UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





ý      QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
quarterly period endedJuly 3,
2010





 ̈      TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
transition period from _____________ to _____________





Commission
File Number 000-33389





nFinanSe
Inc.





(Exact
name of registrant as specified in its charter)





Nevada
            65-1071956(State
      or other jurisdiction of
            (IRS
      Employer Identification No.)incorporation
      or organization)3923
      Coconut Palm Drive, Suite 107Tampa,
      Florida
            33619(Address
      of principal executive offices)
            (Zip
      Code)Issuer’s
      telephone number, including area code:
            (813)
      367-4400





Indicate
by check mark whether the registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 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
            
            No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).





Yes
            X
            
            No





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





Large
      accelerated filer   £
            Accelerated
      filer   £Non-accelerated
      filer (Do not check if a smaller reporting company)   £
            Smaller
      reporting company   T





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





Yes
            
            
            No
            X





State the
number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date:
23,539,996shares of
common stock, $0.001 par value, outstanding as of August 3,
2010.
















nFinanSe
      Inc.A
      Development Stage EnterpriseTable
      of ContentsPage
      No.NOTE
      REGARDING FORWARD LOOKING STATEMENTS
            1PART
      I - FINANCIAL INFORMATIONItem
      1.     Financial Statements:Consolidated
      Balance Sheets as of July 3, 2010 (unaudited) and January 2, 2010
      (audited)
            2Consolidated
      Statements of Operations (unaudited) for the thirteen and twenty-six weeks
      ended July 3, 2010 and July 4, 2009 and  for the period July 10,
      2000 (inception) to July 3, 2010
            3Consolidated
      Statements of Cash Flows (unaudited) for the twenty-six weeks ended July
      3, 2010 and July 4, 2009, and for the period July 10, 2000 (inception) to
      July  3, 2010
            4Notes
      to Consolidated Financial Statements (unaudited)
            6Item
      2.     Management’s Discussion and Analysis of
      Financial Condition and Results of Operations.
            17Item
      3.     Quantitative and Qualitative Disclosures
      About Market Risk.
            22Item
      4T.   Controls and Procedures.
            23PART
      II - OTHER INFORMATIONItem
      2.  Unregistered Sales
      of Equity Securities and Use of Proceeds.
            24Item
      6.     Exhibits.
            24SIGNATURES







-i-


FORWARD-LOOKING
STATEMENTS





In this
quarterly report, we make a number of statements, referred to as “forward-looking statements,”
which are intended to convey our expectations or predictions regarding the
occurrence of possible future events or the existence of trends and factors that
may impact our future plans and operating results. These forward-looking
statements are derived, in part, from various assumptions and analyses we have
made in the context of our current business plan and information currently
available to us and in light of our experience and perceptions of historical
trends, current conditions and expected future developments and other factors we
believe to be appropriate in the circumstances. You can generally identify
forward-looking statements through words and phrases such as “seek,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “budget,” “project,” “may be,” “may continue,” “may likely result,”and other similar
expressions and include statements regarding:





·
            the
      extent to which we continue to experience losses;·
            our
      real property leases and expenses related thereto;·
            our
      ability to fund our future cash needs through public or private equity
      offerings and debt financings;·
            whether
      our business strategy, expansion plans and hiring needs will significantly
      escalate our cash needs;·
            our
      need to raise additional capital and, if so, whether our success will
      depend on raising such capital;·
            our
      expectation of continued and increasing governmental regulation of the
      stored value card industry;·
            our
      anticipation of future earnings volatility;·
            our
      entrance into additional financings, which can result in a recognition of
      derivative instrument liabilities; and·
            the
      hiring of a substantial number of additional employees in sales,
      operations and customer service.





When
reading any forward-looking statement you should remain mindful that all such
statements are inherently uncertain as they are based on current expectations
and assumptions concerning future events or future performance of the Company,
and that actual results or developments may vary substantially from those
expected as expressed in or implied by that statement for a number of reasons or
factors, including those relating to:





·
            our
      ability to design and market our products;·
            the
      estimated timing of our product roll-outs;·
            our
      ability to protect our intellectual property rights and operate our
      business without infringing upon the intellectual property rights of
      others;·
            the
      changing regulatory environment related to our
products;·
            whether
      or not markets for our products develop and, if they do develop, the pace
      at which they develop;·
            our
      ability to attract the qualified personnel to implement our growth
      strategies,·
            our
      ability to develop sales and distribution capabilities;·
            our
      ability to work with our distribution partners;·
            the
      accuracy of our estimates and projections;·
            our
      ability to fund our short-term and long-term financing
    needs;·
            changes
      in our business plan and corporate strategies; and·
            other
      risks and uncertainties discussed in greater detail in this quarterly
      report, including those risks discussed under the heading “Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.”





Each
forward-looking statement should be read in context with, and with an
understanding of, the various other disclosures concerning the Company, as well
as other public reports filed with the United States Securities and Exchange
Commission. You should not place undue reliance on any forward-looking statement
as a prediction of actual results or developments. We are not obligated to
update or revise any forward-looking statement contained in this quarterly
report to reflect new events or circumstances unless and to the extent required
by applicable law.





As used
in this quarterly report, the terms “we,” “us,” “our,” “nFinanSe,” and “the Company” mean nFinanSe
Inc. and subsidiaries unless otherwise indicated. All dollar amounts in this
quarterly report are in U.S. dollars unless otherwise stated.








1





PART
I - FINANCIAL INFORMATION





Item
1. Financial Statements.


nFinanSe
Inc.


(A Development Stage
Enterprise)


CONSOLIDATED
BALANCE SHEETS





July
      3,
            
            
            January
      2,2010
            
            
            2010ASSETS
            
            (unaudited)
            
            
            (audited)CURRENT
      ASSETS:Cash
      and cash equivalents
            
            $
            616,817
            
            
            $
            3,794,788Restricted
      cash
            
            
            322,956
            
            
            
            343,075Receivables:Accounts
      (net of allowance for doubtful accounts of $0 and $0,
      respectively)
            
            
            200,296
            
            
            
            189,015Other
            
            
            25,859
            
            
            
            13,519Prepaid
      expenses and other current assets, including prepaid marketing costs of
      approximately $86,100 and $30,800, respectively
            
            
            412,972
            
            
            
            236,758Inventories
            
            
            705,684
            
            
            
            1,416,890Total
      current assets
            
            
            2,284,584
            
            
            
            5,994,045PROPERTY
      AND EQUIPMENT  (net of accumulated depreciation of $1,056,881
      and $944,122, respectively)
            
            
            344,048
            
            
            
            405,615OTHER
      ASSETS
            
            
            54,935
            
            
            
            54,932TOTAL
      ASSETS
            
            $
            2,683,567
            
            
            $
            6,454,592LIABILITIES AND STOCKHOLDERS’
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable
            
            $
            636,350
            
            
            $
            347,936Accrued
      personnel costs
            
            
            112,411
            
            
            
            88,231Credit
      facility and term loans outstanding
            
            
            500,000
            
            
            
            500,000Deferred
      revenues
            
            
            50,000
            
            
            
            51,667Other
      accrued liabilities
            
            
            52,660
            
            
            
            44,365Total
      current liabilities
            
            
            1,351,421
            
            
            
            1,032,199COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS’
      EQUITY:Preferred
      stock - $0.001 par value:  25,000,000 shares authorized;
      17,203,156 and 16,869,822 shares issued and outstanding on July 3, 2010
      and January 2, 2010, respectively, as follows:Series
      A Convertible Preferred Stock – 9,330,514 shares authorized; 7,500,484 and
      7,500,484 shares  issued and outstanding with a liquidation
      value of $7,689,537 and $7,877,563 (including undeclared and unpaid
      accumulated dividends in arrears of $189,053 and $377,079) at July 3, 2010
      and January 2, 2010, respectively
            
            
            7,500
            
            
            
            7,500Series
      B Convertible Preferred Stock – 1,000,010 shares authorized; 1,000,000
      shares issued and outstanding with a liquidation value of $3,000,000 at
      July  3, 2010 andJanuary
      2, 2010
            
            
            1,000
            
            
            
            1,000Series
      C Convertible Preferred Stock – 4,100,000 shares authorized; 4,037,500
      shares issued and outstanding with a liquidation value of $8,075,000 at
      July 3, 2010 and January 2, 2010
            
            
            4,038
            
            
            
            4,038Series
      D Convertible Preferred Stock – 4,666,666 shares
      authorized;  4,665,172 and 4,331,838 shares issued and
      outstanding with a liquidation value of $13,995,516 and $12,995,514 at
      July 3, 2010 and January 2, 2010, respectively
            
            
            4,665
            
            
            
            4,332Common
      stock - $0.001 par value: 200,000,000 shares authorized; 23,539,996
      and  9,542,887 shares issued and outstanding as of July 3, 2010
      and January 2, 2010, respectively
            
            
            23,540
            
            
            
            9,543Additional
      paid-in capital
            
            
            72,646,329
            
            
            
            71,421,315Deficit
      accumulated during the development stage
            
            
            (71,354,926
            )
            
            
            (66,025,335
            )Total
      stockholders’ equity
            
            
            1,332,146
            
            
            
            5,422,393TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            2,683,567
            
            
            $
            6,454,592





See notes
to consolidated financial statements.


2


nFinanSe
Inc.


(A Development Stage
Enterprise)





CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)




For
      the
              thirteen
      weeks
              ended
              July
      3, 2010
            
            
            For
      the
              thirteen
      weeks
              ended
              July
      4, 2009
            
            
            For
      thetwenty-
              six
      weeks
              ended
              July
      3, 2010
            
            
            For
      the twenty-
              six
      weeks
              ended
              July
      4, 2009
            
            
            For
      the period
              July
      10, 2000
              (inception)
      to
              July
      3, 2010REVENUES
            
            $
            110,472
            
            
            $
            1,774
            
            
            $
            165,164
            
            
            $
            (3,880
            )
            
            $
            1,420,530OPERATING
      EXPENSESTransaction
      and operating expenses
            
            
            627,976
            
            
            
            831,310
            
            
            
            1,550,753
            
            
            
            1,372,072
            
            
            
            9,601,236Selling
      and marketing expenses
            
            
            344,296
            
            
            
            431,571
            
            
            
            749,848
            
            
            
            930,667
            
            
            
            10,597,770General
      and administrative expenses
            
            
            1,441,804
            
            
            
            1,434,498
            
            
            
            2,772,517
            
            
            
            2,945,731
            
            
            
            38,848,194Total
      operating expenses
            
            
            2,414,076
            
            
            
            2,697,379
            
            
            
            5,073,118
            
            
            
            5,248,470
            
            
            
            59,047,200Loss
      before other income (expense)
            
            
            (2,303,604
            )
            
            
            (2,695,605
            )
            
            
            (4,907,954
            )
            
            
            (5,252,350
            )
            
            
            (57,626,670
            )Other
      income (expense):Interest
      expense
            
            
            (23,234
            )
            
            
            (1,505,906
            )
            
            
            (46,699
            )
            
            
            (2,279,417
            )
            
            
            (5,292,975
            )Interest
      income
            
            
            43
            
            
            
            94
            
            
            
            87
            
            
            
            94
            
            
            
            1,164,512Gain
      on derivative instruments
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,449,230Loss
      from litigation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (105,500
            )Loss
      on debt extinguishment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4,685,518
            )Registration
      rights penalties
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (98,649
            )Other
      expense
            
            
            -
            
            
            
            (152
            )
            
            
            -
            
            
            
            (1,761
            )
            
            
            (95,510
            )Total
      other income (expense)
            
            
            (23,191
            )
            
            
            (1,505,964
            )
            
            
            (46,612
            )
            
            
            (2,281,084
            )
            
            
            (7,664,410
            )Loss
      from continuing operations
            
            
            (2,326,795
            )
            
            
            (4,201,569
            )
            
            
            (4,954,566
            )
            
            
            (7,533,434
            )
            
            
            (65,291,080
            )Loss
      from discontinued operations
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3,861,579
            )Net
      loss
            
            
            (2,326,795
            )
            
            
            (4,201,569
            )
            
            
            (4,954,566
            )
            
            
            (7,533,434
            )
            
            
            (69,152,659
            )Dividends
      paid on Series A Convertible Preferred Stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,202,266
            )Undeclared
      and unpaid dividends on Series A Convertible Preferred
    Stock
            
            
            (93,499
            )
            
            
            (96,582
            )
            
            
            (186,998
            )
            
            
            (190,081
            )
            
            
            (186,998
            )Net
      loss attributable to common stockholders
            
            $
            (2,420,294
            )
            
            $
            (4,298,151
            )
            
            $
            (5,141,564
            )
            
            $
            (7,723,515
            )
            
            $
            (71,541,923
            )Net
      loss per share - basic and diluted
            
            $
            (0.11
            )
            
            $
            (0.45
            )
            
            $
            (0.30
            )
            
            $
            (0.82
            )Weighted
      average number of shares outstanding
            
            
            22,076,875
            
            
            
            9,542,887
            
            
            
            16,967,175
            
            
            
            9,371,413





See notes
to consolidated financial statements.


3


nFinanSe
Inc.


(A Development Stage
Enterprise)





CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





For
      the
              twenty-six
              weeks
      ended
              July
      3, 2010
            
            
            For
      the
              twenty-six
              weeks
      ended
              July
      4, 2009
            
            
            For
      the
              period
              July
      10, 2000
              (inception)
      to
              July
      3, 2010CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (4,954,566
            )
            
            $
            (7,533,434
            )
            
            $
            (69,152,659
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            112,759
            
            
            
            125,817
            
            
            
            1,604,692Provision
      for inventory obsolescence
            
            
            807,513
            
            
            
            171,099
            
            
            
            1,720,949Provision
      for bad debts
            
            
            -
            
            
            
            -
            
            
            
            461,972Amortization
      of intangible assets
            
            
            -
            
            
            
            -
            
            
            
            15,485Stock-based
      compensation and consulting
            
            
            347,288
            
            
            
            228,606
            
            
            
            8,915,238Purchased
      in process research and development
            
            
            -
            
            
            
            -
            
            
            
            153,190Gain
      on derivative instruments
            
            
            -
            
            
            
            -
            
            
            
            (1,449,230
            )Loss
      on debt extinguishments
            
            
            -
            
            
            
            -
            
            
            
            4,685,518Loss
      on disposal of assets
            
            
            -
            
            
            
            1,609
            
            
            
            29,572Loss
      from impairment of assets
            
            
            -
            
            
            
            449,589
            
            
            
            3,319,504Debt
      forgiveness as a result of litigation settlement
            
            
            -
            
            
            
            -
            
            
            
            (50,000
            )Non-cash
      interest expense
            
            
            -
            
            
            
            1,778,548
            
            
            
            3,621,924Other
      non-cash expense
            
            
            -
            
            
            
            1,013
            
            
            
            15,881Changes in assets and
      liabilities, net:Restricted
      cash
            
            
            20,119
            
            
            
            14,609
            
            
            
            (322,956
            )Receivables
            
            
            (23,621
            )
            
            
            7,213
            
            
            
            (525,864
            )Prepaid
      expenses and other current assets
            
            
            (176,214
            )
            
            
            214,948
            
            
            
            (174,660
            )Inventories
            
            
            (96,307
            )
            
            
            (68,476
            )
            
            
            (3,770,628
            )Other
      assets
            
            
            (3
            )
            
            
            15,992
            
            
            
            (4,122
            )Assets
      of discontinued operations
            
            
            -
            
            
            
            -
            
            
            
            (229,060
            )Accounts
      payable and accrued  liabilities
            
            
            320,889
            
            
            
            278,166
            
            
            
            1,030,559Accrued
      registration rights penalties
            
            
            -
            
            
            
            -
            
            
            
            98,649Deferred
      revenues
            
            
            (1,667
            )
            
            
            (19,583
            )
            
            
            50,000NET
      CASH USED IN OPERATING ACTIVITIES
            
            
            (3,643,810
            )
            
            
            (4,334,284
            )
            
            
            (49,956,046
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
            
            
            (51,192
            )
            
            
            (5,431
            )
            
            
            (2,184,505
            )Early
      redemption of short-term investment
            
            
            -
            
            
            
            -
            
            
            
            (2,504
            )Investment
      in Product Benefits Systems Corporation
            
            
            -
            
            
            
            -
            
            
            
            (15,737
            )Cash
      advanced under note receivable
            
            
            -
            
            
            
            -
            
            
            
            (202,000
            )Other
            
            
            -
            
            
            
            -
            
            
            
            (15,000
            )NET CASH USED IN INVESTING
      ACTIVITIES
            
            
            (51,192
            )
            
            
            (5,431
            )
            
            
            (2,419,746
            )





(Continued)


4


nFinanSe
Inc.


(A Development Stage
Enterprise)





CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)


For
      the
              twenty-six
              weeks
      ended
              July
      3, 2010
            
            
            For
      the
              twenty-six
              weeks
      ended
              July
      4, 2009
            
            
            For
      the
              period
              July
      10, 2000
              (inception)
      to
              July
      3, 2010CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of Series A Convertible Preferred Stock
            
            
            -
            
            
            
            -
            
            
            
            4,000,000Proceeds
      from issuance of Series B Convertible Preferred Stock
            
            
            -
            
            
            
            -
            
            
            
            3,000,000Proceeds
      from issuance of Series C Convertible Preferred Stock
            
            
            -
            
            
            
            -
            
            
            
            8,075,000Proceeds
      from issuance of Series D Convertible Preferred Stock
            
            
            500,000
            
            
            
            -
            
            
            
            7,753,199Proceeds
      from borrowings
            
            
            -
            
            
            
            4,000,000
            
            
            
            11,265,162Repayments
      of notes payable
            
            
            -
            
            
            
            -
            
            
            
            (147,912
            )Collections
      on note receivable from stockholder
            
            
            -
            
            
            
            -
            
            
            
            3,000,000Payment
      for deferred financing costs
            
            
            -
            
            
            
            -
            
            
            
            (459,606
            )Payments
      for stock issuance costs
            
            
            -
            
            
            
            37,950
            
            
            
            (1,519,289
            )Proceeds
      from the exercise of stock warrants
            
            
            17,031
            
            
            
            -
            
            
            
            17,031Proceeds
      from the exercise of vested stock options
            
            
            -
            
            
            
            -
            
            
            
            8,249Proceeds
      from the issuance of Common Stock
            
            
            -
            
            
            
            -
            
            
            
            18,000,775NET
      CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            517,031
            
            
            
            4,037,950
            
            
            
            52,992,609





NET
      CHANGE IN CASH AND CASH EQUIVALENTS
            
            
            (3,177,971
            )
            
            
            (301,765
            )
            
            
            616,817CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
            
            
            3,794,788
            
            
            
            475,608
            
            
            
            -CASH
      AND CASH EQUIVALENTS, END OF PERIOD
            
            $
            616,817
            
            
            $
            173,843
            
            
            $
            616,817SUPPLEMENTAL
      DISCLOSURE OF CASH FLOWINFORMATION:Interest
      paid
            
            $
            46,699
            
            
            $
            503,903
            
            
            $
            1,136,061Income
      taxes paid
            
            $
            -
            
            
            $
            -
            
            
            $
            -SUPPLEMENTAL
      DISCLOSURE OF NON-CASHINVESTING
      AND FINANCING ACTIVITIES:Acquisition
      of assets by issuance of Common Stock
            
            $
            -
            
            
            $
            -
            
            
            $
            818,200Reclassification
      of proceeds from sales of Common Stock to derivative financial instrument
      liabilities
            
            $
            -
            
            
            $
            -
            
            
            $
            4,007,443Issuance
      of Common Stock for net assets of Pan American Energy Corporation in a
      recapitalization  - see Note A
            
            $
            -
            
            
            $
            -
            
            
            $
            2,969,000Issuance
      of Common Stock in lieu of cash payment of registration
      penalties
            
            $
            -
            
            
            $
            -
            
            
            $
            652,625Reclassification
      of long-lived assets to assets of discontinued telecom
      operations
            
            $
            -
            
            
            $
            -
            
            
            $
            100,000Warrants
      exchanged for Common Stock
            
            $
            9,998
            
            
            $
            -
            
            
            $
            9,998Warrants
      issued to DFS Services, LLC
            
            $
            -
            
            
            $
            -
            
            
            $
            535,302Warrants
      issued to Lenders
            
            $
            -
            
            
            $
            1,353,877
            
            
            $
            1,530,381Conversion
      of Series A Convertible Preferred Stock to Common Stock
            
            $
            -
            
            
            $
            -
            
            
            $
            1,828Dividends
      on Series A Convertible Preferred Stock
            
            $
            375,024
            
            
            $
            189,053
            
            
            $
            2,202,266Declared
      and unpaid dividends on Series A Convertible Preferred
    Stock
            
            $
            179,772
            
            
            $
            -
            
            
            $
            179,772Conversion
      of Senior Secured Convertible Promissory Notes and accrued interest to
      Series A Convertible Preferred Stock
            
            $
            -
            
            
            $
            -
            
            
            $
            5,327,934Exchange
      of Accommodation and Term Loans and accrued interest to Series D
      Convertible Preferred Stock
            
            $
            -
            
            
            $
            -
            
            
            $
            5,693,898





See notes
to consolidated financial statements.


5


nFinanSe
Inc.


(A Development Stage
Enterprise)





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





NOTE A -FORMATION, BACKGROUND AND OPERATIONS
OF THE COMPANY





Background





The
accompanying consolidated financial statements include the accounts of nFinanSe
Inc. (formerly Morgan Beaumont, Inc.) and those of its wholly owned
subsidiaries, nFinanSe Payments Inc. and MBI Services Group, LLC (currently
dormant) (collectively, the “Company,” “we, ” “us, ” or “our”).  All
significant inter-company balances and transactions have been
eliminated.  We made the decision to abandon MBI Services Group, LLC’s
prepaid telephone card business in the fourth quarter of fiscal
2006.  We accounted for this discontinued operation using the
component-business approach in accordance with a certain accounting standard as
defined in the Accounting Standards Codification (“ASC”). As such, the
results of MBI Services Group, LLC have been eliminated from ongoing operations
for all periods presented and shown as a single line item on the statements of
operations entitled “Loss from discontinued operations” for each period
presented.  Because we are continuing to raise funds, and because our
revenues have been minimal, we are considered to be a development stage
enterprise as defined in the ASC.





nFinanSe
Inc. is a provider of stored value cards (“SVCs”), for a wide
variety of markets, including grocery stores, convenience stores, general
merchandise stores and direct to customer through on-line or direct marketing
activities. Our products and services are aimed at capitalizing on the growing
demand for stored value and reloadable ATM/prepaid card financial products. We
believe SVCs are a fast-growing product segment in the financial services
industry.





Basis of
Presentation





The
consolidated financial statements contained herein have been prepared in
accordance with generally accepted accounting principles (“GAAP”) for interim
financial statements, the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, these consolidated financial statements do not include all the
information and footnotes required by GAAP for annual financial statements. In
addition, certain comparative figures for the prior year and inception to date
period may have been reclassified to conform with the current year’s
presentation. In the opinion of management, the accompanying consolidated
financial statements contain all the adjustments necessary (consisting only of
normal recurring accruals and adjustments) to fairly present the financial
position of the Company at July 3, 2010 and January 2, 2010, its results of
operations for the thirteen and twenty-six weeks ended July 3,
2010  (“2Q2010”and “1stHalf 2010”,
respectively) and for the thirteen and twenty-six weeks ended July 4, 2009 (
“1Q2009” and
“1stHalf 2009”,
respectively) and its cash flows for the 1st Half
2010 and the 1st Half
2009. Operating results for the 1st Half
2010 are not necessarily indicative of the results that may be expected for the
fiscal year ending January 1, 2011. These consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company’s Annual Report on Form 10-K for the
fiscal year ended January 2, 2010.




Revenue
Recognition





We
generate the following types of revenues:





•
            Wholesale
      fees, charged to our prepaid card distributors when our general purpose
      reloadable cards are reloaded and our gift cards are
  sold.•
            Transaction
      fees, paid by the applicable networks and passed through by our card
      issuing banks when our SVCs are used in a purchase or ATM
      transaction.•
            Maintenance
      fees, charged to an SVC with a cash balance.•
            Interest
      revenue, on overnight investing of SVC balances by our card issuing
      bank.





We
recognize revenue when (1) there is persuasive evidence of an arrangement
existing, (2) delivery has occurred, (3) our price to the buyer is fixed or
determinable and (4) collectability of the receivables is reasonably assured. We
recognize the costs of these revenues, including the cost of printing the cards,
packaging and collateral material, at the time revenue is
recognized.  Certain periodic card costs are recognized as
incurred.





6


Accounts Receivable and
Allowance for Doubtful Accounts





Our
credit terms to our prepaid card distributors for our wholesale fees and the
load value of gift cards and of the general purpose reloadable cards vary by
customer but are less than two weeks. Payroll card loads are remitted by the
sponsor company directly to the issuing bank, in advance. Transaction fees and
interest income are paid monthly in arrears by the card-issuing bank
approximately two weeks into the month following the recognition of such fees or
interest income.  Maintenance fees are charged to active cards with
balances upon activation and then on the same day of each month in
arrears.





Accounts
receivable are determined to be past due if payment is not made in accordance
with the terms of our contracts. Receivables are written off when they are
determined to be uncollectible.  Our customers are typically prepaid
card distributors and large multi-unit retailers. We perform ongoing credit
evaluations of our customers and, with the exception of some minimum cash
balances, we generally do not require collateral.





We
evaluate the allowance for doubtful accounts based upon our review of the
collectability of our receivables in light of historical experience, adverse
situations that may affect our customers’ ability to repay, estimated value of
any underlying collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes
available.  Management believes accounts receivable are fully
collectible; therefore, no allowance for doubtful accounts has been
established.





Use of
Estimates





The
preparation of consolidated financial statements in conformity with GAAP
requires us to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements. The reported
amounts of revenues and expenses during the reporting period may be affected by
the estimates and assumptions we are required to make. Estimates that are
critical to the accompanying consolidated financial statements arise from our
belief that (1) we will be able to raise and generate sufficient cash to
continue as a going concern (2) all long-lived assets are recoverable, and (3)
our inventory is properly valued and deemed recoverable.  In addition,
stock-based compensation expense represents a significant
estimate.  The markets for our products are characterized by intense
competition, rapid technological development, evolving standards and regulations
and short product life cycles, all of which could impact the future realization
of our assets. Estimates and assumptions are reviewed periodically and the
effects of revisions are reflected in the period that they are determined to be
necessary. It is at least reasonably possible that our estimates could change in
the near term with respect to these matters.





Cash and Cash
Equivalents





For
purposes of the statement of cash flows, we consider all highly liquid
investments with an original maturity of thirteen weeks or less to be cash
equivalents.





Restricted
Cash





Funds
classified as restricted cash at July 3, 2010 and January 2, 2010 relate to loan
advances on our credit facility, as described in Note C – Credit
Facility.





Inventories





Inventories
are charged to operations using the first in, first out method. Our inventory
costs generally arise from costs incurred to produce SVCs, including costs for
plastic and packaging, embossing fees, printing fees and shipping. 
Inventories consist of the following:





July
      3, 2010
            
            January
      2, 2010Finished
      cards
            $
            2,341,905
            $
            3,359,927Inventory
      in process
            
            17,642
            
            11,6632,359,547
            
            3,371,590Less
      reserve for damaged and obsolete inventory
            
            1,653,863
            
            1,954,700Total
      Inventories
            $
            705,684
            $
            1,416,890






7


We have a
policy of reserving the full inventory carrying cost for any cards that are on
our books with six months or less to expiration.  This policy results
in a higher reserve percentage being charged in the period of time beginning
twelve months prior to a card’s expiration and continuing until the card is
fully reserved at the point six months from expiration.  This policy
resulted in an increase in inventory reserves charges of approximately $759,100
for the 1st Half
2010.  During 2Q2010 we destroyed 1,230,100 cards that had expiration
dates in FY2010.  These cards were previously fully reserved and
resulted in a charge to inventory reserve of approximately
$790,500.  During the fiscal year ended January 2, 2010, we recognized
impairment charges of $1,474,200 on certain inventory items printed in 2007 that
are scheduled to be destroyed or that have an expiration date of less than six
months.





Property and
Equipment





Property
and equipment are stated at cost. Major additions are capitalized, but minor
additions which do not extend the useful life of an asset, and maintenance and
repairs are expensed as incurred. Depreciation and amortization are provided
using the straight-line method over the shorter of the lease term, if any, or
the assets' estimated useful lives, which range from three to ten
years.





Long-Lived
Assets





In
accordance with ASC 360  “Property, Plant and
Equipment”, we evaluate the recoverability of long-lived assets and the
related estimated remaining lives when events or circumstances lead us to
believe that the carrying value of an asset may not be recoverable.





We did
not incur any impairment charges in the 1st Half
2010.  During the 1st Half
2009, we recognized impairment charges of approximately $230,238 on an
intangible asset related to a marketing incentive agreement.  These
impairment charges are included in general and administrative expenses in the
accompanying statements of operations





As of
July 3, 2010 our estimates indicate that all remaining long-lived assets are
recoverable.





Advertising
Costs





Advertising
expenses, which were approximately $213,900 and $165,100 during the 1st Half
2010 and the 1st Half
2009, respectively, are expensed as incurred. The majority of advertising for
both the 1st Half
2010 and 1st Half
2009 was related to attending trade shows and employing media
consultants.   At July 3, 2010, we had approximately $86,100 in
prepaid marketing of which the majority is related to product placement
inducement payments and advertising promotional payments made to a nationwide
retailer. The product placement inducement payments are being amortized as a
reduction of revenue over the contract period and the promotional payments are
expensed when the advertising event occurs.





Research and
Development





Research
and development costs, which approximated $571,300 and $554,000 during the
1st Half
2010 and 1st Half
2009, respectively, are expensed as incurred.  These costs are
primarily related to network software development, security compliance and
systems maintenance.





Net Loss Per
Share





Basic net
loss per share is computed by dividing the net loss attributable to common
stockholders for the period after deducting dividends on our Series A
Convertible Preferred Stock, par value $.001 per share (“Series A Preferred
Stock”) by the weighted average number of common shares outstanding
during the period. Diluted net loss per share is computed by dividing the net
loss for the period by the number of common and common equivalent shares
outstanding during the period (common stock equivalents arise from options,
warrants and convertible preferred stock). Because of our net losses, none of
these common stock equivalents have been dilutive at any time since our
inception; accordingly basic and diluted net loss per share are identical for
each of the periods in the accompanying consolidated statements of
operations.


8





The
following table lists the total of the Company’s common stock, par value $0.001
per share (the “Common
Stock”) and our common stock equivalents outstanding at July 3,
2010:


Description
            
            Shares
      of Common Stock and Common Stock Equivalents OutstandingCommon
      Stock
            
            23,539,996Series
      A Convertible Preferred Stock *
            
            7,500,484Series
      B Convertible Preferred Stock *
            
            1,000,000Series
      C Convertible Preferred Stock *
            
            4,037,500Series
      D Convertible Preferred Stock *
            
            46,651,720Stock
      Options
            
            12,346,084Warrants
            
            44,946,931Total
            
            140,022,715*  as-converted
      into Common Stock.





Income
Taxes





Under
certain ASCs, deferred taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory rates applicable to future
years to differences between the financial statement carrying amounts and the
tax basis of existing assets and liabilities. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date. Significant temporary differences arise primarily from reserves
for inventory obsolescence, impairment charges and accounts payable and accrued
liabilities that are not deductible for tax reporting until they are realized
and/or paid.





Financial Instruments and
Concentrations





Financial
instruments, as defined in a certain ASCs, consist of cash, evidence of
ownership in an entity and contracts that both (1) impose on one entity a
contractual obligation to deliver cash or another financial instrument to a
second entity, or to exchange other financial instruments on potentially
unfavorable terms with the second entity, and (2) conveys to that second entity
a contractual right (a) to receive cash or another financial instrument from the
first entity or (b) to exchange other financial instruments on potentially
favorable terms with the first entity. Our financial instruments consist
primarily of cash and cash equivalents, restricted cash, short-term
investment(s), accounts receivable, accounts payable, accrued liabilities and
credit facilities.  The carrying values of these financial instruments
approximate their respective fair values due to their short-term
nature.





Financial
instruments that potentially subject us to significant concentrations of credit
risk consist primarily of cash and cash equivalents, restricted cash and
accounts receivable. We frequently maintain cash balances in excess of federally
insured limits. However, we believe that cash balances held in non interest
bearing accounts are fully insured at this time. As such, with interest rates at
historical lows, we have made the decision to maintain cash balances at more
than one bank to diversify our exposure and to use our non-interest-earning
balances to lower any banking fees. Our revenues and accounts receivable balance
is and is expected to be primarily composed of amounts generated from our
largest distributor, Interactive Communications (“InComm”).  We
have not experienced any losses from receivables due from InComm.





Stock-Based
Compensation





We
account for stock based compensation utilizing the fair value recognition
pursuant to ASC 718 “Compensation – Stock
Compensation”.  This statement requires us to recognize
compensation expense in an amount equal to the grant-date fair value of
shared-based payments such as stock options granted to
employees.  These options generally vest over a period of time and the
related compensation cost is recognized over that vesting
period.


9





The
following table summarizes our stock-based compensation expense:


Stock-based
      compensation charged to:
              
              
              2Q2010
              
              
              
              2Q2009
              
              
              1st
      Half 2010
              
              
              1st
      Half 2009Transaction
      and operating expenses
              
              $
              1,149
              
              
              $
              789
              
              
              $
              2,378
              
              
              $
              1,593Selling
      and marketing expenses
              
              
              27,876
              
              
              
              29,604
              
              
              
              53,743
              
              
              
              58,442General
      and administrative expenses
              
              
              202,441
              
              
              
              88,796
              
              
              
              291,167
              
              
              
              168,571Interest
      expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              9,925Total
      stock-based compensation
              
              $
              231,466
              
              
              $
              119,189
              
              
              $
              347,288
              
              
              $
              238,531


General
and administrative expenses include amounts charged to consulting expense for
the cost of options issued in conjunction with an internet-based sales
development agreement.  These costs were $2,670 and $7,009 for 2Q2010
and 1stHalf2010,
respectively.  In addition, Bruce E. Terker and Donald A. Harris were
issued warrants in lieu of cash compensation for board of director fees for
which the cost of options issued was approximately $17,500.  This cost
was charged to general and administrative expenses, as further discussed in Note
D – Stock Options and Warrants.  The prior year amount charged to
interest expense represent the costs of warrants issued as compensation to Mr.
Terker, one of the Company’s directors, for supplying the required collateral
for bonds issued to support our state money transmitter licenses.





Dividends on Preferred
Stock





Our
Series A Preferred Stock accrues dividends of 5% per annum, which are paid
semiannually and can be satisfied in cash or through the issuance of Common
Stock.  Unless and until these dividends are declared and paid in
full, the Company is prohibited from declaring any dividends on its Common
Stock.  Pursuant to the Company’s Amended and Restated Loan and
Security Agreement, dated November 26, 2008 (see Note C – Credit Facility and
Term Notes), the Company is limited to paying $500,000 in any fiscal year for
cash dividends or other cash distributions to the holders of shares of Series A
Preferred Stock.  There are no dividend requirements on our Series B
Convertible Preferred Stock, on our Series C Convertible Preferred Stock or on
our Series D Convertible Preferred Stock.





On April
21, 2010, the Company’s Board of Directors (the “Board”) declared
$195,252 in dividends due through December 31, 2009 and paid through the
issuance of 1,904,021 shares of our Common Stock. Dividends owed but not
declared on our Series A Preferred Stock were $189,053 as of July 3,
2010.





Fair
Value Measurements





At July 3, 2010, the Company did not have any items to be
measured at fair value.





Recently Issued Accounting
Pronouncements





In
January 2010, the Financial Accounting Standards Board (‘‘FASB’’) issued
Accounting Standards Update No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements. The amendments in this update require, among other things,
new disclosures and clarifications of existing disclosures related to transfers
in and out of Level 1 and Level 2 fair value measurements, further
disaggregation of fair value measurement disclosures for each class of assets
and liabilities, and additional details of valuation techniques and inputs
utilized. The adoption of this standard is not expected to affect the Company’s
consolidated financial statements.





In
January 2010, the FASB issued Accounting Standards Update No. 2010-01,
Equity (Topic 505): Accounting
for Distributions to Shareholders with Components of Stock and Cash. This
update requires that dividends declared and payable in a combination of stock
and cash, at the shareholders election, be included in earnings per share
prospectively and not considered a stock dividend for purposes of computing
earnings per share. To date, the Company has not declared dividends in this
manner so this update has had no impact on the Company’s computation of earnings
per share.





10


NOTE
B - GOING CONCERN





Our
consolidated financial statements are prepared using GAAP as applicable to a
going concern, which contemplate the realization of assets and liquidation of
liabilities in the normal course of business.  Our operations have
historically been funded primarily through equity capital.  Because of
our operating losses, at July 3, 2010, we have a cash balance of approximately
$617,000.  In June 2010, in order to fund our operations, we sold
333,334 shares of our Series D Convertible Preferred Stock, $0.001 par
value per share (“Series D Preferred
Stock”), which pursuant those certain Securities Purchase Agreementsdated as of July 3,
2010, as amended by addendums to the Securities Purchase Agreements dated as of
July 3, 2010 (as amended, the “Purchase Agreements”)
was exchanged for 333,334 shares of Series E Convertible Preferred Stock,
$0.001 par value per share (“Series E Preferred
Stock”), on July 8, 2010 the date on which the Statement of
Designations, Rights and Preferences of the Series E Preferred
Stock  was filed with the Secretary of State of the State of Nevada
for an aggregate cash purchase price of $500,001.  Through August 10,
2010, we sold an additional $600,001 of Series E Preferred Stock to an investors
that have previously supported the Company.  We expect to raise up to
an additional $3.5 to $5.5 million in the fall of 2010 to complete the
Series E Preferred Stock sale.  We believe this equity financing
should be adequate to fund our fiscal year 2010 operations and cash commitments;
however, we have incurred significant losses and negative cash flows from
operations since our inception, and as a result no assurance can be given that
we will be successful in attaining profitable operations, especially when one
considers the problems, expenses and complications frequently encountered in
connection with entrance into established markets and the competitive
environment in which we operate.





These
factors, among others, indicate that we may be unable to continue as a going
concern for a reasonable period of time. Our consolidated financial statements
do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or the amounts and classification of liabilities that
might be necessary should we be unable to continue as a going
concern.





NOTE
C - CREDIT FACILITY





On June
10, 2008, the Company and its wholly owned subsidiary, nFinanSe Payments Inc.
(collectively, the “Borrowers”), entered
into a Loan and Security Agreement (the “Original Loan
Agreement”) and, on November 26, 2008, entered into an Amended and
Restated Loan and Security Agreement (the “Amended and Restated Loan
Agreement”) with Ballyshannon Partners, L.P., Ballyshannon Family
Partnership, L.P., Midsummer  Investment, Ltd. (“Midsummer”), Porter
Partners, L.P. and Trellus Partners, L.P. (collectively, the “Lenders”).  The
Original Loan Agreement established a revolving credit facility in the maximum
aggregate principal amount of $15,500,000 (the “Credit Facility”),
with the Borrowers’ obligations secured by a lien on substantially all of the
Company’s assets.  Loans under the Original Loan Agreement (each, a
“Loan”) may be
used solely to make payments to card-issuing banks for credit to
SVCs.  The Amended and Restated Loan Agreement modified the Original
Loan Agreement by establishing a sub-commitment of $3,400,000, pursuant to which
each Lender, excluding Midsummer Investment, Ltd., which did not participate in
the sub-commitment, in its sole discretion, may advance funds (each, an “Accommodation Loan”)
that may be used by the Company for working capital expenditures, working
capital needs and other general corporate purposes.  Loans and
Accommodation Loans will be funded by the Lenders into separately controlled
accounts subject to the Lenders’ lien.  Loan amounts deposited into a
lender-controlled loan account are reflected as Restricted Cash on our balance
sheet and bear interest at 6% per annum until withdrawn (for the sole purpose of
funding SVCs) from that deposit account, at which time they bear interest at 16%
per annum.  Accommodation Loans are funded into a company-controlled
operating account and bear interest at 16% per annum.  Loans may be
repaid and re-borrowed in accordance with the provisions of the Original Loan
Agreement.  Accommodation Loans may be repaid and re-borrowed in
accordance with the provisions of the Amended and Restated Loan Agreement,
including the requirement that upon the occurrence and during an event of
default, Accommodation Loans will be repaid after the repayment in full of all
other loans under the Credit Facility.





On
October 29, 2009, the Lenders approved the extension of maturity for an
additional six months, or May 25, 2010, upon the satisfaction of certain
conditions set forth in the Amended and Restated Loan Agreement.  On
May 26, 2010, the Company entered into that certain Second Amendment to the
Amended and RestatedLoan Agreement (the
“Second
Amendment”) with the Lenders.  The Second Amendment amends the
Amended and RestatedLoan Agreement such that
the Maturity Date (as such term is defined in the Amended and RestatedLoan Agreement) of the
notes issued pursuant to theAmended and Restated
Loan Agreement is June 25, 2010.  On June 25, 2010, the Company
entered into that certain Third Amendment to the Amended and RestatedLoan Agreement (the
“Third
Amendment”) with the Lenders.  The Third Amendment amends the
Amended and RestatedLoan Agreement such that
the Maturity Date of the notes issued pursuant to theAmended and Restated
Loan Agreement is July 26, 2010. On July 23, 2010, a Fourth Amendment to the
Amended and Restated Loan Agreement (the “Fourth
Amendment”)amended the Maturity
Date to September 30, 2010 and capped the commitment of Midsummer to $500,000
and issued to Midsummer 26,667 shares of its Series E Convertible Preferred
Stock, par value $0.001, valued using the Black-Scholes option pricing model at
an aggregate fair value of approximately $3,000. The Company expects to replace
Midsummer as a Lender prior to September 30, 2010. Midsummer’s commitment prior
to the Fourth Amendment had been $5,000,000.




11





The
Credit Facility provides for usual and customary events of default, including
but not limited to (i) the occurrence of a Material Adverse Change and (ii) the
occurrence of a Change of Control (as such terms are defined in the Amended and
Restated Loan Agreement).  The Credit Facility contemplates that, with
the Lenders’ consent, the maximum commitment may be increased to up to
$20,000,000, and additional lenders may be added.





As of
July 3, 2010, the Borrowers had drawn $500,000 in Loans under the Amended and
Restated Loan Agreement.




Mr.
Terker, a current member of the Board, has sole voting and dispositive power
over the securities held by Ballyshannon Partners, L.P. and its affiliates, two
of which were Accommodation Loan Lenders.  Mr. Terker has a financial
interest in such entities, and, as such, has a financial interest in the Amended
and Restated Loan Agreement.





NOTE
D - STOCK OPTIONS AND WARRANTS





On March
1, 2007, our stockholders approved the 2007 Omnibus Equity Compensation Plan
(the “2007
Plan”) which combined the 709,850 shares that were issued and outstanding
under the Company’s 2004 Stock Option Plan with the 2,300,000 shares available
for issuance under the 2007 Plan.  On May 8, 2008, and again on June
17, 2010 at the Company’s Annual Stockholders’ Meeting, the Company’s
stockholders voted to amend the 2007 Plan by increasing the number of authorized
shares available for issuance by 1,000,000 and 9,790,150 shares, respectively,
thus providing a total of 13,800,000 shares for issuance under the combined
plans.  As of July 3, 2010, we had 1,453,916 shares available under
the combined plans for future option grants and 12,346,084 total options
outstanding, consisting of 12,224,834 options issued to employees and
non-employee directors and 121,250 options issued to consultants. Such options
vest over various periods up to three years and expire on various dates through
2020.





The fair
value of each option grant is estimated at the date of grant using the
Black-Scholes option valuation model with the following weighted average
assumptions for the periods ended July 3, 2010 and July 4, 2009:





1st
      Half 2010
            
            1st
      Half 2009Expected
      term in years
            5
            
            5Expected
      stock price volatility
            168%
            
            165%
      - 191%Risk
      free interest rate
            2.7%
            
            1.5%Dividend
      yield
            0%
            
            0%





Expected
stock price volatility is determined using historical volatility of the
Company's stock.  The average expected life was estimated based on
historical employee exercise behavior.





The
following table summarizes our stock option activity during the six month period
ended July 3, 2010:





Number
      of
              Options
            
            Weighted
      average
              exercise
              price
      per share
              (price
      at date
              of
      grant)Outstanding
      at January 2, 2010
            
            3,012,638
            $
            3.09Granted
            
            9,433,967
            $
            0.51Cancelled
            
            (100,521)
            $
            3.64Outstanding
      at July 3, 2010
            
            12,346,084
            $
            0.81Options
      granted at or above market value during the six month period
      ended  July 3, 2010
            
            9,433,967





12





The
following table summarizes information regarding options that are outstanding at
July 3, 2010:




Options
      outstanding
            
            Options
      exercisableRange
      of
              exercise
      prices
            
            Number
              outstanding
            
            Weighted
              average
              remaining
              contractual
              life
      in years
            
            Weighted
              average
              exercise
              price
            
            Number
              exercisable
            
            Weighted
              average
              exercise
              price
      per
              share$0.25-$0.50
            
            11,630,832
            
            7.8
            $
            0.49
            
            3,097,433
            $
            0.50$0.75-$2.20
            
            149,979
            
            8.0
            $
            1.40
            
            135,354
            $
            1.34$2.30-$3.75
            
            30,000
            
            7.5
            $
            3.44
            
            24,028
            $
            3.45$4.00-$32.00
            
            535,273
            
            4.7
            $
            7.29
            
            533,829
            $
            7.2812,346,084
            
            7.3
            $
            1.50
            
            3,790,644
            $
            0.81





The
grant-date fair value of options granted during the 1st Half
2010 and the 1st Half
2009 was approximately $857,000 and $286,000, respectively.  The total
fair value of shares vested during the six-month period ended July 3, 2010 was
approximately $214,000.  At July 3, 2010, we estimate the aggregate
stock-based compensation attributable to unvested options was approximately
$839,000, which amount is expected to be recognized over a period of
approximately three years.





Officer Stock
Options





On
January 4, 2010, the Board approved the repricing of all existing officer
options to $0.50.  The options were originally issued at exercise
prices ranging from $0.75 to $11.00.  The cost of the repricing of
these options was valued using the Black-Scholes option pricing model at an
aggregate fair value of approximately $9,729.This repricing was
approved by stockholder’s at the Company’s Annual Stockholders’ Meeting held on
June 17, 2010. The fair value of these options will be recognized as stock-based
compensation expense upon stockholder approval.




On
January 28, 2010, the Board awarded a total of 8,796,385 stock options to eight
officers at an exercise price of $0.50 per share, which were valued using the
Black-Scholes option pricing model at an aggregate fair value of approximately
$804,893.  The options vest ratably over the next ten calendar
quarters. These grants were approved by stockholder’s at the Company’s Annual
Stockholders’ Meeting held on June 17, 2010.  The fair value of these
options will be recognized as stock-based compensation expense over the vesting
period of the options, once stockholder approval is obtained.





On
February 23, 2009, the Compensation Committee recommended to the Board and the
Board granted to our Chief Executive Officer, Jerry R. Welch, 250,000 stock
options at an exercise price of $1.00 per share, which, using the Black-Scholes
option pricing model, were valued an aggregate of $143,840.  Options
to purchase 50,000 shares became fully vested on the anniversary date of the
grant and 50,000 options will vest ratably over the 12 months beginning March
31, 2010. Of the final 150,000 options, 75,000 were to vest on the first
anniversary date of the grant and 75,000 were to vest ratably over the 12 months
beginning March, 2010, provided the Company had positive earnings before
interest, tax, depreciation and amortization (“EBITDA” in any month prior to
September 30, 2009. The Company failed to achieve positive EBITDA and the
150,000 stock options were subsequently forfeited by Mr. Welch.





On
February 23, 2009, the Compensation Committee recommended to the Board and the
Board granted to our Chief Financial Officer, Raymond P. Springer, 50,000 stock
options at an exercise price of $1.00 per share, which, using the Black-Scholes
option pricing model, were valued at an aggregate of $28,768.  The
options will become fully vested in two years, with one half vesting on the
anniversary date of the grant and 1/12 of the remaining grant vesting monthly
thereafter.





On
January 29, 2009 , the Compensation Committee recommended to the Board and the
Board granted to six officers of the Company an aggregate of 116,000 stock
options at an exercise price of $1.02 per share, which, using the Black-Scholes
option pricing model, were valued at an aggregate of $113,555. The options
become fully vested in two years, one half vested on the anniversary date of the
grant and 1/12 of the remaining grant vests monthly thereafter.


13





On
December 15, 2008, the Company issued a total of 42,750 stock options (750 stock
options to each employee [including seven officers] except our CEO) at an
exercise price of $0.75 per share.  The options vest one third at the
one-year anniversary of the grants and then ratably for the following 24
months.  The options were valued using the Black-Scholes option
pricing model at an aggregate fair value of approximately $30,000, which is
being recognized as stock-based compensation expense over the vesting period of
the options.





On May
12, 2008, our compliance officer was awarded 20,000 stock options at an exercise
price of $2.30 per share, which were valued using the Black-Scholes option
pricing model at an aggregate fair value of approximately
$28,900.  The options vest one third at the one-year anniversary of
the grants and then ratably for the following 24 months. The fair value of these
options is being recognized as stock-based compensation expense over the vesting
period of the options.





On
January 24, 2008, Messrs. Welch and Springer were awarded 95,000 and 45,000
stock options, respectively, at an exercise price of $4.00 per share, which were
valued using the Black-Scholes option pricing model at aggregate fair values of
approximately $234,000 and $111,000, respectively.  These amounts were
recognized as stock-based compensation expense as the options
vested.   The options were divided into 28 equal installments,
with the first seventeen installments vesting on January 28, 2008 and additional
installments vesting on the final day of each month through December 31,
2008.  At January 3, 2009, all options have vested and all
compensation expense related to these options has been recognized.





On
January 24, 2008, the Board also awarded a total of 155,000 stock options to
eight other officers at an exercise price of $4.00 per share, which were valued
using the Black-Scholes option pricing model at an aggregate fair value of
approximately $381,300.  The options vest one-third at the one-year
anniversary of the grants and then ratably for the following 24 months. The fair
value of these options is being recognized as stock-based compensation expense
over the vesting period of the options.





Non Employee Director
Options





In
February 2010, 40,000 options were granted to the non-employee members of our
Board. The options, which were 100% vested on the date of grant with an exercise
price of $0.75, were valued using the Black-Scholes option pricing model at an
aggregate fair value of approximately $4,000. This amount was included in
employee and director stock-based compensation in the statement of operations
for the 1st Half
2010.





In May
2010, 222,282 options were issued to each of Donald A. Harris and Bruce E.
Terker in lieu of cash payments for their compensation as members of the
Board.   The options, which were 100% vested on the date of grant
with an exercise price of $0.50, were valued using the Black-Scholes option
pricing model at an aggregate fair value of approximately $17,500. This amount
was included in board of director compensation expense in the statement of
operations for the 1st Half
2010.





Outstanding
Warrants





The
following table summarizes our warrant activity during the six month period
ended July 3, 2010:





Number
      of
              Warrants
            
            Weighted
      average
              exercise
      price
              per
      share
              (price
      at
              date
      of grant)Outstanding
      at January 2, 2010
            
            57,759,385
            $
            0.07Exercised
            
            (11,701,523)
            $
            0.01Forfeited
            
            (1,110,931)
            $
            0.01Outstanding
      at July 3, 2010
            
            44,946,931
            $
            0.09





On March
25, 2010, Mr. Terker, a member of our Board, and entities controlled by Mr.
Terker elected the cashless option to exercise 11,109,308 warrants with an
exercise price of $0.01 resulting in the issuance of 9,998,377 shares of Common
Stock and the forfeiture of 1,110,931 warrants.  On March 29, 2010,
Mr. Harris, a member or our Board, paid to the Company $17,031 for the exercise
of 1,703,146 warrants with an exercise price of $0.01 for the issuance of
1,703,146 shares of our Common Stock.


14


Summary
of Warrants outstanding by Exercise Price:




Exercise
      Price
                per
      Share
              
              Number
      of
                Warrants
                Outstanding
              
              Expiration
      Date$    0.01
              
              43,405,131
              
              Various
      dates from November 25, 2010 through November 30, 2014$    0.30
              
              256,250
              
              June
      29, 2012 and June 12, 2012$    1.20
              
              5,000
              
              November
      22, 2011$    2.30
              
              883,475
              
              June
      29, 2012 and June 12, 2012$    2.53
              
              54,575
              
              June
      12, 2013$    3.00
              
              200,000
              
              November
      12, 2012$    5.00
              
              142,500
              
              Various
      dates from April 1, 2011 through September 30 ,2011$   0.09
              
              44,946,931







NOTE
E - COMMITMENTS AND CONTINGENCIES





Operating
Leases





We are
obligated under various operating lease agreements for our
facilities.  Future minimum lease payments and anticipated common area
maintenance charges under all of our operating leases are approximately as
follows at July 3, 2010:





Twelve
      months ending
            
            
            AmountsJune
      2011
            $
            205,200June
      2012
            
            207,300June
      2013
            
            52,100June
      2014
            
            -June
      2015
            
            -Total
            $
            464,600





Rent
expense included in loss from continuing operations for 1st Half
2010 and 1st Half
2009, was approximately $114,800 and $123,100, respectively.





Employment
Agreements





We are
obligated under employment agreements with our Chief Executive Officer, Jerry R.
Welch, and our Chief Financial Officer, Raymond P. Springer.  The
employment agreements had an initial term from September 5, 2006 to December 31,
2008 and were automatically renewed for two years with a new expiration date of
December 31, 2010.  The employment agreements provide to Messrs. Welch
and Springer a current annual salary of $275,000 and $200,000, respectively.
Each agreement is to be automatically renewed indefinitely for succeeding terms
of two years unless otherwise terminated in accordance with the
agreement.  Both Mr. Welch and Mr. Springer also receive
performance-based bonuses and certain medical and other benefits.  If
we terminate Mr. Welch or Mr. Springer without cause, we will be required to pay
severance to them in the amount of compensation and benefits they would have
otherwise earned in the remaining term of their employment agreements or twelve
months, whichever period is shorter.





In
addition to the above, Messrs. Welch and Springer received certain stock options
as described in Note D – Stock Options and Warrants.





Service and Purchase
Agreements





We have
entered into renewable contracts with DFS Services LLC (“DFS”) and VISA®
U.S.A. Inc. (“VISA®”), our card
networks, Palm Desert National Bank (“PDNB”), and First
Bank & Trust (“FB&T”), our
card-issuing banks, Metavante Corporation (“Metavante”), our
processor, and American Express® Travel Related Services Company, Inc., a gift
card program, that have initial expiration dates from March 17, 2011 through
December 26, 2014.    Because the majority of the fees to be
paid are contingent primarily on card volume, it is not possible to calculate
the amount of the future commitment on these contracts. The Metavante, PDNB and
FB&T agreements also require a minimum payment of $5,000, $3,000 and $7,500
per month, respectively.  During the 1st Half
2010 and the 1st Half
2009, we made aggregate payments of approximately $107,900 and $478,300,
respectively, to Metavante, $14,500 and $1,600, respectively, to PDNB and
$55,700 and $88,300, respectively, to FB&T under these
agreements.


15


Our
agreements with PDNB and FB&T require us to maintain certain reserve
balances for our card programs.  As of January 2, 2010 and July 3,
2010, the reserve balances held at PDNB and FB&T were $10,000 and $25,000,
respectively.  These amounts are included in “Other assets” on the
Company’s balance sheets as of January 2, 2010 and July 3, 2010.





Pending or Threatened
Litigation





We may
become involved in certain other litigation from time to time in the ordinary
course of business. To the best of our knowledge, no material litigation exists
or is threatened.





Bond
Collateral





On
February 1, 2009, we completed a partial funding of collateral amounting to
approximately $500,000 for performance bonds issued in connection with our state
licensing efforts.  The collateral, in the form of a letter of credit
arranged by Mr. Jeffrey Porter, was issued by a bank and was placed with the
insurance company that issued the various bonds which at the end of the year
aggregated approximately $9,600,000.  Mr. Porter entered into a
Guarantee and Indemnification Agreement with the Company dated February 1, 2009.
Accordingly, we are currently contingently liable for the face amount of the
letter of credit. Mr. Porter was to be compensated in cash at 2% of the average
outstanding amount of the letter of credit per quarter paid in arrears, however,
he chose to take the compensation in the form of Series D Preferred Stock during
the August 2009 equity raise. The Guarantee and Indemnification Agreement can be
cancelled by the Company upon receiving a more favorable arrangement from
another party. Upon demand, the Company will be required to increase the
collateral up to 10% of the face amount of bonds issued by the insurance
company. On February 1, 2010, both the letter of credit and the Guarantee and
Indemnification Agreement were renewed for another twelve months.





NOTE
F - SUBSEQUENT EVENTS





The
Company evaluated subsequent events as of July 3, 2010.





On
June 29, 2010, the Board approved an offering of up to $5,000,000 of
Series E Preferred Stock at a purchase price of $1.50 per share.  On
July 3, 2010, the Company entered into the Purchase Agreements with several
institutional and accredited investors (collectively, the “Investors”), pursuant
to which the Company issued 333,334 shares of Series D Preferred Stock,
which pursuant to the Purchase Agreements was exchanged for 333,334 shares of
Series E Preferred Stock on July 8, 2010 (the date on which the
Statement of Designations, Rights and Preferences of the Series E
Convertible Preferred Stock was filed with the Secretary of the State of Nevada
of for an aggregate cash purchase price of $500,001.





The
Series E Preferred Stock is not convertible into shares
of  Common Stock by the Investors to the extent that, if converted,
they or any of their affiliates would beneficially own in excess of 9.99% of the
then issued and outstanding shares of Common Stock.





Through
August 10, 2010, the Company has entered into additional Securities Purchase
Agreements pursuant to which the Company issued 400,001 shares of its Series E
Preferred Stock for the aggregate cash purchase price of $600,001.  We
expect to raise up to an additional $3.5 to $5.5 million in the fall of
2010 to complete the Series E Preferred Stock sale.





On July
23, 2010, a Fourth Amendment amended the Maturity Date to September 30, 2010 and
capped the commitment of Midsummer to $500,000 and issued to Midsummer
Investment Ltd. 26,667 shares of its Series E Preferred Stock were valued using
the Black-Scholes option pricing model at an aggregate fair value of
approximately $3,000. The Company expects to replace Midsummer as a Lender prior
to September 30, 2010. Midsummer’s commitment prior to the Fourth Amendment had
been $5,000,000.




In July
2010, 180,000 options were granted to the non-employee members of our Board. The
options, which were 100% vested on the date of grant with an exercise price of
$0.50, were valued using the Black-Scholes option pricing model at an aggregate
fair value of approximately $16,000. This amount will be included in employee
and director stock-based compensation in the statement of operations for the
third quarter of 2010.










End
of Financial Statements.







16




Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.




Overview.nFinanSe
Inc. is a provider of SVCs, for a wide
variety of markets, including grocery stores, convenience stores and general
merchandise stores. Our products and services are aimed at capitalizing on the
growing demand for stored value and reloadable ATM/prepaid card financial
products. We believe SVCs are a fast-growing product segment in the financial
services industry.





Discontinued Operations.In
September 2006, we discontinued the operations of our wholesale long distance
and prepaid phone card business.  All financial information pertaining
to this discontinued business has been eliminated from ongoing operations for
all periods presented in our financial statements included in this report and is
shown as a single line item entitled “Discontinued Operations.”





Results of Operations. Our
principal operations commenced in 2001.  However, to date, we have had
limited revenues.  Accounting guidelines set forth guidelines for
identifying an enterprise in the development stage and the standards of
financial accounting and reporting applicable to such an enterprise. In the
opinion of management, our activities from our inception through October 3, 2009
fall within the referenced guidelines. Accordingly, we report our activities in
this report in accordance with these guidelines.





Lack of Profitability of Business
Operations since 2001.During the years leading up to fiscal 2006, we
were primarily focused on selling Visa® and MasterCard® SVCs and experienced
significant difficulties and interruptions with our third-party card issuers due
to administrative errors, defective cards and poor service. Additionally, it
became apparent to management that there was a flaw in focusing solely on the
sale of SVC products that did not include a convenient load solution for
consumers. Consequently, management made the decision to expand our focus to
include the development of a process, which became known as the nFinanSe Network
TM, to
allow the consumer to perform value loads in a retail environment. To enhance
the load center footprint, in fiscal 2006, we entered into agreements with
MoneyGram Payments Systems, Inc. (“MoneyGram®”) and
Western Union Financial Services, Inc. (“Western Union®”)
whereby our SVCs could be loaded at their locations.





Further,
in 2006, and as amended in June 2007, we signed an agreement with DFS that
permits us to provide Discover® Network-branded SVCs directly or through a card
issuing bank. We believe the Discover® Network SVC products have multiple
competitive advantages over the SVCs we were previously selling. Consequently,
we focused on implementing the agreement with DFS in lieu of pursuing SVC sales
through our existing arrangements. Accordingly, our sales efforts were
interrupted while we developed our new Discover® Network SVC programs and
abandoned our then-existing SVC programs by disposing of the associated SVC
inventory. The time and money lost due to the difficulties and interruptions we
experienced hindered our progress and ability to make a profit.





In late
2006, we developed a new go-to-market strategy centered on marketing bank-issued
Discover® Network-branded SVCs through well-established prepaid card
distributors combined with the load performing ability of the nFinanSe
NetworkTM.  In 2007, we secured agreements with several prepaid card
distributors including InComm, which
distributes prepaid card products to retailers with more than 100,000 locations
throughout the United States.  We had to source a new bank to issue
cards for InComm’s retailers and we began the task of integrating our network
with InComm’s.  Additionally, the issuing bank required that we
immediately begin making applications for licenses in those states claiming
jurisdiction over SVCs. The general purpose reloadable card is a relatively new
product for most distributors and it has taken time to integrate with
distributors and to market to their retail partners. During the fourth quarter
of 2008, several large InComm retailers began marketing our cards.  In
July 2009, we executed a Card Distribution and Agency Agreement with Coinstar
E-Payment Services Inc.(“Coinstar”) who
distributes nFinanSe SVCs to more than 6,000 retail
locations.  Coinstar was subsequently acquired by InComm in the Spring
of 2010.  During fiscal 2009, we made the decision to expand our card
offerings and executed an agreement with American Express, Inc. (“American Express”) to
offer American Express-branded gift cards and an agreement with Visa® along with
PDNB that permits us to offer Visa-branded general purpose reloadable
SVCs.





At July
3, 2010, there were over 84,000 locations where our SVCs could be loaded (mostly
Western Union® and Moneygram® locations) and approximately 14,000 retail
locations currently offering our SVCs for sale and for reload
services.







17


Revenues. We produce revenues
through four general types of transactions:





•
            Wholesale
      fees, charged to our prepaid card distributors when our general purpose
      reloadable cards are reloaded and our gift cards are
  sold.•
            Transaction
      fees, paid by the applicable networks and passed through by our card
      issuing banks when our SVCs are used in a purchase or ATM
      transaction.•
            Maintenance
      fees, charged to an SVC with a cash balance.•
            Interest
      revenue, on overnight investing of SVC balances by our card issuing
      bank.







These
fees differ by card type, issuing bank and transaction type.


Revenues
for 2Q2010 and 2Q2009 were $110,472 and $1,774,
respectively.  Revenues for 1st Half
2010 and 1st Half
2009 were $165,164 and $(3,880), respectively. The negative revenue for the
1st Half
2009 is attributable to the amortization of $60,000 of marketing funds paid to a
national retailer.  We are required under GAAP to reflect this type of
amortization expense as a contra-revenue item in our financial statements. Gross
revenues for 2Q2010 were $140,472, compared with $31,774 for 2Q2009 and gross
revenues for the 1st Half
2010 were $225,165, compared with $56,120 for the 1st Half
2009.





Operating Expenses.Operating expenses for 2Q2010 decreased $283,303 to $2,414,076 compared
with $2,697,379 for 2Q2009, an 11% decrease. Operating expenses for the 1st Half
2010 decreased $175,352 to $5,073,118 compared with $5,248,470 for the 1st Half
2009, a 3% decrease. These changes in our operating expenses are attributable to
the following:





Transaction and operating expenses.Transaction and operating expenses for 2Q2010 and 2Q2009 were $627,976
and $831,310, respectively, a 24% decrease, and for the 1st Half
2010 and the 1st Half
2009 transaction and operating expenses were $1,550,753 and $1,372,072,
respectively, a 13% increase.   The components of expense
are:





Description
            
            
            2Q2010
            
            
            
            2Q2009
            
            
            1st
      Half 2010
            
            
            1st
      Half 2009SVC
      card cost, program and transaction expenses
            
            $
            199,924
            
            
            $
            339,266
            
            
            $
            351,610
            
            
            $
            613,015Inventory
      reserves
            
            
            216,223
            
            
            
            86,349
            
            
            
            780,026
            
            
            
            159,649Inventory
      impairment
            
            
            -
            
            
            
            219,851
            
            
            
            -
            
            
            
            219,851Stock-based
      compensation
            
            
            1,149
            
            
            
            789
            
            
            
            2,378
            
            
            
            1,593Customer
      service expenses
            
            
            210,680
            
            
            
            185,055
            
            
            
            416,739
            
            
            
            377,964Total
      Transaction and Operating Expenses
            
            $
            627,976
            
            
            $
            831,310
            
            
            $
            1,550,753
            
            
            $
            1,372,072


SVC card
cost, program and transaction expenses decreased 41% to $199,924 for 2Q2010 from
$339,266 for 2Q 2009.  For the 1st Half
2010, the decrease was $261,405, or 43%, when compared with the 1st Half
2009.  These decreases in 2010 are primarily due to the elimination of
the costs charged by our processor to maintain our increased card inventory on
their system.    We implemented a process to reduce the
costs charged by our processor to maintain card inventory that was fully
reflected in our results for the third quarter of 2009.  In addition,
we are purchasing card inventory when retailer commitments or sales warrant the
purchase versus maintaining large card inventories on hand for expected future
orders or commitments.





Inventory
reserves increased $129,874 and $620,377 when comparing 2Q2010 with 2Q2009 and
the 1st Half
2010 with the 1st Half
2009, respectively.  This is due primarily to our policy of increasing
monthly inventory reserves beginning twelve months prior to card expiration date
until six months before the expiration date when the inventory cost for those
cards is fully reserved.  We recorded an inventory impairment charge
of $219,851 for inventory in 2Q2009, due to the delays in implementation of that
card program.





Customer
service expenses increased by $25,625 and $38,775 to $210,680 and to $416,739
when comparing 2Q2010 with 2Q2009 and the 1st Half
2010 and 1st Half
2009, respectively.  This was primarily due to increased staffing for
increased call volume from higher revenues.


18


Selling and marketing
expenses. Selling and marketing expenses decreased $87,275 to $344,296
when comparing 2Q2010 with 2Q2009, a 20% decrease, and decreased $180,819 to
$749,848 when comparing the 1stHalf
2010 with the 1st Half
2009, a 19% decrease.  The components of expense are:





Description
            
            
            2Q2010
            
            
            
            2Q2009
            
            
            1st
      Half 2010
            
            
            1st
      Half 2009Advertising
      and marketing expenses
            
            $
            159,242
            
            
            $
            150,502
            
            
            $
            359,585
            
            
            $
            303,730Sales
      force expenses
            
            
            157,178
            
            
            
            251,465
            
            
            
            336,520
            
            
            
            568,495Stock-based
      compensation
            
            
            27,876
            
            
            
            29,604
            
            
            
            53,743
            
            
            
            58,442Total
      Selling and Marketing Expenses
            
            $
            344,296
            
            
            $
            431,571
            
            
            $
            749,848
            
            
            $
            930,667





Advertising
and marketing expenses increased 6%, or $8,740, to $159,242 when comparing
2Q2010 with 21Q2009.  This increase is primarily attributable to an
on-line advertising initiative to drive demand for our product by directing
customers to our website.





Sales
force expenses decreased $94,287 to $157,178, a 37% decrease for 2Q2010 when
compared with 2Q2009.  The principal components of this decrease are
employee compensation and benefits expense, travel and entertainment expense,
and rent expense.  The decrease in sales force compensation and travel
and entertainment expenses can be attributed to reductions in the sales force to
four employees at the end of the 2Q2010 from a total of seven employees at the
end of the 2Q2009.  In addition, rent expense decreased due to the
elimination of our Dallas sales office in 2009.





Stock-based
compensation decreased in 2Q2010 due to forfeiture of options and the
termination of stock based compensation expense associated with the reduction of
sales force employees.





General and administrative expenses.General and administrative expenses increased 1%, or $7,306, to
$1,441,804 during 2Q2010 when compared with 2Q2009.  For the 1st Half
2010, general and administrative expenses decreased 6%, or $173,214, to
$2,772,517 when compared with the 1st Half
2009.  The components of expense are:




Description
            
            
            2Q2010
            
            
            
            2Q2009
            
            
            1st
      Half 2010
            
            
            1st
      Half 2009Payroll,
      benefits and taxes
            
            $
            687,339
            
            
            $
            672,950
            
            
            $
            1,402,498
            
            
            $
            1,446,753Stock-based
      compensation
            
            
            182,257
            
            
            
            88,796
            
            
            
            266,644
            
            
            
            168,571Professional,
      legal and licensing expense
            
            
            220,224
            
            
            
            214,281
            
            
            
            416,444
            
            
            
            400,175Office
      and occupancy expenses
            
            
            205,990
            
            
            
            198,005
            
            
            
            403,468
            
            
            
            426,873Impairment
      expense
            
            
            -
            
            
            
            111,962
            
            
            
            -
            
            
            
            230,238Other
      administrative expense
            
            
            145,994
            
            
            
            148,504
            
            
            
            283,463
            
            
            
            273,121Total
      General and Administrative Expenses
            
            $
            1,441,804
            
            
            $
            1,434,498
            
            
            $
            2,772,517
            
            
            $
            2,945,731





When
comparing 2Q2010 with 2Q2009, changes in the expense categories are primarily
attributable to:





▪
            increased
      payroll, benefits and taxes expenses of $14,389, in 2Q2010
      from  2Q2009 due primarily to a one-time payment and
      compensation adjustment for a key employee;▪
            increased
      stock-based compensation expense of $93,461, which is primarily
      attributable to expensing the January though June 2010 expense for
      officer’s option grants and option re-pricings that were subject to
      shareholder ratification, which grants and re-pricings were approved at
      the Company’s Annual Shareholder’s Meeting on June 17, 2010;
      and▪
            no
      impairment of asset charge in 2Q2010 compared to an impairment of asset
      charge of $111,962 to write-down the expected value of a marketing
      incentive agreement in 2Q2009.





When
comparing the 1st Half
2010 with the 1st Half
2009, changes in the expense categories are primarily attributable
to:





▪
            decreased
      payroll, benefits and taxes expenses of $44,255, due primarily to a
      temporary reduction of one IT position, slightly offset by a one-time
      payment and  compensation adjustment for a key
      employee;▪
            increased
      stock-based compensation expense of $98,073, which is primarily
      attributable to expensing the January though June 2010 expense for
      officer’s option grants and option re-pricings that were subject to
      shareholder ratification, which grants and re-pricings were approved at
      the Company’s Annual Shareholder’s Meeting on June 17,
    2010;▪
            increased
      professional, legal and licensing expense of $16,269 due to $31,935 in
      higher state licensing fees being somewhat offset by lower fees in other
      categories; and▪
            no
      impairment of asset charge in the 1st
      Half 2010 compared to impairment of asset charges of $230,238 in the
      1st
      Half 2009 to write-down the expected value of a marketing incentive
      agreement.




19


Loss Before Other Income
(Expense).  As a result of the above, loss before other income
(expense) for 2Q2010 and 2Q2009 was $2,303,604 and $2,695,605, respectively and
for the 1st Half
2010 and the 1st Half
2009 was $4,957,954 and $5,252,350, respectively.





Other
Income (Expense):





Interest expense.Interest
expense was $23,234 and $1,505,906 for 2Q2010 and 2Q2009, respectively, and
$46,699 and $2,279,417 for the 1st Half
2010 and the 1st Half
2009, respectively.  All of the interest expense in 2Q2010 was in
cash, and consisted of:





Ÿ
            $341
      paid to finance our D&O insurance policy;Ÿ
            $10,000
      for payment to Mr. Jeffrey Porter under his agreement to provide the
      required collateral for bonds issued to states in connection with
      licensing; andŸ
            $12,893
      interest accrued for funds advanced under the Amended and Restated Loan
      Agreement.





In
2Q2009, cash interest expense was $283,124 and primarily consisted
of:





Ÿ
            $158,099
      was paid to the lenders for funds advanced under the terms of the Amended
      and Restated Loan Agreement;Ÿ
            $114,902
      for the amortization of placement fees and legal fees incurred in
      connection with the Amended and Restated Loan Agreement;
    andŸ
            $9,973
      for payment to Mr. Jeffrey Porter under his agreement to provide the
      required collateral for bonds issued to states in connection with
      licensing.





In
2Q2009, non-cash interest expense was $1,222,782 and consisted of amortization
of the cost of the warrants issued under the Amended and Restated Loan
Agreement.





All of
the interest expense in 1st Half
2010 was in cash, and consisted of:





Ÿ
            $619
      paid to finance our D&O insurance policy; andŸ
            $20,000
      for payment to Mr. Jeffrey Porter under his agreement to provide the
      required collateral for bonds issued to states in connection with
      licensing; andŸ
            $26,080
      interest accrued for funds advanced under the Amended and Restated Loan
      Agreement.





In 1ST Half
2009, cash interest expense was $500,868 and primarily consisted
of:





Ÿ
            $243,697
      was paid to the lenders for funds advanced under the terms of the Amended
      and Restated Loan Agreement;  andŸ
            $229,803
      for the amortization of placement fees and legal fees incurred in
      connection with the Amended and Restated Loan; andŸ
            $26,082
      for payment to Mr. Jeffrey Porter under his agreement to provide the
      required collateral for bonds issued to states in connection with
      licensing; andŸ
            $485
      paid to finance our D&O insurance
policy.





Loss from Continuing
Operations. Loss from continuing operations was $2,326,795 and $4,954,566
for 2Q2010 and the 1st Half 2010,
respectively or $1,874,774 and $2,578,868 lower than the loss from continuing
operations of $4,201,569 and $7,533,434 for 2Q2009 and the 1st Half
2009, respectively.





Liquidity and Capital
Resources.From inception to July 3, 2010, we have
raised net proceeds of approximately $53.0 million from financing activities. We
used these proceeds to fund operating and investing activities. We had a cash
balance of approximately $616,800 as of July 3, 2010.





By the
4th
quarter of this year, we expect to receive additional proceeds of approximately
$3.5 - $5.5 million in connection with the sale of our Series E Preferred
Stock.  As such, we believe these amounts will be adequate to fund our
operations for the next 12 months.





Net cash
used in operating activities was approximately $3.6 million and $4.3 million for
the 1st Half
2010 and the 1st Half
2009, respectively.  The decrease in cash used in operations was
primarily due to lower operating losses during the current thirteen weeks
compared with the same period of the prior year.  This was primarily
due to lower selling and marketing expenses, lower general and administrative
expenses, increased revenues and lower cash interest expense.





20


Net cash
used in investment activities for 2Q2010 was approximately $51,200 consisting of
purchases of property and equipment, primarily for additional computer hardware
to improve the capacity of the nFinanSe NetworkTM.  We
recorded minimal investment activity for the 1st Half
2009.





As
described in Note C to our consolidated financial statements, on June 10, 2008,
we entered into the Credit Facility.  Loans under the Credit Facility
are to be used solely to make payments to card issuing banks for credit to
SVCs.  On November 26, 2008, the Credit Facility was subsequently
amended to establish a sub-commitment of $3,400,000, pursuant to which each
Lender in its sole discretion, may make Accommodation Loans that may be used by
the Company for working capital expenditures, working capital needs and other
general corporate purposes.  Loans and Accommodation Loans may be
repaid and re-borrowed.  The maturity date of the Credit Facility was
November 25, 2009, one year after the initial borrowing and on October 29, 2009,
the Lenders approved the extension of maturity for an additional six months upon
the satisfaction of certain conditions set forth in the Amended and Restated
Loan Agreement.  The Credit Facility has been amended to extend the
maturity to September 30, 2010 and to cap the commitment of Midsummer to
$500,000 and issued to Midsummer 26,667 shares of its Series E Preferred Stock.
The Company expects to replace Midsummer as a Lender prior to September 30,
2010.  The Credit Facility contemplates that, with the Lenders’
consent, the maximum commitment may be increased to up to $20,000,000, and
additional lenders may be added.




During
the 1st Half
2010, cash provided by financing activities was $517,301 from the cash exercise
of 1,703,146 warrants at an exercise price of $0.01 per share and the sale of
333,334 shares of Series D Preferred Stock.  During the 1st Half
2009, the cash provided by financing activities of $4.0 million was the result
of borrowings under the Amended and Restated Loan Agreement.  As of
July 3, 2010, we had drawn $500,000 under the Amended and Restated Loan
Agreement.





Changes in Number of Employees and
Location.We anticipate that the development of our business will require
the hiring of a substantial number of additional employees in sales,
administration, operations and customer service.





Off-Balance
Sheet Arrangements:





Operating
Leases





We are
obligated under various operating lease agreements for our
facilities.  Future minimum lease payments and anticipated common area
maintenance charges under all of our operating leases are approximately as
follows at July 3, 2010:





Twelve
      months ending
            
            
            AmountsJune
      2011
            $
            205,200June
      2012
            
            207,300June
      2013
            
            52,100June
      2014
            
            -June
      2015
            
            -Total
            $
            464,600





Rent
expense included in loss from continuing operations for 1st Half
2010 and 1st Half
2009, was approximately $114,800 and $123,100, respectively.





Employment
Agreements





We are
obligated under employment agreements with our Chief Executive Officer, Jerry R.
Welch, and our Chief Financial Officer, Raymond P. Springer.  The
employment agreements had an initial term from September 5, 2006 to December 31,
2008 and were automatically renewed for two years with a new expiration date of
December 31, 2010.  The employment agreements provide to Messrs. Welch
and Springer a current annual salary of $275,000 and $200,000, respectively.
Each agreement is to be automatically renewed indefinitely for succeeding terms
of two years unless otherwise terminated in accordance with the
agreement.  Both Mr. Welch and Mr. Springer also receive
performance-based bonuses and certain medical and other benefits.  If
we terminate Mr. Welch or Mr. Springer without cause, we will be required to pay
severance to them in the amount of compensation and benefits they would have
otherwise earned in the remaining term of their employment agreements or twelve
months, whichever period is shorter.





In
addition to the above, Messrs. Welch and Springer received certain stock options
as described in Note D – Stock Options and Warrants.





21


Service and Purchase
Agreements





We have
entered into renewable contracts with DFS and VISA®, our card networks, PDNB,
and FB&T, our card-issuing banks, Metavante Corporation (“Metavante”), our
processor, and American Express® Travel Related Services Company, Inc., a gift
card program, that have initial expiration dates from March 17, 2011 through
December 26, 2014.    Because the majority of the fees to be
paid are contingent primarily on card volume, it is not possible to calculate
the amount of the future commitment on these contracts. The Metavante, PDNB and
FB&T agreements also require a minimum payment of $5,000, $3,000 and $7,500
per month, respectively.  During the 1st Half
2010 and the 1st Half
2009, we made aggregate payments of approximately $107,900 and $478,300,
respectively, to Metavante, $14,500 and $1,600, respectively, to PDNB and
$55,700 and $88,300, respectively, to FB&T under these
agreements.





Our
agreements with PDNB and FB&T require us to maintain certain reserve
balances for our card programs.  As of January 2, 2010 and July 3,
2010, the reserve balances held at PDNB and FB&T were $10,000 and $25,000,
respectively.  These amounts are included in “Other assets” on the
Company’s balance sheets as of January 2, 2010 and July 3, 2010.





Pending or Threatened
Litigation





We may
become involved in certain other litigation from time to time in the ordinary
course of business. To the best of our knowledge, no material litigation exists
or is threatened.





Bond
Collateral





On
February 1, 2009, we completed a partial funding of collateral amounting to
approximately $500,000 for performance bonds issued in connection with our state
licensing efforts.  The collateral, in the form of a letter of credit
arranged by Mr. Jeffrey Porter, was issued by a bank and was placed with the
insurance company that issued the various bonds which at the end of the year
aggregated approximately $9,600,000.  Mr. Porter entered into a
Guarantee and Indemnification Agreement with the Company dated February 1, 2009.
Accordingly, we are currently contingently liable for the face amount of the
letter of credit. Mr. Porter was to be compensated in cash at 2% of the average
outstanding amount of the letter of credit per quarter paid in arrears, however,
he chose to take the compensation in the form of Series D Preferred Stock during
the August 2009 equity raise. The Guarantee and Indemnification Agreement can be
cancelled by the Company upon receiving a more favorable arrangement from
another party. Upon demand, the Company will be required to increase the
collateral up to 10% of the face amount of bonds issued by the insurance
company. On February 1, 2010, both the letter of credit and the Guarantee and
Indemnification Agreement were renewed for another twelve months.





Critical Accounting
Estimates





The
preparation of consolidated financial statements in conformity with GAAP in the
United States of America requires us to make certain estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements. The reported amounts of revenues and expenses during the reporting
period may be affected by the estimates and assumptions we are required to make.
Estimates that are critical to the accompanying consolidated financial
statements arise from our belief that we will generate adequate cash to continue
as a going concern and that all long-lived assets are recoverable.  In
addition, stock-based compensation expense represents a significant
estimate.  The markets for our products are characterized by intense
competition, rapid technological development, evolving standards, short product
life cycles and price competition, all of which could impact the future
realization of our assets. Estimates and assumptions are reviewed periodically
and the effects of revisions are reflected in the period that they are
determined to be necessary. It is at least reasonably possible that our
estimates could change in the near term with respect to these
matters.





See
Note A — “Formation, Background and Operations of the Company” to the
consolidated financial statements, regarding the effect of certain recent
accounting pronouncements on our consolidated financial
statements.





Item
3.   Quantitative and Qualitative Disclosures About Market
Risk.





Not
applicable.





22





Item
4T.  Controls and Procedures.





Evaluation
of Disclosure Controls and Procedures





An
evaluation of the effectiveness of our disclosure controls and procedures as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of
1934, as amended (the “Securities Exchange
Act”), as of July 2, 2010 was carried out by us under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures as of the end of the period covered by this report are
effective.





Disclosure
controls and procedures are designed to ensure that information required to be
disclosed in our reports filed or submitted under the Securities Exchange Act
are recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and
forms.  Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in our reports filed or submitted under the Securities Exchange
Act is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding disclosure.





Change
in Internal Control over Financial Reporting





There
were no changes in our internal control over financial reporting during our most
recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.








































23





PART
II - OTHER INFORMATION





Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.





Series
D Preferred Stock Sale





On June
29, 2010, the Board approved an offering of up to $5,000,000 of Series E
Preferred Stock at a purchase price of $1.50 per share.  On July 3,
2010, the Company entered into the Purchase Agreements with the Investors,
pursuant to which the Company issued 333,334 shares of its Series D Preferred
Stock, which pursuant to the Purchase Agreements was exchanged for 333,334
shares of Series E Preferred Stock on July 8, 2010 (the date on which the
Statement of Designations, Rights and Preferences of the Series E Convertible
Preferred Stock was filed with the Secretary of State of the State of Nevada for
an aggregate cash purchase price of $500,001.




The
Series E Preferred Stock is not convertible into shares of Common Stock, by the
Investors to the extent that, if converted, they or any of their affiliates
would beneficially own in excess of 9.99% of the then issued and outstanding
shares of Common Stock.




Item
6. Exhibits.




Exhibit Number
              
              Description of Exhibit10.1
              
              SecondAmendmentto Amended and Restated
      Loan and Security Agreement (attached as Exhibit 99.1 to that
      certain Form 8-K, filed by the Company with the Securities and Exchange
      Commission on May 27,
  2010).10.2
              
              ThirdAmendmentto Amended and Restated
      Loan and Security Agreement(attached as
      Exhibit 99.1 to that certain Form
      8-K, filed by the Company with the Securities and Exchange Commission on
      June 25, 2010).*10.3
              
              Form of Securities Purchase
      Agreement entered into by the Company and those investors party thereto
      between July 2, 2010 and August 6, 2010 and Form of Addendum to Securities
      Purchase Agreement entered into by the Company and those investors party
      thereto on July 2, 2010.*31.1
              
              Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002*31.2
              
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002*32.1
              
              Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002*32.2
              
              Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002


* filed
herewith.

















24





SIGNATURES





In
accordance with the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.





NFINANSE
      INC.Date: August
      16, 2010
            By:
            /s/ Jerry R. WelchJerry
      R. Welch
              Chief
      Executive Officer and Chairman of the Board of Directors(Principal
      Executive Officer)





NFINANSE
      INC.Date:  August
      16, 2010
            By:
            /s/ Raymond P. SpringerRaymond
      P. Springer
              Chief
      Financial Officer(Principal
      Financial Officer)





NFINANSE
      INC.Date:  August
      16, 2010
            By:
            /s/ Jerome A. KollarJerome
      A. Kollar
              Vice
      President Finance and Controller(Principal
      Accounting Officer)






















25