revenue was from transaction fees we receive
from processing credit and debit card transactions through point-of-sale
terminals at a merchant’s retail location. In fiscal year 2006, we also began
generating revenue from sales of point-of-sale terminals as well as consulting
fees, which include customization of software applications for merchants and
other customers. In fiscal year 2010, the period from July 1, 2009 through
June 30, 2010, we believe that transaction fees from point-of-sale terminal
transactions will continue to be derived primarily from merchants and customers
based in Finland. We also derived revenue from transaction fees from clients in
Estonia, Spain and Iceland. In addition, we derived revenue from consulting and
development fees from our customers in Finland, France, the
Dominican Republic and in Ireland through our 50% stake in PLC, Project
Life Cycle Partners Limited.





The
Company's principal offices are in Wicklow, Ireland. The Company also has
offices in Helsinki, Finland and Santo Domingo, the Dominican Republic. While
the Company's offices in Finland and Ireland will primarily focus on the
European market, the Company's office in the Dominican Republic will continue to
pursue opportunities in the Caribbean and Latin America, including our recently
developed electronic PIN distribution application for point of sale solutions in
association with some of the most important telecommunications companies in the
Dominican Republic and Haiti. Management believes that these emerging markets
could offer favorable opportunities in the longer term. The Company
has achieved certification to become a third party services provider for
China UnionPay. Through our agreement with the French bank Natixis
Paiements, we processed our first live transaction for China UnionPay in June,
2008 in Paris, France.    We expect to continue to pursue
additional banking relationships to allow us to expand our market for China
UnionPay transactions in Europe.





Results of
Operations





THREE
MONTHS ENDED DECEMBER 31, 2009 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2008





Revenue





For the
reasons below, total revenue for the three months ended December 31, 2009
was $1,436,156 compared to $1,375,768 for the three months ended December
31, 2008, an increase of $60,388 or approximately 4%.




4
 Table of Contents





Transaction processing and
related revenue





Transaction
processing and related revenue was $581,904 for the three months ended December
31, 2009, compared to $494,349 during the prior period, an increase of $87,555
or approximately 18%. The Company processed a total of 6,540,268 transactions
during the three months ended December 31, 2009, an increase of 1,291,351 or
approximately 24% compared to 5,248,917 transactions processed during the prior
period.  The increase in the number of transactions processed and the
transaction revenue was primarily related to the increase in the number of
clients and an increase in our installed base of processing terminals compared
to the same period of the prior year.  Also, it should be noted that
the Company invoices its customers in Euro, which declined in value by
approximately 7.8% compared to the U.S. Dollar for the three months ended
December 31, 2009.  This factor should be taken into consideration
when analyzing our transaction processing sales.





Consulting
services revenue





Consulting services revenue
was $379,996 for the three months ended December 31, 2009, compared to $523,227
during the prior year, a decrease of $143,231 or approximately 27%. Consulting
services revenue is primarily generated by the Company’s 50% stake in PLC.
The primary reasons for the decline in consulting services revenue can be
attributed to the completion of projects under management during the period
without comparable replacement projects being initiated, and the decline in
value of the Euro compared to the U.S. dollar, and the worsening of economic
conditions in Ireland.





Hardware
and related  revenue





Hardware and related revenue
was $474,256 during the three months ended December 31, 2009, compared to
$358,192 during the prior period, an increase of $116,064 or approximately
32%.  The primary reason for the increase in hardware related revenue
is the continued rollout of the Company’s hardware products to an expanding
client base.





We expect
continued increases in transaction processing and related revenue together with
hardware and related revenue throughout the next twelve months  as we
continue to increase our client base and service offerings.  Although
transaction revenue decreased during the quarter ended December 31, 2009, our
goal is to increase transaction processing and related revenue during the next
12 months by obtaining additional clients and substantially increasing the
number of transactions processed.  We hope to offset any decreases in
price-per-transaction with increased volume.  Due to the global economic
downturn and the budgetary constraints of potential clients (particularly in
Ireland), we see a decrease in consulting services over the next six months and
remain cautiously optimistic for the six months following that.  In all
cases, however, there can be no guarantee that our products will be
accepted in the marketplace or that our sales efforts will be
successful.





All of
our revenue for the three months ended December 31, 2009 has been derived from a
limited number of customers, primarily Finnish customers for our transaction
processing products. Approximately 56% of our total revenue was attributable to
our ten largest customers. The future loss of any major customer could have a
material adverse effect on our business, financial condition and results of
operations. We believe that this customer concentration will continue for much
of the fiscal year ending June 30, 2010. We believe that this customer
concentration will be gradually diluted in the latter half of the fiscal year
ending June 30, 2010 as we continue to pursue operations outside of Finland. All
of our revenues for the three months ended December 31, 2009 have been generated
by our operations outside of the United States, and our future growth rate is,
in part, dependent on continued growth in international markets. We expect this
to continue through the fiscal year ending June 30, 2010.





5
 Table of Contents




Cost
of Revenue





Cost of transaction
processing and related revenue





Cost of
transaction processing and related revenue was $258,045 for the three months
ended December 31, 2009, compared to $274,293 for the prior three months
ended December 31, 2008, a decrease of $16,248 or approximately 6%. 
The Company experienced a reduction in development expenses as projects were
completed and new products were brought to market. We have also moved many
of our processing platform support functions in-house, both to gain greater
control of these activities and to reduce costs.  It is important to note
that many of our costs associated with maintaining and improving our processing
and customer support capabilities are charged to cost of revenue, but
these costs do not always change in direct relation to sales.





Cost of consulting
services





Cost of
consulting services revenue was $316,307 for the three months ended December 31,
2009, compared to $295,599 for the three months ended December 31, 2008, an
increase of $20,708 or approximately 7%.  The
primary reason for the increase was a
decrease in gross margins due to competitive conditions in the current Irish
business environment.





Cost of hardware and
related  revenue





Cost of
hardware and related revenue was $192,166  during the three months
ended December 31, 2009, compared to $100,428 during the prior period, an
increase of $91,738 or approximately 91%. The primary reason for the
increase was the sale of more hardware units, which, as described above,
also resulted in an increase in hardware revenue.




For the
reasons stated above, cost of revenue for the three months ended December
31, 2009 was $766,518 compared to $670,320 for the three months ended December
31, 2008, an increase of $96,198 or approximately 14%.  Gross margin
on sales for the three months ended December 31, 2009 was $669,638 or
approximately 47% of sales, compared to gross margin on sales for the three
months ended December 31, 2008 of $705,448 or approximately 51% of
sales.





We expect
cost of revenue to increase in the coming year as we continue our current
trend of increasing sales and expanding our product offering. As our service
offerings and business mix changes, gross margin as a percent of sales may not
remain constant.





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses were $2,111,499 for the three months
ended December 31, 2009 compared to $4,753,853 for the three months ended
December 31, 2008, a decrease of $2,642,354  or approximately 56%. The
primary components of selling, general, and administrative expenses for the
three months ended December 31, 2009 were: payroll and related costs of
$906,186; $586,505 of this amount consisted of non-cash compensation in the form
of stock, stock options, and warrants.  Other components  of
selling, general, and administrative costs for the three months ended December
31, 2009 were  facility costs  (rent, telephone, utilities,
and maintenance) of $315,532;  consulting fees of $41,143 to service
providers for financial consulting and other professional services; depreciation
and amortization of $96,626; travel and entertainment costs of $35,040; and
professional fees of $33,928.





The
amount of future selling, general, and administrative expenses will largely
depend on the pace of our growth in the market for payment processing products
and upon the cost of outside services and professional fees, including legal
fees relating to litigation and acquisitions. We fully expect these costs to
increase as we continue our expected rollout of product offerings. We also
intend to continue to build out our infrastructure, which may include adding
support staff and branch offices. Selling expenses may also continue to increase
due to increased focus on obtaining new customers. In addition, we may pursue
further acquisitions in order to facilitate our growth and exploit market
opportunities, which would further drive up legal and accounting fees, payroll,
and travel costs.





Interest Expense





Interest
expense, net was $96,153 for the three months ended December 31, 2009, compared
to $19,603  for the three months ended December 31, 2008, an
increase of $76,550 or approximately  391%. The increase is due
primarily to an increase in notes payable outstanding during the
period.





6
 Table of Contents




Historically,
we have primarily utilized equity financing partly in order to avoid the
interest charges associated with debt financing.  However, as
described above, we recently utilized debt financing as well, although we
continue to pursue equity financing. The recent price and performance of our
common stock have made equity financings substantially more difficult, and
required us to pursue alternative methods of financing for our cash needs. Due
to the perceived risks associated with an investment in the Company, our debt
financings required us to pay high interest rates (20% and 40% per year)
compared to traditional bank financings.  If we conduct additional
debt financings at similar rates, interest expense could continue to
significantly increase.





Net
Loss





For the
reasons stated above, we recorded a net loss  of $1,538,014  for
the three months ended December 31, 2009 compared to $5,199,598  for
the three months ended December 31, 2008, a decrease of $3,661,584 or
approximately 70%.





SIX
MONTHS ENDED DECEMBER 31, 2009 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2008





Revenue





For the
reasons below, total revenue for the six  months ended December
31, 2009 was $2,674,098 compared to $2,622,253 for the three months ended
December 31, 2008, an increase of $51,845 or approximately 2%.





Transaction processing and
related revenue





Transaction
processing and related revenue was $1,050,615 for the six months ended December
31, 2009, compared to $1,058,762 during the prior period, a decrease of $8,147
or approximately 1%. The Company processed a total of 14,028,844 transactions
during the six months ended December 31, 2009, an increase of 2,957,022 or
approximately 21% compared to 11,071,822 transactions processed during the prior
period.  The increase in the number of transactions processed was
primarily related to the increase in the number of clients and an increase in
our installed base of processing terminals compared to the same period of the
prior year. The decrease in transaction processing and related revenue was due
primarily because we have transitioned to a flat monthly pricing model for some
of our new clients as opposed to the legacy per-transaction fees
structure.  Also, it should be noted that the Company invoices its
customers in Euro, which declined in value by approximately 1.3% compared to the
U.S. Dollar for the six months ended December 31, 2009.  This factor
should be taken into consideration when analyzing our transaction processing
sales.





Consulting
services revenue





Consulting services revenue
was $752,054 for the six months ended December 31, 2009, compared to $1,041,576
during the prior year, a decrease of $289,522 or approximately 28%. Consulting
services revenue is primarily generated by the Company’s 50% stake in PLC.
The primary reasons for the decline in consulting services revenue can be
attributed to the completion of projects under management during the period
without comparable replacement projects being initiated, and the decline in
value of the Euro compared to the U.S. dollar, and the worsening of economic
conditions in Ireland.





Hardware
and related  revenue





Hardware and related revenue
was $871,429 during the six months ended December 31, 2009, compared to $521,915
during the prior period, an increase of $349,514 or approximately
67%.  The primary reason for the increase in hardware related revenue
is the continued rollout of the Company’s hardware products to an expanding
client base.





We expect
continued increases in transaction processing and related revenue together with
hardware and related revenue throughout the next twelve months  as we
continue to increase our client base and service offerings.  Although
transaction revenue decreased during the quarter ended December 31, 2009, our
goal is to increase transaction processing and related revenue during the next
12 months by obtaining additional clients and substantially increasing the
number of transactions processed.  We hope to offset any decreases in
price-per-transaction with increased volume.  Due to the global
economic downturn and the budgetary constraints of potential clients
(particularly in Ireland), we see a decrease in consulting services over the
next six months and remain cautiously optimistic for the six months following
that.  In all cases,  however, there can be no guarantee that our
products will be accepted in the marketplace or that our sales efforts will be
successful.




7
 Table of Contents





All of
our revenue for the six months ended December 31, 2009 has been derived from a
limited number of customers, primarily Finnish customers for our transaction
processing products. Approximately 56% of our total revenue was attributable to
our ten largest customers. The future loss of any major customer could have a
material adverse effect on our business, financial condition and results of
operations. We believe that this customer concentration will continue for much
of the fiscal year ending June 30, 2010. We believe that this customer
concentration will be gradually diluted in the latter half of the fiscal year
ending June 30, 2010 as we continue to pursue operations outside of Finland. All
of our revenues for the six months ended December 31, 2009 have been generated
by our operations outside of the United States, and our future growth rate is,
in part, dependent on continued growth in international markets. We expect this
to continue through the fiscal year ending June 30, 2010.





Cost
of Revenue





Cost of transaction
processing and related revenue





Cost of
transaction processing and related revenue was $461,891 for the six months ended
December 31, 2009, compared to $627,307 for the prior six months ended
December 31, 2008, a decrease of $165,416 or approximately 26%.  The
Company experienced a reduction in development expenses as projects were
completed and new products were brought to market. We have also moved many
of our processing platform support functions in-house, both to gain greater
control of these activities and to reduce costs.  It is important to note
that many of our costs associated with maintaining and improving our processing
and customer support capabilities are charged to cost of revenue, but
these costs do not always change in direct relation to sales.





Cost of consulting
services





Cost of
consulting services revenue was $515,770 for the six months ended December 31,
2009, compared to $536,489 for the six months ended December 31, 2008, a
decrease of $20,719 or approximately 4%.  The primary reason for the
decrease was that as various stages of projects came to completion, fewer
contractors were needed and therefore there was a reduction in contractor
fees.





Cost of hardware and
related  revenue





Cost of
hardware and related revenue was $431,228  during  the six
months ended December 31, 2009, compared to $236,881 during the prior period, an
increase of $194,347 or approximately 82%. The primary reason for the
increase was the sale of more hardware units, which, as described above,
also resulted in an increase in hardware revenue.  The primary reason
that hardware revenue increased at a higher percentage than cost of hardware was
a reduction in the number of test units and replacement units sent to
customers.





For the
reasons stated above, cost of revenue for the six months ended December 31,
2009 was $1,408,889 compared to $1,400,677 for the six months ended December 31,
2008, an increase of $8,212 or approximately 1%.  Gross margin on
sales for the six months ended December 31, 2009 was $1,265,209 or approximately
47% of sales, compared to gross margin on sales for the six months ended
December 31, 2008 of $1,221,576 or approximately 47% of sales.





We expect
cost of revenue to increase in the coming year as we continue our current
trend of increasing sales and expanding our product offering. As our service
offerings and business mix changes, gross margin as a percent of sales may not
remain constant.





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses were $3,741,417 for the six months
ended December 31, 2009 compared to $8,545,749 for the six months ended December
31, 2008, a decrease of $4,804,332  or approximately 56%. The primary
components of selling, general, and administrative expenses for the six months
ended December 31, 2009 were: payroll and related costs of $1,832,127;
$707,885 of this amount consisted of non-cash compensation in the form of stock,
stock options, and warrants.  Other components of selling, general,
and administrative expenses for the six months ended December 31, 2009 were
facility costs  (rent, telephone, utilities, and maintenance) of
$519,134; ;  depreciation and amortization of $189,579; travel and
entertainment costs of $81,159; consulting fees of $41,578 to service providers
for financial consulting and other professional services; and professional fees
of $33,928.





8
 Table of Contents




The
amount of future selling, general, and administrative expenses will largely
depend on the pace of our growth in the market for payment processing products
and upon the cost of outside services and professional fees, including legal
fees relating to litigation and acquisitions. We fully expect these costs to
increase as we continue our expected rollout of product offerings. We also
intend to continue to build out our infrastructure, which may include adding
support staff and branch offices. Selling expenses may also continue to increase
due to increased focus on obtaining new customers. In addition, we may pursue
further acquisitions in order to facilitate our growth and exploit market
opportunities, which would further drive up legal and accounting fees, payroll,
and travel costs.





Interest Expense





Interest
expense, net was $170,306 for the six months ended December 31, 2009, compared
to $32,187  for the six months ended December 31, 2008, an increase of
$138,119 or approximately  429%. The increase is due primarily to an
increase in notes payable outstanding during the period.





Historically,
we have primarily utilized equity financing partly in order to avoid the
interest charges associated with debt financing.  However, as
described above, we recently utilized debt financing as well, although we
continue to pursue equity financing. The recent price and performance of our
common stock have made equity financings substantially more difficult, and
required us to pursue alternative methods of financing for our cash needs. Due
to the perceived risks associated with an investment in the Company, our debt
financings required us to pay high interest rates (20% and 40% per year)
compared to traditional bank financings.  If we conduct additional
debt financings at similar rates, interest expense could continue to
significantly increase.





Net
Loss





For the
reasons stated above, we recorded a net loss of $2,599,285 for the six
months ended December 31, 2009 compared to $8,551,562 for the six months ended
December 31, 2008, a decrease of $5,952,277 or
approximately 70%.





Operating
Activities





The net
cash used in operating activities was $825,420 for the six months ended
December 31, 2009 compared to $1,845,625 for the six months ended December 31,
2008, a decrease of $1,020,205 or approximately 55%.  The primary
components of cash used in operating activities during the current period are
the net loss of ($2,599,285), partially offset by the non-cash charges of
non-cash compensation of $707,885, and depreciation and amortization of
$189,974.  The total amount of cash used in operating activities was
also increased or (decreased) by the following changes in
the  components of working capital:  accounts receivable of
$149,330; inventory of $23,489; other current assets of ($65,272); accounts
payable and accrued expenses of $396,024; deferred revenue of
$80,524;  and accrual of salary to officers of $339,140.





Investing
Activities





Net cash
used in investing activities was $2,380 during the six months ended December 31,
2009 compared to $0 for the six months ended December 31, 2008. The Company has
curtailed its development activities as many of its current projects have
been completed.





Financing
Activities





Net cash
provided by financing activities was $856,240 for the six months ended December
31, 2009, compared to $1,470,869 for the six months ended December 31, 2008,
a decrease of $614,629  or approximately 42%.  The
reason for the decrease was a decrease in cash provided from the issuance of
notes payable and notes payable to related parties in the aggregate amount of
$114,884, a decrease in cash received from the exercise of stock options and
warrants of $601,450, and a decrease in cash contributed by the officer of a
subsidiary of $35,857. The Company raised $137,562 during the six months ended
December 31, 2009 from the sale of common stock, compared to $0 in the
comparable period of the prior year.





9
 Table of Contents




Liquidity and Capital
Resources





As of
December 31, 2009, we had total current assets of $1,473,456 and total current
liabilities of $6,102,244, resulting in a working capital deficiency of
$4,628,788.  We had cash and cash equivalents of $318,047 at December
31, 2009, and an accumulated deficit of $118,152,243.





Management
expects that global economic conditions will continue to present a challenging
operating environment for at least the rest of the year. Working capital
management will continue to be a high priority, but there can be no assurance
that we will be able to raise sufficient working capital funds.





The
independent auditor's report on the Company's June 30, 2009 financial statements
included in our Annual Report states that the Company's recurring losses raise
substantial doubts about the Company's ability to continue as a going
concern. The accompanying financial statements have been prepared assuming
that the Company continues as a going concern that contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business.
However, the ability of the Company to continue as a going concern on a
longer-term basis will be dependent upon its ability to generate sufficient cash
flow from operations to meet its obligations on a timely basis, to obtain
additional financing, and ultimately, attain profitability.





Management
plans to continue raising additional capital through a variety of fund raising
methods during the fiscal year ending June 30, 2010 and to pursue all available
financing alternatives in this regard. Management may also consider a variety of
potential partnership or strategic alliances to strengthen its financial
position. Although the Company has been successful in the past in raising
capital, no assurance can be given that these sources of financing will continue
to be available to us and/or that demand for our equity/debt instruments will be
sufficient to meet our capital needs, or that financing will be available on
terms favorable to the Company. The recent price and performance of our common
stock has had a material adverse effect on our ability to obtain equity
financing, and has made any such financings substantially more dilutive to
existing shareholders. The financial statements do not include any adjustments
relating to the recoverability and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. If
funding is insufficient at any time in the future, the Company may not be able
to take advantage of business opportunities or respond to competitive pressures,
or may be required to reduce the scope of its planned product development and
marketing efforts, any of which could have a negative impact on its business and
operating results. In addition, insufficient funding may have a material adverse
effect on the Company's financial condition, which could require the Company
to:





w
            curtail
      operations significantly;w
            sell
      significant assets;w
            seek
      arrangements with strategic partners or other parties that may require us
      to relinquish significant rights to products, and/orw
            explore
      other strategic alternatives including a merger or
  sale.





To the
extent that we raise additional capital through the sale of equity or
convertible debt securities, the issuance of such securities will likely result
in dilution to existing stockholders. If additional funds are raised through the
issuance of debt securities, these securities may have rights, preferences and
privileges senior to holders of common stock and the terms of such debt could
impose restrictions on our operations. Given our negative cash flow, there is
also substantial risk of a default on our debt obligations, which could have a
material adverse affect on the Company, its assets and
operations.  Regardless of whether our cash assets prove to be
inadequate to meet our operational needs, we may seek to compensate providers of
services by issuance of stock in lieu of cash, which may also result in dilution
to existing shareholders.





10
 Table of Contents




Certain Indebtedness and
Transactions





Paul Egan
and Ciaran Egan have delayed payment of a portion of their salary in order to
conserve our cash. At December 31, 2009, $174,797  and
$208,181  of accrued salaries were owed to Paul Egan and Ciaran Egan,
respectively.





Paul Egan
and Ciaran have also advanced the funds to the Company. These advances accrue
interest at the rate of 7% per annum.  At December 31, 2009, the
Company owed the amount of $52,362 and $48,973 to Paul Egan and Ciaran
Egan, respectively, for advances;  plus $1,210 and $6,700 to Paul Egan
and Ciaran Egan, respectively, for accrued interest.





Pursuant
to Paul Egan’s and Ciaran Egan’s employment agreements, the Company provides the
officers a car allowance. These allowances have not been paid during the six
months ended December 31, 2009, and the amounts of $19,473 to Paul
Egan and $66,648 to Ciaran Egan have been accrued at December 31,
2009.





Exchange
Rates





Our
operations are principally conducted in Finland through our subsidiary Rahaxi
Processing Oy, which operates in its local currency, the Euro. We also have
operations in the Dominican Republic under the name FreeStar Dominicana
S.A., operating in its local currency, the Dominican Republic Peso. All
assets and liabilities are translated at exchange rates in effect at the end of
the year. Accounts for consolidated statements of operations are translated at
weighted average rates for the year. Exchange rates had a material negative
impact on our revenue for the three and six months ended December 31, 2009.
Gains and losses from translation of foreign currency into U.S. dollars are
included in other comprehensive income (loss). The accumulated foreign currency
translation adjustment attributable to Rahaxi was ($16,193 ) and ($77,919 ) for
the three and six months ended December 31, 2009 and $310,517 for the year ended
June 30, 2009, respectively.





A
significant portion of our revenues and expenses is denominated in currencies
other than U.S. dollars; Rahaxi generates its revenue in Euros. Any significant
change in exchange rates may have a favorable or negative effect on both our
revenues and operational costs. In particular, the value of the U.S. dollar to
the Euro impacts our operating results. Our expenses are not necessarily
incurred in the currency in which revenue is generated, and, as a result, we are
required from time to time to convert currencies to meet our obligations. In
addition, a significant portion of our financial statements are prepared in Euro
and translated to U.S. dollars for consolidation.





Inflation





The
impact of inflation on our costs, and the ability to pass on cost increases to
our customers over time is dependent upon market conditions. We are not aware of
any inflationary pressures that have had any significant impact on our
operations over the past fiscal year, and we do not anticipate that inflationary
factors will have a significant impact on future operations.





Off-Balance Sheet
Arrangements





We do not
maintain off-balance sheet arrangements nor do we participate in non-exchange
traded contracts requiring fair value accounting treatment.





Other





We do not
provide post-retirement or post-employment benefits requiring charges under ASC
715-10-15 (formerly referred to as Statements of Financial Accounting Standards
No. 106) and ASC 712-10-05 (formerly referred to as No. 112).




11
 Table of Contents





Critical Accounting
Policies





The SEC
has issued Financial Reporting Release No. 60, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies" ("FRR 60"), suggesting companies
provide additional disclosure and commentary on their most critical accounting
policies. In FRR 60, the Commission has defined the most critical accounting
policies as the ones that are most important to the portrayal of a company's
financial condition and operating results, and require management to make its
most difficult and subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on this definition,
our most critical accounting policies include: (a) use of estimates in the
preparation of financial statements; (b) stock-based compensation arrangements;
(c) revenue recognition; and (d) long-lived assets. The methods, estimates and
judgments we use in applying these most critical accounting policies have a
significant impact on the results we report in our financial
statements.





(a)
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS





The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, the Company evaluates these estimates, including those related
to revenue recognition and concentration of credit risk. The Company bases its
estimates on historical experience and on various other assumptions that is
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.





(b)
STOCK-BASED COMPENSATION ARRANGEMENTS





The
Company intends to issue shares of common stock to various individuals and
entities for management, legal, consulting and marketing services. These
issuances will be valued at the fair market value of the service provided and
the number of shares issued is determined, based upon the open market closing
price of common stock as of the date of each respective transaction. These
transactions will be reflected as a component of selling, general and
administrative expenses in the accompanying statement of
operations.





(c)
REVENUE RECOGNITION





The
Company recognizes revenues from contracts in which the Company provides only
consulting services as the services are performed. The contractual terms of the
agreements dictate the recognition of revenue by the Company. 
 Payments received in advance are deferred until the service is
provided.





Contract
costs include all direct equipment, material, and labor costs and those indirect
costs related to contract performance, such as indirect labor. Selling, general
and administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in contract performance, contract conditions, and
estimated profitability that may result in revisions to costs and income are
recognized in the period in which the revisions are determined.





For
revenue from product sales, the Company recognizes revenue in accordance with
ASC 605-15-15 (formerly referred to as Staff Accounting Bulletin ("SAB") No.
104, "Revenue Recognition," which superseded SAB No. 101, "Revenue Recognition
in Financial Statements.") ASC 605-15-15 requires that four basic criteria must
be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred; (3) the selling price is fixed
and determinable; and (4) collectability is reasonably assured. Determination of
criteria (3) and (4) are based on management's judgments regarding the fixed
nature of the selling prices of the products delivered and the collectability of
those amounts. Provisions for discounts and rebates to customers, estimated
returns and allowances, and other adjustments are provided for in the same
period the related sales are recorded. The Company defers any revenue for which
the product has not been delivered or is subject to refund until such time that
the Company and the customer jointly determine that the product has been
delivered or no refund will be required. ASC 605-15-15 incorporates ASC
605-25-05 (formerly referred to as Emerging Issues Task Force ("EITF") No.
00-21, "Multiple-Deliverable Revenue Arrangements.") ASC 605-25-05 addresses
accounting for arrangements that may involve the delivery or performance of
multiple products, services and/or rights to use assets. The effect of
implementing ASC 605-25-05 on the Company's consolidated financial position and
results of operations was not significant. This issue addresses determination of
whether an arrangement involving more than one deliverable contains more than
one unit of accounting and how the arrangement consideration should be measured
and allocated to the separate units of accounting. ASC 605-25-15 became
effective for revenue arrangements entered into in periods beginning after June
15, 2003. For revenue arrangements occurring on or after August 1, 2003, the
Company revised its revenue recognition policy to comply with the provisions of
ASC 605-25-15.





12
 Table of Contents




For those
contracts which contain multiple deliverables, management must first determine
whether each service, or deliverable, meets the separation criteria of ASC
605-25-05. In general, a deliverable (or a group of deliverables) meets the
separation criteria if the deliverable has standalone value to the customer and
if there is objective and reliable evidence of the fair value of the remaining
deliverables in the arrangement. Each deliverable that meets the separation
criteria is considered a "separate unit of accounting." Management allocates the
total arrangement consideration to each separate unit of accounting based on the
relative fair value of each separate unit of accounting. The amount of
arrangement consideration that is allocated to a unit of accounting that has
already been delivered is limited to the amount that is not contingent upon the
delivery of another separate unit of accounting. After the arrangement
consideration has been allocated to each separate unit of accounting, management
applies the appropriate revenue recognition method for each separate unit of
accounting as described previously based on the nature of the arrangement. All
deliverables that do not meet the separation criteria of ASC 605-25-05 are
combined into one unit of accounting, and the appropriate revenue recognition
method is applied.





Processing
fee revenue is earned based upon the actual number of transactions processed
through the Company's processing system. Transaction processing fees are
recognized in the period that the service is performed. These fees are typically
charged on a per transaction basis, depending on the arrangement with the
customer.





(d)
LONG-LIVED ASSETS





Long-lived
assets to be held and used are analyzed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company evaluates at each balance sheet date whether events
and circumstances have occurred that indicate possible impairment. If there are
indications of impairment, the Company uses future undiscounted cash flows of
the related asset or asset grouping over the remaining life in measuring whether
the assets are recoverable. In the event such cash flows are not expected to be
sufficient to recover the recorded asset values, the assets are written down to
their estimated fair value. Long-lived assets to be disposed of are reported at
the lower of carrying amount or fair value of asset less the cost to
sell.





ITEM
 3.  QUALITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.





Foreign
Currency Risk





Information
required by this Item is not required for smaller reporting
companies.  Note generally, that in the normal course of business,
operations of the Company are exposed to risks associated with fluctuations in
foreign currency exchange rates. Overall, the Company is a net recipient of
currencies other than the U.S. dollar and, as such, benefits from a weaker
dollar and is adversely affected by a stronger dollar relative to major
currencies worldwide. Accordingly, changes in exchange rates, and in particular
a strengthening of the U.S. dollar, may negatively affect the Company's
consolidated sales and gross margins as expressed in U.S. dollars.





ITEM 4. CONTROLS AND PROCEDURES





Evaluation of Disclosure
Controls and Procedures





As of
December 31, 2009 our management carried out an evaluation, under the
supervision of our Chief Executive Officer and Chief Financial Officer of the
effectiveness of the design and operation of our system of disclosure controls
and procedures pursuant to the Securities and Exchange Act, Rule 13a-15(e) and
15d-15(e) under the Exchange Act). Based upon that evaluation and due
to the material weakness existing in our internal controls as of June 30,
2009 (described below) which has not been fully remediated as of December 31,
2009, we have concluded that as of December 31, 2009, our disclosure controls
and procedures were ineffective.





Changes in internal
controls





There
were no changes in our internal control over financial reporting during the
quarter ended December 31, 2009 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.




13
 Table of Contents





Significant Deficiencies In
Disclosure Controls And Procedures Or Internal Controls





We have
determined there were errors in accounting for the status of certain shares of
the Company’s common stock which had been issued pursuant to a financing
agreement. The Company previously reported that these shares of stock had been
held in escrow, when in fact these shares were improperly in the possession of
third parties.





The
Company completed its review in order to design enhanced controls and procedures
to remedy this deficiency, and determined that such escrows should be avoided in
the future where possible, or an outside third-party escrow should be
utilized.





We also
determined that our disclosure controls and procedures were not effective in
light of the Company’s failure to timely file its Annual Report on Form 10-K for
the fiscal year ended June 30, 2009.   The late filing was caused
by our inability to timely gather and report required financial information,
including from our local staffs and local accounting firms, from our various
operations in Finland, Ireland and the Dominican Republic.  Based on
this, our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were not effective based on our material
weakness in the form of lack of segregation of duties, which stems in part
from limited capital resources to hire additional financial and administrative
staff.  We have begun to delegate duties to other employees of the
Company in order to address such deficiencies, but significant resource
limitations remain.




PART
II - OTHER INFORMATION





ITEM
 1. LEGAL PROCEEDINGS





The
Company is subject to certain legal proceedings as reported in Part II, Item 1 -
"Legal Proceedings" in the Company's Form 10-Ks filed with the SEC, and as
updated in its quarterly reports filed on Form 10-Q.  Listed below are
updates to certain pending claims.
 
 ACI v. Rahaxi Processing
Oy
 
 On March
31, 2008, Rahaxi Processing Oy, a subsidiary of FreeStar based in Helsinki,
Finland, received a summons detailing legal proceedings to be taken against it
by ACI Worldwide (EMEA) Limited (“ACI”), which is domiciled in Watford, United
Kingdom pursuant to a written complaint filed on the 26th February 2008 in
Helsinki District Court. ACI is claiming payment relating to outstanding
invoices for services provided to the Company such as license fees, maintenance
fees, support and software fees and consultancy service fees pursuant to
various agreements between ACI and the Company.
 
 14
 Table of Contents
  The
Company has acknowledged that a certain amount of the fees claimed under summons
are due to ACI and in recognition of this fact the Company has paid a
significant portion of the monies due with respect to the uncontested invoices.
The Company, however, contested a significant portion of the fees claimed by ACI
under the summons when the hearing of the case took place in Helsinki District
Court on the 19th and
20th
January 2010. We are currently awaiting the judgment of the Helsinki District
Court.  At the hearing, ACI requested approximately $449,500 in
damages and interest costs.
 
 This
matter remains in litigation and there can be no assurance as to the outcome of
the lawsuit. Litigation is subject to inherent uncertainties, and unfavorable
rulings could occur.  Were unfavorable rulings to occur, there exists
the possibility of a material adverse impact of money damages on the Company’s
financial condition.
 
 Transaction Network Services
AB v Rahaxi Processing Oy
 
 On
December 22, 2008, Rahaxi Processing Oy, a subsidiary of Rahaxi
Inc.  based in Helsinki, Finland, received a summons detailing legal
proceedings to be taken against it by Transaction Network Services AB (“TNS”),
which is domiciled in Stockholm, Sweden pursuant to a written complaint filed in
Stockholm District Court. TNS is claiming payment relating to outstanding
invoices for services provided to the Company under an agreement between TNS and
the Company.  TNS has demanded approximately $257,000.
  The
Company will, however, be contesting all amounts claimed by TNS under the
summons as the services were not performed and/or not properly
performed.  The preliminary hearing is expected to take place in the
Stockholm District Court in late March of 2010.


This
matter remains in the early stages of litigation and there can be no assurance
as to the outcome of the lawsuit. Litigation is subject to inherent
uncertainties, and unfavorable rulings could occur. Were unfavorable rulings to
occur, there exists the possibility of a material adverse impact of money
damages on the Company’s financial condition.





ITEM
 1A. RISK FACTORS





The
operating results of the Company can vary significantly depending upon a number
of factors, many of which are outside the Company's control. General factors
that may affect the Company's operating results include:





w
            market
      acceptance of and changes in demand for products and
    services;





w
            a
      small number of customers account for, and may in future periods account
      for, substantial portions of the Company's revenue, and revenue could
      decline because of delays of customer orders or the failure to retain
      customers;





w
            gain
      or loss of clients or strategic
  relationships;





w
            announcement
      or introduction of new services and products by the Company or by its
      competitors;





w
            price
      competition;





w
            the
      ability to upgrade and develop systems and infrastructure to accommodate
      growth;





w
            the
      ability to introduce and market products and services in accordance with
      market demand;





w
            changes
      in governmental regulation;
and





w
            reduction
      in or delay of capital spending by clients due to the effects of
      terrorism, war and political
instability.





15
 Table of Contents




The
Company believes that any future growth and profitability will depend in large
part on the ability to promote its services, gain clients and expand its
relationship with current clients. Accordingly, the Company intends to invest in
marketing, strategic partnerships, and development of its client base. If the
Company is not successful in promoting its services and expanding its client
base, this may have a material adverse effect on its financial condition and the
ability to continue to operate the business.





The
Company is also subject to the following specific factors that may affect the
Company's operating results:





GLOBAL
ECONOMICS, POLITICAL AND OTHER CONDITIONS MAY ADVERSELY AFFECT TRENDS IN
CONSUMER SPENDING, WHICH MAY ADVERSELY IMPACT THE COMPANY’S REVENUE AND
PROFITABILITY.





The
global electronic payments industry depends heavily upon the overall level of
consumer, business and government spending. A sustained deterioration in the
general economic conditions affects the Company’s financial performance by
reducing the number of transactions involving payment cards. A reduction in the
amount of consumer spending could adversely impact future revenues and profits
of the Company and make it more difficult for the Company to obtain new
business.





THE
LOSS OF EVEN ONE SIGNIFICANT CLIENT OR ANY SIGNIFICANT REDUCTION IN THE USE OF
OUR SERVICES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.





We derive
a significant portion of our revenues from two clients. For the years ended June
30, 2009 and 2008, revenues from two customers represented approximately
21% and 50% of our total revenues, respectively. The loss of anyone of these
customers could have a material adverse effect on our business, financial
condition and results of operations.





WE
HAVE NEVER BEEN PROFITABLE AND REQUIRE IMMEDIATE ADDITIONAL CAPITAL TO CONTINUE
OUR OPERATIONS





Based on
our cash balance, assets and liabilities as of December 31, 2009, we are in need
of immediate additional financing to fund our current working capital
requirements, as well as longer-term needs.  The recent global
economic downturn, along with the decline in our average stock price over the
past fiscal year and our continued losses, have made raising such required
capital significantly more difficult.





Since our
incorporation, we have not achieved profitability. We have incurred substantial
costs to build the foundations of our business. From our inception to the date
of this report we have retained a deficit. We expect our operating losses and
negative cash flows to continue into the future. Even if we do become
profitable, we cannot assure you that we can sustain or increase profitability
on a quarterly or annual basis in the future. If our revenues grow slower than
we anticipate, or if our operating expenses exceed our projected levels and
cannot be adjusted appropriately, our business will be materially and adversely
affected.





We do not
expect to generate sufficient revenue to meet our cash requirements for the next
twelve months. We will need to raise additional capital to continue meeting
operational expenses. In our annual report on Form 10-K, our independent
auditors have added an explanatory paragraph to their report of our financial
statements for the year ended June 30, 2009 stating that our net losses, lack of
revenues and dependence on our ability to raise additional capital to continue
our existence, raise substantial doubt about our ability to continue as a going
concern. If we are not successful in raising sufficient additional capital, we
may not be able to continue as a going concern, our stockholders may lose their
entire investment in us.





DEBT
FINANCINGS INVOLVE ADDITIONAL RISKS TO OUR STOCKHOLDERS IF WE ARE UNABLE TO
REPAY SUCH OBLIGATIONS





Due to
our inability to raise equity capital in sufficient amounts, we have recently
conducted debt offerings and issued promissory notes in private debt
placements.  These debt financings have involved high interest rates
(20% and 40% per year) compared to traditional bank financings.  Due
to the high interest rates and our historical and ongoing negative cash flows,
there is substantial risk that we will be unable to repay these debt instruments
as they become due.  We have, in some cases, been able to extend the
maturity date for some of our promissory notes.  However, there can be
no assurance that we will be able to do so in the future.  If we are
unable to repay our debt instruments as they become due, such creditors may
pursue collections proceedings against us, which could result in our inability
to continue as a going concern.  In such event, our stockholders may
lose their entire investment in us.




16
 Table of Contents





FAILURE
TO REMAIN CURRENT IN REPORTING REQUIREMENTS COULD RESULT IN DELISTING FROM THE
OVER THE COUNTER BULLETIN BOARD





Companies
trading on the Over the Counter Bulletin Board ("OTCBB"), such as the Company,
must be reporting issuers under Section 12 of the Securities Exchange Act of
1934, as amended, and must be current in their reports under Section 13, in
order to maintain price quotation privileges on the OTCBB. If we fail to remain
current in our reporting requirements, we could be delisted from the Bulletin
Board.





In
addition, pursuant to the applicable rules of the National Association of
Securities Dealers, Inc. that operates the OTCBB, those OTCBB issuers that are
cited for filing delinquency in its Form 10-K's/Form 10-Q's three times in a
24-month period and those OTCBB issuers removed for failure to file such reports
two times in a 24-month period ineligible for quotation on the OTCBB for a
period of one year. Under this proposed rule, a company filing with the
extension time set forth in a Notice of Late Filing (Form 12b-25) would not be
considered late. This rule does not apply to a company's Current Reports on Form
8-K.





As a
result of these rules, the market liquidity for our securities could be severely
adversely affected by limiting the ability of broker-dealers to sell our
securities and the ability of stockholders to sell their securities in the
secondary market.





Since our
annual report on Form 10-K for the fiscal year ended June 30, 2009 was filed
late, there is an increased risk that we could be delisted due to future late
filings, since we have already incurred our first “strike” for having a late
filing.





COMPETITION





The
market for electronic payment systems and electronic POS systems is intensely
competitive and we expect competition to continue to increase. The Company's
competitors for POS systems include VeriFone and Ingenico, amongst others, and
companies such as Global Payments, First Data and Euroconnex for the Company's
electronic payment software. In Finland, the company faces competition from
companies such as Point, which is the largest terminal vendor in the Finnish
market, as well as companies such as Screenway and Altdata, which are Point of
Sale software vendors. In addition, the companies with whom we have strategic
relationships could develop products or services that compete with the Company's
products or services. In addition, some competitors in the Company's market have
longer operating histories, significantly greater financial, technical,
marketing and other resources, and greater brand recognition than the Company
does. The Company also expects to face additional competition as other
established and emerging companies enter the market for electronic payment
solutions. To be competitive, the Company believes that it must, among other
things, invest significant resources in developing new products, improve its
current products and maintain customer satisfaction. Such investment will
increase the Company's expenses and affect its profitability. In addition, if it
fails to make this investment, the Company may not be able to compete
successfully with its competitors, which could have a material adverse effect on
its revenue and future profitability.





TECHNOLOGICAL
AND MARKET CHANGES





The
markets in which the Company competes are characterized by rapid technological
change, frequent new product introductions, evolving industry standards and
changing needs of customers. There can be no assurance that the Company's
existing products will continue to be properly positioned in the market or that
the Company will be able to introduce new or enhanced products into the market
on a timely basis, or at all. Currently, the Company is focusing on upgrading
and introducing new products. There can be no assurance that enhancements to
existing products or new products will receive customer acceptance. As
competition in the electronic payments industry increases, it may become
increasingly difficult for the Company to be competitive.





17
 Table of Contents




Risks
associated with the development and introduction of new products include delays
in development and changes in payment processing, and operating system
technologies that could require the Company to modify existing products. There
is also the risk to the Company that there may be delays in initial shipments of
new products. Further risks inherent in new product introductions include the
uncertainty of price-performance relative to products of competitors,
competitors' responses to the introductions and the desire by customers to
evaluate new products for longer periods of time. Further, the Company expects
that its future revenue will be significantly affected by the timing and success
of the introduction and roll-out of new products and services.





NEW
VERSIONS OF COMPANY'S PRODUCTS MAY CONTAIN ERRORS OR DEFECTS





The
Company's electronic payment software products and point of sale devices are
complex and, accordingly, may contain undetected errors or failures when first
introduced or as new versions are released. This may result in the loss of, or
delay in, market acceptance of the Company's products. The Company has in the
past discovered software errors in its new releases and new products after their
introduction. The Company has experienced delays in release, lost revenues and
customer frustration during the period required to correct these errors. The
Company may in the future discover errors and additional scalability limitations
in new releases or new products after the commencement of commercial shipments
or be required to compensate customers for such limitations or errors, as a
result of which the Company's business, cash flow, financial condition and
results of operations could be materially adversely affected.





NO
ASSURANCE OF SUCCESSFUL AND TIMELY PRODUCT DEVELOPMENT





The
Company's products and proposed enhancements are at various stages of
development and additional development and testing will be required in order to
determine the technical feasibility and commercial viability of the products.
There can be no assurance that the Company's product development efforts will be
successfully completed. The Company's proposed development schedule may be
affected by a variety of factors, many of which will not be within the control
of the Company, including technological difficulties, access to proprietary
technology of others, delays in regulatory approvals, international operating
licenses, and the availability of necessary funding. In light of the foregoing
factors, there can be no assurance that the Company will be able to complete or
successfully commercialize new products. The inability of the Company to
successfully complete the development of new products or to do so in a timely
manner, could force the Company to scale back operations, or cease operations
entirely.





MARKET
ACCEPTANCE





The
Company's success is dependent on the market acceptance of its products. Market
acceptance of the Company's products will be dependent, among other things, upon
quality, ease of use, speed, reliability, and cost effectiveness. Even if the
advantages of the Company's products are established, the Company is unable to
predict how quickly, if at all, the products will be accepted by the
marketplace.





PROTECTION
OF PROPRIETARY RIGHTS





The
Company's success and ability to compete will be dependent in part on the
protection of its potential patents, trademarks, trade names, service marks and
other proprietary rights. The Company intends to rely on trade secret and
copyright laws to protect the intellectual property that it plans to develop,
but there can be no assurance that such laws will provide sufficient protection
to the Company, that others will not develop services that are similar or
superior to the Company's, or that third parties will not copy or otherwise
obtain and use the Company's proprietary information without authorization. In
addition, certain of the Company's know-how and proprietary technology may not
be patentable.





The
Company may rely on certain intellectual property licensed from third parties,
and may be required to license additional products or services in the future.
There can be no assurance that these third party licenses will be available or
will continue to be available to the Companion acceptable terms or at all. The
inability to enter into and maintain any of these licenses could have a material
adverse effect on the Company's business, financial condition or operating
results.





18
 Table of Contents




There is
a risk that some of the Company's products may infringe the proprietary rights
of third parties. In addition, whether or not the Company's products infringe on
proprietary rights of third parties, infringement or invalidity claims may be
asserted or prosecuted against it and it could incur significant expense in
defending them. If any claims or actions are asserted against the Company, it
may be required to modify its products or seek licenses for these intellectual
property rights. The Company may not be able to modify its products or obtain
licenses on commercially reasonable terms, in a timely manner or at all. The
Company's failure to do so could have a negative affect on its business and
revenues.





DEPENDENCE
ON SUPPLIERS





The
Company depends upon a number of suppliers for components of its products. There
is an inherent risk that certain components of the Company's products will be
unavailable for prompt delivery or, in some cases, discontinued. The Company
only has limited control over any third-party manufacturer as to quality
controls, timeliness of production, deliveries and various other factors. Should
the availability of certain components be compromised, it could force the
Company to develop alternative designs using other components, which could add
to the cost of goods sold and compromise delivery commitments. If the Company is
unable to obtain components in a timely manner, at an acceptable cost, or at
all, the Company may need to select new suppliers or redesign or reconstruct
processes used to build its products. In such an instance, the Company would not
be able to manufacture any security devices for a period of time, which could
materially adversely affect its business, results from operations, and financial
condition.





KEY
PERSONNEL





The
Company's success is largely dependent on the personal efforts and abilities of
its senior management. The loss of certain members of the Company's senior
management, including the Company's chief executive officer, chief financial
officer and chief technical officer, could have a material adverse effect on the
Company's business and prospects.





As needed
from time to time, the Company may continue to recruit employees who are skilled
in e-commerce, payment, funds management, payment reconciliation, Internet and
other technologies. The failure to recruit these key personnel could have a
material adverse effect on the Company's business. As a result, the Company may
experience increased compensation costs that may not be offset through either
improved productivity or higher revenue. There can be no assurances that we will
be successful in retaining existing personnel or in attracting and recruiting
experienced qualified personnel.





LIMITATIONS
ON LIABILITY AND INDEMNIFICATION





The
Company's articles of incorporation and bylaws include provisions to the effect
that we may indemnify any director, officer, or employee, as well as limit the
liability of such persons. In addition, provisions of Nevada law provide for
such indemnification, as well as for a limitation of liability of our directors
and officers for monetary damages arising from a breach of their fiduciary
duties. Any limitation on the liability of any director or officer, or
indemnification of any director, officer, or employee, could result in
substantial expenditures being made by the Company in covering any liability of
such persons or in indemnifying them.





LITIGATION





As
described under Legal Proceedings in our Form 10-K for the fiscal year
ended June 30, 2009, the Company is subject to one lawsuit. From time to
time, the Company is involved in a variety of claims, suits, investigations and
proceedings arising from the operation of the Company's business. It is possible
that such a matter could arise in the future and be resolved in a manner that
ultimately would have a material adverse impact on the Company's business, and
could negatively impact its revenues, operating margins, and net
income.





WE
MAY HAVE PROBLEMS OBTAINING OUR INDEPENDENT ACCOUNTING FIRM’S REPORT ON OUR
COMPLIANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT





The SEC,
as directed by Section 404 of the Sarbanes-Oxley Act, adopted rules generally
requiring each public company to include a report of management on the company’s
internal controls over financial reporting in its annual report on Form 10-K
that contains an assessment by management of the effectiveness of the company’s
internal controls over financial reporting.   Commencing with our
annual report for the fiscal year ending June 30, 2010, our independent
registered accounting firm must attest to and report on management’s assessment
of the effectiveness of our internal controls over financial
reporting.





19
 Table of Contents




ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES.





The
Company made the following sales of unregistered (restricted) securities during
the quarter ended on December 31, 2009 (not previously reported in a Form
8-K):





The
Company sold 7,801,375 shares (post reverse-split) of common stock for cash of
$137,583, of that $15,000 was previously accrued.





The
Company issued  13,500,000 shares (post reverse-split) of common stock
with a fair value of $350,000 to consultants for services provided.





The
Company issued 20,000,000 shares (post-reverse split) of common stock for cash
proceeds in the amount of $200,000, previously accrued.





The
Company issued 16,301,375 shares (post reverse split) of common stock pursuant
to the exercise of options for cash proceeds of $222,563.





No
commissions were paid in connection with any of these sales. We did not
employ any form of general solicitation or advertising in connection with the
offer and sale of the securities described below. Except as otherwise noted
above, the offer and sale of the securities listed below were made in reliance
on the exemption from registration provided by Section 4(2) of the Securities
Act or Regulation D or Regulation S promulgated by the Securities and Exchange
Commission as transactions by an issuer not involving any public
offering.





ITEM
 3. DEFAULTS UPON SENIOR
SECURITIES.





Not
applicable.





ITEM
 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.





None.





ITEM 5. 
OTHER INFORMATION.





None.





SUBSEQUENT
EVENTS.





Subsequent
to December 31, 2009, the Company issued the following shares of common
stock:





The
Company issued a total of 4,000,000 shares (post reverse-split) of common stock
to two consultants for services; a total of 4,000,000 shares (post
reverse-split) of common stock to a director for services; a total of 1,200,000
shares (post reverse-split) of common stock to two employees as bonuses; and a
total of 7,812,000 shares (post reverse-split) of common stock as loan
collateral.  The Company also
sold  3,250,000  shares of common stock (post reverse-split)
to an investor for cash proceeds of $65,000.




ITEM
 6. EXHIBITS.





Number
            
            Description31.1
            
            Rule 13a-14(a)/15d-14(a)
      Certification of Paul Egan (filed herewith).31.2
            
            Rule 13a-14(a)/15d-14(a)
      Certification of Ciaran Egan (filed
  herewith).32
            
            Section 1350 Certification of
      Paul Egan and Ciaran Egan (furnished
  herewith).





20
 Table of Contents





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.





RAHAXI, INC.Date: February
      22, 2010
            By:
            /s/ Paul
      EganPaul
      EganChief
      Executive Officer








Date: February
      22, 2010
            By:
            /s/ Ciaran
      EganCiaran
      EganSecretary/Treasurer/
              Chief
      Financial Officer








21
 Table of Contents