UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-K







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


For
the fiscal year ended October 31, 2007


OR


o
            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: 0-20317





PSI
CORPORATION


(Exact
Name of Registrant as Specified in Its Charter)





Nevada
            88-0270266(State
      of incorporation)
            (I.R.S.
      Employer Identification No.)7222
      Commerce Center Drive, Suite 230,
            80919Colorado
      Springs, Colorado(Address
      of principal executive office)
            (Zip
      Code)


(719)
359-5533


(Registrant’s
telephone number, including area code)





Securities
registered under Section 12(b) of the Act:









Securities
registered pursuant to Section 12(g) of the Act:




Common
Stock, $.001 Par




Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yeso  Noþ
 
 Indicate
by check mark whether the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yeso  Noþ
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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. Yeso  Noþ
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.o
 
 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. (Check
one):
 
 Large
      accelerated filero
                Accelerated
      filero
                Non-accelerated
      filero
                Smaller
      reporting companyþ
 
 Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
 Yeso  Noþ
 
 The
aggregate market value of the voting stock held by non-affiliates of the
registrant based upon the closing price of the Company’s Common Stock on
September 22, 2008 was $14.8 million. Shares of Common Stock held by each
executive officer and director and by each person or group who owns 10% or more
of the outstanding Common Stock at September 22, 2008 have been excluded.
Exclusion of such shares should not be construed to indicate that any such
person possesses the power, direct or indirect, to direct or cause the direction
of the management or policies of the registrant or that such person is
controlled by or under common control with the registrant.
 
 On
September 22, 2008 there were 81,784,989 shares of the registrant’s common
stock outstanding.
  
 1




TABLEOF CONTENTS





PART
      IItem
      1.
                      Description of Business
                      3Item
      1A
                      Risk Factors
                      4Item
      1B
                      Unresolved Staff Comments
                      6Item
      2.
                      Properties
                      6Item
      3.
                      Legal Proceedings
                      7Item
      4.
                      Submission of Matters to a Vote of Security
      Holders
                      7PART
      IIItem
      5.
                      Market for Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                      7Item
      6.
                      Selected Financial Data
                      8Item
      7.
                      Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                      8Item
      7A
                      Quantitative and Qualitative Disclosures about Market
      Risk
                      9Item
      8.
                      Financial Statements and Supplementary Data
                      9Item
      9.
                      Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
                      25Item
      9A(T)
                      Controls and Procedures
                      25Item
      9B
                      Other Information
                      26PART
      IIIItem
      10.
                      Directors, Executive Officers and Corporate
      Governance
                      26Item
      11.
                      Executive Compensation
                      27Item
      12.
                      Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                      27Item
      13.
                      Certain Relationships and Related Transactions and Director
      Independence
                      27Item
      14.
                      Principal Accountant Fees and Services
                      28PART
      IVItem
      15
                      Exhibits, Financial Statement Schedules
                      28


2
 Table of Contents




PART
I




ITEM1. BUSINESS





This
report contains forward-looking statements. These forward-looking statements are
based on our current expectations about our business and industry. In some
cases, these statements may be identified by terminology such as “anticipates,”
“believes,” “continue,” “estimates,” “expects,” “may,” “plans,” “potential,”
“predicts,” “should,” “will,” or the negative of such terms and other comparable
terminology. These statements involve known and unknown risks and uncertainties
that may cause our results, levels of activity, performance or achievements to
be materially different from those expressed or implied by the forward-looking
statements. Factors that may cause or contribute to such differences include,
among others, those discussed in this report under Item 1A.—“Risk Factors.”
Except as may be required by law, we do not intend to update any forward-looking
statement to reflect events after the date of this report.





Overview





PSI
Corporation, doing business as Pantel Systems, Inc. (“PSI” or “the Company”) is
a full service kiosk and digital signage company that specializes in the
placement and management of self-service kiosks throughout the
country.  The e-banking kiosks follow a “general store” concept with
multiple functions and profit centers. These kiosks come standard with the
ability to process money transfers, cash dispensing, debit card dispensing and
reloading, as well as bill payment.




Our
kiosks provide consumers with information and functionality needed to perform
any of their banking needs and more. Digital signage screens attached to the
kiosks provide advertising opportunities for both national and local
advertisers.




We have
two vertical products: full motion video digital signage and full service
e-banking kiosks.




Our full
service e-banking kiosks are fully functional automated teller machines,
allowing consumers to process balance inquiries, withdrawals from checking and
savings accounts as well as credit cards and the ability to receive cash in
multiple denominations with a multilingual interface.  Consumers can
cash payroll checks, with real-time visual and biometric
validation.  When cashing a payroll check, consumers can choose to
receive cash instantly or load funds onto a debit card.  24-hour
customer support is available via the attached handset.  In addition,
consumers can choose from hundreds of gift cards to purchase, may purchase
pre-paid debit cards, may pay online bills with cash, check or credit card and
may purchase domestic and international calling cards or talk time for cell
phones.





Background





For the
period October 31, 1999, through December 10, 2004, PSI had been a public shell
company with no revenue from operations.  During this period, the
Company’s management had sought to acquire an operating business.  On
August 24, 2004, the Company entered into a Share Exchange Agreement with the
stockholders of friendlyway, Inc. (“FWI”), pursuant to which the Company agreed
to acquire all of the outstanding shares of FWI in exchange for the issuance of
18,000,000 shares of Common Stock of the Company and the assumption of
outstanding options granted to FWI employees.  That transaction closed
on December 10, 2004, and FWI became a wholly-owned subsidiary of the
Company.  This transaction has been accounted for (effective as of
December 10, 2004) as a recapitalization of FWI, which is the accounting
acquirer.





FWI was
incorporated in Delaware in June, 2000, as a self-service solutions provider of
customer-facing  public access self-service systems.  FWI’s
products focused on the improvement of internet-based customer communication at
the point of sale in retail stores, point of service/information in public
locations, or the Internet.  Through July 31, 2002, FWI had been a
wholly-owned subsidiary of Friendlyway AG (“FWAG”).  Effective August
1, 2002, FWI’s President, Alexander von Welczeck, acquired a 70% interest in FWI
from FWAG, pursuant to a Management Buyout Agreement (“MBO”) with
FWAG.  Following the MBO, FWAG retained a 30% ownership interest in
FWI.





The
assumptions motivating the Company’s acquisition of FWI were
unfulfilled.  Additional capital requirements were unmet, increased
sales were not realized, cost of goods sold was not lowered, and profitability
was not achieved.  Of significant damage was the ultimate refusal of
FWAG to be acquired by the Company (despite repeated assurances from FWAG and
its adviser that such would occur).  This became evident with the
resignations of the four FWAG directors of the Company in December,
2005.





The one
remaining director of the Company (the CEO of the Company and the chief
executive of FWI), refusing to act upon a proposal that the FWI transaction be
rescinded, then unilaterally determined (with the assistance of the Company’s
then principal financial officer), to discontinue the operations of
FWI.  To replace the elimination of FWI, the one director executed
documents to acquire Pantel Systems, Inc. (“Pantel”), in exchange for 20,000,000
shares of the Company’s Common Stock.  No consideration was given to
the return or cancellation of any of the 18,000,000 shares issued on December
10, 2004, in exchange for 100% of FWI.  The sole stockholder of Pantel
became the sole director and principal executive of the
Company.


3
 Table of Contents




In
immediate, successive order the Company proceeded to effect three acquisitions,
to raise substantial additional capital, and to issue substantial additional
shares of Common Stock.  The price of the Company’s Common Stock
declined to $.06 per share.  All of the additional capital raised from
the sale(s) of cheap stock was dissipated.




Inasmuch
as the Pantel acquisition was in violation of Item 9.01 of Form 8-K and of Rule
14f-I promulgated under the 1934 Act, as the Company never received a Pantel
stock certificate, as none of the 20,000,000 shares was ever delivered to an
escrow agent, as no closing documents were ever exchanged, and no Form 13-D was
filed by the Pantel sole stockholder, the acquisition of Pantel was deemed to
have been rescinded.




Effective
January 7, 2007, David Foni became the sole director and principal executive of
PSI.  Mr. Foni had previously invested in the Company’s private
placement.  Since his appointment, Mr. Foni has concentrated upon the
development of the Company’s product line, the rescission of all acquisitions
except for one remaining, the raising of additional capital, the elimination of
all litigation, the obtaining of orders for and the installation of the
Company’s product lines, and the resolution of the Company’s accounting
issues.





Available Information and Website
Address





Our
website address is www.pantelsystems.com. We
make available free of charge through our website, our Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all
amendments to these reports as soon as reasonably practicable after filing with
the SEC. They also may be obtained directly from the SEC’s website, www.sec.gov. The contents of
our website are not incorporated by reference into this report.








ITEM1A. RISK
FACTORS




This
Annual Report on Form 10-K includes forward-looking statements about our
business and results of operations that are subject to risks and uncertainties.
Factors that could cause or contribute to such differences include those
discussed below. In addition to the risk factors discussed below, we are also
subject to additional risks and uncertainties not presently known to us or that
we currently deem immaterial. If any of these known or unknown risks or
uncertainties actually occurs, our business could be harmed
substantially.




Our
success will depend on our ability to develop new products and to adapt to rapid
technological change.




The types
of products sold by us are subject to rapid and continual technological change.
Products available from us, as well as from our competitors, have increasingly
offered a wider range of features and capabilities. We believe that in order to
compete effectively in selected vertical markets, we must provide compatible
systems incorporating new technologies at competitive prices. To the extent we
determine that new software and hardware technologies are required to remain
competitive or our customers demand more advanced offerings, the development,
acquisition and implementation of these technologies are likely to require
significant capital investments by us. To the extent that such expenses precede
or are not subsequently followed by increased revenues, our business, results of
operations and financial condition may be materially and adversely
affected.




We can
provide no assurance that we will be able to continue funding research and
development at levels sufficient to enhance our current product offerings or be
able to develop and introduce on a timely basis new products that keep pace with
technological developments and emerging industry standards and address the
evolving needs of clients. There can also be no assurance that we will not
experience difficulties that will result in delaying or preventing the
successful development, introduction and marketing of new products in our
existing markets or that our new products and product enhancements will
adequately meet the requirements of the marketplace or achieve any significant
degree of market acceptance. Likewise, there can be no assurance as to the
acceptance of our products in new markets, nor can there be any assurance as to
the success of our penetration of these markets, or to the revenue or profit
margins with respect to these products. Our inability, for any reason, to
develop and introduce new products and product enhancements in a timely manner
in response to changing market conditions or client requirements could
materially adversely affect our business, financial position, results of
operations and cash flow.




In
addition, we strive to achieve compatibility between our products and retail
systems that we believe are or will become popular and widely adopted. We invest
substantial resources in development efforts aimed at achieving such
compatibility. Any failure by us to anticipate or respond adequately to
technology or market developments could materially adversely affect our
business, operating results and financial condition.




We
may have difficulty implementing our products, which could damage our reputation
and our ability to generate new business.




Implementation
of our software products can be a lengthy process, and commitment of resources
by our clients is subject to a number of significant risks over which we have
little or no control. Delays in the implementations of any of our software
products, whether by our business partners or us, may result in client
dissatisfaction, disputes with customers, or damage to our reputation.
Significant problems implementing our software can cause delays or prevent us
from collecting fees for our software and can damage our ability to generate new
business.


4
 Table of Contents




Errors
or defects in our products could diminish demand for our products, injure our
reputation and reduce our operating results.




Our
products are complex and may contain errors that could be detected at any point
in the life of the product. Errors may be found in new products or releases
after shipment. Such errors could result in diminished demand for our products,
delays in market acceptance and sales, diversion of development resources,
injury to our reputation or increased service and warranty costs. If any of
these were to occur, our operating results could be adversely
affected.




We
are highly dependent on a limited number of clients, the loss of one or more of
which could have a material adverse effect on our business, operating results
and financial condition.




We sell
systems and services to a limited number of large clients. We can provide no
assurance that the loss of one or more of these clients will not have a material
adverse effect on our business, financial position, results of operations, and
cash flows.




We have
traditionally depended on our installed client base for future revenues from
services and licenses of other products. If existing clients fail to renew their
maintenance agreements, our revenues could decrease. The maintenance agreements
are generally renewable annually at the option of the client and there are no
mandatory payment obligations or obligations to license additional software.
Therefore, current clients may not necessarily generate significant maintenance
revenues in future periods. In addition, clients may not purchase additional
products or services. Any downturn in software license revenues could result in
lower services revenues in future quarters.




Our
failure to manage our growth effectively could have a material adverse effect on
our business, financial position, results of operations, and cash
flows.




The
growth in the size and complexity of our business and the expansion of our
product lines and client base may place a significant strain on our management
and operations. An increase in the demand for our products could strain our
resources or result in delivery problems, delayed software releases, slow
response time, or insufficient resources for assisting clients with
implementation of our products and services, which could have a material adverse
effect on our business, operating results and financial condition. We anticipate
that continued growth, if any, will require us to recruit, hire and assimilate a
substantial number of new employees, including consulting, product development,
sales and marketing, and administrative personnel.




Our
ability to compete effectively and to manage future growth, if any, will also
depend on our ability to continue to implement and improve operational,
financial and management information systems on a timely basis and to expand,
train, motivate and manage our work force, particularly our direct sales force
and consulting services organization. We can provide no assurance that we will
be able to manage any future growth, and any failure to do so could have a
material adverse effect on our business, financial position, results of
operations, and cash flows.




The
loss of our key personnel could have a material adverse effect on
us.




Our
future success depends in part on the performance of our executive officers and
key employees. We do not have employment agreements with any of our executive
officers. The loss of the services of any of our executive officers or other key
employees could have a material adverse effect on our business, financial
position, results of operations, and cash flows.




In
addition, our failure to recruit and retain qualified accounting and finance
personnel may result in excessive third party accounting and auditing costs and
expenses in connection with compliance with the Sarbanes-Oxley Act, specifically
in connection with Section 404 (internal control over financial
reporting).




Our
inability to attract, hire or retain the necessary technical and managerial
personnel could have a material adverse effect on our business, financial
position, results of operations, and cash flows.




We are
heavily dependent upon our ability to attract, retain and motivate skilled
technical and managerial personnel, especially highly skilled engineers involved
in ongoing product development and consulting personnel who assist in the
development and implementation of our total business solutions. The market for
such individuals is intensely competitive. Due to the critical role of our
product development and consulting staffs, the inability to recruit successfully
or the loss of a significant part of our product development or consulting
staffs could have a material adverse effect on us. The software industry is
characterized by a high level of employee mobility and aggressive recruiting of
skilled personnel. We can provide no assurance that we will be able to retain
our current personnel, or that we will be able to attract, assimilate or retain
other highly qualified technical and managerial personnel in the future. The
inability to attract, hire or retain the necessary technical and managerial
personnel could have a material adverse effect upon our business, financial
position, results of operations, and cash flows.


5
 Table of Contents




If
we become subject to adverse claims alleging infringement of third-party
proprietary rights, we may incur unanticipated costs and our competitive
position may suffer.




There has
been a substantial amount of litigation in our industry regarding intellectual
property rights. It is possible that in the future third parties may claim that
our current or potential future solutions infringe on their intellectual
property. We anticipate that product developers will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows. Although we are not aware of any infringement by our technology
on the proprietary rights of others and are not currently subject to any legal
proceedings involving claimed infringements, we can provide no assurance that we
will not be subject to such third-party claims, litigation or indemnity demands
or that these claims will not be successful. If a claim or indemnity demand were
to be brought against us, it could result in costly litigation or product
shipment delays, or force us to stop selling or providing services or enter into
costly royalty or license agreements.




We
operate in a highly competitive market and can give no assurance that we will be
able to compete successfully against our current or future
competitors.




The
market for retail information systems is intensely competitive. We believe the
principal competitive factors are product quality, reliability, performance and
price, vendor and product reputation, financial stability, features and
functions, ease of use, quality of support, and degree of integration effort
required with other systems. A number of companies offer competitive products
addressing certain of our target markets. In addition, we believe that new
market entrants may attempt to develop fully integrated systems targeting the
retail industry. In the market for consulting services, we compete with various
systems integrators. Many of our existing competitors, as well as a number of
potential new competitors, have significantly greater financial, technical and
marketing resources than we have. We can provide no assurance that we will be
able to compete successfully against our current or future competitors or that
competition will not have a material adverse effect on our business, operating
results and financial condition.




Additionally,
we compete with a variety of hardware and software vendors. Some of our
competitors may have advantages over us due to their significant worldwide
presence, longer operating and product development history, and substantially
greater financial, technical and marketing resources. If competitors offer more
favorable payment terms and/or more favorable contractual implementation terms
or guarantees, we may need to lower prices or offer other favorable terms in
order to compete successfully. Any such changes would likely reduce our
margins.




An
increase in customer bankruptcies, due to weak economic conditions, could harm
our business.




During
weak economic times, there is an increased risk that certain of our customers
will file bankruptcy. If a customer files bankruptcy, we may be required to
forego collection of pre-petition amounts owed and to repay amounts remitted to
us during the 90-day preference period preceding the filing. Accounts receivable
balances related to pre-petition amounts may in certain of these instances be
large due to extended payment terms for software license fees, and significant
billings for consulting and implementation services on large projects. The
bankruptcy laws, as well as specific circumstances of each bankruptcy, may limit
our ability to collect pre-petition amounts. We also face risk from
international customers that file for bankruptcy protection in foreign
jurisdictions, in that the application of foreign bankruptcy laws may be more
difficult to predict. Although we believe that we have sufficient reserves to
cover anticipated customer bankruptcies, we can provide no assurance that such
reserves will be adequate, and if they are not adequate, our business, operating
results and financial condition would be adversely affected.




Our
products and services could be vulnerable to unauthorized access and
hacking.




Credit
card issuers have promulgated credit card security guidelines as part of their
ongoing effort to battle identity theft and credit card fraud. We continue to
work with credit card issuers to assure that our products and services comply
with the credit card associations’ security regulations and best practices
applicable to our products and services. There can be no assurances, however,
that our products and services are invulnerable to unauthorized access or
hacking. Additionally, there can be no guarantee that our customers will
implement all of the credit card security features that we introduce or all of
the protections and procedures required by the credit card issuers, or that our
customers will establish and maintain appropriate levels of firewall protection
and other security measures. When there is unauthorized access to credit card
data that results in financial loss, there is a potential that parties could
seek damages from us. Additionally, changes in the security guidelines could
require significant and unanticipated development efforts.








ITEM1B. UNRESOLVED
STAFF COMMENTS





None.








ITEM2.
PROPERTIES





Our
principal executive offices are located Colorado Springs, Colorado that is
occupied under an operating lease expiring in 2011. We believe that our existing
facilities are adequate to meet our needs for the foreseeable future and that
suitable alternative space is readily available should we choose to or be unable
to renew our leases at the conclusion of their terms.


6
 Table of Contents


ITEM3. LEGAL
PROCEEDINGS





This Note
embraces all litigation items commenced, disposed of or otherwise resolved
during the period November 1, 2004, through October 31,
2007.  Thereafter, one item of litigation is referred to in Note 10
hereinafter as a post-balance sheet event.





A)
            On
      April 27, 2007, FWAG, a German corporation that had received 6,000,000 of
      the aggregate of 18,000,000 shares issued by the Company effective
      December 10, 2004, in exchange for 100% of the capital stock of
      friendlyway, Inc. (“FWI”), sued the Company in California Superior Court
      in response to the Company’s attempted cancellation of the shares received
      by FWAG.  The Company then instituted a separate action in
      California Federal District Court (No. C 07 02869 SBA) on June 1, 2007,
      against FWAG in which the Company alleged that it was fraudulently induced
      to acquire FWI and to issue 18,000,000 shares of its Common Stock in
      exchange therefore.  The Company sought rescission of the FWI
      transaction and, to prevent irreparable harm, moved on June 5, 2007, for a
      temporary restraining order to attempt to preserve the status
      quo.  (The named defendants in the Federal action were believed
      to own an aggregate of 15,576,000 of the 18,000,000
    shares.)





The law
is settled that a party seeking a temporary restraining order must demonstrate
either (a) the combination of probable success on the merits or (b) serious
issues being raised and the balance of hardships being in favor of the
movant.  The Court ruled that the Company failed to show a likelihood
of success on the Merits, that the securities fraud and breach of contract
claims were time-barred, and that its allegations of fraud were precatory and,
therefore, unsupported.





Subsequently,
the Company was constrained to execute settlement agreements with each of the
four named defendants.  Such settlements resolved the litigation
instituted both by AG and by the Company.  Each such settlement
agreement differed in content and result and in the disposition of the shares of
Common Stock in issue.  In sum, the settlements resulted in the net
cancellation of 4,401,906 shares of Common Stock and the release of AG claims to
an additional 18 million shares thereof.  The Company believes it to
be significant that its then counsel did not raise the issues of (a) failure to
deliver consideration by the shareholders of FWI and (b) damages sustained by
the Company as the proximate cause of all AG-appointed Company directors
resigning in December, 2006, resulting in only one director of the Company
remaining and that such one director initiated the transaction that resulted in
the dissipation of Company assets, the decline in the Company’s stock price, and
the necessity that present management (from January, 2007) be compelled to
effect a reorganization of the Company.





Additional
litigation matters are discussed in Note 6 (Acquisitions).  The final
resolution of the settlement reached with one of the four defendants mentioned
in Note 6 is referred to in Note 10 (Subsequent Event) hereto.








ITEM4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS





None.








PART
II





ITEM5. MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES





Our
common stock is traded on the Pink Sheets under the symbol “PSCP.” The following
table sets forth the high and low reported intraday sale prices of our common
stock during the past two fiscal years as reported by the Pink
Sheets.  Such quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commissions, and may not represent actual
transactions.  Although we are listed on the Pink Sheets, there can be
no assurance that an active trading market for our stock will develop. Price
quotations on the exchange will reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual
transactions.





Should a
market develop for our shares, the trading price of the common stock is likely
to be highly volatile and could be subject to wide fluctuations in response to
factors such as actual or anticipated variations in quarterly operating results,
announcements of technological innovations, new sales formats, or new services
by us or our competitors, changes in financial estimates by securities analysts,
conditions or trends in Internet or traditional retail markets, changes in the
market valuations of other equipment and furniture leasing service providers or
accounting related business services, announcements by us or our competitors of
significant acquisitions, strategic partnerships, joint ventures, capital
commitments, additions or departures of key personnel, sales of common stock and
other events or factors, many of which are beyond our control. In addition, the
stock market in general, and the market for instant messaging business services
in particular, has experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of such
companies. These broad market and industry factors may materially adversely
affect the market price of the common stock, regardless of our operating
performance.





Consequently,
future announcements concerning us or our competitors, litigation, or public
concerns as to the commercial value of one or more of our services may cause the
market price of our common stock to fluctuate substantially for reasons which
may be unrelated to operating results.  These fluctuations, as well as
general economic, political and market conditions, may have a material adverse
effect on the market price of our common stock.


7
 Table of Contents




Fiscal
      Year 2007
                
                High
                
                
                LowFourth
      Quarter
                
                $
                0.22
                
                
                $
                0.04Third
      Quarter
                
                $
                0.08
                
                
                $
                0.04Second
      Quarter
                
                $
                0.40
                
                
                $
                0.07First
      Quarter
                
                $
                0.48
                
                
                $
                0.28





Fiscal
      Year 2006
                  
                  High
                  
                  
                  LowFourth
      Quarter
                  
                  $
                  1.01
                  
                  
                  $
                  0.17Third
      Quarter
                  
                  $
                  0.44
                  
                  
                  $
                  0.15Second
      Quarter
                  
                  $
                  0.51
                  
                  
                  $
                  0.10First
      Quarter
                  
                  $
                  0.55
                  
                  
                  $
                  0.15





As of
September 22, 2008, there were approximately 541 holders of record of our common
stock and a total of 81,784,989 shares of common stock
outstanding.  No dividends have been paid on our common stock to date,
and we do not anticipate paying any dividends in the foreseeable
future.








ITEM6. SELECTED FINANCIAL DATA





Not
applicable.








ITEM7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





This
report, including the sections entitled “Risk Factors,” “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” and “Business,”
contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, or the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. We may, in some cases, use words such as “project,” “believe,”
“anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,”
“could,” “potentially,” “will,” or “may,” or other words that convey uncertainty
of future events or outcomes to identify these forward-looking statements.
Forward-looking statements in this report may include statements
about:





•
            our
      ability to obtain licenses to any necessary third-party intellectual
      property;





•
            our
      ability to retain and hire necessary employees and appropriately staff our
      development programs;





•
            our
      cash requirements; and





•
            our
      financial performance.





There are
a number of important factors that could cause actual results to differ
materially from the results anticipated by these forward-looking statements.
These important factors include those that we discuss in this report under the
caption “Risk Factors.” You should read these factors and the other cautionary
statements made in this report as being applicable to all related
forward-looking statements wherever they appear in this report. If one or more
of these factors materialize, or if any underlying assumptions prove incorrect,
our actual results, performance or achievements may vary materially from any
future results, performance or achievements expressed or implied by these
forward-looking statements. We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law.







Introduction




Management’s
Discussion and Analysis (“MD&A”) is intended to facilitate an understanding
of our business and results of operations. This MD&A should be read in
conjunction with our consolidated financial statements and the accompanying
notes to consolidated financial statements included elsewhere in this report.
MD&A consists of the following sections:





•
            Overview: A summary of
      our business, financial performance and
  opportunities





•
            Results of Operations:
      A discussion of operating results





•
            Liquidity and Capital
      Resources: An analysis of cash flows, sources and uses of cash,
      contractual obligations and financial
position


8
 Table of Contents




•
            Critical Accounting Policies
      and Procedures: A discussion of critical accounting policies that
      require the exercise of judgments and
estimates





•
            Recent Accounting
      Pronouncements: A summary of recent accounting pronouncements and
      the effects on the Company





Overview





PSI
Corporation, doing business as Pantel Systems, Inc. (“PSI” or “the Company”) is
a full service kiosk and digital signage company that specializes in the
placement and management of self-service kiosks throughout the
country.  The e-banking kiosks follow a “general store” concept with
multiple functions and profit centers. These kiosks come standard with the
ability to process money transfers, cash dispensing, debit card dispensing and
reloading, as well as bill payment





Management
has devoted almost eighteen months to the development of the Company’s two
product lines. Deliveries to customers of the first product line recently
commenced; the first installations of the second product line occurred during
the week of July 7, 2008.  Although the sales volume anticipated by
the Company will require substantial additional working capital, the Company
believes that the leasing of its products can be accomplished with lease
financing.





Results
of Operations





The
Company earned revenue of $800,320 in the fiscal year ended October 31, 2007,
compared to $157,183 in the 2006 fiscal year.  The Company’s net loss
for the 2007 fiscal year was $1,603,234, compared to a net loss of $8,044,568 in
the prior fiscal year.  The higher loss in the 2006 fiscal year was
due in part to a loss on impairment of goodwill, loss on investments and
forgiveness of indebtedness in the 2006 fiscal year.





Liquidity
and Capital Resources





Cash
Flows





Cash used
in operations was $1,833,458 for the year ended October 31, 2007 compared to
2,711,636 of cash used in operations for the year ended October 31,
2006.





Cash
flows from financing activities were $1,783,200 for the year ended October 31,
2007 due primarily to proceeds from long-term debt offset by repayment of
long-term debt.  Cash flows from financing activities were $3,168,919
for the year ended October 31, 2006.





Cash
and cash equivalents





We had
cash and cash equivalents of $407,201 as of October 31, 2007.  Due to
the substantial doubt of our ability to meet our working capital needs, history
of losses and current shareholders’ deficit, in their report on the annual
financial statements for the year ended October 31, 2007, our independent
auditors included an explanatory paragraph regarding concerns about our ability
to continue as a going concern. Our financial statements contain additional note
disclosures describing the circumstances that lead to this disclosure by our
independent auditors.





Critical
Accounting Policies and Procedures and Recent Accounting
Pronouncements





The
Company’s critical accounting policies and procedures and recent accounting
pronouncements are set forth in the Notes to our Consolidated Financial
Statements set forth in Item 8 hereof.





Off-Balance
Sheet Arrangements





The
Company does not have any off-balance sheet arrangements.





ITEM7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
applicable.





ITEM8.FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA







The
following consolidated financial statements are filed with this
Report:




Report of
Independent Registered Public Accounting Firm




Consolidated
Balance Sheets at October 31, 2007 and 2006




Consolidated
Statements of Operations for the years ended October 31, 2007 and
2006


9
 Table of Contents




Consolidated
Statements of Shareholders’ Equity for the years ended October 31, 2007 and
2006




Consolidated
Statements of Cash Flows for the years ended October 31, 2007 and
2006




Notes to
Consolidated Financial Statements.


10
 Table of Contents


Seligson
& Giannattasio, LLP





REPORT
OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board of
Directors and Shareholders of PSI Corporation





We have
audited the accompanying consolidated balance sheets of PSI Corporation and its
subsidiaries as of October 31, 2007 and 2006 and the related consolidated
statements of operations and comprehensive loss, cash flows and stockholders’
equity (deficit) for the two years ended October 31, 2007. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of PSI Corporation and its
subsidiaries as of October 31, 2007 and 2006 and the results of their operations
and their cash flows for the two years ended October 31, 2007 in conformity with
accounting principles generally accepted in the United States of
America.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has incurred significant losses since inception and has
relied on non-operational sources of financing to fund operations, which raise
substantial doubt about its ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.








/s/
Seligson & Giannattasio, LLP








White
Plains, NY


October
23, 2008


11
 Table of Contents




PSI
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


OCTOBER
31,








2006
                    
                    
                    2007ASSETSCURRENT
      ASSETSCash
                    
                    $
                    10,943
                    
                    
                    $
                    407,201Accounts
      receivable, net of allowance for doubtful accounts of$11,000
      in 2006 and $17,000 in 2007
                    
                    
                    119,871
                    
                    
                    
                    45,723Inventory
                    
                    
                    59,328
                    
                    
                    
                    283,677Prepaid
      expenses
                    
                    
                    14,954
                    
                    
                    
                    157,063Total
      current assets
                    
                    
                    205,096
                    
                    
                    
                    893,664Fixed
      assets, net
                    
                    
                    4,750
                    
                    
                    
                    8,973Other  Assets:Loans
      to formerly affiliated companies
                    
                    
                    455,776
                    
                    
                    
                    3,155Deferred
      expenses
                    
                    
                    1,107,976
                    
                    
                    
                    0Debt
      financing costs, net
                    
                    
                    0
                    
                    
                    
                    150,091Total
      Assets
                    
                    $
                    1,773,598
                    
                    
                    $
                    1,055,883






The
accompanying notes are an integral part of these consolidated financial
statements




12
 Table of Contents




PSI
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


OCTOBER
31,








LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY





2006
                      
                      
                      2007CURRENT
      LIABILITIESAccounts
      payable
                      
                      $
                      1,400,104
                      
                      
                      $
                      1,098,422Due
      to Big Fish Marketing Group, Inc.
                      
                      
                      100,000
                      
                      
                      
                      60,000Accrued
      liabilities
                      
                      
                      426,059
                      
                      
                      
                      210,052Total
      current liabilities
                      
                      
                      1,926,163
                      
                      
                      
                      1,368,474Long-
      term debt
                      
                      
                      2,208,770
                      
                      
                      
                      1,786,570Total
      liabilities
                      
                      
                      4,134,933
                      
                      
                      
                      3,155,044Stockholders’
      Deficiency:Preferred
      stock, $.001 par value; 5,000,000 shares authorized, none issued and
      outstandingCommon
      Stock, $.001 par value; 300,000,000 shares authorized, 64,467,396 and
      81,020,396 shares issued and outstanding, respectively
                      
                      
                      64,467
                      
                      
                      
                      81,020Additional
      paid-in capital
                      
                      
                      8,559,432
                      
                      
                      
                      10,408,287Accumulated
      Deficit
                      
                      
                      (10,984,247
                      )
                      
                      
                      (12,587,481
                      )(2,360,348
                      )
                      
                      
                      (2,098,174
                      )Less:  Common
      stock in  treasury
                      
                      
                      (987
                      )
                      
                      
                      (987
                      )Total
      Stockholders’ Deficiency
                      
                      
                      (2,361,335
                      )
                      
                      
                      (2,099,161
                      )Total
      Liabilities and Stockholders’ Deficiency
                      
                      $
                      1,773,598
                      
                      
                      $
                      1,055,883








The
accompanying notes are an integral part of these consolidated financial
statements


13
 Table of Contents


PSI
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


YEARS
ENDED OCTOBER 31,








2006
                              
                              
                              2007REVENUE
                              
                              $
                              157,183
                              
                              
                              $
                              800,320Cost
      of Goods Sold
                              
                              
                              128,202
                              
                              
                              
                              462,779Gross
      Profit
                              
                              
                              28,981
                              
                              
                              
                              337,541ADMINISTRATIVE
      EXPENSES
                              
                              
                              2,291,583
                              
                              
                              
                              1,517,413Loss
      from operations
                              
                              
                              (2,262,602
                              )
                              
                              
                              (1,179,872
                              )OTHER
      INCOME (EXPENSES)Loss
      on discontinued operations, net
                              
                              
                              (865,120
                              )
                              
                              
                              (72,985
                              )Interest,
      net
                              
                              
                              (1,202,789
                              )
                              
                              
                              (770,853
                              )Loss
      on investments
                              
                              
                              (2,164,928
                              )
                              
                              
                              0Forgiveness
      of indebtedness
                              
                              
                              147,634
                              
                              
                              
                              541,131Loss
      on impairment of goodwill
                              
                              
                              (1,480,091
                              )
                              
                              
                              0Write-down
      of inventory
                              
                              
                              (216,672
                              )
                              
                              
                              (120,655
                              )NET
      LOSS
                              
                              $
                              (8,044,568
                              )
                              
                              $
                              (1,603,234
                              )Basic
      and diluted shares outstanding
                              
                              
                              47,352,920
                              
                              
                              
                              66,030,129Basic
      and diluted loss per share
                              
                              $
                              (.17
                              )
                              
                              $
                              (.02
                              )








The
accompanying notes are an integral part of these


consolidated
financial statements


14
 Table of Contents




PSI
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)


YEARS
ENDED OCTOBER 31, 2006 AND 2007





SharesOfCommonStock
                    
                    
                    CommonStock
                    
                    
                    AdditionalPaid-InCapital
                    
                    
                    AccumulatedDeficit
                    
                    
                    Treasury
      Stock
                    
                    
                    Total
      Stockholders’
                      (Deficit)Balance
      at October 31, 2005
                    
                    
                    25,428,130
                    
                    
                    $
                    25,428
                    
                    
                    $
                    170,073
                    
                    
                    $
                    (2,939,679
                    )
                    
                    $
                    (987
                    )
                    
                    $
                    (2,745,165
                    )Stock
      option expense
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7,216
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7,216Sale
      of common stock
                    
                    
                    5,000,000
                    
                    
                    
                    5,000
                    
                    
                    
                    495,000
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    500,000Issuance
      of stock as compensation
                    
                    
                    20,185,371
                    
                    
                    
                    20,186
                    
                    
                    
                    1,807,758
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,827,944Issuance
      of stock in connection with business acquisitions
                    
                    
                    11,770,562
                    
                    
                    
                    11,770
                    
                    
                    
                    5,052,368
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    5,064,138Issuance
      of stock to settle debt
                    
                    
                    2,083,333
                    
                    
                    
                    2,083
                    
                    
                    
                    497,917
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    500,000Issuance
      of warrants in connection with financing
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    529,100
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    529,100Net
      Loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (8,044,568
                    )
                    
                    
                    
                    
                    
                    
                    (8,044,568
                    )Balance,
      October 31, 2006
                    
                    
                    64,467,396
                    
                    
                    $
                    64,467
                    
                    
                    $
                    8,559,432
                    
                    
                    
                    (10,984,247
                    )
                    
                    
                    (987
                    )
                    
                    $
                    (2,361,335
                    )Conversion
      of long-term debt into common stock
                    
                    
                    22,454,000
                    
                    
                    
                    22,454
                    
                    
                    
                    2,951,651
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,974,105Return
      of shares in connection with various litigation
                    
                    
                    (5,901,000
                    )
                    
                    
                    (5,901
                    )
                    
                    
                    (1,358,532
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,364,433
                    )Issuance
      of warrants in connection with financing
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    255,736
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    255,736Net
      Loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,603,234
                    )
                    
                    
                    
                    
                    
                    
                    (1,603,234
                    )Balance,
      October 31, 2007
                    
                    
                    81,020,396
                    
                    
                    
                    81,020
                    
                    
                    
                    10,408,287
                    
                    
                    
                    (12,587,481
                    )
                    
                    
                    (987
                    )
                    
                    
                    (2,099,161
                    )






These
accompanying notes are an integral part of these consolidated financial
statements.


15
 Table of Contents


PSI
CORPORATION AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


YEARS
ENDED OCTOBER 31,





2006
                        
                        
                        2007OPERATING
      ACTIVITIESNet
      Loss
                        
                        $
                        (8,044,568
                        )
                        
                        $
                        (1,603,234
                        )Adjustments
      to reconcile net loss :Depreciation
                        
                        
                        250
                        
                        
                        
                        1,882Forgiveness
      of indebtedness
                        
                        
                        (152,634
                        )
                        
                        
                        (541,131
                        )Write
      down of inventory
                        
                        
                        216,672
                        
                        
                        
                        0Issuance
      of warrants in connection with financing
                        
                        
                        529,100
                        
                        
                        
                        0Issuance
      of stock in connection with failed investment
                        
                        
                        2,164,928
                        
                        
                        
                        0Stock
      based compensation
                        
                        
                        729,450
                        
                        
                        
                        0Stock
      option expense
                        
                        
                        7,216
                        
                        
                        
                        0Impairment
      of goodwill
                        
                        
                        1,480,091
                        
                        
                        
                        0Accounts
      receivable
                        
                        
                        287,967
                        
                        
                        
                        74,148Inventories
                        
                        
                        100,075
                        
                        
                        
                        (224,349
                        )Prepaid
      expenses
                        
                        
                        (8,264
                        )
                        
                        
                        (142,109
                        )Accounts
      payable
                        
                        
                        1,273,015
                        
                        
                        
                        239,449Accrued
      liabilities
                        
                        
                        (1,294,934
                        )
                        
                        
                        361,886Net
      cash Provided By (Used in) operating activities
                        
                        
                        (2,711,636
                        )
                        
                        
                        (1,833,458
                        )INVESTING
      ACTIVITIESNet
      advances to formerly related parties
                        
                        
                        (498,848
                        )
                        
                        
                        452,621Purchase
      of fixed assets
                        
                        
                        (5,000
                        )
                        
                        
                        (6,105
                        )Net
      cash Provided by (Used in)  investing activities
                        
                        
                        (503,848
                        )
                        
                        
                        446,516FINANCING
      ACTIVITIESProceeds
      from long term debt
                        
                        
                        2,808,770
                        
                        
                        
                        1,845,000Proceeds
      from sale of common stock
                        
                        
                        500,000
                        
                        
                        
                        0Repayment
      of long term debt
                        
                        
                        (139,851
                        )
                        
                        
                        (61,800
                        )Net
      cash provided by (utilized by) financing activities
                        
                        
                        3,168,919
                        
                        
                        
                        1,783,200INCREASE
      (DECREASE) IN CASH
                        
                        
                        (46,565
                        )
                        
                        
                        396,258Cash,
      beginning of year
                        
                        
                        57,508
                        
                        
                        
                        10,943Cash,
      end of year
                        
                        
                        10,943
                        
                        
                        $
                        407,201SUPPLEMENTAL
      DISCLOSURES:Cash
      paid during the year for interest
                        
                        $
                        23,738
                        
                        
                        $
                        32,961Cash
      paid during the year for income taxes
                        
                        $
                        0
                        
                        
                        $
                        0






The
accompanying notes are an integral part of these


consolidated
financial statements


16
 Table of Contents




PSI
CORPORATION AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


12-MONTH
PERIODS ENDED OCTOBER 31, 2007 AND 2006





1.
            ORGANIZATION
      AND GOING CONCERN





Organization





PSI
Corporation (the “Company”) was organized under the laws of Nevada in June,
1991, and is a full service kiosk and digital signage company that specializes
in the placement and management of self-service kiosks throughout the
country.  The e-banking kiosks follow a “general store” concept with
multiple functions and profit centers. These kiosks come standard with the
ability to process money transfers, cash dispensing, debit card dispensing and
reloading, as well as bill payment.




The
Company’s kiosks provide consumers with information and functionality needed to
perform any of their banking needs and more. Digital signage screens attached to
the kiosks provide advertising opportunities for both national and local
advertisers.





The
Company has two vertical products: full motion video digital signage and full
service e-banking kiosks.





The
Company’s full service e-banking kiosks are fully functional automated teller
machines, allowing consumers to process balance inquiries, withdrawals from
checking and savings accounts as well as credit cards and the ability to receive
cash in multiple denominations with a multilingual
interface.  Consumers can cash payroll checks, with real-time visual
and biometric validation.  When cashing a payroll check, consumers can
choose to receive cash instantly or load funds onto a debit
card.  24-hour customer support is available via the attached
handset.  In addition, consumers can choose from hundreds of gift
cards to purchase, may purchase pre-paid debit cards, may pay online bills with
cash, check or credit card and may purchase domestic and international calling
cards or talk time for cell phones.





As of
December, 2004, the Company was a non-operating public shell
corporation.  A summary of the successive name changes of the Company
appears in the first paragraph of Note 6.  Prior to December 10, 2004,
the Company’s operations consisted of administrative costs necessary to maintain
the Company and seeking to identify potential operating entities.  The
Company became an operating entity when such quest resulted in the transaction
set forth in the next paragraph.





On
December 10, 2004, the Company entered into a reverse merger transaction with
friendlyway, Inc., (“FWI”), an ostensible full-service solutions provider of
interactive customer communications systems and applications.  As a
result of this transaction the six stockholders of FWI became the controlling
stockholders of the Company.  This reverse merger transaction was
accounted for as a recapitalization of FWI, as FWI became the accounting
acquirer, effective December 10, 2004.





FWI was
an early stage business with a limited operating history.  However,
assumptions furnished the Company by FWI induced the Company to believe FWI to
be a potentially high growth entity with the ability to raise the capital
required to fund its promised expansion and working capital needs.





The
Company is of the view that none of the Assumptions motivating the acquisition
of FWI were either accurate or capable of being fulfilled.  The
paramount failure was the refusal of the principal shareholder of FWI to merge
its Munich-based operations with those of FWI.  The refusal by this
30% (6,000,000 shares) shareholder of FWI (out of an aggregate of 18.000,000
shares issued by the Company in exchange for FWI), to become part of the public
entity (which refusal was manifested in the December 2005, resignations of all
of the Munich designees on the Board of the public entity), meant that
anticipated financing to be provided by Munich would not be forthcoming, that
there would not be significant world-wide sales of FWI products, and that the
operations of FWI would have to be curtailed.  The one remaining
director of the Company then terminated the operations of FWI and turned the
Company over to a privately-held entity without audited financial statements,
each occurring in the Spring of 2006.





Going
Concern





The
Company’s consolidated financial statements have been prepared on the assumption
that the Company will continue as a going concern, which contemplates the
continuation of operations, the realization of assets and the liquidation of
liabilities in the ordinary course of business, and do not reflect any
adjustments that might result from the Company being unable to continue as a
going concern.  At October 31, 2007, the Company had total assets of
$1,055,883 and liabilities of $3,155,044 in addition to net losses accumulated
since inception totaling $12,587,481.  Management has indicated that
it is cognizant of the need to raise additional capital not only to meet its
financial obligations but also to expand the business.  (Between
November 1, 2007 and July 31, 2008, the Company raised an additional
$1,545,000.)  These factors cumulatively indicate that there is
substantial doubt about the Company’s ability to continue as a going
concern.  The accompanying financial statements do not include any
adjustments that might be necessary should the Company be unable to continue as
a going concern.


17
 Table of Contents




2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





Accounting
Principles.The financial statements and accompanying notes
are prepared in accordance with accounting principles generally accepted in the
United States.





Allowance For Doubtful
Accounts.The allowance for doubtful accounts reflects PSI’s
best estimate of probable losses inherent in the accounts receivable
balance.  PSI determines the allowance based on known troubled
accounts, historical experience, and other currently available
evidence.





Cash and Cash
Equivalents.PSI considers all highly liquid interest-earning
investments with a maturity of three months or less at the date of purchase to
be cash equivalents.  The fair value of these investments will
approximate their carrying value.  In general, investments with
original maturities of greater than three months and remaining maturities of
less than one year will be classified as short-term
investments.  Investments with maturities beyond one year may be
classified as short-term based on their highly liquid nature and because such
marketable securities represent the investment of cash that is available for
current operations.  All cash equivalents and short-term investments
are classified as available for current operations.  All cash
equivalents and short-term investments are classified as available for sale and
are recorded at market value using the specific identification
method.





Equity
and other investments may include both debt and equity
instruments.  Debt securities and publicly traded equity securities
will be classified as available for sale and will be recorded at market using
the specific identification method.





Fair Value.The carrying
amounts of cash and cash equivalents, trade receivables, accounts payable, notes
payable and accrued liabilities approximate fair value because of the short
maturity of these instruments.





Goodwill.Goodwill
was tested for impairment during the fiscal year ended October 31, 2006 using a
fair-value-based approach.  A full impairment of the goodwill was
identified and reflected in the statement of operations during the year
tested.





Income
Taxes.Income taxes are calculated using the liability method
specified by Statement of Financial Accounting Standards (“SFAS”) No. 109,
“Accounting for Income Taxes.”  The Company had deferred tax assets of
approximately $2,876,000 as of October 31, 2007, primarily related to net
operating loss carryforwards (“NOL”), which have yet to be
utilized.  At October 31, 2007, the Company had an operating loss
carry forward of approximately 7,189,000 for federal tax purposes which expires
in various amounts through 2027. Also, the utilization of these losses, if
available, to reduce the future income taxes, will depend upon the generation of
sufficient taxable income prior to the expiration of the
NOL.  Therefore, at October 31, 2007, the Company established a 100%
valuation allowance against the deferred tax assets as the likelihood of
recognizing this benefit cannot be certain.  The net operating losses
will expire in various years through 2027.  The Company has not filed
federal or state tax returns for the 2006 and 2007 fiscal years.  The
Company does not expect to owe any federal or state taxes for the 2006 and 2007
fiscal years.








Intangible
Assets.Intangible assets consist of deferred financing costs
and will be amortized using the straight-line method over their estimated period
of benefit, ranging from three to four years.  PSI will evaluate the
recoverability of intangible assets periodically and take into account events or
circumstances that warrant revised estimates of useful lives or that indicate
that impairment exists. Estimated amortization costs as of October 31, 2007 are
as follows:





Year
      Ended October 31,2008
                    
                    $
                    44,0712009
                    
                    $
                    44,0712010
                    
                    $
                    44,0712011
                    
                    $
                    17,878





Inventories.Inventories
are stated at the lower of cost or market, using the average cost
method.  Cost includes materials, labor, and manufacturing overhead
related to the purchase and production of  inventories.  PSI
will regularly review inventory quantities on hand, future purchase commitments
with its suppliers, and the estimated utility of its inventory.  If
such review indicates a reduction in utility below carrying value, PSI will
reduce its inventory to a new cost basis.  The Company reflected a
reduction in the carrying value of the inventory as of October 31, 2006 and 2007
totaling $216,672 and $120,655 respectively, in order to reduce the carrying
value to its net realization value.





Loss per Common
Share.In 1998, the Company adopted SFAS No. 128, “Earnings
Per Share” (“EPS”), which provides for the calculation of basic and diluted
EPS.  Basic EPS includes no dilution and is computed by dividing the
income (loss) available to common stockholders by the weighted-average number of
common shares outstanding for the period.  Diluted EPS reflects the
potential dilution of securities that could share in the income (loss) of the
Company.  The effect of the potentially dilutive shares for the years
ended October 31, 2006 and 2007 have been ignored, as their effect would be
antidilutive.  Potentially dilutive securities outstanding at October
31, 2006 and 2007 excluded from the calculation of loss share totaled
8,923,825.


18
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Principles of
Consolidation.The accompanying consolidated financial
statements include the accounts of PSI Corporation and its wholly owned
subsidiaries (collectively referred to as the “Company” or “PSI”) after
elimination of all significant intercompany balances and
transactions.  Consolidated subsidiaries include friendlyway, Inc.
(December 2004, through May, 2006), and Big Fish Marketing Group, LLC (August,
2006, to the date hereof).





Product
Warranty.PSI provides for the estimated costs of hardware and
software warranties at the time the related revenue is
recognized.  For hardware warranty, PSI estimates the costs based on
historical and projected project failure rates, historical and projected repair
costs, and knowledge of specific product failures (if any).  The
specific hardware warranty terms and conditions vary depending upon the product
sold and country in which PSI will do business, but generally include technical
support, parts, and labor over a period generally ranging from 90 days to three
years.  For software, PSI estimates the costs to provide bug fixes,
such as security patches, over the estimated life of the
software.  PSI will regularly reevaluate its estimates to assess the
adequacy of the recorded warranty liabilities and adjust the amounts as
necessary. Sales subject to warranty were immaterial during the years ended
October 31, 2006 and 2007.





Property and
Equipment.Property and equipment is stated at cost and
depreciated using the straight-line method over the estimated life of
approximately five years.





Revenue
Recognition.Revenue is recognized when persuasive evidence of
an arrangement exists, delivery has occurred, the fee is fixed or determinable,
and collectibility is probable.  In the event PSI should enter into
contracts where it is obligated to deliver multiple products and/or services,
total revenue will be generally allocated among the products based upon the sale
price of each product when sold separately.





In the
event PSI should in the future license or lease its products (rather than effect
outright sales of the same), revenue derived therefrom will be treated as
subscriptions, with billings recorded as unearned revenue and recognized as
revenue ratably over the billing coverage period.  PSI’s potential
multiple year licensing/lease transactions may include the right to receive
future updated improvements to its product line.  Some multi-year
licensing/lease arrangements may include a perpetual license for current
products combined with rights to receive future improved/updated versions of
such products.  Online advertising revenue derived from the kiosks and
signage products are and will be recognized as advertisements are
displayed.  Costs related to PSI’s product line are recognized when
the related revenue is recognized.





Use of Estimates and
Assumptions.The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period.  Actual results could differ from those
estimates.





Concentration of Credit
Risk.  Financial instruments that potentially subject the
Company to concentrations of credit risk consist primarily of
cash.  The Company maintains substantially all its cash balances in a
limited number of financial institutions.  The balances are insured by
the Federal Deposit Insurance Corporation up to $100,000.  At October
31, 2007, the Company’s uninsured balances totaled approximately
$282,000.





Recently
Issued Accounting Standards





In June,
2006, the FASB issued Interpretation No. 48 (“FIN No. 48”), Accounting for
Uncertaintyin Income
Taxes – an interpretation of FASB Statement No. 109,which clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with SFAS No. 109, Accounting for Income
Taxes.  The Interpretation provides a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return.  Under
FIN No. 48, PSI may recognize the tax benefit from an uncertain tax position
only if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the
position.  The tax benefits recognized in the financial statements
from such a position should be measured based on the largest benefit that has a
greater than 50% likelihood of being realized upon ultimate
settlement.  FIN No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.  FIN No. 48 is effective for PSI beginning
November 1, 2007.  The adoption of FIN No. 48 is not expected to have
a material impact on the Company.  .





In June,
2006, the FASB ratified the Emerging Issues Task Force (“EITF”) consensus on
EITF issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits
Pursuant to FASB Statement No. 43.”  EITF Issue No. 06-2 requires
companies to accrue the costs of compensated absences under a sabbatical or
similar benefit arrangement over the requisite service period.  EITF
Issue No. 06-2 is effective for PSI beginning November 1, 2007.  The
cumulative effect of the application of this consensus on prior period results
should, in the future, be recognized through a cumulative-effect adjustment to
retained earnings as of the beginning of the year of
adoption.  Elective retrospective application is also
permitted.


19
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In fiscal
year 2007, we adopted Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Current Year
Misstatements.SAB No. 108 requires companies to quantify
misstatements using both a balance sheet (iron curtain) and an income statement
(rollover) approach to evaluate whether either approach results in an error that
is material in light of relevant quantitative and qualitative factors, and
provides for a one-time cumulative effect transition adjustment.  The
adoption of SAB No. 108 will not have an impact on PSI’s financial
statements.





In
September, 2006, the FASB issued SFAS No. 157, Fair Value Measurements,which defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements.  SFAS No. 157 does not require any new fair
value measurements, but provides guidance on how to measure fair value by
providing a fair value hierarchy used to classify the source of the
information.  This statement is effective for us beginning November 1,
2008.





In
February, 2007 the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities.SFAS No. 159 will afford PSI the
irrevocable option to carry many financial assets and liabilities at fair
values, with changes in fair value recognized in earnings.  No. 159
does not require any new fair value measurements, but provides guidance on how
to measure fair value by providing a fair value hierarchy used to classify the
source of the information.  SFAS No. 159 is effective for PSI
beginning November 1, 2008, although earlier adoption is permitted.




3.
            FIXED
      ASSETS





Fixed
assets consist of the following:





October 312006
                          
                          
                          2007Computers
                          
                          $
                          -
                          
                          
                          $
                          6,105Office
      Equipment
                          
                          $
                          5,000
                          
                          
                          $
                          5,000$
                          5,000
                          
                          
                          $
                          11,105Less
      AccumulatedDepreciation
                          
                          $
                          250
                          
                          
                          $
                          2132$
                          4,750
                          
                          
                          $
                          8,973





For the
fiscal years ended October 31, 2006 and 2007, depreciation expense,
respectively, amounted to $250 and $1,882.




4.
            INVENTORIES




Inventories
consist of the following:




October 31,2006
                      
                      
                      2007Raw
      Materials
                      
                      $
                      -
                      
                      
                      $
                      -Finished
      Goods
                      
                      
                      59,328
                      
                      
                      
                      283,677TOTAL
                      
                      $
                      59,328
                      
                      
                      $
                      283,677




5.
            STOCKHOLDERS’
      EQUITY





Stock Incentive
Plan.The Company does not have a stock or option
incentive plan.  Any grants of stock or options are made pursuant to
approval of the board of directors or shareholders, as applicable.





Sale of Common
Stock.  In October 2006, the Company sold 5,000,000 shares of
its common stock pursuant to an exemption from registration at $.10 per
share.




6.
            ACQUISITIONS





Since
inception, the corporate name of the Company has been changed
successively:  Global Spill Management, Inc. (1991-1998); Biofarm,
Inc. (1998-2005); Friendlyway Corporation (2005-2006); and PSI Corporation
(2006-to date).  Hereinafter, the Company is referred to as “PSI” or
the “Registrant.”  The management of PSI as of the date hereof assumed
their respective offices subsequent to the transactions described in this
note.


20
 Table of Contents




A)
            Failed Acquisition of
      Pantel.  As previously reported in Form 8-K and Form
      8-K/A filings dated respectively, May 3, 2006, and July 12, 2006,
      Friendlyway Corporation (“FC”) entered into an agreement, dated April 27,
      2006, to acquire 100% of the capital stock of Pantel Systems, Inc.
      (“Pantel”).  Such agreement was manifestly deficient in that it
      contained inadequate representations and warranties, it did not require
      the receipt by FC of audited financial statements of Pantel for the
      preceding two-year period, its escrow provisions (the deposit into an
      escrow account of an aggregate of 8,600,000 of the twenty million shares
      to be issued by FC in exchange for 100% of Pantel) were not complied with,
      and its very execution was violative of Rule 14f-1 (1934 Act) and Item
      9.01 of Form 8-K.





For
accounting purposes, Pantel would have been considered the acquiring party had
the agreement to acquire Pantel been effective.  In such event, the
Pantel acquisition would have been accounted for as a reverse purchase in
accordance with Generally Acted Accounting Principles (GAPP) and with the
management of Pantel in control of PSI.  Notwithstanding the
deficiencies in the agreement noted above, the management of Pantel became the
directors and officers of PSI. Simultaneously with the acquisition of Pantel,
PSI ceased all of its operating activities and friendlyway, Inc. (its sole
operating subsidiary) discontinued its operations.





Predicated
upon a legal opinion received by the present management of PSI concerning the
legal status of the 20,000,000 shares of PSI Common Stock to be issued by PSI in
exchange for 100% of the Pantel capital stock, the present management of PSI
considers the failed acquisition of Pantel to have been a nullity, to have been
void ab initio, and to
have never been consummated.  Accordingly, the accounts and operations
of Pantel (which, in any event were de minimis) have been omitted
from PSI’s consolidated financial statements.  All Common Stock and
per share amounts from the date of the failed acquisition of Pantel to October
31, 2006, have been retroactively adjusted to reflect the nullification of the
issuance of the 20,000,000 PSI shares.





With
respect to the accounting issue presented by the rescission, effective October
31, 2006, of the proposed Pantel transaction, namely, whether rescission voids
the proposed Pantel transaction nunc pro tunc or whether
recession requires treatment of the Pantel acquisition as a discontinued
operation requiring inclusion of Pantel in the PSI consolidated financial
statements for the fiscal year ended October 31, 2006, PSI believes that such
decision must be decided upon the facts peculiar to the proposed Pantel
transaction.  In that regard, PSI learned that the Escrow Agreement
included as part of the Pantel acquisition agreement, was never actually
consummated.  The designated escrow agent received neither the
8,600,000 PSI shares nor 100% of the capital stock of Pantel.  The
failure to deliver a certificate representing 100% of the capital stock of
Pantel is evidence that PSI never took possession of Pantel and cannot be deemed
ever to have controlled Pantel.  The foregoing failures support the
PSI position that the proposed Pantel acquisition was void ab initio.  The
legal opinion received by PSI supports this conclusion.





Additional
evidence of the failure to consummate the proposed acquisition of Pantel
consists of the following:





i.
            the
      July 12, 2006, Form 8-K/A filing of PSI signed by the sole shareholder of
      Pantel specifically states that “no shares of common stock have been
      issued to consummate the acquisition of Pantel” and that the obligation to
      deliver to the escrow agent has not been honored.  No subsequent
      Form 8-K filing reflects either the issuance of the 20,000,000 PSI shares
      or the failure to deliver to the escrow
agent;





ii.
            all
      of the 20,000,000 PSI shares delivered to the sole shareholder of Pantel
      have been returned to PSI and the directors and officers of PSI named by
      Pantel have resigned;





iii.
            Rule
      14f-1 of the 1934 Act was violated when the Pantel management, then in
      control of PSI, failed to advise the SEC of the change in the majority of
      the Board of Directors of PSI and that such change was not approved by the
      Shareholders of PSI;





iv.
            Neither
      the Form 8-K nor the Form 9-K/A filings signed by the solo shareholder of
      Pantel contained the audited financial statements of Pantel required to be
      filed by Item 9.01 of Form 8-K;
and,





v.
            The
      sole shareholder of Pantel did not comply with the requirement to file
      Schedule 13D pursuant to the 1934 Act, indicating his ownership of more
      than five (5%) of the issued and outstanding shares of PSI Common
      Stock.





Predicated
upon all of the foregoing, PSI has concluded that the proposed transaction
between PSI and Pantel never, in point of fact, was consummated pursuant to the
May 3, 2006, agreement.  Therefore, the operations of Pantel never
belonged to PSI and should not be included in the PSI financial statements for
the fiscal period ended October 31, 2006, and the fiscal year ended October 31,
2007.





B)
            Failed Acquisition of
      Ignition Media Group, LLC.  As previously reported in a
      Form 8-K filing dated August 25, 2006, a wholly-owned subsidiary of FC
      entered into an Asset Purchase Agreement (“ASP”), dated August 22, 2006,
      to acquire substantially all of the assets of Ignition Media Group, LLC
      (“IMG”), a Pennsylvania limited liability company.  The
      Registrant was not a signatory to such ASP.  The wholly-owned
      subsidiary of the Registrant agreed to purchase the assets of IMG for
      $1,000,000 in cash and an aggregate of 6,818,182 shares of the parent
      Registrant’s Common Stock.  The $1,000,000 was to have been paid
      in twelve equal monthly installments of $83,333.33 each.  The
      initial installment payment was made at closing.  The 6,818,182
      shares of the Registrant’s Common Stock were represented as having an
      agreed aggregate value of $1,500,000.  Thus, the aggregate
      consideration to be paid by the subsidiary for the assets of IMG amounted
      to $2,500,000 plus the assumption of $180,000 in
  debt.


21
 Table of Contents




As
reported in a Form 8-K filing dated November 13, 2007, the Registrant and IMG
entered into a Settlement Agreement and Release (“SAR”) dated November 9,
2007.  Such SAR resolved all issues involved in a February 1, 2007,
lawsuit initiated by IMG against the subsidiary and counterclaims interposed by
the Registrant on May 14, 2007.  The Registrant was not named as a
party defendant in the action initiated by IMG.  However, then counsel
for the Registrant named the Registrant as the plaintiff in the counterclaim
interposed in the action initiated by IMG.  The SAR obligated IMG to
return to the Registrant for cancellation an aggregate of 3,318,182 shares of
the initial 6,818,182 shares issued to IMG pursuant to the ASP.  The
SAR acknowledged that the Registrant was not then current in its required 1934
Act filings and that, therefore, Rule 144 was not applicable to the remaining
3,318,182 shares.  The SAR also obligated the Registrant to pay to IMG
the additional sum of $100,000.  (In some instances, references herein
to IMG refer to the shareholder(s) thereof.)





C)
            Failed Acquisition of
      Captive Audience LLC.  As previously reported in a Form
      8-K filing dated August 25, 2006, a wholly-owned subsidiary of FC entered
      into an Asset Purchase Agreement (“ASP”), dated May 18, 2006, to acquire
      substantially all of the assets of Captive Audience LLC (“CA”), a New
      Jersey limited liability company.  The Registrant was not a
      signatory to such ASP.  The wholly-owned subsidiary of the
      Registrant agreed to purchase the assets of CA for $1,000,000 in cash and
      an aggregate of 5,909,591 shares of the parent Registrant’s Common
      Stock.  The $1,000,000 was to have been paid in twelve equal
      monthly installments of $83,333.33 each.  The initial
      installment payment was made at closing.  The 5,909,591 shares
      of the Registrant’s Common Stock were represented as having an agreed
      aggregate value of $1,300,000.  Thus, the aggregate
      consideration to be paid by the subsidiary for the assets of CA amounted
      to $2,300,00.





As
reported in a Form 8-K filing dated November 22, 2006, the Registrant and CA
entered into a Settlement Agreement (“SA”), dated November 17,
2006.  Such Settlement Agreement resolved all issues involved in a
lawsuit initiated on October 18, 2006, by CA against the
subsidiary.  The Registrant was not named as a party defendant in the
action instituted by CA.  The subsidiary of the Registrant, an entity
known as Pantel Systems, Inc., and Friendlyway Inc., a former subsidiary, the
operations of which ceased as of July 31, 2006, were the named
defendants.  The lawsuit alleged that the purchase of the assets of CA
by the subsidiary pursuant to the ASP originally dated May 18, 2006, the
addendum thereto dated August 10, 2006, and the closing thereof dated August 22,
2006, resulted in the default by the subsidiary in the payment of $872,809.95 of
the cash portion of the purchase price for CA.  The lawsuit also
alleged the failure by the subsidiary to deliver to CA the 5,909,591 shares of
the Registrant’s Common Stock.





The SA
provided for the rescission of the transaction between CA and the subsidiary,
the retention by CA of $195,000 of the cash portion of the purchase price
previously received by CA, and the payment of the additional sum of $90,000 to
CA.  CA agreed to relinquish all right, title and interest in and to
the 5,909,591 shares of Common Stock to be issued to CA and to surrender the
promissory note it had previously received at closing in the amount of
$872,809.85.  (In some instances, reference herein to CA refers to the
shareholder(s) thereof.)





D)
            Consequences of Failed
      Acquisitions.  The Company has entered into several
      contracts relating to the proposed acquisitions of
      businesses.  In connection with such contracts, the Company may
      have made cash advances to such proposed acquirees.  Each of
      these investments (with the exception of Big Fish Marketing Group, the one
      remaining operating subsidiary included in these consolidated financials),
      has been abandoned and the contracts terminated at October 31,
      2007.  Abandoned investments for the fiscal year ended October
      31, 2006 resulted in charges to operations $2,165,000.  These
      financial statements include the operations of FWI for the period December
      10, 2004, through July 31, 2006.





The three
failed acquisitions mentioned in this note, all of which were initiated and
consummated by prior alleged management of the Registrant, have all been
disavowed by present management.  The resolution by present management
of the three transactions is not to be construed in any manner as the
ratification of the acquisitions initiated and consummated by prior
management.





E)
            Acquisition of Big
      Fish.   On August 7, 2006, the Company acquired
      substantially all of the assets of Big Fish Marketing Group, Inc, a
      Colorado corporation (“Big Fish”) pursuant to an Agreement and Plan of
      Reorganization (the “Purchase Agreement”) effective July 26, 2006. In
      consideration for the Purchase Agreement, the Company paid to Big Fish
      $150,000 (the “Cash Consideration”) in cash and delivered 4,952,380 shares
      of the Company’s common stock (having an agreed-upon aggregate value of
      $1,350,000).





7.
            LITIGATION





This Note
embraces all litigation items commenced, disposed of or otherwise resolved
during the period November 1, 2004, through October 31,
2007.  Thereafter, one item of litigation is referred to in Note 10
hereinafter as a post-balance sheet event.


22
 Table of Contents




B)
            On
      April 27, 2007, FWAG, a German corporation that had received 6,000,000 of
      the aggregate of 18,000,000 shares issued by the Company effective
      December 10, 2004, in exchange for 100% of the capital stock of
      friendlyway, Inc. (“FWI”), sued the Company in California Superior Court
      in response to the Company’s attempted cancellation of the shares received
      by FWAG.  The Company then instituted a separate action in
      California Federal District Court (No. C 07 02869 SBA) on June 1, 2007,
      against FWAG in which the Company alleged that it was fraudulently induced
      to acquire FWI and to issue 18,000,000 shares of its Common Stock in
      exchange therefore.  The Company sought rescission of the FWI
      transaction and, to prevent irreparable harm, moved on June 5, 2007, for a
      temporary restraining order to attempt to preserve the status
      quo.  (The named defendants in the Federal action were believed
      to own an aggregate of 15,576,000 of the 18,000,000
    shares.)





The law
is settled that a party seeking a temporary restraining order must demonstrate
either (a) the combination of probable success on the merits or (b) serious
issues being raised and the balance of hardships being in favor of the
movant.  The Court ruled that the Company failed to show a likelihood
of success on the Merits, that the securities fraud and breach of contract
claims were time-barred, and that its allegations of fraud were precatory and,
therefore, unsupported.





Subsequently,
the Company was constrained to execute settlement agreements with each of the
four named defendants.  Such settlements resolved the litigation
instituted both by AG and by the Company.  Each such settlement
agreement differed in content and result and in the disposition of the shares of
Common Stock in issue.  In sum, the settlements resulted in the net
cancellation of 4,401,906 shares of Common Stock and the release of AG claims to
an additional 18 million shares thereof.  The Company believes it to
be significant that its then counsel did not raise the issues of (a) failure to
deliver consideration by the shareholders of FWI and (b) damages sustained by
the Company as the proximate cause of all AG-appointed Company directors
resigning in December, 2006, resulting in only one director of the Company
remaining and that such one director initiated the transaction that resulted in
the dissipation of Company assets, the decline in the Company’s stock price, and
the necessity that present management (from January, 2007) be compelled to
effect a reorganization of the Company.





C)
            Additional
      litigation matters are discussed in Note 6 (Acquisitions).  The
      final resolution of the settlement reached with one of the four defendants
      mentioned in Note 6 is referred to in Note 10 (Subsequent Event)
      hereto.





8.
            DEBT





Round
A Secured Term Loans





In August
2006, the Company entered into secured term notes (“Round A Notes”) with several
unrelated parties totaling $282,500.  The Round A Notes were due on
February 18, 2009 and incurred an interest rate of the greater of 12% per annum
or the prime interest rate plus 4%.  Among other provisions, the Round
A Notes provided for monthly repayments of principle and interest over a 28
month period commencing in October 2006.  The Company failed to make
the required payments at that time.  Pursuant to the default
provisions of the note, the Company incurred a 25% default penalty payment of
the then outstanding balance.  The Company recorded a $43,750 penalty
during the year ended October 31, 2006 which it reflected as additional interest
expense.





In
connection with the Round A Notes, the Company also issued warrants to purchase
4,900,000 shares of the Company’s common stock at an exercise price of
$.01.  The warrants may be exercisable at any time for a period of 7
years.  In connection with the issuance of the warrants, the Company
has reflected a value for the warrants of $96,023.  The fair value of
the warrant grant was estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted average assumptions: expected
volatility of 15%, risk free interest rate of 4.86%; and expected lives of 5
years. The warrants meet the requirements to be classified as
equity.  The value of the warrants was reflected as additional
interest and expensed on the date of issuance.





In August
2007, the Company entered into exchange agreements with the holders of the Round
A Notes whereby the notes were converted into 2,280,500 shares of the Company’s
common stock.





Round
B-1 Convertible Term Loans





In July
2006, the Company entered into convertible term notes (“Round B-1 Notes”) with
several unrelated parties totaling $830,000.  The Round B-1 Notes were
due on January 19, 2009 and incurred an interest rate of 14% per
annum.  Among other provisions, the Round B-1 Notes provided for
monthly repayments of principle and interest over a 28 month period commencing
in October 2006.  The Company failed to make the required payments at
that time.  Pursuant to the default provisions of the note, the
Company incurred a 25% default penalty payment of the then outstanding
balance.  The Company recorded a $207,500 penalty during the year
ended October 31, 2006 which it reflected as additional interest
expense.





In
connection with the Round B-1 Notes, the Company also issued warrants to
purchase 1,976,191 shares of the Company’s common stock at an exercise price of
$.19.  The warrants may be exercisable at any time for a period of 5
years.  In connection with the issuance of the warrants, the Company
has reflected a value for the warrants of $41,912.  The fair value of
the warrant grant was estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted average assumptions: expected
volatility of 15%, risk free interest rate of 5.06%; and expected lives of 2.5
years. The warrants meet the requirements to be classified as
equity.  The value of the warrants was reflected as additional
interest and expensed on the date of issuance.


23
 Table of Contents


In August
2007, the Company entered into exchange agreements with the holders of the Round
B-1 Notes whereby the notes were converted into 8,300,000 shares of the
Company’s common stock.  In addition, the warrants were exchanged for
new warrants to purchase 1,976,191 shares of the Company’s common stock which
may be exercised at any time over a 5 year period at an exercise price of $.19
per share.  No additional expense was recorded for these warrants as
the additional cost was not material.





Round
B-2 Convertible Term Loans





In
October 2006, the Company entered into convertible term notes (“Round B-2
Notes”) with several unrelated parties totaling approximately
$960,000.  The Round B-2 Notes were due on November 11, 2009 and
incurred an interest rate of 14% per annum.  Among other provisions,
the Round B-2 Notes provided for monthly repayments of principle and interest
over a 28 month period commencing in December 2006.  The Company
failed to make the required payments at that time.  Pursuant to the
default provisions of the note, the Company incurred a 25% default penalty
payment of the then outstanding balance.  The Company recorded a
$240,000 penalty during the year ended October 31, 2007 which it reflected as
additional interest expense.





In
connection with the Round B-2 Notes, the Company also issued warrants to
purchase 2,047,634 shares of the Company’s common stock at an exercise price of
$.19.  The warrants may be exercisable at any time for a period of 5
years.  In connection with the issuance of the warrants, the Company
has not reflected a value for the warrants as the value was not
material.  The fair value of the warrant grant was estimated on the
date of the grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: expected volatility of 15%, risk free
interest rate of 5.06%; and expected lives of 2.5 years.





In August
2007, the Company entered into exchange agreements with the holders of the Round
B-1 Notes whereby the notes were converted into 9,599,980 shares of the
Company’s common stock.  In addition, the warrants were exchanged for
new warrants to purchase 2,047,634 shares of the Company’s common stock which
may be exercised at any time over a 5 year period at an exercise price of $.19
per share.  No additional expense was recorded for these warrants as
the additional cost was not material.





Bridge
Loans





In
February and March 2007, the Company entered into notes (“Bridge Notes”) with
several unrelated parties totaling approximately $325,000.  The Bridge
Notes were due on November 11, 2009 and incurred an interest rate of 12% per
annum.





In August
2007, the Company entered into exchange agreements with the holders of 300,000
of the Bridge Notes whereby the notes were converted into 3,000,000 shares of
the Company’s common stock.  The remaining $25,000 remains outstanding
at October 31, 2007





Round
D Loans





From May
through October, the Company entered into notes (“Round D Notes”) with several
unrelated parties totaling approximately $1,520,000.  The Round D
Notes were incur interest at a rate of 12% per annum, payable
semi-annually.  Subsequent to October 31, 2007, the Company sold an
additional $1,075,000 of the Round D Notes.





Big
Fish Notes





In May
and June 2006, the Company entered into notes payable aggregating $45,000 with
two unrelated parties.  The notes are due three years from the date of
issuance and incur interest at the rate of 10% per annum.  Interest on
the notes is payable on a quarterly basis.





Shelter
Island Opportunity Fund Notes





In August
2006, the Company entered into a note agreement for the payment of consulting
fees to an unrelated party totaling $98,770.  The note is due on
October 31, 2008 with 11 monthly payments commencing on January 31, 2007 and
incurs interest at the rate of 12.25% per annum.  Interest on the
notes is payable on a monthly basis commencing November 30, 2007.





Miller
Financial Network Note





In June
2006, the Company entered into a note agreement with an unrelated party totaling
$100,000.  The note incurred interest at the rate of 10% per
annum.  In January 2007, the Company was notified that the note was in
default and the holder had elected to accelerate the note.  The
Company has been making payments monthly payments towards the interest, legal
costs and principle on the note.  At October 31, 2007, there was
$97,800 in principle remaining on the note.


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 Table of Contents




9.
            COMMITMENTS





Operating
Leases







The
Company leases office space and equipment under non-cancelable operating lease
agreements expiring through fiscal 2012. These leases contain renewal options
and the Company is responsible for certain executory costs, including insurance,
maintenance, taxes and utilities.




The
approximate minimum rental commitments under noncancelable operating leases that
have remaining noncancelable lease terms in excess of one year at October 31,
2007 are as follows:




Years
      Ending October 31
                          
                          FutureMinimum LeasePayments2008
                          
                          $
                          48,4472009
                          
                          
                          50,7542010
                          
                          
                          53,0612011
                          
                          
                          55,368Total
                          
                          $
                          207,630




Employment
Agreements




None of
the Company’s employees is currently bound by an employment agreement with the
Company or any of its subsidiaries.




10.
            SUBSEQUENT
      EVENT





Settlement with Former Chief
Financial Officer.  On June 13, 2008, Henry C. Lo, the former
Chief Financial Officer of Friendlyway Corporation, completed his obligations
pursuant to a settlement agreement executed in November, 2007, that terminated
litigation instituted by the Registrant against him.  Mr. Lo delivered
to the Registrant 700,000 shares of Registrant’s Common Stock and $20,000 in
cash.  The settlement agreement did not purport to extinguish any
claims by the Registrant arising out of the FWI transaction and the resolution
thereof.  See Note 6 (“Acquisitions”).








ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE





None.








ITEM9A(T). CONTROLS
AND PROCEDURES





Evaluation of Disclosure Controls
and Procedures





Under the
supervision and with the participation of our management, including our
principal executive officer and principal accounting officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as of October 31, 2007 (the “Evaluation Date”).
Based on this evaluation, our principal executive officer and principal
accounting officer concluded as of the Evaluation Date that our disclosure
controls and procedures were effective such that the material information
required to be included in our Securities and Exchange Commission
(SEC) reports is recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms relating to us, including our
consolidated subsidiary, and was made known to them by others within those
entities, particularly during the period when this report was being
prepared.





There
were no changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the Evaluation
Date.





Management’s Report on Internal
Control over Financial Reporting





We are
responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the
Exchange Act). Under the supervision and with the participation of our
management, including our principal executive officer and chief financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Controls — Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission, and the related guidance provided in Internal Control Over Financial
Reporting — Guidance for Smaller Public Companiesalso issued by the
Committee of Sponsoring Organizations of the Treadway
Commission.


25
 Table of Contents




Our
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the preparation and fair presentation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that
in reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on the financial statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Based on
our evaluation under the framework in Internal Controls — Integrated
Framework, our management concluded that our internal control over
financial reporting was effective as of October 31, 2007.





This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Our internal control over financial reporting was not subject to
attestation by our independent registered public accounting firm pursuant to
temporary rules of the SEC that permit us to provide only management’s report in
this annual report.








ITEM9B. OTHER INFORMATION





None.








PART III





ITEM10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE





The
executive officers, directors and key personnel of the Company as of October 23,
2008 are as follows:





Name
              Positions
      held with the CompanyDavid
      Foni
              Chief
      Executive Officer and Chairman of the BoardEric
      Kash
              Chief
      Financial Officer








Biographies
of the directors and executive officers of the Company are set forth
below.  All directors hold office until the next annual stockholders
meeting and until their successors have been elected and qualified or until
their death, resignation, retirement, removal or
disqualification.  Vacancies in the existing Board are filled by
majority vote of the remaining directors.  Officers of the Company
serve at the will of the Board of Directors.





On
January 7, 2007, coincident with the resignations of the two Pantel designees as
directors of the Company (and of the resignation of one as the principal
executive officer), David Foni became the sole director and chief executive
officer of the Company.  Mr. Foni’s appointment was not subject to the
requirements of Rule 14f-1 (1934 Act) because there was no “arrangement or
understanding” pursuant to which Mr. Foni would receive Common Stock of the
Company in a transaction subject to Section 13 (d) or 14 (d) of the 1934
Act.  Mr. Foni was appointed because of his technical expertise in
areas related to the Company’s product line and because he was then a
shareholder of the Company.   It is the intention of the Company
to disseminate a proxy statement incident to the calling of a Special Meeting of
its shareholders in which the shareholders will be asked to vote upon a proposal
to ratify, confirm and approve the actions of Mr. Foni from January 7, 2007, to
date.





David Foni.  For
the five years prior to joining PSI, Mr. Foni was employed by MavriQ
Technologies, LLC.





Eric Kash.  For the
five years prior to joining PSI, Mr. Kash was an investment banker with Basic
Investors and Sloan Securities.


26
 Table of Contents




No
director, officer or affiliate of the Company is an adverse party to the Company
or any of its subsidiaries in any material proceeding.





The
Company’s Board of Directors does not have an audit committee and no
determination has been made as to whether any member of the Board of Directors
qualifies as an audit committee financial expert as defined in Item 401 of
Regulation S-B.





Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Securities Exchange Act of 1934, as amended, requires that our
directors and executive officers and persons who beneficially own more than 10%
of our common stock (referred to herein as the “reporting persons”) file with
the SEC various reports as to their ownership of and activities relating to our
common stock. Such reporting persons are required by the SEC regulations to
furnish us with copies of all Section 16(a) reports they file. Based solely upon
a review of copies of Section 16(a) reports and representations received by us
from reporting persons, and without conducting any independent investigation of
our own, in 2008, 2007 and 2006, we believe all Forms 3, 4 and 5 were timely
filed with the SEC by such reporting persons.





Code
of Ethics





The
Company does not currently have a code of ethics applicable to its principal
executive and financial officers.  Prior to the FWI transaction and
after the rescission of the Pantel transaction, the Company did not believe such
a code was necessary as the Company had limited operations.  The Board
of Directors intends to consider adopting such a code.





ITEM11. EXECUTIVE
COMPENSATION





None of
the directors and officers of the Company has received any renumeration of any
kind (including reimbursement of expenses or equity compensation) during the
period November 1, 2006, through October 31, 2007.








ITEM12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS





The
following table sets forth certain information with regard to the beneficial
ownership of outstanding


Shares of
Common Stock by (i) each person known by PSI to own beneficially five (5%)
percent or more of the outstanding shares of the Company’s Common Stock; (ii)
each director and named executive officer individually; and (iii) all executive
officers and directors of the Company as a group.  As of September 22,
2008 there were 81,784,989 shares of our common stock issued and outstanding.
The numbers of shares beneficially owned include shares of common stock which
the listed beneficial owners have the right to acquire within 60 days of
September 22, 2008 upon the exercise of all options and other rights
beneficially owned on that date. Unless otherwise noted, we believe that all
persons named in the table have sole voting and investment power with respect to
all the shares beneficially owned by them.





Name
      and Address Of Beneficial Owner
                    
                    Number
      of Shares of Common Stock Beneficially Owned
                    
                    
                    Percentage (%)
      of Common StockDavid
      Foni (1)
                    
                    
                    2,000,000
                    
                    
                    
                    2.45
                    %Eric
      Kash  (2)
                    
                    
                    1,700,000
                    
                    
                    
                    2.08
                    %Directors
      and Officers as a group (2 persons)
                    
                    
                    3,700,000
                    
                    
                    
                    4.52
                    %





(1)
            Includes
      1,500,000 shares of common stock owned directly by Mr. Foni, and warrants
      to purchase an additional 500,000 shares of common stock, which warrants
      are exercisable within 60 days of September 22,
  2008.


(2)
            Includes
      700,000 shares of common stock owned directly by Mr. Kash, and warrants to
      purchase an additional 1,000,000 shares of common stock, which warrants
      are exercisable within 60 days of September 22,
  2008.








ITEM13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE





Certain
Relationships and Related-Party Transactions





None.


27
 Table of Contents




Director
Independence.





Mr. Foni,
our sole director, is not independent.








ITEM14. PRINCIPAL ACCOUNTING FEES AND SERVICES





a)
            Audit
      Fees.  The aggregate fees billed for the last fiscal year for
      professional services rendered by the independent auditor for the audit of
      the Company’s annual financial statements and review of financial
      statements included in the Company’s Form 10-Q, or services that are
      normally provided by the accountant in connection with the statutory and
      regulatory filings or engagements for such fiscal year, amounted to
      $36,000





b)
            Audit
      Related Fees.  There were no fees billed in the last fiscal year
      for assurance and related services by the independent auditor that are
      reasonably related to the performance of the audit or review of the
      Company’s financial statements and are not reported under Item 9(e) (1) of
      Schedule 14A.





c)
            Tax
      Fees.  There were no fees billed in the last fiscal year for
      professional services rendered by the independent auditor for tax
      compliance, tax advice and tax
planning.





d)
            All
      Other Fees.  There were no fees billed in the last fiscal year
      for products and services provided by the independent auditor other than
      the services reported in the three preceding
  paragraphs.








ITEM 15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES





(a)
            Financial Statements and
      Schedules:





Financial
statements as of October 31, 2007 and 2006, and for the two years ended October
31, 2007, are included in Item 8. All schedules are omitted because they
are not applicable or the required information is shown in the financial
statements or notes thereto.





(b)
            Exhibits:





The
following exhibits are incorporated by reference or filed as part of this
report.





Exhibit
                                      
                                      
                                      
                                      Incorporated
      by ReferenceNo.
                                      
                                      Description
                                      
                                      Form
                                      
                                      Date
      of Filing
                                      
                                      Filed
      Herewith3.1
                                      
                                      Certificate
      of Incorporation
                                      
                                      10-K
                                      
                                      March
      9, 20063.2
                                      
                                      Bylaws
                                      
                                      10-K
                                      
                                      March
      9, 20064.1
                                      
                                      Form
      of Common Stock Certificate
                                      
                                      10-K
                                      
                                      March
      9, 200610.1
                                      
                                      Office
      Lease Agreement
                                      
                                      10-K
                                      
                                      October
      27, 200821.1
                                      
                                      Subsidiaries
      of the Company
                                      
                                      
                                      
                                      
                                      
                                      X23.1
                                      
                                      Consent
      of Seligson & Giannattasio, Independent Registered Public Accounting
      Firm
                                      
                                      
                                      
                                      
                                      
                                      X31.1
                                      
                                      Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
                                      
                                      
                                      
                                      
                                      
                                      X31.2
                                      
                                      Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
                                      
                                      
                                      
                                      
                                      
                                      X32.1
                                      
                                      Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                                      
                                      
                                      
                                      
                                      
                                      X32.2
                                      
                                      Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                                      
                                      
                                      
                                      
                                      
                                      X





*
            This
      exhibit is a management contract or compensatory plan or
      arrangement.


28
 Table of Contents




SIGNATURES


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





PSI
      CorporationBy:
                  /s/
      David FoniDated:
      October 28, 2008
                  
                  David
      FoniChief
      Executive Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.





Signature
              
              Title
              
              Date/s/David
      Foni
              
              Chief
      Executive Officer and Chairman of the Board
              
              October 28,
      2008David
      Foni
              
              (Principal
      Executive Officer)/s/
      Eric Kash
              
              Chief
      Financial Officer
              
              October 28,
      2008Eric
      Kash
              
              (Principal
      Financial Officer and Principal Accounting Officer)


29
 Table of Contents




EXHIBIT INDEX




Exhibit
                                        
                                        
                                        
                                        Incorporated
      by ReferenceNo.
                                        
                                        Description
                                        
                                        Form
                                        
                                        Date
      of Filing
                                        
                                        Filed
      Herewith3.1
                                        
                                        Certificate
      of Incorporation
                                        
                                        10-K
                                        
                                        March
      9, 20063.2
                                        
                                        Bylaws
                                        
                                        10-K
                                        
                                        March
      9, 20064.1
                                        
                                        Form
      of Common Stock Certificate
                                        
                                        10-K
                                        
                                        March
      9, 200610.1
                                        
                                        Office
      Lease Agreement
                                        
                                        10-K
                                        
                                        October
      27, 200821.1
                                        
                                        Subsidiaries
      of the Company
                                        
                                        
                                        
                                        
                                        
                                        X23.1
                                        
                                        Consent
      of Seligson & Giannattasio, Independent Registered Public Accounting
      Firm
                                        
                                        
                                        
                                        
                                        
                                        X31.1
                                        
                                        Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
                                        
                                        
                                        
                                        
                                        
                                        X31.2
                                        
                                        Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
                                        
                                        
                                        
                                        
                                        
                                        X32.1
                                        
                                        Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                                        
                                        
                                        
                                        
                                        
                                        X32.2
                                        
                                        Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                                        
                                        
                                        
                                        
                                        
                                        X








*
            This
      exhibit is a management contract or compensatory plan or
      arrangement.






30