U.S. 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, 2007ORo
              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
  FREESTAR TECHNOLOGY
CORPORATION
 (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.)
   31 Mespil Road, Ballsbridge,
Dublin 4, Ireland
 (Address
of Principal Executive Offices)
 
 353
1 6185060
 (Company's
Telephone Number)
  Indicate
by check mark 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 that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes x Noo
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definitions of "accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
 
 Large
accelerated filer o, Accelerated filer
o, Non-accelerated
filer x
  Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2of the Exchange Act). Yes o  No x
  APPLICABLE
ONLY TO CORPORATE ISSUERS
  As of
February 14,  2008, there were 302,904,043 shares of Common Stock
issued and outstanding.
  
 
 i
 Table of Contents
   TABLEOFCONTENTS
 
   PAGEPART
      I
                FINANCIAL
      INFORMATIONITEM
      1.
                FINANCIAL
      STATEMENTS (UNAUDITED)CONDENSED
      CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2007 AND JUNE
      30,  2007
                F-1CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE  AND SIX
      MONTHS ENDED DECEMBER 31, 2007 AND 2006
                F-2CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED DECEMBER
      31, 2007 AND 2006
                F-3NOTES TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                F-5 to
      F-15ITEM
      2.
                MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                1ITEM
      3
                QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT
      MARKET RISK
                13ITEM
      4.
                CONTROLS AND
      PROCEDURES
                13PART
      II
                OTHER
      INFORMATIONITEM
      1.
                LEGAL
      PROCEEDINGS
                14ITEM
      2.
                UNREGISTERED SALES
      OF EQUITY SECURITIES AND USE OF PROCEEDS
                14ITEM
      3.
                DEFAULTS UPON
      SENIOR SECURITIES
                14ITEM
      4.
                SUBMISSION OF
      MATTERS TO A VOTE OF SECURITY HOLDERS
                14ITEM
      5.
                OTHER
      INFORMATION
                14ITEM
      6.
                EXHIBITS
                14SIGNATURES
                15
 
    ii
 Table of Contents
  FREESTARTECHNOLOGY CORPORATION
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 
 
 ASSETS
   December
      31,
                  
                  
                  June
      30,2007
                  
                  
                  2007
                    (Audited)Current
      assets:Cash
      and cash equivalents
                  
                  $
                  401,524
                  
                  
                  
                  466,408Accounts
      receivable, net of allowance for doubtful accounts of $56,839 and
      $54,903at
      December 31 and June 30, 2007,  respectively (note
      3)
                  
                  
                  718,721
                  
                  
                  
                  977,502Other
      current assets (note 4)
                  
                  
                  93,404
                  
                  
                  
                  103,988Inventory
      (note 5)
                  
                  
                  732,258
                  
                  
                  
                  918,947Total
      current assets
                  
                  
                  1,945,907
                  
                  
                  
                  2,466,845Property,
      plant and equipment, net of accumulated depreciation andamortization
      of  $229,146 and $170,804, respectively  (note
      6)
                  
                  
                  189,089
                  
                  
                  
                  187,323Software
      license, net of accumulated amortization of  $1,138,767 and
      $1,027,457, respectively (note 7)
                  
                  
                  1,122,389
                  
                  
                  
                  1,233,699Customer
      relationships and contracts, net of accumulated amortization of $1,003,453
      and $848,493, respectively  (note 7)
                  
                  
                  1,945,796
                  
                  
                  
                  2,100,756Software,
      net of accumulated amortization of  $1,397,925 and $1,175,908,
      respectively (note 7)
                  
                  
                  2,914,493
                  
                  
                  
                  2,608,446Other
      long-term assets (note 8)
                  
                  
                  83,631
                  
                  
                  
                  19,966Total
      assets
                  
                  $
                  8,201,305
                  
                  
                  
                  8,617,035LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses (note 9)
                  
                  
                  2,901,438
                  
                  
                  
                  2,485,629Due
      to related parties (note 10)
                  
                  
                  504,579
                  
                  
                  
                  191,984Deferred
      revenue
                  
                  
                  103,580
                  
                  
                  
                  87,897Total
      current liabilities
                  
                  
                  3,509,597
                  
                  
                  
                  2,765,510Commitments
      and contingenciesMinority
      interest
                  
                  
                  407,398
                  
                  
                  
                  184,008Stockholders'
      Equity: (note 11)Convertible
      preferred stock, series A, $0.001 par value,1,000,000
      shares  authorized; 1,000,000 shares issued and
      outstanding
                  
                  
                  1,000
                  
                  
                  
                  1,000Convertible
      preferred stock, series B, $0.001 par value,4,000,000
      shares authorized,  1,500,000 and 2,000,000 shares issued
      and outstanding atDecember
      31 and June 30, 2007, respectively
                  
                  
                  1,500
                  
                  
                  
                  2,000Additional
      paid-in capital - preferred stock
                  
                  
                  2,530,558
                  
                  
                  
                  2,890,058Common
      stock, $0.001 par value, 500,000,000 shares authorized; 294,558,543 and
      233,783,452shares
      issued and outstanding at December 31, 2007 and June 30,
      2007,  respectively  (note 11)
                  
                  
                  294,559
                  
                  
                  
                  233,783Additional
      paid-in capital - common stock
                  
                  
                  87,672,134
                  
                  
                  
                  75,589,649Common
      stock subscrptions receivable
                  
                  
                  (1,635,000
                  )
                  
                  
                  (600,000
                  )Common
      stock subscribed
                  
                  
                  50,000
                  
                  
                  
                  2,600,014Deferred
      compensation (note 11)
                  
                  
                  (257,646
                  )
                  
                  
                  (599,770
                  )Unearned
      compensation on restricted stock
                  
                  
                  (48,331
                  )
                  
                  
                  (121,701
                  )Accumulated
      deficit
                  
                  
                  (84,626,459
                  )
                  
                  
                  (74,418,911
                  )Accumulated
      other comprehensive gain
                  
                  
                  301,995
                  
                  
                  
                  91,395Total
      stockholders' equity
                  
                  
                  4,284,310
                  
                  
                  
                  5,667,517Total
      liabilities and stockholders' equity
                  
                  
                  8,201,305
                  
                  
                  
                  8,617,035
 
 The
accompanying notes form an integral part of these unaudited condensed
consolidated financial statements.
   F-1
 Table of Contents
 
 FREESTARTECHNOLOGY CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 
 Three
                  
                  
                  Three
                  
                  
                  Six
                  
                  
                  SixMonths
      Ended
                  
                  
                  Months
      Ended
                  
                  
                  Months
      Ended
                  
                  
                  Months
      EndedDecember
      31,
                  
                  
                  December
      31,
                  
                  
                  December
      31,
                  
                  
                  December
      31,2007
                  
                  
                  2006
                  
                  
                  2007
                  
                  
                  2006RevenueTransaction
      processing
                  
                  $
                  512,782
                  
                  
                  $
                  497,810
                  
                  
                  $
                  1,000,505
                  
                  
                  $
                  959,670Consulting
      services
                  
                  
                  683,862
                  
                  
                  
                  263,944
                  
                  
                  
                  1,289,839
                  
                  
                  
                  263,944Hardware
      and related
                  
                  
                  252,069
                  
                  
                  
                  50,148
                  
                  
                  
                  512,864
                  
                  
                  
                  50,148Total
      revenue
                  
                  
                  1,448,713
                  
                  
                  
                  811,902
                  
                  
                  
                  2,803,208
                  
                  
                  
                  1,273,762Cost
      of revenueTransaction
      processing
                  
                  
                  609,361
                  
                  
                  
                  626,365
                  
                  
                  
                  1,243,628
                  
                  
                  
                  1,160,343Consulting
      services
                  
                  
                  606,054
                  
                  
                  
                  212,013
                  
                  
                  
                  995,314
                  
                  
                  
                  212,013Hardware
      and related
                  
                  
                  192,312
                  
                  
                  
                  48,930
                  
                  
                  
                  449,655
                  
                  
                  
                  48,930Total
      cost of revenue
                  
                  
                  1,407,727
                  
                  
                  
                  887,308
                  
                  
                  
                  2,688,597
                  
                  
                  
                  1,421,286Gross
      profit (loss)
                  
                  
                  40,986
                  
                  
                  
                  (75,406
                  )
                  
                  
                  114,611
                  
                  
                  
                  (147,524
                  )Selling,
      general and administrative expenses
                  
                  
                  4,634,031
                  
                  
                  
                  3,054,011
                  
                  
                  
                  10,065,580
                  
                  
                  
                  5,452,127Loss
      from operations
                  
                  
                  (4,593,045
                  )
                  
                  
                  (3,129,417
                  )
                  
                  
                  (9,950,969
                  )
                  
                  
                  (5,599,651
                  )Other
      income (expenses):Additional
      cost of acquisition (note 7)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (192,555
                  )
                  
                  
                  -Interest
      income/(expense)
                  
                  
                  (11,198
                  )
                  
                  
                  (791
                  )
                  
                  
                  (30,411
                  )
                  
                  
                  (779
                  )Loss
      before income taxes and minority interest in subsidiaries
                  
                  
                  (4,604,243
                  )
                  
                  
                  (3,130,208
                  )
                  
                  
                  (10,173,935
                  )
                  
                  
                  (5,600,430
                  )Income
      taxes
                  
                  
                  -
                  
                  
                  
                  7,960
                  
                  
                  
                  -
                  
                  
                  
                  7,960Minority
      interest in net income (loss) of subsidiaries
                  
                  
                  (35,973
                  )
                  
                  
                  (13,712
                  )
                  
                  
                  33,613
                  
                  
                  
                  (13,712
                  )Net
      Loss
                  
                  
                  (4,568,270
                  )
                  
                  
                  (3,124,456
                  )
                  
                  
                  (10,207,548
                  )
                  
                  
                  (5,594,678
                  )Other
      - Comprehensive income (loss):  Gain (Loss) on foreign
      exchange
                  
                  
                  73,774
                  
                  
                  
                  14,548
                  
                  
                  
                  210,600
                  
                  
                  
                  26,028Comprehensive
      loss
                  
                  $
                  (4,494,496
                  )
                  
                  $
                  (3,109,908
                  )
                  
                  $
                  (9,996,948
                  )
                  
                  $
                  (5,568,650
                  )Loss
      per share - basic and diluted
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.04
                  )
                  
                  $
                  (0.03
                  )Weighted
      average shares outstanding - basic
                  
                  
                  287,463,762
                  
                  
                  
                  186,510,046
                  
                  
                  
                  266,397,812
                  
                  
                  
                  184,722,154Weighted
      average shares outstanding - diluted
                  
                  
                  295,196,103
                  
                  
                  
                  212,623,091
                  
                  
                  
                  274,130,153
                  
                  
                  
                  211,456,726
 The
accompany notes form an integral part of these unaudited condensed consolidated
financial statements.
 
 
 F-2
 Table of Contents
  FREESTAR TECHNOLOGY CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
  Six
                  
                  
                  SixMonths
      Ended
                  
                  
                  Months
      EndedDecember
      31,
                  
                  
                  December
      31,2007
                  
                  
                  2006Cash
      flows used for operating activities:Net
      loss
                  
                  $
                  (10,207,548
                  )
                  
                  $
                  (5,594,679
                  )Minority
      interest in income loss of subsidiary
                  
                  
                  33,613
                  
                  
                  
                  (13,712
                  )Adjustments
      to reconcile net loss to net cash(used in) operating activities:Depreciation
      and amortization
                  
                  
                  457,660
                  
                  
                  
                  394,168Common
      stock issued in legal settlement
                  
                  
                  
                  
                  
                  
                  -Non-cash
      compensation
                  
                  
                  5,914,187
                  
                  
                  
                  2,566,590Changes
      in assets and liabilities:(Increase)
      decrease in assetsAccounts
      receivable
                  
                  
                  181,905
                  
                  
                  
                  134,236Inventory
                  
                  
                  114,921
                  
                  
                  
                  (550,196
                  )Long
      term deposits and prepaid rent
                  
                  
                  
                  
                  
                  
                  (29,416
                  )Other
      current assets
                  
                  
                  (56,269
                  )
                  
                  
                  20,137Increase
      (decrease) in liabilitiesAccounts
      payable and accrued expenses
                  
                  
                  806,647
                  
                  
                  
                  20,843Cash
      advance to company by employee
                  
                  
                  
                  
                  
                  
                  109,861Deferred
      revenue
                  
                  
                  15,683
                  
                  
                  
                  -Due
      to shareholders
                  
                  
                  
                  
                  
                  
                  -Accrual
      of salary to officers
                  
                  
                  312,595
                  
                  
                  
                  61,423Total
      adjustments
                  
                  
                  7,780,942
                  
                  
                  
                  2,713,934Net
      cash used in operating activities
                  
                  
                  (2,426,606
                  )
                  
                  
                  (2,880,745
                  )Cash
      flows used in investing activities:Purchase
      of fixed assets
                  
                  
                  (35,079
                  )
                  
                  
                  (80,440
                  )Purchase
      of software and capitalized software cost
                  
                  
                  (209,380
                  )
                  
                  
                  (300,306
                  )Investment
      in PLC, net of cash acquired
                  
                  
                  
                  
                  
                  
                  (177,787
                  )Net
      cash used in investing activities
                  
                  
                  (244,459
                  )
                  
                  
                  (558,533
                  )Cash
      flows provided by financing activities:Proceeds
      from sale of common stock
                  
                  
                  965,000
                  
                  
                  
                  1,900,000Comissions
      for sale of common stock
                  
                  
                  
                  
                  
                  
                  (190,000
                  )Proceeds
      from exercise of stock options/warrants
                  
                  
                  1,542,000
                  
                  
                  
                  52,500Cash
      contributed by officer of subsidiary
                  
                  
                  189,777
                  
                  
                  
                  -Net
      cash provided by financing activities
                  
                  
                  2,696,777
                  
                  
                  
                  1,762,500Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  25,712
                  
                  
                  
                  (1,676,778
                  )Foreign
      currency translation adjustments
                  
                  
                  (90,596
                  )
                  
                  
                  30,014Cash
      and cash equivalents, beginning of period
                  
                  
                  466,408
                  
                  
                  
                  2,972,135Cash
      and cash equivalents, end of period
                  
                  $
                  401,524
                  
                  
                  $
                  1,325,370
   F-3
 Table of Contents
  FREESTAR TECHNOLOGY CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (continued)
  
 Six
                    
                    
                    SixMonths
      Ended
                    
                    
                    Months
      EndedDecember
      31,
                    
                    
                    December
      31,2007
                    
                    
                    2006Supplemental
      disclosure of cash flow information:Interest
      paid
                    
                    $
                    -
                    
                    
                    $
                    -Income
      tax paid
                    
                    $
                    -
                    
                    
                    $
                    7,961Shares
      of restricted common stock issued for services
                    
                    $
                    3,906,915
                    
                    
                    $
                    876,500Shares
      of common stock issued to employees for services
                    
                    $
                    181,750
                    
                    
                    $
                    -Adjustment
      of unearned restricted common stock for the period
                    
                    $
                    73,370
                    
                    
                    $
                    -Adjustment
      of deferred compensation for the period
                    
                    $
                    342,124
                    
                    
                    $
                    1,086,673Shares
      of common stock issued for subscriptions receivable
                    
                    $
                    1,500,000
                    
                    
                    $
                    -Fair
      value of options issued to consultants and employees
                    
                    $
                    1,410,028
                    
                    
                    $
                    761,417Shares
      of common stock issued for prepaid rent
                    
                    $
                    -
                    
                    
                    $
                    75,600Shares
      of common stock issued for subscriptions payable
                    
                    $
                    -
                    
                    
                    $
                    352,500Stock
      options exercised, cash not received
                    
                    $
                    -
                    
                    
                    $
                    75,000Conversion
      of preferred stock to common stock
                    
                    $
                    360,000
                    
                    
                    $
                    -Cancellation
      of shares of common stock
                    
                    $
                    -
                    
                    
                    $
                    (158,000
                    )Shares
      of common stock issued to acquire interest in subsidiary
                    
                    $
                    -
                    
                    
                    $
                    800,000Acquisiton
      of PLC Partners, LTD:Accounts
      receviable
                    
                    $
                    -
                    
                    
                    $
                    273,740Property
      and equipment
                    
                    
                    -
                    
                    
                    
                    2,381Customer
      relationships and contracts
                    
                    
                    -
                    
                    
                    
                    982,045Current
      liabilites
                    
                    
                    -
                    
                    
                    
                    (262,423
                    )Minority
      interest
                    
                    
                    -
                    
                    
                    
                    (17,956
                    )Net
      Assets
                    
                    $
                    -
                    
                    
                    $
                    977,787Comon
      stock Issued
                    
                    $
                    -
                    
                    
                    
                    800,000.00Cash
      paid
                    
                    
                    -
                    
                    
                    
                    200,000.00Cash
      balance upon acquisition
                    
                    
                    -
                    
                    
                    
                    (22,213.00
                    )Net
      Assets
                    
                    $
                    -
                    
                    
                    $
                    977,787Fair
      value of additional shares issued  for PLC
      Acquisition:'
                    
                    $
                    192,555
                    
                    
                    $
                    -
 The
accompany notes form an integral part of these un audited condensed consolidated
financial statements.
  F-4
 Table of Contents
 FREESTAR TECHNOLOGY CORPORATON
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 
 1. BASIS
OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS
 
 Basis Of
Presentation
 
 The
accompanying unaudited condensed consolidated financial statements of FreeStar
Technology Corporation, 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-KSB for the fiscal year ended
June 30, 2007. 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, 2007, and the results of operations
and cash flows for the six months ended December 31, 2007 and 2006. The results
of operations for the three and six months ended December 31, 2007 are not
necessarily indicative of the results that may be expected for the entire fiscal
year.
 
 Nature Of Business
Operations
 
 The
Company (formerly Freestar Technologies) 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 Dublin, Ireland; the Company also has
offices in Helsinki, Finland; Stockholm, Sweden; Geneva, Switzerland; and Santo
Domingo, the Dominican Republic.
 
 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;
and (5) Consulting Fees: consulting services provided to financial institutions
and merchants.
 
 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 $4,568,270 and
$10,207,548 for the three and six months ended December 31, 2007 and $16,305,197
for the year ended June 30, 2007, and had an accumulated deficit of $84,624,675
as of December 31, 2007.
 
 The
Company believes that anticipated revenues from operations will be insufficient
to satisfy its ongoing capital requirements for at least 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.
 
 Management
plans to take the following steps that it believes will be sufficient
to provide the Company with the ability to continue as
a going concern. Management intends to raise financing through the sale of its
stock in private placements to individual investors. Management may also raise
funds in the public markets, although there are no current plans or expectations
to do so. Management believes that with this financing, the Company will be able
to generate additional revenues that will allow the Company to continue as a
going concern. This may be accomplished by hiring additional personnel and
focusing sales and marketing efforts on the distribution of services and
products through key marketing channels. 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.
 
 F-5
 Table of Contents
 FREESTAR TECHNOLOGY CORPORATON
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  For
revenue from product sales, the Company recognizes revenue in accordance with
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which
superseded SAB No. 101, "Revenue Recognition in Financial Statements." SAB
No.101 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)
collectibility 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 collectibility 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. SAB No. 104 incorporates Emerging Issues Task Force ("EITF") No.
00-21, "Multiple-Deliverable Revenue Arrangements." EITF No. 00-21 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 EITF No. 00-21 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. EITF No. 00-21 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
EITF No. 00-21.
 
 For those
contracts which contain multiple deliverables, management must first determine
whether each service, or deliverable, meets the separation criteria of EITF No.
00-21. 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 EITF No. 00-21 are
combined into one unit of accounting, and the appropriate revenue recognition
method is applied under SAB No. 101. 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 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 SFAS No. 123 (revised), “Share-Based
Payment” (SFAS 123R) utilizing the modified prospective approach. Prior to the
adoption of SFAS 123R we accounted for stock option grants in accordance with
APB Opinion No. 25, “Accounting for Stock Issued to Employees” (the intrinsic
value method), and accordingly, recognized compensation expense for stock option
grants.
 
 Aggregate
intrinsic value of options outstanding and options exercisable at December 31,
2007 was $5,000 and $5,000, respectively. Aggregate intrinsic value represents
the difference between the company's closing stock price on the last trading day
of the fiscal period, which was $0.15 as of December 31, 2007, and the exercise
price multiplied by the number of options outstanding. As of December 31, 2007,
total unrecognized stock-based compensation expense related to non-vested stock
options was $0. The total fair value of options vested was $62,104 and $0 for
the six-month periods ended December 31, 2007 and 2006,
respectively.
 
 Capitalized
Software Development Costs
 
 In
accordance with 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.
 
 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 six months ended December 31, 2007, the Company
placed into service and began amortizing $0 of software. The total net book
value of software in service at December 31, 2007 is approximately $786,662.
During the six months ended December 31, 2007, the Company has capitalized
software totaling $209,380. The total net book value of software under
development at December 31, 2007 is approximately $2,127,831. At December 31,
2007, total software capitalized at under SFAS No. 86 is approximately
$4,312,418 net of accumulated amortization of $1,397,925.
 F-6
 Table of Contents
  FREESTAR TECHNOLOGY CORPORATON
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  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.
 2.
ACQUISITION OF PROJECT LIFE CYCLE PARTNERS, LTD.
 
 Effective
November 21, 2006, the Company acquired 50% of the outstanding capital stock of
Project Life Cycle Partners, Ltd. (“PLC Partners”), a technology consulting firm
located in Dublin, Ireland. PLC Partners is a niche project consulting firm
specializing in the management and implementation of information systems
projects. PLC Partners has international experience within the financial
services sector.
  The 50%
acquisition of PLC Partners was accounted for using the purchase method in
accordance with SFAS 141, “Business Combinations”. Total consideration for the
transaction was $1,000,000, consisting of $200,000 cash and 2,222,222 shares of
the Company's common stock, valued at $0.36 per share based upon a 30-day
average closing price per share. The Company also assumed 50%, or approximately
$132,000, of PLC's liabilities at the date of acquisition. The Company was
required to issue additional shares, capped at a maximum of an additional 50%,
since, on the one-year anniversary of the acquisition, the 30-day average
closing price per share of the Company's stock was less than
$0.36.  In November 2007, the Company issued  1,111,111 of
additional common shares  valued at $192,555.  The
additional shares were accrued and charged against operations during the three
months ended September 30, 2007.
 
 The 50%
acquisition of PLC Partners is not a significant acquisition pursuant to Rule
3-01 of regulation S-X of the Securities and Exchange Commission, and the
Company is not required to submit pro forma financial statements under Item
9.01(b).
 
 The
results of operations for PLC Partners have been included in the Consolidated
Statements of Operations since the date of acquisition. The components of
the purchase price were as follows:
  Common
      stock
                
                $
                800,000Cash
                
                
                200,000Total
                
                $
                1,000,000
  In
accordance with Financial Accounting Standard (SFAS) No. 141, Business
Combinations, the total purchase price was allocated to the estimated fair value
of assets acquired and liabilities assumed. The fair value of the assets
acquired was based on management's best estimates. The purchase price was
allocated to the fair value of assets acquired and liabilities assumed as
follows:
  Cash
      and cash equivalents
                
                $
                22,213Accounts
      receivable
                
                
                273,740Equipment
      and other assets
                
                
                2,381Customer
      relationships and contracts
                
                
                982,045Subtotal
                
                
                1,280,379Current
      liabilities
                
                
                (262,423
                )Minority
      interest
                
                
                (17,956
                )Total
                
                $
                1,000,000
  The
financial information in the unaudited table set forth below summarizes the
combined results of operations of PLC and Freestar, on a pro forma basis, as
though the companies had been combined at the beginning of fiscal year 2007 or
July 1, 2006.
 
 The
unaudited pro forma condensed combined results of operations do not purport to
represent what the companies' combined results of operations would have been if
such transaction had occurred at the beginning of the periods presented, and are
not necessarily indicative of the Company's future results.
  
 F-7
 Table of Contents
  FREESTAR TECHNOLOGY CORPORATON
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 Three
      months ended December 31,
                  
                  
                  Six
      months ended December 31,2007
                  
                  
                  2006
                  
                  
                  2007
                  
                  
                  2006Actual
                  
                  
                  Proforma
                  
                  
                  Actual
                  
                  
                  ProformaRevenue:Freestar
                  
                  
                  764,852
                  
                  
                  
                  598,457
                  
                  
                  
                  1,513,370
                  
                  
                  
                  1,060,317PLC
                  
                  
                  683,861
                  
                  
                  
                  365,711
                  
                  
                  
                  1,289,838
                  
                  
                  
                  736,633Combined
                  
                  
                  1,448,713
                  
                  
                  
                  964,168
                  
                  
                  
                  2,803,208
                  
                  
                  
                  1,796,950Net
      income (loss):
                  
                  $
                  (4,293,806
                  )
                  
                  $
                  (2,978,172
                  )
                  
                  $
                  (9,690,693
                  )
                  
                  $
                  (5,300,025
                  )Net
      loss per share – basic and diluted
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.05
                  )
                  
                  $
                  (0.03
                  )
  Pursuant
to the terms of the 50% acquisition of  PLC, the Company is obligated to
issue to the PLC shareholders  additional shares of Freestar common stock
representing the difference between $800,000 and the value of the FreeStar
Shares, calculated based on the one-year closing price. The number of shares
issuable pursuant to this calculation was capped at
1,111,111.   The one year closing price was calculated as of
November 21, 2007.  As of such date, the Company owed to the PLC
shareholders an additional 1,111,111 shares of common stock with a fair value
of $192,555.  The Company has accrued this amount to operations
during the three months ended September 30, 2007, and the shares were issued
during the three months ended December 31, 2007.
  3.
ACCOUNTS RECEIVABLE
 
 Accounts
receivable consists of the following:
 
 December
      31,
                
                
                June
      30,2007
                
                
                2007Amounts
      receivable from customers
                
                $
                775,560
                
                
                $
                1,032,405Less:
      Reserve for doubtful accounts
                
                
                56,839
                
                
                
                54,903Accounts
      receivable, net
                
                $
                718,721
                
                
                $
                977,502
  4.  OTHER
CURRENT ASSETS
 
 Other
current assets consists of the following:
  December
      31,
                
                June
      30,2007
                
                2007Prepaid
      expenses
                
                $
                42,003
                
                $
                79,433Advances
      to employees
                
                
                9,773
                
                
                12,830Deposits
                
                
                41,628
                
                
                11,725$
                93,404
                
                $
                103,988
 
 5.
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
      30,2007
                
                
                2007Finished
      goods
                
                $
                732,258
                
                
                $
                918,947Total
                
                $
                732,258
                
                
                $
                918,947
   F-8
 Table of Contents
  FREESTAR TECHNOLOGY CORPORATON
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  6.
PROPERTY AND EQUIPMENT
 
 A summary
of property and equipment is as follows:
 
 December
      31,
                
                
                June
      30,2007
                
                
                2007Computer
      equipment
                
                $
                201,235
                
                
                $
                171,372Furniture
      and office equipment
                
                
                217,000
                
                
                
                186,755418,235
                
                
                
                358,127Less:
      accumulated depreciation
                
                
                (229,146
                )
                
                
                (170,804
                )Property
      and equipment, net
                
                $
                189,089
                
                
                $
                187,323
 
 Total
depreciation and amortization expense for property and equipment amounted to
$47,712 and $26,004 for the six months ended December 31, 2007 and 2006,
respectively.
 
 7.
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 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, 2007 are:
 
 Gross
      Carrying Amount
                
                
                Accumulated
      Amortization
                
                
                Net
                
                
                Residual
      Value
                
                Average
      Amortization YearsAmortizable
      Intangible Assets:Software
      and related development costs
                
                $
                4,312,418
                
                
                $
                1,397,925
                
                
                $
                2,914,493
                
                
                $
                -
                
                4.1Customer
      Relationships and Contracts
                
                $
                2,949,249
                
                
                $
                1,003,453
                
                
                $
                1,945,796
                
                
                $
                -
                
                9.5Software
      Licenses
                
                $
                2,261,156
                
                
                $
                1,138,767
                
                
                $
                1,122,389
                
                
                $
                -
                
                9.5
  The
identifiable intangible assets acquired and their carrying values at June 30,
2007 are:
 
 Gross
      Carrying Amount
                
                
                Accumulated
      Amortization
                
                
                Net
                
                
                Residual
      Value
                
                Average
      Amortization YearsAmortizable
      Intangible Assets:Software
      and related development costs
                
                $
                3,784,354
                
                
                $
                1,175,908
                
                
                $
                2,608,446
                
                
                $
                -
                
                4.6Customer
      Relationships and Contracts
                
                $
                2,949,249
                
                
                $
                848,493
                
                
                $
                2,100,756
                
                
                $
                -
                
                10.0Software
      Licenses
                
                $
                2,261,156
                
                
                $
                1,027,457
                
                
                $
                1,233,699
                
                
                $
                -
                
                10.0
  Total
amortization expense charged to operations for the six months ended December 31,
2007 and 2006 was $409,948 and $368,164, respectively.
 
 8.  OTHER
LONG TERM ASSETS
 
 Other
long-term assets at December 31, 2007 and June 30, 2007 consists of prepaid rent
of $83,631 and $19,966, respectively.
   F-9
 Table of Contents
 FREESTAR TECHNOLOGY CORPORATON
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  9.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
 
 Accounts
payable and accrued liabilities at December 31 and June 30, 2007 are as
follows:
 
 December
      31,
                
                June
      30,2007
                
                2007Accounts
      payable and accrued expenses
                
                $
                2,584,404
                
                $
                2,312,644Accrued
      payroll and related expenses
                
                
                317,034
                
                
                172,985$
                2,901,438
                
                $
                2,485,629
  10.  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  has 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:
  December
      31,
                
                June
      30,2007
                
                2007Accrued
      salaries
                
                $
                274,001
                
                $
                131,550Advances
                
                
                195,489
                
                
                56,126Accrued
      Interest
                
                
                4,179
                
                
                264Accrued
      car allowance
                
                
                30,910
                
                
                4,044$
                504,579
                
                $
                191,984
  11.
EQUITY
 
 Minority
Interest
 
 Minority
interest consists of the minority owned portion of the Company’s 50% owned
subsidiary PLC Partners.
 
 Private Placement of Common
Stock
 
 On
January 27, 2006, the Company signed subscription agreements with a group of
offshore investors for the sale of an aggregate of $9.2 million in Company
common stock, plus warrants (the "January Financing"). Due to the failure of the
investment group to timely fund in full the first payment required for the
purchase of shares and warrants, the Company terminated the January Financing;
all shares and warrants issued thereunder were returned by the escrow holder to
the Company for cancellation, and any funds received pursuant to the January
Financing were returned by the escrow holder to the investors.
 
 In March
2006, a group of European investors , lead by Olympia Holding AS, informed the
Company that they were willing to invest on the same terms and conditions that
were negotiated for the now-terminated January Financing, and the Company agreed
to this financing transaction with these investors (the "March
Financing").
  Pursuant
to the March Financing, the Company agreed to issue 46 million shares of
restricted common stock under Regulation S at $0.20 per share, plus warrants to
purchase 50 million shares of common stock with two-year exercise periods and
strike prices ranging from $1.50 to $8.50, as set forth below. The shares were
held in escrow by Carl Hessel, a director and major stockholder of the Company
based in Geneva, Switzerland, along with the warrants. Pursuant to the terms of
the March Financing, the first payment of $4.6 million was due immediately, with
a second payment of $4.6 million due within three months
thereafter.
 
 As of
June 30, 2007, the Company had received cash in the amount $7,169,924
pursuant to the March Financing, and had issued 22,850,000 shares of common
stock and warrants to purchase an additional 24,836,957 shares. The Company also
issued to consultants 7,600,000 shares of unregistered common stock with a fair
value of $2,912,000; warrants to purchase 12,000,000 shares of common stock at a
price of $1.00 per share with a fair value of $2,212,684; and warrants to
purchase an additional 1,000,000 shares of common stock at a price of $1.50 with
a fair value of $148,086 as commission to consultants related to the March
Financing. The Company charged the aggregate amount of $5,272,770 to operations
during the twelve months ended June 30, 2006 with regard to the issuance of
these shares and warrants.
  
 F-10
 Table of Contents
  FREESTAR TECHNOLOGY CORPORATON
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  During
three months ended September 30, 2007, the Company received an additional
$500,000 pursuant to the March Financing, and the Company issued a total of
23,000,000 shares of common stock and warrants to purchase an additional
25,000,000 shares.  During the three months ended December 31, 2007,
the Company received an additional $465,000 pursuant to the March financing. At
December 31, 2007, there remains a total of $1,035,000 due on the 23,000,000
shares which were issued during the quarter. This amount is recorded as
Subscriptions Receivable on the Company’s balance sheet at December 31,
2007.
 
 The
warrants issued pursuant to the investors in the March Financing are as
follows:
  Number
      of shares of Company Common Stock underlying WarrantsExercise
      Price Per Share
                
                
                When
      fully subscribed
                
                At
      December 31, 2007$
                1.50
                
                
                
                14,000,000
                
                13,954,348$
                2.50
                
                
                
                11,000,000
                
                10,964,130$
                4.50
                
                
                
                7,000,000
                
                6,977,174$
                5.50
                
                
                
                7,000,000
                
                6,977,174$
                6.50
                
                
                
                7,000,000
                
                6,977,174$
                8.50
                
                
                
                4,000,000
                
                3,986,95750,000,000
                
                49,836,957
 
 All
warrants have a two-year exercise period from the date of issuance of the
warrants. No registration rights were granted to the Investors in connection
with the March Financing and the shares and warrants issued in the March
Financing will be restricted securities, subject to the applicable restrictions
set forth in Regulation S promulgated under the Securities Act of 1933, as
amended.
  Sales Of
Securities
  During
the three months ended September 30, 2007, the Company issued the following
shares of common stock:
 
 The
Company issued 11,225,000 shares of common stock with a fair value of $2,103,375
to consultants for services.
 
 The
Company issued 750,000 shares of common stock with a fair value of $163,750 to
employees for services.
 
 The
Company issued 7,000,000 shares of common stock pursuant to the exercise of an
option by a consultant for $700,000 cash.
 
 The
Company issued 857,143 shares of common stock pursuant to the conversion of
500,000 shares of Series B preferred stock by a director.
 
 The
Company issued 13,000,000 shares of common stock in a financing transaction for
cash of $2,600,000 which was received in prior periods.
 
 The
Company issued 2,500,000 shares of common stock in a financing transaction for
cash of $500,000 received during the three months ended September 30,
2007.
 
 The
Company issued 7,500,000 shares of common stock in a financing transaction for
subscriptions receivable in the amount of $1,500,000.
 
 The
Company adjusted the number of shares issuable to an officer for preferred stock
converted to common stock in a prior period. The number of shares issuable was
reduced from 14,286 to 0, and this transaction was deemed complete.
 
 During
the three months ended December 31, 2007, the Company issued the following
shares of common stock:
 
 The
Company issued 10,536,000 shares of common stock with a fair value of $1,803,540
to consultants for services.
 
 The
Company issued 100,000 shares of common stock with a fair value of $18,000 to an
employee for services.
 
 The
Company issued 6,196,138 shares of common stock pursuant to the exercise of
options by consultants for $792,000 cash.
 
 The
Company issued 1,111,110 shares of common stock with a fair value of $192,555
pursuant to the terms of the PLC acquisition.
 12. STOCK
OPTIONS AND WARRANTS
 
 F-11
 Table of Contents
  FREESTAR TECHNOLOGY CORPORATON
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  Non-Employee Stock
Options
 
 The
following table summarizes the changes in options outstanding and the related
prices for the shares 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):
  Range
      of 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$
                0.15
                
                
                
                166,666
                
                
                
                7.7
                
                
                $
                0.15
                
                
                
                166,666
                
                
                $
                0.150.20
                
                
                
                1,350,000
                
                
                
                8.8
                
                
                
                0.20
                
                
                
                1,350,000
                
                
                
                0.200.49
                
                
                
                756,303
                
                
                
                5.2
                
                
                
                0.49
                
                
                
                756,303
                
                
                
                0.490.70
                
                
                
                756,303
                
                
                
                5.2
                
                
                
                0.70
                
                
                
                756,303
                
                
                
                0.703,029,272
                
                
                
                7.0
                
                
                $
                0.39
                
                
                
                3,029,272
                
                
                $
                0.39
  Transactions
involving stock options issued to non-employees are summarized as
follows:
 
 Number
      of Shares
                  
                  Weighted
      Average
                    Exercise
      PriceOptions
      exercisable at June 30, 2007
                  
                  
                  3,029,272
                  
                  $
                  0.39Granted
                  
                  
                  7,000,000
                  
                  
                  0.10Exercised
                  
                  
                  (7,000,000
                  )
                  
                  (0.10Cancelled
      / Expired
                  
                  
                  -
                  
                  
                  -Options
      exercisable at September 30, 2007
                  
                  
                  3,029,272
                  
                  $
                  0.39Granted
                  
                  
                  6,196,138
                  
                  
                  0.13Exercised
                  
                  
                  (6,196,138
                  )
                  
                  (0.13Cancelled
      / Expired
                  
                  
                  -
                  
                  
                  -Options
      exercisable at December 31, 2007
                  
                  
                  3,029,272
                  
                  $
                  0.39
 
 
 The
non-employee stock-based compensation expense recognized in the unaudited
condensed consolidated statements of operations for the six months ended
December 31, 2007 and 2006 was $1,410,028 and $625,860,
respectively.
 
 The
weighted-average fair value of stock options granted to non-employees during the
six months ended December 31, 2007 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):
                
                2007
                
                
                2006Risk-free
      interest rate at grant date
                
                
                4.75
                
                
                
                4.75
                %Expected
      stock price volatility
                
                
                104
                %
                
                
                108-111
                %Expected
      dividend payout
                
                
                0
                
                
                
                0Expected
      option life (in years)
                
                
                1.0
                
                
                
                0.5
   F-12
 Table of Contents
  FREESTAR TECHNOLOGY CORPORATON
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  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):
 
 Range
      of 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$
                0.14
                
                
                
                500,000
                
                
                
                9.7
                
                
                $
                0.14
                
                
                
                500,00
                
                
                $
                0.140.15
                
                
                
                200,000
                
                
                
                8.4
                
                
                
                0.15
                
                
                
                200,000
                
                
                
                0.150.47
                
                
                
                375,000
                
                
                
                8.3
                
                
                
                0.47
                
                
                
                375,000
                
                
                
                0.471,075,000
                
                
                
                9.0
                
                
                $
                0.26
                
                
                
                1,075,000
                
                
                $
                0.27
  Transactions
involving stock options issued to employees are summarized as
follows:
  Number
      of Shares
                
                
                Weighted
      AverageExercise PriceOptions
      outstanding at June 30, 2007
                
                
                1,075,000
                
                
                $
                0.26Granted
                
                
                --
                
                
                
                --Exercised
                
                
                
                
                
                
                --Cancelled
      / Expired
                
                
                --
                
                
                
                --Options
      outstanding at September 30, 2007
                
                
                1,075,000
                
                
                $
                0.26Granted
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -Cancelled
      / Expired
                
                
                -
                
                
                
                -Options
      outstanding at December 31, 2007
                
                
                1,075,000
                
                
                
                0.26Non-vested
      at December 31, 2007
                
                
                -
                
                
                
                -Exercisable
      at December 31, 2007
                
                
                1,075,000
                
                
                
                1,075,000
  The
employee stock based compensation expense recognized in the unaudited condensed
consolidated statements of operations for the six months ended December 31, 2007
and 2006 was $33,892 and $0, respectively.
  Warrants
 
 The
following table summarizes the 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).
   F-13
 Table of Contents
  FREESTAR TECHNOLOGY CORPORATON
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  Range
      of 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
options$
                0.75
                
                
                
                750,000
                
                
                
                0.4
                
                
                $
                0.75
                
                
                
                750,000
                
                
                $
                0.750.98-1.00
                
                
                
                13,392,857
                
                
                
                1.8
                
                
                
                0.98-1.00
                
                
                
                13,392,857
                
                
                
                0.98-1.001.50
                
                
                
                14,954,348
                
                
                
                0.8
                
                
                
                1.50
                
                
                
                14,954,348
                
                
                
                1.502.50
                
                
                
                10,964,130
                
                
                
                1.0
                
                
                
                2.50
                
                
                
                10,964,130
                
                
                
                2.504.50
                
                
                
                6,977,174
                
                
                
                1.0
                
                
                
                4.50
                
                
                
                6,977,174
                
                
                
                4.505.50
                
                
                
                6,977,174
                
                
                
                1.0
                
                
                
                5.50
                
                
                
                6,977,174
                
                
                
                5.506.50
                
                
                
                6,977,174
                
                
                
                1.0
                
                
                
                6.50
                
                
                
                6,977,174
                
                
                
                6.508.50
                
                
                
                3,986,957
                
                
                
                1.0
                
                
                
                8.50
                
                
                
                3,986,957
                
                
                
                8.50$
                3.22
                
                
                
                64,979,814
                
                
                
                0.9
                
                
                $
                3.22
                
                
                
                64,979,814
                
                
                $
                3.22
  Transactions
involving warrants are summarized as follows:
  Number
      of Shares
                
                Weighted
      Average
                  Exercise
      PriceWarrants
      exercisable at June 30, 2007
                
                41,184,600
                
                $
                2.77Granted
                
                25,000,000
                
                
                3.96Exercised
                
                -
                
                
                -Cancelled
      / Expired
                
                -
                
                
                -Warrants
      exercisable at September 30, 2007
                
                66,184,600
                
                $
                3.22Granted
                
                -Exercised
                
                -Cancelled
      / Expired
                
                (1,204,814)
                
                
                0.214Warrants
      exercisable at December 31, 2007
                
                64,979,814
                
                
                3.27
 
  F-14
 Table of Contents
 FREESTAR TECHNOLOGY CORPORATON
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  13.
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 31,2007
                  
                  
                  2006
                  
                  
                  2007
                  
                  
                  2006Sales
      to external customers:Corporate
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Dominicana
                  
                  
                  27,240
                  
                  
                  
                  -
                  
                  
                  
                  95,084
                  
                  
                  
                  -Rahaxi
                  
                  
                  737,612
                  
                  
                  
                  598,457
                  
                  
                  
                  1,418,286
                  
                  
                  
                  1,060,317PLC
                  
                  
                  683,861
                  
                  
                  
                  213,445
                  
                  
                  
                  1,289,838
                  
                  
                  
                  213,445Total
      sales to external customers:
                  
                  $
                  1,448,713
                  
                  
                  $
                  811,902
                  
                  
                  $
                  2,803,208
                  
                  
                  $
                  1,273,762Depreciation
      and amortization:Corporate
                  
                  $
                  80,849
                  
                  
                  $
                  1,230
                  
                  
                  $
                  161,442
                  
                  
                  $
                  2,460Dominicana
                  
                  
                  3,635
                  
                  
                  
                  -
                  
                  
                  
                  9,011
                  
                  
                  
                  4,605Rahaxi
                  
                  
                  144,774
                  
                  
                  
                  194,513
                  
                  
                  
                  287,090
                  
                  
                  
                  381,488PLC
                  
                  
                  34
                  
                  
                  
                  5,615
                  
                  
                  
                  117
                  
                  
                  
                  -Total
      depreciation and amortization:
                  
                  $
                  229,292
                  
                  
                  $
                  201,358
                  
                  
                  $
                  457,660
                  
                  
                  $
                  388,553General
      and administrative expense:(not
      including depreciation and amortization)Corporate
                  
                  $
                  3,451,081
                  
                  
                  $
                  2,017,989
                  
                  
                  $
                  7,854,957
                  
                  
                  $
                  3,925,434Dominicana
                  
                  
                  134,700
                  
                  
                  
                  192,463
                  
                  
                  
                  282,896
                  
                  
                  
                  274,388Rahaxi
                  
                  
                  796,856
                  
                  
                  
                  673,392
                  
                  
                  
                  1,497,873
                  
                  
                  
                  971,293PLC
                  
                  
                  149,719
                  
                  
                  
                  58,769
                  
                  
                  
                  227,182
                  
                  
                  
                  58,769Total
      general and administrative expense (not including depreciation and
      amortization)
                  
                  $
                  4,532,356
                  
                  
                  $
                  2,942,613
                  
                  
                  $
                  9,862,908
                  
                  
                  $
                  5,229,884Capital
      expenditures:Corporate
                  
                  $
                  1,796
                  
                  
                  $
                  -
                  
                  
                  $
                  1,796
                  
                  
                  $
                  -Dominicana
                  
                  
                  -
                  
                  
                  
                  24,317
                  
                  
                  
                  -
                  
                  
                  
                  24,317Rahaxi
                  
                  
                  127,163
                  
                  
                  
                  176,237
                  
                  
                  
                  242,663
                  
                  
                  
                  356,429PLC
                  
                  
                  -
                  
                  
                  
                  177,787
                  
                  
                  
                  -
                  
                  
                  
                  177,787Total
      capital expenditures
                  
                  $
                  128,959
                  
                  
                  $
                  378,341
                  
                  
                  $
                  244,459
                  
                  
                  $
                  558,533Operating
      income (loss):Corporate
                  
                  $
                  (3,643,187
                  )
                  
                  $
                  (2,017,989
                  )
                  
                  $
                  (8,127,709
                  )
                  
                  $
                  (3,925,434
                  )Dominicana
                  
                  
                  (128,851
                  )
                  
                  
                  (187,856
                  )
                  
                  
                  (262,072
                  )
                  
                  
                  (274,388
                  )Rahaxi
                  
                  
                  (749,054
                  )
                  
                  
                  (904,110
                  )
                  
                  
                  (1,628,413
                  )
                  
                  
                  (1,380,367
                  )PLC
                  
                  
                  (71,947
                  )
                  
                  
                  (19,463
                  )
                  
                  
                  67,225
                  
                  
                  
                  (19,463
                  )Total
      operating income (loss)
                  
                  $
                  (4,593,045
                  )
                  
                  $
                  (3,129,418
                  )
                  
                  $
                  (9,950,969
                  )
                  
                  $
                  (5,599,652
                  )Interest
      Expense, Net:Corporate
                  
                  $
                  659
                  
                  
                  $
                  791
                  
                  
                  $
                  1,317
                  
                  
                  $
                  779Dominicana
                  
                  
                  1,342
                  
                  
                  
                  -
                  
                  
                  
                  1,849
                  
                  
                  
                  -Rahaxi
                  
                  
                  9,197
                  
                  
                  
                  -
                  
                  
                  
                  27,245
                  
                  
                  
                  -PLC
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      Interest Expense
                  
                  $
                  11,198
                  
                  
                  $
                  791
                  
                  
                  $
                  30,411
                  
                  
                  $
                  779Segment
      assets:Corporate
                  
                  $
                  3,174,405
                  
                  
                  $
                  1,048,140
                  
                  
                  $
                  3,174,405
                  
                  
                  $
                  1,048,140Dominicana
                  
                  
                  187,284
                  
                  
                  
                  159,031
                  
                  
                  
                  187,284
                  
                  
                  
                  159,031Rahaxi
                  
                  
                  4,162,897
                  
                  
                  
                  5,860,783
                  
                  
                  
                  4,162,897
                  
                  
                  
                  5,860,783PLC
                  
                  
                  676,400
                  
                  
                  
                  1,451,940
                  
                  
                  
                  676,400
                  
                  
                  
                  1,451,940Total
      segment assets
                  
                  $
                  8,200,986
                  
                  
                  $
                  8,519,894
                  
                  
                  $
                  8,200,986
                  
                  
                  $
                  8,519,894
  F-15
 Table of Contents
  FREESTAR TECHNOLOGY CORPORATON
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 14.
SUBSEQUENT EVENTS
 Subsequent
to December 31, 2007, the Company issued a total of 8,345,500  shares
of common stock:
 
 A total
of 1,312,500 shares of common stock were issued to consultants for
services;
 A total
of 1,700,000 shares of common stock were issued to a director as
compensation;
 A total
of 5,333,333 shares of common stock were issued pursuant to the exercise of
options by a consultant.
 ITEM2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
 
 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. We currently process on average approximately
1,620,000 transactions per month and serve in excess of 1,100 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, Spectra Technologies, a leading Chinese
electronic payment solution provider, and Thyron Systems, 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.
 
 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.
 
 Management
believes that our primary short-term growth opportunities will be derived from
the European marketplace 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, which is located in Finland. We are one of the
leading players in the Finnish transaction processing market,
serving approximately 1,400
merchants each day and processing on average approximately
1,620,000 transactions per month.
  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. Other anticipated revenue streams include additional processing
fees from processing dynamic currency conversion through our agreement with
Global Refund Group and Monex. In fiscal year 2007, the period from July 1, 2006
through June 30, 2007, transaction fees from point-of-sale terminal transactions
were 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, Sweden, the United Kingdom, Dominican Republic and in
Ireland through our 50% stake in PLC, Project Life Cycle Partners
Limited.
  The
Company's principal offices are in Dublin, Ireland. The Company also has offices
in Helsinki, Finland; Stockholm, Sweden; Geneva, Switzerland; and Santo Domingo,
the Dominican Republic. While the Company's offices in Finland, Sweden, and
Switzerland 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. 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 Union
Pay.
 
 1
 Table of Contents
  Results of
Operations
 
 THREE
MONTHS ENDED DECEMBER 31, 2007 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2006
 
 Revenue
 
 Transaction processing and
related revenue
 
 Transaction
processing and related revenue was $512,782 for the three months ended December
31, 2007, compared to $497,810 during the three months ended December 31, 2006,
an increase of $14,972 or approximately 3%. The Company processed a total of
5,060,184 transactions during the three months ended December 31, 2007, a
decrease of 231,865 or approximately 4.4% compared to 5,292,049 transactions
processed during the three months ended December 31, 2006. The slight decrease
was primarily related to the increase in hardware sales, whereby some clients
who purchase a Point of Sale terminal are charged a flat recurring monthly fee
rather than per transaction fee .The slight decrease is more than offset by the
increase in hardware and related revenue which was $252,069, an increase of
$201,921 over the comparable period in the prior year. We expect this trend to
continue throughout fiscal 2008 as we continue to expand our customer base. The
Company invoices its customers in Euro. The average exchange rate of the Euro to
the U.S. Dollar for the three months ended December 31, 2007 has declined by
approximately 11% compared to the three months ended December 31, 2006, and this
exchange rate difference should be taken into consideration when analyzing our
transaction processing sales.
  Consulting
services revenue
 
 Consulting
services revenue was $683,862 for the three months ended December 31, 2007,
compared to $263,944 during the three months ended December 31, 2006. Consulting
services revenue is primarily generated by the Company’s 50% stake in PLC.
 Hardware and related
revenue
 
 Hardware
and related revenue was $252,069 during the three months ended December 31,
2007, compared to $50,148 during the three months ended December 31, 2006. The
Company began selling processing terminals and related equipment in December
2006. We expect to report increased hardware and related sales in the year
ending June 30, 2008 as we not only increase actual hardware sales to our
expanding customer base, but began to recognize revenue from annual maintenance
fees and service initiation fees, which were not recognized during fiscal year
2007.
 
 For the
reasons above, total revenue for the three months ended December 31, 2007 was
$1,448,713 compared to $811,902 for the three months ended December 31, 2006, an
increase of $636,811 or approximately 78%.
 We expect
revenue levels to increase throughout the next twelve months as we continue to
increase our client base and continue to diversify our service offerings, such
as EMV-compliant transaction processing, dynamic currency conversion, sales of
point of sale terminals and consulting fees. 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, 2007 has been derived from a
limited number of its customers, primarily Finnish customers for its transaction
processing products. Approximately 62% 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 fiscal 2008. We believe that this customer concentration will be diluted in
the latter half of fiscal 2008 as we pursues operations outside of Finland. All
of our revenues for the twelve months ended June 30, 2007 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
trend to continue through fiscal year 2008.
  Cost
of Revenue
 
 Cost of transaction
processing and related revenue
 
 Cost of
transaction processing and related revenue was $609,361 for the three months
ended December 31, 2007, compared to $626,365 for the prior three months ended
December 31, 2006, a decrease of $17,004 or approximately 3%. The reason
for the relatively small decrease is a decrease in expenditures made for our
processing infrastructure. Though we capitalize the acquisition and installation
costs of certain software components purchased from third party suppliers, we
expense all costs associated with maintaining, and many of the costs of
improving, our processing and customer support capabilities. These costs do not
always change in direct relation to sales, and in fact often increase in advance
of any potential increase in sales which they may support. Included in cost of
transaction processing and related revenue is depreciation and amortization of
$125,282 and $129,196 for the three months ended December 31, 2007 and 2006,
respectively.
  2
 Table of Contents
  Cost of consulting
services
 
 Cost of
consulting services revenue was $606,054 for the three months ended December 31,
2007, compared to $212,013 for the three months ended December 31, 2006, an
increase of $394,041 or approximately 186%. The primary reason for the increase
was an increase in consulting service revenue.
 
 Cost of hardware and related
revenue
 
 Cost of
hardware and related revenue was $192,312 during the three months ended December
31, 2007, compared to $48,930 during the prior year, an increase of $143,382 or
approximately 293%. The primary reason for the increase was an increase in
volume, as the Company began selling processing terminals and related equipment
in December 2006.
 
 For the
reasons above, total cost of revenue was $1,407,727 for the three months ended
December 31, 2007, compared to $887,308 for the three months ended December 31,
2006, an increase of $520,419 or approximately 59%.
 
 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 $4,634,031 for the three months ended
December 31, 2007 compared to $3,054,011 for the three months ended December 31,
2006, an increase of $1,580,020 or approximately 52%. The primary components of
selling, general, and administrative expenses for the three months ended
December 31, 2007 were: consulting fees of $2,729,006 to service providers for
financial consulting and other professional services; $2,362,642 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
three months ended December 31, 2007 included payroll and related costs of
$1,284,552; facilities expense (rent, telephone, utilities, and maintenance) of
$246,014; legal and accounting fees of $52,132; travel and entertainment costs
of $165,298; depreciation and amortization of $99,326; other professional
services of $92,871; and $45,429 for marketing.
  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. Selling expenses may also continue to increase due to increased
focus on obtaining new customers. We intend to focus additional resources in the
areas of sales personnel salaries, trade show participation, and other
promotional expenses. 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
income (expense) net was ($11,198) for the three months ended December 31, 2007,
compared to ($791) for the three months ended December 31, 2006, an
increase of ($10,407) or approximately 1316%. The increase is due primarily
to vendor financing which the Company utilized during the three months ended
December 31, 2007.
  In the
past, we have relied primarily on equity financing partly in order to avoid the
interest charges associated with debt financing.  To the extent that
we continue to sell hardware and carry inventory, we may continue to use vendor
or other third-party debt financing for such inventory, further increasing out
interest charges in the future.
 
 Net
Loss
 
 For the
reasons stated above, we recorded a net loss of $4,568,270 for the three months
ended December 31, 2007 compared to $3,124,456 for the three months ended
December 31, 2006, an increase of $1,443,814 or
approximately 46%.
 
 SIX
MONTHS ENDED DECEMBER 31, 2007 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2006
 
 3
 Table of Contents
  Revenue
 
 Transaction processing and
related revenue
 
 Transaction
processing and related revenue was $1,000,505 for the six months ended December
31, 2007, compared to $959,670 during the six months ended December 31, 2006, an
increase of $40,835 or approximately 4%. The Company processed a total of
10,185,858 transactions during the six months ended December 31, 2007, an
decrease of 24,144 or approximately 0.2% compared to 10,210,002 transactions
processed during the six months ended December 31, 2006. The slight decrease was
primarily related to the increase in hardware sales, whereby some clients who
purchase a Point of Sale terminal are charged a flat recurring monthly fee
rather than per transaction fee .The slight decrease is more than offset by the
increase in hardware and related revenue which was $512,864 an increase of
$50,148 over the comparable period in the prior year. We expect the
increase in revenue trend to continue throughout fiscal 2008 as we continue
to expand our customer base. The Company invoices its customers in Euro. The
average exchange rate of the Euro to the U.S. Dollar for the six months ended
December 31, 2007 has declined by approximately 9% compared to the six months
ended December 31, 2006, and this exchange rate difference should be taken into
consideration when analyzing our transaction processing sales.
  Consulting
services revenue
 
 Consulting
services revenue was $1,289,839 for the six months ended December 31, 2007,
compared to $263,944 during the prior year. Consulting services revenue is
primarily generated by the Company’s 50% stake in PLC.  The Company
acquired PLC in November, 2006. We expect to report increased revenue from
consulting services in the fiscal year ending June 30, 2008.
  Hardware and related
revenue
 
 Hardware
and related revenue was $512,864 during the six months ended December 31, 2007,
compared to $50,148 during the prior year. The Company began selling processing
terminals and related equipment in December 2006. We expect to report increased
hardware and related sales in the year ending June 30, 2008 as we not only
increase actual hardware sales to our expanding customer base, but began to
recognize revenue from annual maintenance fees and service initiation fees,
which were not recognized during the comparable period.
 
 For the
reasons above, total revenue for the six months ended December 31, 2007 was
$2,803,208 compared to $1,273,762 for the six months ended December 31, 2006, an
increase of $1,529,446 or approximately 120%.
 
 We expect
revenue levels to increase throughout the next twelve months as we continue to
increase our client base and introduce service offerings, such as EMV
transaction processing, dynamic currency conversion, sales of point of sale
terminals and consulting fees. 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 six months ended December 31, 2007 has been derived from a
limited number of its customers, primarily Finnish customers for its transaction
processing products. Approximately 62% 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 fiscal 2008. We believe that this customer concentration will be slightly
diluted in the latter half of fiscal 2008 as we pursues operations outside of
Finland. All of our revenues for the twelve months ended June 30, 2007 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 trend to continue through fiscal year 2008.
  Cost
of Revenue
 
 Cost of transaction
processing and related revenue
 
 Cost of
transaction processing and related revenue was $1,243,628 for the six months
ended December 31, 2007, compared to $1,160,343 for the prior six months ended
December 31, 2006, an increase of $83,285 or approximately 7%. The reason
for the increase is our continued investment in our processing infrastructure,
as we further build out our processing capabilities and service offerings.
Though we capitalize the acquisition and installation costs of certain software
components purchased from third party suppliers, we expense all costs associated
with maintaining, and many of the costs of improving, our processing and
customer support capabilities. These costs do not always change in direct
relation to sales, and in fact often increase in advance of any potential
increase in sales which they may support. Included in cost of transaction
processing and related revenue is depreciation and amortization of $254,988 and
$257,807 for the six months ended December 31, 2007 and 2006,
respectively.
  Cost of consulting
services
 
 Cost of
consulting services revenue was $995,314 for the six months ended December 31,
2007, compared to $212,013 for the six months ended December 31, 2006.  The
primary reason for the increase was an increase in labor costs due required in
connection with generating increased consulting service
revenue.
 
 4
 Table of Contents
  Cost of hardware and related
revenue
 
 Cost of
hardware and related revenue was $449,655 during the six months ended December
31, 2007, compared to $49,980 during the prior year. The reason for the increase
is an increase in hardware sales. The Company began selling processing terminals
and related equipment in December 2006. Included in cost of hardware revenue are
terminals shipped to customers as test and demonstration units, as well as items
replaced or returned.
 
 For the
reasons above, total cost of revenue was $2,688,597 for the six months ended
December 31, 2007, compared to $1,421,286 for the six months ended December 31,
2006, an increase of $1,267,311 or approximately 89%.
 
 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 $10,065,580 for the six months ended
December 31, 2007 compared to $5,452,127 for the six months ended December 31,
2006, an increase of $4,613,453 or approximately 85%. The primary components of
selling, general, and administrative expenses for the six months ended December
31, 2007 were: consulting fees of $6,295,700 to service providers for financial
consulting and other professional services; $5,688,654 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 six months
ended December 31, 2007 included payroll and related costs of $2,446,929;
facilities expense (rent, telephone, utilities, and maintenance) of $468,159;
legal and accounting fees of $264,694; travel and entertainment costs of
$268,506; depreciation and amortization of $202,672; other professional services
of $159,575; and $60,843 for marketing.
  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. We intend to focus additional
resources in the areas of sales personnel salaries, trade show participation,
and other promotional expenses. 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.
  Cost
of Acquisition
 
 Pursuant
to the acquisition agreement for the Company’s 50% owned subsidiary PLC
Partners, the Company was obligated to issue additional shares of the Company’s
common stock, since the average closing price was under $0.36 for the thirty day
period preceding November 21, 2007, the one-year anniversary of the transaction.
The number of shares that we were required to issue pursuant to this clause was
capped at 1,111,111, and the maximum amount of 1,111,111 additional shares were
issued in November 2007. The Company accrued the value of these shares, or
$192,555, to operations during the six months ended December 31, 2007. There was
no comparable expense during the prior year.
 
 Interest Expense
 
 Interest
income (expense) net was ($30,411) for the six months ended December 31, 2007,
compared to ($799) for the six months ended December 31, 2006, an
increase of ($29,632) or approximately 3804%. The increase is due primarily
to vendor financing which the Company utilized during six months ended December
31, 2007.
  In the
past, we have relied primarily on equity financing partly in order to avoid the
interest charges associated with debt financing.  To the extent that
we continue to sell hardware and carry inventory, we may continue to use vendor
or other third-party debt financing for such inventory, further increasing out
interest charges in the future.  In addition, we could receive an
offer of attractive debt financing or could undertake additional financing with
regard to an acquisition, in which cases interest expense would also
significantly increase.
 
 Net
Loss
 
 For the
reasons stated above, we recorded a net loss of $10,207,548 for the six months
ended December 31, 2007 compared to $5,594,678 for the six months ended December
31, 2006, an increase of $4,612,870 or approximately 82%.
 
 We may
continue to incur losses on both a quarterly and annual basis. In addition, we
expect to continue to incur significant costs of services and substantial
operating expenses. Therefore, we will need to significantly increase revenues
to achieve profitability and a positive cash flow. We may not be able to
generate sufficient revenues to achieve profitability. We expect losses to
continue for at least the next twelve months.
 
 5
 Table of Contents
  Operating
Activities
 
 The net
cash used in operating activities was $2,426,606 for the six months ended
December 31, 2007 compared to $2,880,745 for the six months ended December 31,
2006, a decrease of $454,139 or approximately 16%. The primary components of
cash used in operating activities during the current period are the net loss of
($10,205,764), partially offset by the non-cash charges of non-cash compensation
of $5,914,187 and depreciation and amortization of $457,660. The total amount of
cash used in operating activities also reduced by changes in the following
components of working capital: accounts payable and accrued expenses of
$806,647; accrued salary due to officers of $312,595; accounts receivable of
$181,905; Inventory of $114,921; and deferred revenue of $15,683.
 
 Investing
Activities
 
 Net cash
used in investing activities was $244,459 during the six months ended December
31, 2007 compared to $558,533 for the six months ended December 31, 2006, a
decrease of $314,074 or approximately 56%. This change was primarily due to the
cash used in the investment in PLC of $177,787 during the prior year, and a
decrease of the amount of capitalized software of $90,926.
 
 Financing
Activities
 
 Net cash
provided by financing activities was $2,696,777 for the six months ended
December 31, 2007, compared to $1,762,500 for the six months ended December 31,
2006, an increase of $934,277 or approximately 53%. The reason for the increase
was cash provided from the exercise of stock options and warrants of $1,542,000,
an increase of $1,489,500 from the prior period; this was partially offset by a
decrease in cash provided from the sale of common stock, which was $965,000 or
$935,000 less than the prior period.
  Liquidity and Capital
Resources
  As of
December 31, 2007, we had total current assets of $1,945,907 and total current
liabilities of $3,509,597, resulting in a working capital deficiency of
($1,563,690). We had cash and cash equivalents of $401,524 at December 31, 2007,
and an accumulated deficit of $84,626,459.
 
 On
January 27, 2006, the Company signed subscription agreements with a group of
offshore investors for the sale of an aggregate of $9.2 million in Company
common stock, plus warrants (the "January Financing"). Due to the failure of the
investment group to timely fund in full the first payment required for the
purchase of shares and warrants, the Company terminated the January Financing;
all shares and warrants issued thereunder were returned by the escrow holder to
the Company for cancellation, and any funds received pursuant to the January
Financing were returned by the escrow holder to the investors.
 
 In March
2006, a group of European investors, lead by Olympia Holding AS, informed the
Company that they were willing to invest on the same terms and conditions that
were negotiated for the now-terminated January Financing, and the Company agreed
to this financing transaction with these investors (the "March
Financing").
  Pursuant
to the March Financing, the Company agreed to issue 46 million shares of
restricted common stock under Regulation S at $0.20 per share, plus warrants to
purchase 50 million shares of common stock with two-year exercise periods and
strike prices ranging from $1.50 to $8.50, as set forth below. The shares were
held in escrow by Carl Hessel, a director and major stockholder of the Company
based in Geneva, Switzerland, along with the warrants. Pursuant to the terms of
the March Financing, the first payment of $4.6 million was due immediately, with
a second payment of $4.6 million due within six months thereafter.
 
 As of
June 30, 2007, the Company had received cash in the amount $7,169,924 pursuant
to the March Financing, and had issued 22,850,000 shares of common stock and
warrants to purchase an additional 24,836,957 shares. The Company also issued to
consultants 7,600,000 shares of unregistered common stock with a fair value of
$2,912,000; warrants to purchase 12,000,000 shares of common stock at a price of
$1.00 per share with a fair value of $2,212,684; and warrants to purchase an
additional 1,000,000 shares of common stock at a price of $1.50 with a fair
value of $148,086 as commission to consultants related to the March Financing.
The Company charged the aggregate amount of $5,272,770 to operations during the
twelve months ended June 30, 2006 with regard to the issuance of these shares
and warrants.
 
 During
three months ended September 30, 2007, the Company received an additional
$500,000 pursuant to the March Financing, and the Company issued a total of
23,000,000 shares of common stock and warrants to purchase an additional
25,000,000 shares. During the three months ended December 31, 2007, the Company
received an additional $465,000 pursuant to the March financing. At December 31,
2007, there remains a total of $1,035,000 due on the 23,000,000 shares which
were issued during the quarter. This amount is recorded as Subscriptions
Receivable on the Company’s balance sheet at December 31, 2007.
 
 The
independent auditor's report on the Company's June 30, 2007 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.
 
 6
 Table of Contents
  Management
plans to continue raising additional capital through a variety of fund raising
methods during fiscal 2008 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. The Company also
recently considered selling all or a portion of its assets, although no offers
were accepted. 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 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:
 
 ·   curtail
operations significantly;
 ·   sell
significant assets;
 ·   seek
arrangements with strategic partners or other parties that may require us to
relinquish significant
rights to products, technologies or markets; or
 ·   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 may 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. 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.
  Certain
Indebtedness
 
 Paul Egan
and Ciaran Egan have delayed payment of a portion of their salary in order to
conserve our cash. At December 31, 2007, $179,627 and $94,374 of accrued
salaries were owed to Paul Egan and Ciaran Egan, respectively.
 
 Paul Egan
has also advanced the funds to the Company. These advances accrue interest at
the rate of 7% per annum. At December 31, 2007, the Company owned the amount of
$58,507 to Paul Egan for advances, plus $637 of accrued interest.
 
 Pursuant
to Paul Egan’s and Ciaran Egan’s employment agreements, the Company provides the
officers a car allowance. These allowance have not been paid during the six
months ended December 31, 2007. At December 31, 2007, the Company has accrued
the amount of $8,559 to Paul Egan and $8,559 to Ciaran Egan for car
allowances.
 
 Exchange
Rates
 
 Our
operations are principally conducted in Finland through our subsidiary Rahaxi,
which operates in its local currency, the Euro. We also have operations in the
Dominican Republic under the name ePayLatina S.A., and Freestar Dominicana, Inc.
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. 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 was $210,600 for
the six months ended December 31, 2007.
 
 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.
 7
 Table of Contents
  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.
  Contractual Obligations and
Commercial Commitments
 
 The
following table of contractual obligations sets forth the contractual
obligations of the Company as of December 31, 2007:
  Less
      than
                
                
                1
      - 3
                
                
                3-
      5
                
                
                More
      thanContractual
      obligation
                
                Total
                
                
                1
      year
                
                
                years
                
                
                years
                
                
                5
      yearsOperating
      lease obligations
                
                $
                1,175,904
                
                
                $
                303,362
                
                
                $
                768,026
                
                
                $
                19,677
                
                
                
                -
 
 Other
 
 We do not
provide post-retirement or post-employment benefits requiring charges under
Statements of Financial Accounting Standards No. 106 and No. 112.
 
 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.
 
 8
 Table of Contents
  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
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which
superseded SAB No. 101, "Revenue Recognition in Financial Statements." SAB No.
101 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)
collectibility 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 collectibility 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. SAB No. 104 incorporates Emerging Issues Task Force ("EITF") No.
00-21, "Multiple-Deliverable Revenue Arrangements." EITF No. 00-21 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 EITF No. 00-21 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. EITF No. 00-21 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
EITF No. 00-21.
 
 For those
contracts which contain multiple deliverables, management must first determine
whether each service, or deliverable, meets the separation criteria of EITF No.
00-21. 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 EITF No. 00-21 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.
 
 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 "Factors That May Affect Operating Results." 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.
 
 9
 Table of Contents
  FACTORS
THAT MAY AFFECT OPERATING RESULTS
 
 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:
  ·
                market
      acceptance of and changes in demand for products and
    services;
 
 ·
                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;
 
 ·
                gain
      or loss of clients or strategic
  relationships;
 
 ·
                announcement
      or introduction of new services and products by the Company or by its
      competitors;
 
 ·
                price
      competition;
 
 ·
                the
      ability to upgrade and develop systems and infrastructure to accommodate
      growth;
 
 ·
                the
      ability to introduce and market products and services in accordance with
      market demand;
 
 ·
                changes
      in governmental regulation;
and
 
 ·
                reduction
      in or delay of capital spending by clients due to the effects of
      terrorism, war and political
instability.
  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:
 
 (a)
COMPETITION
 
 The
market for electronic payment systems and electronic point of sale (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
POS 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.
 
 (b)
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.
 
 10
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  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 revenue during fiscal 2008 could be significantly affected by the
timing and success of the introduction of new products and services during the
fiscal year.
 
 (c) 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.
  (d) 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 or services. 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.
 
 (e)
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.
 
 (f)
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.
  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.
  (g)
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.
  11
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  (h) 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 in fiscal year 2008
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.
 
 (i)
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.
 
 (j)
LITIGATION
 
 As
described under Legal Proceedings in our Form 10-KSB for the fiscal year ended
June 30, 2007, 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.
 
 (k)
OPERATING LOSSES
 
 We have a
history of operating losses and we may not be able to meet our obligations or
continue operating as a going concern without attracting additional
capital. In light of the net losses experienced by us, there can be no
assurance that we will be profitable. If we are not profitable, we may not be
able to meet our obligations or continue operating as a going concern without
attracting additional capital. It is also possible that additional capital may
not be available to us. If additional capital is required and is not available,
we may not be able to continue operating as a going concern.
  (l)
IMPLEMENTATION OF SECTION 404 OF THE SARBANS-OXLEY ACT
 
 We may
not be able to implement Section 404 of the Sarbanes-Oxley Act on a timely
basis. 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. This
requirement will first apply to our annual report on Form 10-K for the
fiscal year ending June 30, 2008. In addition, commencing with our annual report
for the fiscal year ending June 30, 2009 our independent registered accounting
firm must attest to and report on management’s assessment of the effectiveness
of our internal controls over financial reporting.
 
 We have
not yet developed a Section 404 implementation plan. We have in the past
discovered, and may in the future discover, areas of our internal controls that
need improvement. How companies should be implementing these new requirements
including internal control reforms to comply with Section 404’s requirements and
how independent auditors will apply these requirements and test companies’
internal controls, is still reasonably uncertain.
 
 We expect
that we will need to hire and/or engage additional personnel and incur
incremental costs in order to complete the work required by Section 404. We can
not assure you that we will be able to complete a Section 404 plan on a timely
basis. Additionally, upon completion of a Section 404 plan, we may not be able
to conclude that our internal controls are effective, or in the event that we
conclude that our internal controls are effective, our independent accountants
may disagree with our assessment and may issue a report that is qualified. Any
failure to implement required new or improved controls, or difficulties
encountered in their implementation, could negatively affect our operating
results or cause us to fail to meet our reporting obligations.
  12
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  ITEM 3. QUALITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
  In the
normal course of business, operations of the Company are exposed to risks
associated with fluctuations in foreign currency exchange rates.
  To ensure
the adequacy and effectiveness of the Company's foreign exchange positions, the
Company continually monitors its foreign currency exposures from an accounting
and economic perspective. However, given the inherent limitations of forecasting
and the anticipatory nature of the exposures, there can be no assurance that our
continual monitoring will offset more than a portion of the adverse financial
impact resulting from unfavorable movements in foreign exchange
rates.
  Foreign
Currency Risk
  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.
  ITEM4. CONTROLS AND PROCEDURES
  Evaluation
of Disclosure Controls and Procedures
  As of
December 31, 2007, 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 on that evaluation, our chief executive
officer and chief financial officer concluded that our disclosure controls and
procedures are effective to provide reasonable assurance that information we are
required to disclose in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required
disclosure.
 
 Changes
in internal controls
  We
determined that 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. During the quarter ended December 31, 2007, the Company completed
its review of the relevant controls and procedures.
  The
Company concluded that escrowing shares should generally be avoided in any
future financings. In addition, the Company determined that if any escrows of
shares are utilized in subsequent financings, the Company enlist the services of
a professional outside escrow company, or utilize legal counsel. In addition,
the Company shall require periodic reports or statements confirming the escrowed
status of such shares. As described under Legal Proceedings in our Form 10-KSB
for the fiscal year ended June 30, 2007, a Federal Court in Nevada ordered that
the shares that were inadvertently released from the previous financing escrow
have been ordered by to be cancelled and not considered issued or
outstanding.
  13
 Table of Contents
  PART
II - OTHER INFORMATION
  ITEM1. 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-KSB filed with the SEC on September
28, 2007. During the six months ended December 31, 2007, there were no material
changes to the legal proceeding or investigations reported in such
10-KSB.
 
 ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES.
 
 The
Company made the following sales of unregistered (restricted) securities during
the quarter ended on December 31, 2007 (not previously reported in a Form
8-K):
 
 In
November 2007, the Company issued 250,000 shares of common stock with a fair
value of $42,500 to a consultant for services.
 
 In
November 2007, the Company issued 186,000 shares of common stock with a fair
value of $186,000 to a consultant for services.
 
 In
November 2007, the Company issued 100,000 shares of common stock with a fair
value of $18,000 to a consultant for services.
 
 In
November 2007, the Company issued 1,111,110 shares of common stock pursuant to
the provisions of the PLC acquisition.
 
 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.
 
 ITEM3. DEFAULTS UPON SENIOR SECURITIES.
  Not
applicable.
  ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
 
 None.
  ITEM5. OTHER INFORMATION.
 
 None.
  SUBSEQUENT
EVENTS
  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).
  
 14
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  SIGNATURES
 
 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.
  FREESTAR
      TECHNOLOGY CORPORATIONDate: February
      19, 2008
                By:
                /s/ Paul
      EganChief
      Executive Officer
   Date: February  19,
      2008
                By:
                /s/ Ciaran
      EganSecretary/Treasurer/
                  Chief
      Financial Officer
   
  15
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 EXHIBIT
INDEX
  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).
     16
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